In terms of SEO a Bad Neighborhood effect appears when you link to bad sites(bad neighbors). Usually the bad neighbors are the warez sites, hacking sites, pornography sites, link farms. A bad reputation can have also sites like script generated sites, sites with duplicate content, sites generating incoming links using bots.
You have to be carefully who you are linking to because it happens for sites to change their profile. In most of the cases old expired sites get brought by people who drive them using black hat techniques in spammy sites which finally gets banned or penalized.
Links to banned or penalized sites might induce a penalty for your own site and this is named bad neighborhood.
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