Knoxville Spends Millions to Buy Up and Resell Problem Properties to Spur Development. How’s It Working Out?

In Cover Stories, News by Clay Dudaleave a COMMENT

The city of Knoxville is looking for proposals to redevelop the Old South High School on E. Moody Ave. Photo by Clay Duda. Clay Duda
Over the years the Old South High School in South Knoxville has fallen into disrepair. Photo by Clay Duda. Clay Duda

The Old South High School building in South Knoxville.

The shell of a building at 953 E. Moody Ave. in South Knoxville has seen better days. It is a remnant of its former self, windows busted and boarded up, portions of its caved roof funneling in rain, sitting empty and idle. But it hasn’t always been like this, and if the city’s plans for it pan out, it may someday see a return to its former prestige.

This is the Old South High School building, designed by acclaimed architect Charles Barber and opened in 1936 to host inquisitive minds and knowledgeable instructors. But for more than two decades, since 1991, it’s sat mostly vacant and abandoned. Knox County finally put it up for auction in 2008, and as the story goes a man named Bahman Kasraei was passing by that day and decided to get in on the action. He bid up the price to $117,700 and took ownership (outbidding Knoxville developer David Dewhirst, who also had an eye on the property).

Back then, Kasraei said on the fly that he thought the 42,000-square-foot building was well suited for condominiums, but those plans never materialized and its cavernous halls continued to sit unused, further decaying over the years. Kasreai was on the cusp of taking a wrecking ball to the place in 2014 when the city slapped a historic easement on the lot to protect it and started steps towards taking ownership. The following April it struck a deal with Kasraei to purchase it for $189,000, about $71,000 more than he paid for it several years earlier, when it was in better condition. City officials think it has a future as something useful, even if it will cost some tax dollars to see it turned around.

Over the past decade the city of Knoxville has spent millions to purchase dilapidated properties, like the Old South High School and a number of others properties around town, many of them single-family houses, in hopes of seeing them put back to productive use. Some other lots it has acquired by default through tax sales or other means, like the former Sanitary Laundry building on North Broadway, a brownfield site that has also sat vacant since the 1990s. But it’s not holding on to the properties it buys. City officials are looking to flip them to investors—private developers with a vision, whether real estate tycoons or would-be homeowners, in an attempt to turn urban blight into something attractive, vibrant, and useful to residents and visitors. It’s a tactic used by a growing number of municipalities in this post-recession economy, both here in Tennessee and elsewhere around the country, aimed at jump-starting development. But that vision of urban revitalization doesn’t stop at buying and selling properties, and many purchases in low-income areas work in tandem with public housing provided through the Knox County Development Corporation to add to a community’s livability and make homes affordable. That’s the idea, at least.

In the past few years city officials have ramped up their purchasing efforts, acquiring more and varied properties, some with million-dollar price tags, though the exact number of acquisitions still varies widely year to year. In some cases, those properties have floundered on the open market or stalled in a queue for redevelopment, and that’s typically a reason the city decided to purchase them. Some of these properties have seen false starts, attracted weak bids or proposals from the private sphere, or—in a few cases—gone to private hands only to return to the city’s rolls for one reason or another. Others, mostly single-family homes, have gained a second wind through the city’s Homemakers program, and dozens more may someday host families. The number of Payment In Lieu of Taxes (PILOT) agreements the city has entered has also increased dramatically in recent years.

City officials say they expect to take a loss on some of these real estate investments—at least in terms of dollar-for-dollar returns on property sales. But they also say the intrinsic value is real, and it’s working as a tool to spur development and infill among the plywood-covered windows and crumbling brick facades that have long hallmarked some neglected stretches of the city. As a Knoxville taxpayer, you now own a bunch of property. Here’s a look at what’s in your portfolio, and what’s happening with the buildings.

_MG_2064 Clay Duda
DOLLARS AND SENSE?

Since 2004, the city of Knoxville has spent $11.8 million to purchase at least 185 properties it’s intent on flipping to private owners, an analysis of city records shows. (see below for interactive map) The glut of those properties are residential lots or houses, though the vast majority of money went towards buying up six former commercial, industrial, or governmental buildings that had stalled on the open market or otherwise sat unused.

A total of $8.8 million was used to acquire six properties: the Jackson Avenue Lots and the old McClung Warehouses (a total of seven parcels) all on Jackson Street; the old State Supreme Court building on Henley Street; what is know the Walnut Street Garage on Walnut Street; Old South High School; and Sanitary Laundry (which was technically free).

Each property is unique with different factors weighing on its viability and where it may be at in the queue to redevelopment. Plans for some of these lots haven’t exactly panned out, and others are inching along somewhere in the bureaucratic process. Mayor Madeline Rogero says the city has already seen success in some neighborhoods were it’s active in the real estate market, and she’s confident these larger gambles will pay off, too. But it will take more time.

The old Supreme Court Building, a recent purchase, is undergoing a feasibility study to analyze its potential uses—it could be a few years away from seeing any changes. The old McClung warehouses on Jackson street caught fire shortly after the city purchased them in 2014 and were demolished over safety concerns shortly after. That location and the other properties the city owns on the north side of Jackson Street between Henley and Gay streets will likely not see any movement for a few years. The city applied for a $120,000 EPA grant for environmental cleanup at the former McClung property and expects to hear the outcome this spring. The Tennessee Department of Transportation will likely use that same gravelly expanse as a staging area as it starts revamping the Broadway viaduct (the bridge that goes over the railyard).

The city hopes to open bidding on Old South High in June and could name a new owner before year’s end. The property that is now the Walnut Street Garage was a vacant building that was purchased by the city about a decade ago. It was given to a private developer, Walnut Street Garage, LLC, as part of a deal between TVA, that developer, and the city to get more parking downtown. In exchange, the owners provide free parking on nights and weekends. The city spent about $3.1 million to buy the lot and demolish the old building before handing it off.

Rogero says there are some examples that support this blight-flipping approach here in town, citing two previous school house buildings being converted to senior apartments (though the city didn’t take a lead on those). The old Oakwood Elementary School on E. Churchwell Avenue has already been renovated and reopened as senior apartments, and the Historic Knoxville High School on E. Fifth Avenue is planned for similar renovations. Both buildings were owned by the county. And both of those projects were both undertaken by companies owned by developer Rick Dover, who has also expressed an interest in the Old South High building.

chartThe city has also spent $3.1 million for the purchase of 181 properties by the city’s Department of Community Development, most all residential lots located largely in struggling neighborhoods, many of which have been folded into the city’s Homemakers program administered by that same department. Others have been sold via request for proposals. Both are processes where potential buyers detail plans for a property and show they have the financial backing to see them through. If they don’t make good on their proposals, the properties can revert back to city ownership, and some have.

“Our objective in acquiring properties is to eliminate blight and improve neighborhoods,” says Becky Wade, director of Community Development for the city. “The goal is not to make money. The goal is to stabilize neighborhoods, help a particular street, or whatever the scenario is that will enable that neighborhood to improve.”

Of the approximately 181 properties bought by Community Development since 2004, a total of 72 have sold, representing a total loss of about $440,712, according to city data. Some properties purchased with federal funds or taken through court proceedings cannot legally be sold for a loss, Wade says.

The city has invested most heavily in the neighborhoods of Five Points in East Knoxville and Lonsdale to the northwest. Since 2004 it has picked up at least 38 properties in Five Points and 68 in Lonsdale, records show.

Longtime Lonsdale resident Phyllis Patrick says she’s happy to see the city take an interest in the well-being of a neighborhood that she feels has long been neglected and overlooked. She’s lived in Lonsdale off and on for more than 30 years, since the 1960s.

“I think the city and KCDC have had an impact, and of course anytime you can get out of public housing and into your own home it’s a good thing,” Patrick says, adding that she knowns a handful of people that have used the Homemakers program and others to get into a home. The city’s programs don’t work in a silo. KCDC also offers some public housing in the neighborhood, and the East Tennessee Housing Development Corporation has built there as well. “KCDC will even help you with your down payment, but you have to go to classes that teach you how to budget your money so you can continue to keep your property,” Patrick explains—and she would know. For the past three years she’s served as a resident commissioner (basically a liaison) between the people in Lonsdale Homes, where she lives, and KCDC, which owns the complex.

“I see some good things that are coming down the road, like on Minnesota Avenue [where the city has bought up nearly a whole block of now mostly vacant lots]. I’ve heard they’re going to put some houses there under the Homemakers program, and for those that don’t want to leave the neighborhood it’ll be another opportunity to step up and own their own home,” she says.

Wade says the city was considering partnering with some nonprofits to build houses there it would sell to low-income residents, but given the uncertainty of the real estate market it’s backed off those plans and instead will go through a “public input process” to figure out what will be the best fit for the area.

“That idea isn’t completely off the table, but we feel like we need to do a little more planning,” she says. 

This fiscal year, ending in June, Knoxville’s Department of Community Development has a budget of about $500,000 to purchase blighted or chronic problem properties. That represents a mix of local and federal dollars. Most properties it buys are certified blighted or located in a city-designated redevelopment area. As of March 9 there were 35 properties listed for sale under the Homemakers program, with prices ranging from $525 for a small, odd-shaped lot in Five Points to $35,000 for a rundown duplex in the same neighborhood. The Homemakers program traces roots back to 1987 when a program called Project Proud was launched by the city to transfer “substandard” lots and houses in Mechanicsville to low-income buyers. The City Council voted to expand that program in 1995 to open up the sale of those properties to a wider range of buyers, not solely based income.

Mayor Rogero says the city tries to be strategic about where it invests its limited resources, targeting neighborhoods where it thinks it can have an impact.

“We have X amount of money to put into this and we want to have an impact in those neighborhoods,” she says. “Five Points is a neighborhood we’ve been focused on for a while, and we know there’s public housing KCDC has there, there’s privately-owned and rental properties. We want the public investment from KCDC to have a greater impact. To do that we help those who own the properties, we help with a lot of owner-occupied (renovations) in that neighborhood, but when they’re vacant, blighted, and abandoned we go in and purchase them. Sometimes we use eminent domain.”

Wade says properties that have houses already on them tend to sell quickly, while vacant lots can linger in the city’s repository until someone decides to invest and build. Many of the larger, mostly commercial properties owned by the city can take longer to turn around. They’re more complex developments, and officials say it’s important to get back the right kind of development for each area so they don’t languish even longer, or encounter problems down the road.

City officials typically view buying or foreclosing on a property as a last resort, and they have more than a few other tools in their bureaucratic toolbelt. Ideally, current property owners would step up and make improvements, or at least sell to someone who would, officials say. If they don’t, the city has been known to use other methods, such as historic overlays, however rare, to pressure private property owners to take action, or at the least save old buildings from further destruction, as is the recent case with the Cal Johnson Building downtown.

The city is also in the midst of a huge push to revamp streetscapes and refine some building codes as part of its aims to bolster development in some neglected areas and commercial strips, to continue to remake Knoxville from its downtown outward, though it also has a focus on some downtrodden neighborhoods regardless of their proximity to downtown. Once finalized, the updated building codes covering some commercial corridors, starting with the Bearden Village area, should help clear the way for more mixed-use developments in areas previously zoned only for commercial uses (under the new code, think shops at street level and apartments overhead). It’s most visible street redo so far is Cumberland Avenue, near the University of Tennessee, a nearly $17 million project expected to be completed next year. The city is banking that it will usher in substantial private development, building up and not out, and the area is already witnessing more than $140 million in construction, records show. It also has plans to remake Central Avenue from the Old City to Happy Holler, and a portion of Magnolia Avenue between Jessamine and N. Bertrand streets (a plan that has sparked some concerns over gentrification).

The Rogero administration is also keen on providing tax breaks for some developments, having entered PILOT agreements for dozens of properties over the past decade, and also agreed to a number of Tax Incremental Financing (TIF) plans. Both are a means of encouraging development. PILOTs defer any increase in property taxes for a set number of years, while TIFs are a more complex financing mechanism where a developer reaches a loan agreement with a bank and that loan is then repaid through property tax payments. The City Council must sign off on both types of agreements since they defer city property tax revenue. It may also offer facade grants to fix up building exteriors in some designated redevelopment districts.

COVER_v2i12_SanitaryLaundry The Knox County Public Library Calvin M. McClung Digital Collection cmdc.knoxlib.org
BUSTLING TO ABANDONED

Finding the right buyer for the old Sanitary Laundry building has been tough. The city last summer issued a request for proposals and received only one response (from Dewhirst Properties), which city officials say was outside their scope and vision for the property, so that was a no-go. When the state added the site to its brownfields list, it tried and failed to get the owner at the time to clean up the property, says Dan Hawkins, manager of the Tennessee Department of Environment and Conservation’s Division of Remediation for East Tennessee.

“That’s what you find a lot of times at Superfund sites: The owner is either dead, bankrupt, or in the Bahamas,” he says. “You just have no viable entity you can go to that has the resources to clean things up.”

The city acquired it through a tax default, which under the law does not come with cleanup liability, he says, but the city is moving ahead well with the cleanup process because it wants the property back on the tax rolls.

The building itself is in bad shape, and it’s status as a brownfield site (basically the state equivalent to a federal Superfund site) complicates things. Dry cleaning solvent leaked from a large tank and has seeped beyond its property lines, causing problems for others looking to open shop in the mostly boarded-up strip of historic commercial buildings near the intersection of N. Broadway and N. Central streets, as Metro Pulse once reported. The chemicals can still migrate into ground water and air. Breathing the chemical vapors can harm people’s health, but that can be dealt with through a venting system, which is what Bar Marley did, Hawkins says. However, there are signs of life nearby, and the city is hopeful it can still attract a buyer with a plan for the building—eventually. Restaurant Bar Marley opened next door earlier this year after considerable delays due to contamination issues from the Sanitary Laundry building (that property owner used to own both buildings). Dewhirst Properties is revamping an old warehouse across Broadway into artist lofts, and Remedy Coffee recently relocated its coffee shop from the Old City to Tyson Street, opening Makers Donuts next door shortly after. There is also a hodgepodge of legacy businesses there, including a handful of antique stores and a pizza place.

The city is applying for a $200,000 grant from the Environmental Protection Agency (and it will pitch in another $40,000) to help cover cleanup and remediation costs at Sanitary Laundry, which have been a major barrier to its redevelopment. Dewhirst Properties’ proposal for the building envisioned it as a mixed-use, mostly residential hub, calling it a “catalyst for redevelopment” of the area. It promised to also renovate the nearby Dixie Kitchen building at the same time, offering $10,000 to purchase the Sanitary Laundry building and seeking an additional reimbursement of $675,000 from the city to cover remediation costs and exterior improvements. It calculated total costs for the project at about $2.8 million, an example of the extensive work that needs to go into some of these old structures.

Hawkins says the stigma of brownfields has been eroded by the drive to make blighted properties productive. Cities have become more active in owning contaminated land and cleaning it up since the Great Recession started in 2008, leaving many businesses bankrupt or closed and a big hole in local tax collections. Tennessee cities began to embark on more partnerships with private developers to clean up the land and get it back on the tax rolls, he says. For example, Chattanooga has a similar number of publicly-owned contaminated properties being redeveloped, says Erin Sutton, manager at TDEC’s East Tennessee regional office.

The Sanitary Laundry building used to be one of the anchors to a bustling stretch of service-oriented businesses and nearby residents, but in the 1970s the area started witnessing a steady decline following the completion of Interstate 40, which basically cleaved off downtown from the more residential areas to the north, UT graduate student Micah Daniel Antanaitis wrote in his 2011 thesis detailing the history of the area.

“After 2000, more and more parking lots were formed and vacancies doubled. Today, most of the block is vacant, with literally 0 remaining residences,” Antanaitis wrote. “In a block that in 1930 had 19 businesses, 28 residences and only 2 vacancies, there no exist only 6 businesses, 0 residences and 9 vacancies, including multiple surface lots.”

Over the years, cities across the country have grappled with similar issues, taking various approaches in efforts to address blight and revitalize city’s urban cores after many long-time residence started an exodus to the suburbs in the 1950s and 1960s.

“There was of course the national phenomenon of suburbanization. As people had cars they wanted to go to the countryside and live like barons and earls, and a lot of them did,” explains Jack Neely, executive director of the Knoxville History Project (full disclosure: KHP is the nonprofit that owns the Mercury, though Neely does not have a direct hand in our editorial content. He just happens to be an expert on this topic.) “That residential exodus was the beginning of the problem, and in Knoxville it was kind of supercharged in some ways by the rapid development of our exurb areas far outside of downtown: the Smoky Mountains and many, many miles of lakefront properties that had previously been flood prone, and also Oak Ridge. All of a sudden there was this cluster of major employers 25 miles from town. A lot of people wanted to live somewhere in between there and Knoxville, and that sort of spilled Knoxville far to the west in ways that would have probably been unlikely.”

According to census data, the Knoxville metropolitan area—which includes more than just the city of Knoxville—had a gross vacancy rate of about 11 percent in 2015, the 31st highest out of the country’s 75 largest metro areas. Other cities dealing with even larger gluts of vacant buildings and boarded-up residences have taken more drastic measures than we’ve seen locally. There’s a number of approaches that weave into the complex economic fabric of each city and community.

It’s not unheard of for city governments to buy or foreclose on problem properties, and some are essentially bequeathed to the city due to unpaid property taxes. Knoxville in some ways has employed tactics used by other cities, though Rogero says it has not had to use some more extreme approaches such as “land banking,” where municipalities buy up usually large, abandoned properties with the intent of holding them for long periods of time, a more common practice in “Rust Belt” cities with buildings left from a past as a manufacturing hub.

There are case studies out there that support these and other approaches to government involvement, but none directly looking at the return on investment for cities buying and selling properties.

Rogero says she’s not too worried about the upfront investment, because it pays off in the long run.

“It’s not that we’re expecting not to get our money back out of it. We’re actually expecting to get a lot more out of it then what we’ve put in, but it’s more in terms of reknitting the community fabric, strengthening a neighborhood, creating more livability, walkability, increasing safety, and really creating a sense of community,” she says. “That’s hard to put a number to, but you know when it’s there because it’s a great neighborhood.”


Properties purchased to sale by city of Knoxville, 2004-2015:


(View larger map)


Contaminated City-Owned Properties

Various city officials and attorneys said they were unaware of any contaminated city-owned properties besides the McClung Warehouse site and Sanitary Laundry, but officials with the Tennessee Department of Environment and Conservation listed more. They indicated the city has been making satisfactory progress toward the cleanups:

1.Former McClung Warehouses site in Jackson Avenue, likely contaminated due to its historical uses over the course of a century: an automobile garage, woodworking shop, blacksmith shed, freight shipping businesses, and railroad freight storage. The warehouses themselves burned in 2007 and 2014 or had to be demolished following the last fire. After the fire, Knoxville applied for and received EPA funding for a Targeted Brownfields Assessment to determine the extent of contamination and determine the best path towards redevelopment. According to a Knoxville application for $120,000 in EPA cleanup funds, “it poses a health and safety risk, not only because of its condition and potential for site contaminants, but also because it is easily accessible which makes it an attractive nuisance to curious children who have been seen playing in the rubble.” The city proposes to remove asbestos-containing materials and a large amount of contaminated soil, as well as monitor the air and possibly install vents if the site becomes residential housing.

2.Sanitary Laundry at 625 N. Broadway, soil contaminated with dry cleaning solvent, which can vaporize and be inhaled. (See story for more details.)

3.The Public Works complex on Lorraine Street off Middlebrook Pike, which has soil contaminated by lead and arsenic from the former manganes ore processing facility operated there by Foote Mineral. The city, which has owned the property for at least a quarter-century, has a contractor investigating and determining what remedial action steps are needed.

4.Cityview on the South Waterfront, a small strip of land between the road and waterfront.

5.Suttree Park and South Waterfront, where there are constituents of volatile organic compounds in the ground water from former underground storage tanks and “a little” cancer-causing arsenic and polycyclic aromatic hydrocarbons (PAHs) along the railroad bed. As the new park and road are constructed along the waterfront, the city is removing some contaminated soil and capping what remains with several feet of clean soil. TDEC is not requiring the city to do any groundwater cleanup because the contamination there has been “shown to be acceptable.”

6.Baptist Hospital Tower… eventually… sort of. It is owned by Southeastern Development Associates but is about to change hands as part of a redevelopment deal that would bring Regal Entertainment Group’s headquarters to the site. The plan is for it to eventually be owned by the Industrial Development Board on behalf of the city, The property has underground diesel storage tanks which remain in use but have leaked “very minor” volatile organic compounds into ground water. The city, which has a management plan in place, needs to decide whether to remove them, according to TDEC Manager Dan Hawkins.

—S. Heather Duncan

Clay Duda

Former Mercury staff reporter Clay Duda has covered gangs in New York, housing busts in Atlanta, and wildfires in Northern California. And lots of stuff about Knoxville.

Share this Post