Brooklyn Center plans to use a novel funding source to help more than 100 buyers acquire some of the hundreds of foreclosed, vacant homes in the first-ring suburb.

The program, funded by a commercial tax increment district, will provide up to $10,000 to each eligible buyer for closing fees or down payments on vacant homes that the seller registered with the city, said City Manager Curt Boganey. The money is provided as an interest-free loan that is forgiven if the owner lives in the house for five years.

"The goal is to get more single-family housing and get somebody living in foreclosed houses," Mayor Tim Willson said.

Many cities have programs to stimulate sales of foreclosed homes, but Boganey and officials at the League of Minnesota Cities said they hadn't heard of such programs using money from a commercial tax increment district.

Special legislation passed last year allows Brooklyn Center to use part of the money generated in a tax increment district for its city-wide housing program.

Hue Nguyen, a league lobbyist, said the league is discussing possible bills with legislators so other cities can use such tax increment funds to attract buyers for foreclosed homes.

The Brooklyn Center City Council, acting as its Economic Development Authority, last week, unanimously approved the $1.6 million housing program, which kicks off on March 1. The city has had more than 700 foreclosed homes since June 2006, Boganey said.

"It's an incentive program to attract new home buyers into Brooklyn Center," said Bill Gerst, vice president of public policy for the Minneapolis Area Association of Realtors. "It's a positive, proactive way to fill up that housing stock."

Gerst noted that a possible problem for the city and Minneapolis, which has a similar housing program, is that in many cases the home buyer makes no down payment investment because that is covered by the $10,000 incentive for many of the foreclosed, low-priced homes.

"Zero-down payment mortgages are not in favor now," Gerst said, "because some people who get those mortgages could lose their job or something happens. They can't make the payments and the city gets the house back."

Officials in both cities noted that home buyers must have good credit ratings, income verification and qualify for a traditional, fixed-rate mortgage. Subprime loans, involved in many foreclosures, are not allowed.

"We don't think the contribution from the city will attract a less qualified owner," Boganey said. "They still have to meet all the qualifications of a prime loan purchaser."

Minneapolis offered the same kind of no-interest loan program last spring that quickly attracted 50 buyers for homes, most of which were foreclosed and previously were rental houses, said Cherie Shoquist, city foreclosure project coordinator. Brooklyn Center's program is different because it uses tax increment money and sets an income limit for buyers.

Minneapolis has allocated another $500,000 for the program this year, to be combined with $1.5 million in federal funds, but will restrict home buyer incomes to no more than 120 percent of the metro area median income of about $81,000, Shoquist said.

Help for home improvement

The Brooklyn Center program also will serve lower-income buyers. A single buyer or couple can earn up to the metro median income. Families of three or more can earn up to 115 percent of the median income.

Brooklyn Center's program also offers grants of up to $7,000 to repay home improvement loans, as well as funds to demolish blighted buildings to stimulate redevelopment compatible with the neighborhood.

The funds will come from a tax increment financing district that sets aside 15 percent of new property taxes generated to develop housing in the district. The city obtained special legislation last year that allowed it to use the housing funds city-wide, said Rep. Debra Hilstrom, DFL-Brooklyn Center, who sponsored the bill.

Robbinsdale has long used a different tax increment tool to redevelop dilapidated housing, said Ron Batty, attorney for its Economic Development Authority. However, because the tax districts cover only a handful of rundown homes, the increased taxes from new homes built don't cover city costs for acquisition and site work, Batty said

Brooklyn Center's district includes higher tax generating commercial property. The housing funds have been accumulating for years and now total $3.2 million, city documents said. About $300,000 is expected to be added each year until the tax increment district terminates in 2021. The City Council will review the program after six months and decide whether to modify or continue it.

"This is the first time we used any of the housing-designated funds," Boganey said. "We were waiting to identify the best use for the money... We feel that with a number of vacant homes in the city we have a very beneficial use at this time."

Jim Adams • 612-673-7658