Seeding Grass Roots Recovery. New Catalysts. for Community Associatzons I1 Mark Frazier Chnirmnn a n d CEO The Services Group Arlington, Virginin This paper reviews the potential for new types of challenge grants by public and private organizations to stimulate formation of covenant-based residential community associations (RCAs). It suggests ways federal, state and local governments, as well as private vendors of essential services, may find it in their financial self-interest to offer inducements for neighborhoods to mobilize threshold levels of membership by property owners and residents, especially in areas afflicted with economic and social distress. The Problem Problems of crime and physical deterioration are severe in many neighborhoods. Arson, vandalism, robberies, drug use, and neglect of properties create difficult living conditions for the least advantaged residents, and deter the private sector from creating needed jobs and investments. Unless checked, the problems will create new strains for many cities' economic and tax bases in coming years. The physical and social collapse of many neighborhoods reflects an absence of powerful self-help mechanisms. Although voluntary block watches and cleanuplfix-up efforts can be exceptionally cost effective, they seldom prove durable over time. Efforts by governmental agencies are more permanent, but they have proven to be expensive, and have done little to generate lasting improvements. Difficulties in mobilizing financial and in-kind contributions from large numbers of residents over time account for the absence of sustained self-help efforts in blighted neighborhoods. Typically, volunteer efforts to improve conditions in an area fall victim to the "free-rider" problem. Property owners and residents know that they can enjoy the benefitsof any improvement efforts that might arise, regardless of whether they shoulder a share of the burden. This fact tends to reduce participation and produce volunteer burnout, discouraging self-help initiatives within neighborhoods. The Role of Self-Assessing Covenants Residential community associations have been an effective means of improving neighborhood Copyright 1988 The Services Group. Printed with permission. conditions. Through covenants attached to the property title of homes in a neighborhood, all property owners within an area typically agree to share in the support of improved living and working conditions. Typically, covenants are attached by a residential property developer to deeds of all property sold in a subdivision or condominium. The covenants obligate present and future owners to contribute resources for purposes determined by the association of covenanted property owners, and to observe defined architectural and maintenance standards. Failure by a covenanted property owner to abide by the ground rules can trigger enforcement actions by the association. To ensure universal payment of membership fees, the association can record notice of any nonpayment with the local recorder of deeds, creating a lien against seriously delinquent owners. Similarly, failure by a property owner to maintain properties adequately can lead to association initiated repairs or remedial measures, with payment secured through a lien, if necessary. Given the strength of these sanctions, members of property owners' associations seldom choose to withhold annual fees or ignore maintenance and architectural standards. The ensuing success of residential community associations in supporting shared services and maintenance standards has made covenanted properties increasingly desirable to home buyers. During the past 25years, the number of covenant-backed self-assessing associations (including homeowners' associations and condominiums) in the United States has risen from approximately 600 to more than 90,000.' Studies of various residential developments-similar except for their use or lack of covenants-have shown that subdivisions with RCAs are remarkably resistant to traditional cycles of physical and economic decline.2 In several neighborhoods confronting physical decay and rising crime, property owners have unilaterally chosen to form residential community associations. Property owners' associations in distressed areas of St. Louis, as noted in Oscar Newman's Community of Interest, offer especially instructive examples of ~ u c c e s s . ~ Waterman Place in St. Louis is among the most publicized of the spontaneously formed residential community associations. In the early 1970s, this integrated, lower-middle class neighborhood was experiencing rapid growth of crime, drug dealing, prostitution, and deteriorating physical surroundings. Rather than capitulate to what appeared to be an inexorable process of decay, the residents of the neighborhood chose instead to adopt self-assessing covenants, and to request a transfer of ownership of their street from the city to their new association. The formation of the residential community association and the partial closure of the street set in motion a virtuous cycle. Crime abated sharply, as neighborhood relationships became more closely knitted and as block watches were instituted. The property upkeep and maintenance standards established by covenants assured homeowners that physical blight would not establish a foothold in the block. By borrowing against the future stream of self-assessed fees, the RCA was also able to finance needed street improvements and repairs privately. The market took almost immediate note of these changes. Within 12 months of the RCA's creation, Waterman Place property values doubled from $30.000 to $60,000 for a typical owner-occupied house.4 Spontaneous formation of RCAs by property owners has been the exception rather than the rule. The rapid growth of covenant-backed associations during the past 25 years has occurred overwhelmingly in new subdivisions where developers make membership in RCAs an automatic condition of initial purchase. Although tens of thousands of urban neighborhoods are now in need of strong self-help capabilities, neighborhoods without RCAs have only rarely proven able to mobilize sufficient numbers of property owners in new covenant-backed associations. The virtual certainty of free riders and holdouts tends to prevent property owners in such settings from agreeing to adopt covenants for support of improvement initiatives. A New Approach to Mobilizing Property Owners The time may have come, however, to extend the benefits of covenant-backed associations to distressed urban settings, on terms that benefit property owners and tenants alike. A new generation of public and private sector "challenge grants" can motivate residents to overcome the holdout and free rider problems that traditionally have held back sustained community improvement initiatives. In essence, the proposed grants would challenge uncovenanted areas to establish RCAs by offering benefits proportional to the levels of membership they achieve. Traditionally, providers of challenge grants have required recipients only to demonstrate success in mobilizing ad hoc, one-time matching resources for specific purposes. A conventional donor, for example, might offer matching funds in proportion to the success of a public solicitation campaign by a community organization on behalf of transportation, tutoring, or similar serviccs. ('hallenge grants seldom havc been used to create an infrastructure of lasting self-sufficiency on the part of thc rccipicnt. The ncw type of challenge grant, by contrast, would catalyze a lasting neighborhood commit- ment-adoption of self-assessing covenants at a minimum by a majority of the property owners on each block. The self-assessing covenants would oblige members to provide regular financial or in-kind support to neighborhood improvement efforts, rather than the one-time, project-specific counterpart commitments sought by traditional challenge grants. As a means of encouraging widespread participation, the new type of challenge grants could also be linked in size to the percentage of property owners and residents in an area joining a covenant-backed RCA. Public Sector Challenge Grants Governmental organizations wishing to implcment the new challenge grant approach have a variety of tools at their disposal. These range from introduction of new targeting criteria for existing grants and services to more equitable tax treatment of residential community association members and transfer of public sector-owned real estate to RCAs.5 Targeting of Grants and Services Governmental organizations can provide a powerful stimulus for neighborhoods to form lasting, covenant-backed associations by directing expenditures and infrastructure improvements toward neighborhoods that show most progress in creating RCAs. Rudimentary precedents for this approach can be found both in the United States and overseas. Baltimore has begun directing some of its grant programs to neighborhoods cooperating with cleanuplfix-up efforts. In Bogota, Colombia, the city government gives priority in urban road construction to low-income areas where residents dig storm drainage channels in advance for the proposed roads.6 At the local level in the United States, a policy of favoring newly formed RCAs in distressed areas might pay particular dividends in targeting local block grant funds and in prioritizing neighborhoods for road, curb, and sidewalk maintenance or improvements. Wherever possible, the governmental challenge grants should be of a one-time nature, with a stipulation that the new RCA would henceforth assume responsibility for certain services now provided at taxpayer expense. Changes in Tax Treatment Although RCAs have proven their ability to undertake a wide range of municipal functions, including road maintenance, refuse collection, snow removal, street lighting, and emergency services. few governments to date have taken steps to relieve association members of "double payments" problems. Members of RCAs typically pay twice for many local services-once to their associations via selfassessed fees, and again to governments via taxes. Houston, Texas, and Kansas City, Missouri, are the only major cities where members of RCAs receive rebates from the municipality in acknowledgment of the savings for the public sector generated by association-provided refuse collection services. A policy of offering similar rebates (or tax credits) for a range of basic service functions could be a powerful impetus to RCA formation.' Transfers of Public Sector-Owned Real Estate In areas characterized by high levels of abandonments and tax-defaulted properties, governmental organizations can establish procedures to expedite sale or long-term lease (at nominal prices) to newly formed residential community associations that mobilize members in crime prevention, cleanuplfix-up, and other sustained improvement initiatives. Effective efforts of these types can add tens or hundreds of thousands of dollars in value to properties that in many cases are perceived today as close to worthless. As neighborhood conditions improve, earnings from the sale or lease of the formerly public properties by the new RCAs could be applied to a range of purposes deemed beneficial to association members.8 Private Sector Challenge Grants Private sector organizations-both for profit and nonprofit-can also offer challenge grants to enlist a threshold percentage of residents in lasting self-help covenants. Significant support for the challenge grant program might prove to be forthcoming from insurance and realty brokers, as well as others with a stake in stimulating neighborhood improvements and increasing property values. In return for receiving the challenge grants, members of the new RCAs would agree to purchase services from participating realtors, insurance companies, andlor banks on a group rate basis. Members of the associations might thereby achieve appreciable savings; condominium associations often save individuals more than $100 a year in homeowners' insurance by purchasing a group or "blanket" policy in lieu of individual policies.9 Companies offering challenge grants would benefit in at least two ways by offering inducements for neighborhood recovery. The first would be the net financial gain accruing to insurance providers, realtors, and lending institutions as a result of improvements in neighborhood property values. (In the case of insurance companies, RCAs could also be pivotal in "risk engineering." reducing neighborhood losses from arson, vandalism, and theft.) In addition. commercial service providers would be able to gain market share at far less cost than achievable through current techniques. By establishing a favored relationship with all homeowners in a block, a realty firm, for example,might come out far ahead financially. The cost of obtaining an exclusive listing arrangement for properties of association members might be an initial $500 or $1,000 challenge grant to each newly formed RCA, as well as a somewhat reduced commission on members' properties when sold. In the nonprofit sector, substantial opportunities also exist for adopting the new type of challenge grants. Philanthropic contributions, as noted earlier, are often introduced on a challenge grant or matching grant basis, although without criteria that may lead to financial self-sufficiency. Foundations and corporations active in supporting community development organizations might improve the leveraging of their resources by targeting funds to neighborhoods that mobilize both property owners and residents as members of RCAs. Safeguarding the Disadvantaged An apparent paradox confronts any initiative to stimulate creation of RCAs in distressed areas. Although the abilities of RCAs to improve living and working conditions are beyond dispute, such improvements tend to be capitalized into property values. A process of gentrification may occur, thereby depriving the least advantaged residents in an area of affordable homes. Accordingly, sponsors of an RCA challenge grmt strategy should give a particular emphasis to including disadvantaged residents as beneficiaries, rather than victims, of increased neighborhood property values. Rather than make these benefits available as entitlements to low-income tenants, participation in the windfall should itself be offcred on a "challenge" basis. A share of the rising real estate values, for example, can be dedicated to those nonproperty owning residents who contribute actively to neighborhood self-renewal effortst0RCAs have several possible mechanisms for offering lowincome residents a "piece of the action" in return for their participation in neighborhood self-help efforts. Disadvantaged residents cooperating with crime prevention and cleanup/fix-up efforts might benefit in at least two ways: I . Taking o~nershipinterests in publicly o ~ n e d properties in the target area. In Louisville, KY, an innovative means has been adopted for extending a share in property value increases to neighborhood organizations. The city has established the first "Neighborhood Enterprise Association" to be assoclatcd w ~ t ha state-designated enterprise zone.'' This unique form of revenue-earning neighborhood devclopmcnt organization was authorized to receive unused properties from both the city and state and to develop parcels for business purposes. Thus, low- income residents can benefit financially as crime and blight decline. 2. Sharing in "options."Just prior to the start of a neighborhood challenge grants program, organizations representing the disadvantaged can purchase options on a number of properties in selected neighborhoods with a potential for new business and residential development. As neighborhood property values increase, the value of the options will rise proportionately. Shares in the proceeds from sale of its options could be dedicated to low-income residents who participate in measures enhancing market demand for neighborhood properties. Local banking institutions can also be encouraged to provide assistance and financing for project area developments in exchange for an assured number of accounts from association members. Once equity interests or their equivalent are established for the benefit of disadvantaged residents, the success of RCAs in raising property values stands to benefit all who demonstrate a commitment to neighborhood improvements. Implementation Steps For communities interested in introducing challenge grants, demonstration projects appear to be feasible for stimulating RCAs. The implementation steps for a demonstration project, as summarized below, have been designed to generate support from a spectrum of public and private sector organizations, and to secure real estate options on behalf of disadvantaged residents prior to catalyzing self-help efforts. Phase I: Organization, Site Selection and Planning The first phase of the demonstration would entail identifying potential target neighborhoods, conducting background research, structuring the challenge grant offer, and announcing the project. Specific activities within Phase I tasks would include: Step I: Research Background rn Orient the project team through a review of economic development and planning documents, land use maps, background information on local foundations and corporate giving patterns, and newspaper clippings on neighborhood issues. Idcntify key players in business, government, and nonprofit sectors regarding optimal pathsfor approach. Meet with realtors, insurance companies executives, and bankers to identify areas with takeoff potential, and confer with city officials regarding potential target neighborhoods. distribution of idle city properties, and conveyance of such propertics to ncighborhood groups. Step 2: Analyze Promising Sites1 Meet with Key Organizations Identify two or three promising neighborhoods, based on review of Step 1 information. Conduct detailed neighborhood research (e.g., analysis of economic and demographic trends, interviews with neighborhood businesses and residents on obstacles to neighborhood development, and inventory of size, location and value of city-owned propcrties). Meet informally with key neighborhood activists regarding their activities, sources, levels of funding, plans for the future, interest in acquiring city-owned properties, and terms under which they might assist crime prevention or cleanuplfix-up efforts by property owners. Step 3: Structure Challenge Grant Offer Meet with insurers, bankers, realtors, and foundation personnel regarding their receptivity to a challenge grant strategy, and willingness to assist target neighborhoods. Review specific challenge grant plans with prospective donors. Secure specific commitments from companieslfoundations for support of a challenge grant program, both through contribution of resources and through coordination of their existing grant programs to neighborhoods. Plan publicityldissemination strategy for neighborhood property owners, tenants, and the public at large. Prepare tools for assisting neighborhood organizations (e.g., model association covenants and bylaws, information kits for neighborhood groups on obtaining unused city-owned properties). Step 4: Choose Final Sitelpurchase Options rn Rank "semifinalist" neighborhoods according to their intrinsic take-off potential, likely response to challenge grant offers, and prospects for favorable publicity/visibility. Choose implementation vchicle; in consultation with local officials, resolve issues of nonprofit versus for profit, and new vcrsus existing organization. rn rn Purchase three to five options on residential or commercial properties with rapid appreciation potential in the target neighborhood. Approach key neighborhood activists to formalize terms of their commitmentlparticipa. tion in neighborhood improvemenk. Step 5: Announce Program and Site rn Prepare presentation materials outlining the challenge grant program. rn Arrange public announcement andlor a press conference, inviting key donors and community organization participants. rn Disseminate information on challenge grant availability to property owners in targeted neighborhood. Phase 11: Implementation Implementation efforts would concentrate on providing technical assistance to neighborhood groups in the demonstration area. Resources for this phase might be obtained from companies and organizations expressing a willingness during the first phase to support impiementation efforts. The irnplcmenting organization (determined in Phase I, s t e p 4) would work directly with groups of property owners and other residents to carry out the legal and administrative tasks necessary to activate the neighborhood improvements. This would include distribution of "how-to" information to people in the neighborhoods about joining a self-assessing association, as well as assistance in organizing workshops and meetings designed to recruit members. The implementation team would pay particular attention to encouraging associations to concentrate on block watch and cleanuplfix-up efforts. To quantify the fiscal benefits for the city, the implementing organization could also monitor increases in property values and gather evidence of diminished dependency on municipal services. If desired by the project sponsor, local and state governments could also be approached about transferring responsibility for some public services-local transit via minibuses, trash collection, park maintenance, and day care-to resident groups. In doing so, people in the area would gain working experience and, possibly. reductions in property taxes. This undertaking would demonstrate that block-level services can-be carried out by residents themselves (or contracted to private entrepreneurs) with equal or greater efficiency than publicly provided services. Further implementation activities are possible. The implementing organization might accelerate development of target ncighborhoods through incorporation of a profit-making dcvclopment subsidiary. This corporation could buy additional options on properties with development potential in or near the target areas. Newly formed property owners associa- tions, as well as cooperating organizations representing interests of the low- income residents, could automatically quality for shares of stock in the development company and increase their equity position by making additional efforts to improve local conditions. The least advantaged residents thus would gain financially by participating in neighborhood cleanuplfix-up and crime prevention initiatives. As signs of blight and criminal incidents abate, the development subsidiary could actively seek investment by developers in business or residential construction involving parcels owned by the company, as well as the backing of banks and insurers in the process. This option-purchasing enterprise would form a base from which to introduce the "challenge grant" strategy to other high potential neighborhoods in the city. In sum, using challenge grants to catalyze RCA formation offers hope for stimulating neighborhood improvements beneficial to property owners and residents, and to the surrounding community as a whole. Adoption of the challenge grant approach, in concert with measures to create beneficial interests in property value appreciation for the disadvantaged, should result in significant new investment in the designated areas, increased job opportunities for residents, and an overall improvement in local services and physical conditions. NOTES 1 Mark A. Weiss, and John W. Watts, "Community Builders and Community Associations: The Role of Large-Scale Developers in Private Residential Governance," in this volume. , The Hornes Association Hartdbook (Washington, DC: Urban Land Institute, 1964), Chapters 1-3. 3 Oscar Newman, Conlrnlrrtity of Irtteresf (New York: Doubleday, 1980), pp. 139-141. 4 Interviews by author with Williams R. Bosse and Fred Hale, Waterman Place Association, St. Louis, Missouri. For more detailed description. see Mark Frazier and Barry Wax, Neighborhood Revival (Washington, DC: Sabre FoundationIHUD, 1983), pp. 111-6 through 111-8. 5 Mark Frazier, "Privatizing the City," Policy Review (Summer 1980). 6 Cecilia Sager and Mark Frazier, Cor?mwity Self-Heh: A New Strategy, Repor? by Free Zone Authority, Ltd. to the U.S. Agency for I~rtematiortalDevelopr~~er~tlPPC (April 1984), Chapter 11. Enterprise: A Mark Frazier, et al., Stirlllrlatirlg Cor?tr?~tnlity Response to Fiscal Strains in the Public Sector, Report 6y the Sabre FomdatiorllFree Zone Alrthority. Ltd. to the Joint Eco~lomicCormlittee, U.S. Congress (December 1984), Chapter IV. The sensitivity of property values to reduction in crime rates has been documented most systematically in M. M. Li, and J. J. Brown. "Micro-Neighborhood Externalities and Hedonic Housing Prices," Land Ecor~or?~ics, Vol. 56, No. 2. The concept of transferring public properties to neighborhood enterprise associations was developed by Mark Frazier and Peter J. Ferrara in the Sol~rcebookon Enterprise Zones (Washington. DC: Sabre Foundation, 1980), Chapter V. 9 Frazier, et al., Stinldating Corwlurrlity Brterprise, p. 39. "JIbid. p. 29-30. 1 Frazier and Ferrara, Sourcebook 011 Enterprise Zones. Appendix on Model State Enterprise Zone legislation. The legislation,prepared by Peter J. Ferrara, subsequently was enacted almost in full by the state of Kentucky and in part by Texas and Indiana. 2 '