What do Pennsylvania, New York, Missouri, Georgia, and Nebraska have in common? All  passed legislation in the past two years that authorized the formation of land banks to reclaim real estate whose market value in its present blighted or tax-delinquent condition is all but worthless.

For adventurous builders and developers—especially those whose business models include infill aspirations—land banks hold out the promise of inexpensive, albeit risky, redevelopment options. And if this phenomenon expands, as some experts predict it will, land banks could become more important to metros trying to resuscitate neighborhoods and  attract more residents and businesses.

One hundred to 150 authorized land banks are in operation across the United States. Typically, the banks are set up to serve counties or metros like Chicago, whose Cook County Land Bank Authority is scheduled to open this fall. And if all things fall into place as planned, Philadelphia could have its first land bank by mid 2014.

Philadelphia has more than 40,000 residential and commercial properties that haven’t paid taxes in years or are vacant or abandoned. Various public agencies own about one-quarter of these properties. The game plan over time, says Rick Sauer, executive director of the Philadelphia Association of Community Development Corporations, is to move a sizable portion of the land and buildings into the land bank and repurpose as many properties as local real estate conditions will allow to get them back on the tax roles.

Land banks “are a new tool based on a new reality,” says Frank Alexander, professor at Emory University School of Law in Atlanta, and co-founder and general counsel for the Center for Community Progress. Historically, these properties have been located in dilapidated neighborhoods within a city’s urban core. But, says Alexander, the last housing recession spread this plague to the suburbs, where he’s seen whole subdivisions succumb to foreclosure.

Land banks have become a solution for cash-strapped cities that want to rehabilitate rundown neighborhoods, but don’t have the money or manpower to chase down owners of abandoned properties or to tear down buildings.

Land banks have the legal authority to take ownership of properties within days or weeks, settle (often by voiding) title and lien obstacles, demolish what can’t be salvaged, and assemble and resell land and buildings through commercial brokers. 

A few years ago lenders and underwriters—including Fannie Mae, Wells Fargo, and Bank of America—paid Cuyahoga County Land Bank in Ohio $3,500 to $7,500 per house to buy and tear down the worst foreclosed houses in Cleveland.

This kind of quick fix has led some critics to brand land banking as eminent domain in sheep’s clothing, and unreasonable competition for private developers. Proponents reject that argument and note that land banks aren’t forcing anyone out of their homes, as eminent domain might. 

Depending on the city, a sizable portion of what land banks take over inevitably will be demolished and greened over. Of the 9,000-plus properties that Flint, Mich.–based Genesee County Land Bank has in its inventory, it will tear down 1,700 to 1,800 homes, which is only about two-fifths of the demos that could be done, says executive director Doug Weiland.

Over the years, Genesee has paid for demolitions and what little rehabbing it has done partly with funds from the Neighborhood Stabilization Program.

Other land banks are funded in various ways. The office of New York’s Attorney General recently allocated $20 million in grants for seven land banks in the state. Chicago is funding two land banks initially with $6 million from a larger settlement that Illinois won against big banks for foreclosure and mortgage fraud.

Meanwhile, Lucas County Land Bank—with an annual budget of around $1.6 million—is like many programs in Ohio and other states that fund themselves through penalties imposed on property-tax scofflaws.

The business model of many land banks is to eventually operate on proceeds from sales and tax receipts once properties are repaired or cleared and then reused.

One of the more active land bank customers has been Habitat for Humanity. Emory University’s Alexander points out that over the past 15 years, the Atlanta Land Bank Authority has been transferring ownership of properties in South Atlanta to the local Habitat chapter for as little as $1 per lot.

Since 2006, Habitat’s Dallas chapter has acquired 150 lots from the Dallas Urban Land Bank, at an approximate cost of $615,000. 

“The benefit is that the land bank clears up the titles before transferring the land to us,” says Kristen Schulz, Dallas Habitat’s director of public policy and government funding.