rendering from Chicago Sun-Times

Two or three developers (depending on which source you read) plan a new 45-story, 900K sq ft, $300 million office tower at 444 W Lake Street. In the world most of us were born into, this would mean they’d purchase the site, continue to pay taxes on it, and on the building when constructed. Thus the prior landowner would benefit from the transit and other infrastructure that we all provide, some part of this cost being offset by taxes resulting from the project.

This particular building, tho, may be a special case, to be built on air rights over the north approach to Union Station, tracks owned by either Metra or Amtrak. So public transportation would benefit, right?  It doesn’t appear so, because, I think pre-Amtrak, the old Chicago Union Station Co. sold off the air rights. The Sun-Times says Larry Levy owns the “site,” presumably including the air rights.

Still, the building will yield taxes which help the comunity pay, right? Not in today’s Chicago.  Blair Kamin says we’ll pay $29 million in real estate tax money to the developer, to build a park.  A commenter elsewhere suggests it might be $40 million. Whichever, of course, that’s on top of all the subsidies we pay to provide transit service and maintain infrastructure without which this building would be infeasible.

The Tribune helpfully notes that the project “is expected to generate … 3,400 permanent office jobs.”  Apparently those office jobs will be created to fill the building and would not otherwise exist in Chicago. The details of this mechanism are beyond me.

image credit: Steven Vance via Flickr (cc)

In 2010, the University of Minnesota’s Transitway Impacts Research Program released two studies of the impact of the Minneapolis light rail (“Hiawatha Line”) on real estate values. The residential study (pdf) estimated that houses near rail stations gained a total of $29.4 million more than houses outside the area, and multi-family properties gained a total of $17.7 million.  The  commercial/industrial study (pdf) estimates an increase of $20 per square foot (pdf) of building space, tho they do not extrapolate this to estimate the total impact.  Assuming for the moment that the commercial/industrial impact (which includes much of downtown Minneapolis) is double the total residential impact, we have a total land value gain of $141 million.

Now, that’s a nice amount of money, but building and equipping the rail line cost $715 million in total tax money, and it seems per page 32 of this big pdf to require about $15 million in annual operating subsidy from taxes.  Assuming the construction cost to be financed with bonds costing 4%, that’s an annual cost of about $44 million (in addition to fares collected.)  Can this be justified by a land value increase of $141 million?

It’s a question worth asking, but there are reasons the answer may be “yes, easily.” First, a big shortcoming of the studies is that they compare prices before the line started operating, in 2004, with prices afterwards.  It stands to reason, and has been established elsewhere, that real estate values start rising no later than the beginning of construction for a new rail transit line.

Second, real estate sales price may be the capitalized value of future expected net rent, after taxes, but is only indirectly related to gross rent.  The difference is taxes, not only the real estate taxes collected against the parcel, but also other taxes which operate to reduce rent.  Thus, increased real estate tax, sales tax, state income tax, and other taxes which may occur as a result of the transit line should be recognized as a benefit which the community receives (and collects!).

Finally, the studies look only at the localized effects within a mile of the station. Of course the greatest concentration of benefits will be found in this area, but a small percentage value increase regionwide, which could result from the rail line, could sum to a large amount but would not show up in these studies.

In conclusion, it is certainly possible that the community benefit of the Hiawatha Line, as measured by actual land value, far exceeds the cost of building and operating the  facility. Unfortunately, these studies do not actually test the proposition.

None of this is to say that transit investment always increase land value.  A project whose main purpose is to provide jobs and contracts, with little transportation benefit, might cost far more than the resulting increase in land values (if any).

Thanks to Bill Batt for the lead to these studies.

photo credit: Zoomar via flickr (cc)

A surprising lesson I learned from helping a family member shop for a house in the US: most property value is in the improvement (building) not the land. For example, in a 1M$ house only 100k-200k is land (and this is south california where land is supposed to be super expensive). Since I am new to all of this can someone please explain to me why this does not significantly weaken the LVT argument?

photo of Shin Kong Life Tower from Wikimedia

Much like Korea, Japan, and other advanced countries, Taiwan has a land value tax which requires it to monitor land value regularly.  And they do, apparently pretty well, as indicated by this report that 2011 land values average 8.65% over the previous year. The land value tax could be one of the reasons Taiwan seems to be more prosperous than most countries, but that isn’t my point.

My point is that assessing land value is not exceedingly difficult, if one has competent and reasonably honest assessors.  The most valuable land in Taiwan is reportedly under the Shin Kong Life Tower, NT$1.21 million per square meter (about $4,000 per square foot, a figure probably never seen in Chicago).

Thanks to the Facebook LVT group for the link.

New York image credit: Mo Riza via flickr (cc)

Hong Kong image credit: theloneconspirator via flickr (cc)

New York’s transit system, like those here on the U S mainland, finds itself in a financially unsustainable position.  Despite huge subsidies from taxation of productive activity, its managers claim a need for $10 billion additional capital funds, and the current year’s budget assumes a docile union as well as $35 million that appears imaginary.

And, like private-sector corporate managers, its chief has departed the troubled system for triple the compensation at a more prosperous organization, in this case the Hong Kong Mass Transit Railway.  Would you blame him?

For those of us who seek reliable transit funding from a source which does not burden productivity, the important point is what this relocated executive calls Hong Kong’s “sustainable financial model.”  And what is that? Simple, and no surprise to those who have been paying attention here.  The Hong Kong Mass Transit Railway Corporation “earns millions of dollars from real estate developments along its rail lines.”  That’s all it takes.  Collect some of the land value, which public transportation supports, to fund the operation at reasonable fares. [Oh, yeah, and get competent managers for the transit operation, but they don't mention that here.]

Source: Former M.T.A. Chief Recounts His Ups and the System’s Downs, New York Times, by Michael M. Grynbaum, Jan 4 2012.  Thanks to Metro Magazine for the link.

Cocoa Pods, by sarahemcc via Flickr (cc)

This one was “Bernard Callebaut, Alberta’s most famous chocolatier,” who purchased land to build a new chocolate factory.  Those who understand land rent and the business cycle won’t be too surprised at what AlbertaVenture.com tells us happened next:

[Callebaut] insists that it was an ill-timed decision to buy a large plot of land near the Petro-Canada station on the TransCanada Highway just west of Highway 22 for $5 million, and his bank’s unwillingness to exercise patience, that really did him in. “The idea was we would sell 30 acres for development, and we would keep the back part, which is actually the less-expensive part,” Callebaut says. He planned to build a manufacturing and warehousing facility there, and he even held out hope that the project would serve as a tourist attraction. “People love to see chocolate factories,” he says.That never happened. Instead, the value of the land plummeted, and his bank decided to pull the plug.

Of course, under the current system of public finance he really had no choice. He needed land for his factory.  If he rents instead of buying he is hostage to the landowners.  Only if he really understood how the land cycle works, possibly he could have prospered.  But no, Bernard Callebaut is not a political economist,  he is a chocolatier.  But perhaps he might have benefited from a learning some of what we teach at the Henry George School.

Like most good stories, there’s more to it than that.  He not only lost his land and his company, he lost his name.  To his lawyer.  Read it here.

image from Financial Times

Nick Boles

MP for Grantham and Stamford. New-intake MP and a key moderniser. Former Policy Exchange director and one of the Notting Hill set. Deemed close to the leadership. Tipped for bigger things

I assume this means he’s successful, British political terminology being rather unfamiliar to me. What’s really important is that

Nick Boles, The MP for Grantham and Stamford says a Land Value Tax should be introduced and use the proceeds to cut National Insurance – permanently.

He doesn’t want to do it exactly how I would want to do it, because he seems to want to exclude owner-occupied residential land and farmland, without limitation.  But the important thing is, he’s a successful politician, he gets elected, and he appears to want to move toward a sound economy. I’m just some guy with a blog.

I also don’t know how all this relates to the British custom of building homes on rented land far more commonly than Americans do. But it seems to be his top priority.

Source: FT via GN

Image of 3710 N. Kenmore from Cook County Assessor

Gary Lucido writes of a small parcel at 3710 N. Kenmore, offered at $9.9 million ($4950/sq ft) after failing to sell when offered at lower prices. While the price seems outrageous, the property is very close to Wrigley Field and could be used for a billboard or rooftop viewing platform. We know that the former use has commanded $350,000/year on a nearby building, which seems to justify a multi-million-dollar asking price.

So we have a parcel worth, let us say, five million dollars.  What are the taxes? Using data from the Illinois Department of Revenue, our friends at the Civic Federation publish estimates of the effective tax rate for various kinds and locations of property.  For residential parcels in Chicago, they estimate that the real estate taxes at 1.45% of actual market value. So on that basis, a parcel worth $5 million would pay $72,500/year.

But the Assessor doesn’t think this parcel is worth $5 million.  His estimate is $569,580.  (That is, the assessed value, which is supposed to be 10% of market value. is $56,958.)

Looks to me like this parcel is underassessed by something like 90%.  Even if we pretend it’s worth just $569,580, tax at 1.45% should be $8259/year.  Which is  $64,241/year less than the  “fair share” I estimate above.

So how much does the property actually pay? The Realtor’s listing says $147.  Surely this is a typo, no residential property in Chicago can pay so little?  Actually, the County Treasurer confirms it (I can’t seem to link to the actual record, but go here and search for parcel 14-20-218-047-0000).  This parcel receives three different kinds of exemptions: Homeowners, Senior Citizen, and Senior Freeze.  Apparently the net result is a tax bill of $147/year, on a multi-million dollar property which would “normally” pay about $72,500/year toward the costs of running the schools, parks, and various city services. Need we wonder why our local governments are in financial difficulty?

There are several additional points to be raised here.  First, assessment geeks may note that I have conflated data from several different years.  Of course that’s true, because taxes are always based on the value as of the start of the prior calendar year, and calculation assessment/sales ratios cause further delays. I also have not mentioned the multiplier, a factor which might help explain the details of this case but does not alter the basic fact that the property is severely underassessed.  Nor have I mentioned the owner of the property, beneficiary of this governmental failure.  The name of the apparent owner is on the Treasurer’s record, and he seems to have a Facebook page.

Finally, let’s give credit where credit is due.  Not only to Gary Lucido who might not realize the significance of the story he broke, but importantly to the open information policies of the Cook County Assessor and Treasurer.  Pretty much all assessment and real estate tax data is public record.  The income tax involves far worse outrages, but we rarely can see them since individual cases are confidential, and specifics have to be inferred from other sources (as for instance in this case.)

Postscript, a few hours later:

I was thinking about how the Assessor could come up with such a low value for this property.  Basically, what’s a very small residence on a tiny lot worth in the Wrigleyville neighborhood?  Very possibly the answer is $569,580. This particular parcel is worth many times that because of its precise location, but the Assessor does not consider that.  And if I owned the property, I would appeal any higher assessment.  Evidently the assessment rules need to be changed, so that the potential use of the property is considered. One does wonder how many dollars stay in speculators’ pockets because of this failure.

photo credit: jtriefn via flickr (cc)

As the national debt finds its support in the public revenue, which must cover the yearly payments for interest, etc., the modern system of taxation was the necessary complement of the system of national loans. The loans enable the government to meet extraordinary expenses, without the tax-payers feeling it immediately, but they necessitate, as a consequence, increased taxes. On the other hand, the raising of taxation caused by the accumulation of debts contracted one after another, compels the government always to have recourse to new loans for new extraordinary expenses. Modern fiscality, whose pivot is formed by taxes on the most necessary means of subsistence (thereby increasing their price), thus contains within itself the germ of automatic progression. Over-taxation is not an incident, but rather a principle. In Holland, therefore, where this system was first inaugurated, the great patriot, De Witt, has in his “Maxims” extolled it as the best system for making the wage-labourer submissive, frugal, industrious, and overburdened with labour. The destructive influence that it exercises on the condition of the wage-labourer concerns us less however, here, than the forcible expropriation, resulting from it, of peasants, artisans, and in a word, all elements of the lower middle-class.

– K Marx, Capital, Part VIII Chapter XXXI (source)

So Karl objects to public debts, sees them requiring high taxes as a way to keep the workers docile and the lower middle-class poor. What part of this do the Tea-Partiers disagree with?