What Is the Cook County Land Bank and How Do Investors Finance Its Distressed Properties?
Before you bid on a Cook County Land Bank property, understand what you're buying, what the Land Bank expects you to do with it—and why your lender needs to understand the transaction too.
If you're a Chicago-area real estate investor looking for your next rehab project, you may eventually come across a property being sold through the Cook County Land Bank Authority.
At first glance, the opportunity can look familiar. Find a distressed property. Buy it and rehab it. Sell it or put it back into productive use. But a Cook County Land Bank transaction isn't necessarily the same as buying a distressed property from a private seller.
The Land Bank isn't simply trying to sell a property.
It wants that property put back into productive use.
And that distinction can affect everything from how you buy the property to how you finance it.
What Is the Cook County Land Bank Authority?
The Cook County Land Bank Authority, commonly called the CCLBA, was created by Cook County in 2013 to address vacant residential, commercial and industrial properties throughout Cook County.
Its mission includes acquiring, holding and transferring vacant, abandoned, foreclosed and tax-delinquent properties so they can be returned to productive use. The Land Bank says it has acquired and transformed more than 2,500 properties throughout Cook County since 2014.
The Land Bank can acquire property through several different methods, address certain delinquent taxes and liens as permitted by law, and eventually convey the property to another buyer or developer.
For real estate investors, that creates opportunity.
The CCLBA specifically has properties available for community developers looking to purchase and rehab existing homes or build new ones. But there's an important part investors need to understand.
The Land Bank isn't necessarily looking for the person who can simply buy the property. It wants confidence that the buyer can execute the plan.
CCLBA says intended use, experience and the purchaser's capacity to execute are among the factors it considers when evaluating prospective purchasers.
That brings financing into the conversation very early.
How Does Buying a Cook County Land Bank Property Work?
The exact requirements depend upon the property and CCLBA program, so investors should never assume every Land Bank transaction will have identical terms.
But an actual Cook County Land Bank purchase agreement I've reviewed provides a good example.
In that transaction, an investor agreed to purchase a distressed property in suburban Cook County for $82,000.
The investor was responsible for bringing $62,000 to closing.
The remaining $20,000 was structured as a forgivable loan from the Cook County Land Bank secured by a mortgage against the property. That $20,000 is where the transaction becomes especially interesting from a financing standpoint.
What Is the Cook County Land Bank's "Soft Second"?
Investors sometimes hear the term soft second and assume it's simply free money.
That's not the best way to think about it. In the transaction I reviewed, the $20,000 Land Bank loan carried no interest, required no regular payments and had a 36-month term. If the investor satisfied the requirements of the agreement, the debt could ultimately be forgiven. But there's a reason that mortgage exists.
The Land Bank wants to make sure the winning purchaser actually does what they said they were going to do with the property.
CCLBA's own developer materials describe its forgivable mortgage as a mechanism designed to ensure purchasers remain in compliance with their purchase agreements. In the actual transaction I reviewed, the investor was required to begin the work necessary to bring the property into compliance within 90 days and obtain the applicable approvals or certifications allowing occupancy within 12 months.
So think about the soft second differently.
It's not simply: "Here's $20,000."
It's closer to: "Here's part of the economics of this transaction, but you need to execute the redevelopment plan you agreed to." That's an important distinction.
Can You Flip a Cook County Land Bank Property?
This is where investors need to read the actual documents for their particular property.
The purpose of the Land Bank's restrictions is to prevent someone from simply winning a property and disposing of it without accomplishing the redevelopment the Land Bank intended.
But that doesn't necessarily mean a developer can never rehab and resell a property.
For example, the agreement I reviewed provided for forgiveness of the Land Bank loan if the investor completed the required rehabilitation obligations and sold the property to a third-party owner-occupant. Alternatively, forgiveness could occur after the 36-month term if the investor satisfied the applicable requirements.
CCLBA's current FAQ similarly distinguishes developer transactions from other property types and explains circumstances under which releases are provided when a renovated property is sold to an owner-occupant. The lesson isn't "you can't flip it."
The lesson is, You need to understand your exit strategy before you buy it.
Can You Get a Fix-and-Flip Loan on a Cook County Land Bank Property?
Potentially, yes. But here's where investors can run into trouble. Not every lender will allow the Cook County Land Bank soft second. That matters.
A lender may be perfectly comfortable financing your purchase and rehabilitation based upon the purchase price, rehab budget and projected after-repaired value.
But if that lender's guidelines don't allow the Land Bank's subordinate mortgage, the transaction may not work with that lender.
Breclaw Capital works with financing sources that can accommodate the Cook County Land Bank's soft second in qualifying transactions.
And the Land Bank's documents specifically contemplate outside financing.
In the transaction I reviewed, CCLBA agreed to subordinate its mortgage to outside financing when the borrower demonstrated a need for financing to acquire or redevelop the property and remained in compliance with the agreement. That's a critical distinction.
The property may qualify for financing while the lender doesn't qualify for the transaction.
Remember: You're Buying a Distressed Property
Cook County Land Bank properties can create interesting opportunities for real estate investors.
But these aren't transactions where I'd recommend choosing a lender based solely on who advertises the highest leverage.
Your lender needs to understand the transaction.
If there's a Land Bank soft second, your lender needs to accommodate it.
If there's a rehabilitation requirement, your financing needs to support it.
If there's a deadline, your financing needs to work within it.
And most importantly, the numbers still need to make sense. If you're considering purchasing a distressed property through the Cook County Land Bank, call me before you commit to the deal.
Let's look at the address, purchase price, condition, rehab budget, ARV, required cash and Land Bank requirements.
Then we'll determine whether the deal and the financing makes sense.
Breclaw Capital
Commercial & Investor Lending Built Around Real-World Property Strategy
708.680.2090
This article is for educational purposes only. Cook County Land Bank programs, property requirements and transaction terms can vary. Investors should review the specific CCLBA purchase agreement and related documents for their transaction and consult appropriate legal and other professionals.
Comments