Archive for the ‘land value’ Category

Local land prices show that location still matters

taken about 8 years ago by Zachary Korb, via flickr (cc)

A different vacant parcel, about 8 years ago by Zachary Korb, via flickr (cc)

Crains reports the sale of a vacant parcel in the fashionable North State Street neighborhood for $70 million — $4075 per square foot. The article says that “Under a zoning agreement the city approved in 2006, a developer could build as many as 261 residential units on the parcel,” which would work out to about $268,000 land cost per unit.  You can buy a nice residential lot in many decent neighborhoods for a lot less than $268,000 (and in less-decent neighborhoods land is practically free). Perhaps the buyer is expecting to obtain an increase in permitted density.

The article also reports that the seller, a “Miami-based developer” who has held the parcel only four months, will realize a $42 million profit.  It’s unfortunate that none of this profit goes to support the intensive and expensive infrastructure which helps keep the neighborhood functional.

It matters how we own what nobody produced

Tenant farmers paid rent here

Tenant farmers paid rent here

[I]n Bill Clinton’s encapsulation of political strategy, “It’s the economy, stupid.” But the success of an economy can only be measured by its growth.  Since growth requires the accelerated consumption of limited natural resources, it is not a sustainable model in the long run.

If you concentrate on how a place is owned, however, the perspective changes.  As this book demonstrates, matters of laws, of rights and of politics become crucial, taking precedence over economics.  From that point of view… “It’s the neighborhood, stupid.”

…Around the world and throughout history, neighborhoods have succeeded in a million different ways.  It all depends on how the earth is owned.

That, the conclusion of Andro Linklater’s Owning the Earth, illustrates what is right and what is wrong with the book.  Our quality of life does does depend on how the earth is owned, and Georgists are aware of the importance and practicality of recognizing each individual’s right to what no one produced. But must a sound economy necessarily use more of the earth’s limited resources? Is there no practical way to use resources more efficiently? And is there no possibility that economic improvement could be measured by anything other than economic growth?

The book is wide-ranging and (mostly) well-written, making connections in place after place between how the right to use nature is recognized, and how well the community developed. It draws some connections that I hadn’t seen before, such as how the growth in mortgages on American farms followed logically from the end of homesteading.

And Linklater does devote a couple of pages to Henry George, but seriously misunderstands why George’s proposals weren’t widely adopted, saying  “[I]t is notoriously difficult to arrive at a valuation system that can clearly separate earned from unearned capital appreciation.” Here he means “separate improvement value from land value,” and he is wrong.  Practical methods of doing so on a mass basis were described back in 1970 in TRED #5  (outline), which is not posted on line to my knowledge, and in this more recent paper by Ted Gwartney, MAI.   And, of course, land values are routinely estimated by appraisers and are a component of almost every U S income tax return that involves commercial or investment real estate.

It is true that, with limited exceptions, George’s proposals weren’t adopted, but for a different reason.  Mason Gaffney has provided a compelling and well-sourced explanation (also available in a book), and it is unfortunate that Linklater seems to have been unaware of it. One wonders what else he did not know.

 

Land sales price vs. what is paid for land

image credit: Onishenko

image credit: Onishenko

In order to fund community needs from a tax on land value, assessors need to estimate what that land value is.  Conceptually the task need not be difficult (Ted Gwartney outlines some options here, but a more complete and still-valid examination is in this book.) Basically, you look at sales prices for actual land transactions, and make adjustments for parcels which haven’t sold recently or where land comprises only a small part of the value.  But what happens if the buyer pays something additional, “off the books,”  for the land?

According to Peter Katz, that seems to be what often happens. This presentation at APA last March starts off slow (and self-promotional), but moves along thru some interesting territory. Regarding the price of vacant land, he asserts that, in many desirable areas, developers have to first buy (or option) the land, then negotiate with local authorities to get permission to build. Getting that permission might require agreeing to donate money (or land) for public use, or perhaps less savory expenditures, and to the developer this is part of the cost of land. If an area of any size is subject to such constraints, all the land sales are below market prices by the amount of such costs, and all sites, whether sold or not, receive assessed land values that are lower than what developers actually pay to get a buildable site.  This results in less public revenue, implying a need for other taxes, as well as a tendency to develop at lower densities than might be appropriate, when developers choose to settle for existing zoning rather than what they might be able to negotiate. Katz suggests that a formal study of this effect should be done, and nominates Lincoln Institute to make it happen.

Katz’s remedy seems to be a combination of form-based zoning codes, plus a sophisticated (and presumably accurate) fiscal impact analysis that might show denser development to actually be more “profitable” to governments.  But, responding to a question about 65 minutes into (and near the end of) his talk, he acknowledges that funding government from a land value tax would be a good way to obtain the desired development pattern, and that Henry George was a great guy.  His observation that Georgists tend to be wacky has been made before, and I can’t say it’s wrong.

Mortgage Wars & Collapse

An informed review by political economist Ed Dodson of Tim Howard’s new book about the collapse of Fannie Mae. The senior people understood that they were in trouble due to politics and ideology, and they saw the collapse of underwriting standards, but most had no interest in addressing the fundamental cause.

Misunderstanding housing costs again

imge credit: David Shankbone  (cc) via flickr

New York’s housing situation (image credit: David Shankbone (cc) via flickr)

Melissa Kite had a piece in Thursday’s Guardian complaining about the escalating cost of London housing. She starts off well, observing that she can’t earn as much in a year as the increase in the value of her flat.  “[W]hat does it say about our society when we can, in theory at least, make more money doing nothing than we can by the sweat of our brow?”  Agreed, it’s a problem. So what does she recommend?

In New York, 45% of people live in rent-stabilised accommodation where landlords are limited to increasing rates by a certain percentage each year. This is not rent control – which accounts for only 1% of tenants – but rent with controlled increases, an important difference.

I will wait to hear from New Yorkers about how this has solved their housing problem.  Going back to the Guardian article, Kite gets pretty close when she observes that “a British company is selling a flat-pack self-assembly ‘house in a box.’ But she doesn’t take the next step to ask: “If you buy one, where are you going to place it?” The answer, of course, will be that anyone who can afford only the flat-pack house will be unable to obtain a suitable site anywhere near London.

The problem isn’t house costs, it’s land costs. And land costs would be a lot lower if all land was subject to a stiff site value tax, because there could be little or no speculative premium.   (To be clear, the cost of obtaining a site for your house, purchase financing plus tax, would be much less if landholders weren’t pricing sites based on their future hopes rather than current usefulness.)  This point is readily made, for example here and here. It’s unfortunate that the writer of the Guardian article seems unfamiliar with the concept.

 

 

NY Times reports another benefit of the citizens dividend

photo credit: coal dubya via flickr (cc)

photo credit: coal dubya via flickr (cc)

If the earth belongs to the people, then whatever is paid for the use thereof belongs to them in some equitable fashion also.  Therefore, beyond what’s needed for legitimate government purposes, there would seem to be enough for a considerable “citizen’s dividend” for everyone.  Plenty of discussion on this subject can be found here.

My guess is that it would likely be enough to replace most of the aid programs which provide funds — rarely enough but maybe better than nothing — to low income people.  One advantage is that it could be administered at relatively modest expense.  A related advantage is that it can probably be made to work, with everyone getting what they’re entitled to. This latter aspect is what came to mind when I read this NY Times article, in which a Georgetown law professor summarizes “a litany of automation and contracting meltdowns” whereby the poor were unable to obtain benefits to which they were entitled under various aid programs and which may have been essential to their support.

His point seems to be that, while healthcare.gov suffered major problems initially, it was soon repaired because its failure affected many non-poor people. (I have no idea how well-repaired it might be, but will assume he is correct about this.)  He does not mention the citizens dividend, perhaps is unaware of it, or maybe ignores it because it would likely reduce the demand for lawyers. But he makes the case. A regular check for everyone, as a just entitlement, would be a far simpler system than most of the means-tested (and otherwise-restricted) aid programs which cost taxpayers so much money.

And while we’re on the subject of means-tested programs, consider this:

[I]f a single mother has two children in childcare and she’s making $36,000, she’ll pay about $310 a month for childcare. Then, if she gets a raise to $37,000, she’ll need to pay $1,200 a month for childcare because of the loss of a subsidy.

Of course, it needn’t be a raise, it might just be a decision to work a bit of overtime. I have written about this before and I will probably have to write about it again. Means-tested aid is a disgrace.

 

Progressive proposal from Kenya

detail from photo by Jennifer Wu via flickr (cc)

detail from photo by Jennifer Wu via flickr (cc)

Writing in Standard Digital, Charles Kanjama proposes that “If government was clever, it would include a value-capture approach in project financing.”  He’s writing about big infrastructure projects, which in his time (2014) and place (Kenya) include railway and port improvements. He suggests that perhaps half the cost should come from land value tax, without explaining why it would be appropriate for landowners to receive half the benefit of improvements paid for by the general community.  (Kanjama is an attorney and accountant who was rated among the top 100 legal minds in Kenya as well as one of the 100 most influential people in that country.)

The same edition (January 4 2014) carries another article showing a problem resulting from failure of the community to collect all the rent.  It seems that the government wanted to remove a large number of squatters who had settled in a protected forest.  Ordered to vacate, they each received 400,000 shillings ($4604.67 US, according to Wolfram Alpha) to purchase land elsewhere.  Now the time for relocation has expired, and many spent the money on things other than land.  Of course I don’t know these people, don’t know what land was available, don’t know their needs, but very clearly if land were nearly free (as results from a high land value tax) they would almost certainly be better off.

What cell towers might be worth

Water tower on Plymouth Court in downtown Chicago.  Photo by Menaceofprivilege 2013.

Water tower on Plymouth Court. Photo by Menaceofprivilege 2013.

I just happened on this article from Reuters (via Yahoo),  reporting that AT&T has long-tem leased or sold 9700 cell towers for what appears to be $500,000 each, including a leaseback of each at $1900/month with 2% annual escalation.  Lots of details aren’t included, but it gives some idea of what an old water tower or other (possibly disused) elevated location in an urban area can be worth. Curious why there don’t appear to be any antennas on the downtown Chicago tower pictured here; perhaps they’re on the other side.

Land value depends on the definition

Image of Drake Hotel by Teemu008 (cc via flickr)

Image of Drake Hotel by Teemu008 (cc via flickr)

In an urban context, absent special environmental issues or legal constraints,  land value and location value are pretty much the same thing.  So we read in Crains that the Drake Hotel is on a 63,000 square foot parcel valued at $150 million, implying this land is worth about $2381/square foot.  But no, the location probably isn’t worth that much.  Rather, the land is leased by the owner of the structure, and the lease document says that, every five years, the land value is to be estimated and the annual rental set at 10% of the land value.

Possibly 10% was a reasonable return in the past, but in today’s zero-interest-rate world no safe investment would yield that much. Rather, the owner of the land actually owns two things: (1) the land, and (2) the privilege of requiring the building owner to pay an above-market rental rate.  Were we to value the land “as vacant,” which is the correct way to estimate land value for taxation purposes, then (2) would disappear and the land would be worth, more or less, the same per square foot as other land in the very prestigious immediate neighborhood.

It would be interesting to see what the lease says specifically about how the land value is to be estimated, and to read the (certainly confidential) document describing how the $150 million value is justified.

For more discussion about methods of valuing land for assessment purposes, duck around for works by Ted Gwartney on the subject, or consult the old but still-relevant TRED volume.

Location remains critical, even as the criteria change

image credit: xeni via flickr (cc)

image credit: xeni via flickr (cc)

The Internet doesn’t make the earth economically flat.  Some locations are still worth many times as much as others.  But technology can affect the criteria for “most valuable site,” as most recently illustrated by the sale of One Wilshire Blvd in Los Angeles for more than twice the price per square foot of a mostly similar office building nearby. It also commands about twice the rent, per square foot.

The difference: One Wilshire is ” the primary terminus for major fiber-optic cable routes between Asia and North America,” and is therefore is a location prized by telecommunications firms.

“You can’t reproduce the connectivity,” said real estate broker Kevin Shannon of CBRE Group Inc. “It’s telecom gold.”

Of course the buyer thinks it’s a fine investment that will only become more valuable in the future.  Presumably the seller thinks different.  The only thing certain is that technology will change, and the pattern of valuable sites will likely be affected.

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