land value – Page 5 – The Menace of Privilege

Are subsidies driving Chicago land prices back up?

Image from the Crain's article — Image linked from the Crain’s article

Of course they are, but it’s convenient to see it illustrated as Crains Chicago Real Estate Daily explains.

The proposal seems to be for Pam Gleichman and Karl Norberg to sell their 4.9 acre parcel (the Tribune story says 3.67 acres) near McCormick Place, in pieces, for a total of $195 million, which works out to something over $900/square foot, a level which I don’t recall seeing so distant from the loop. We also learn from Crains that $90 million in TIF (real estate tax) money will be sought to help pay for these developments. And of course the entire McCormick Place complex benefits from the 1% tax which all restaurant patrons in the central portion of Chicago (as far north as Diversey and as far west as Ashland) pay, not to mention the basic urban services, such as fire protection, transit, and streets, which are funded from other taxes. We’re all paying so Gleichman and Norberg can get their $195 million. It’s only slightly comforting to realize that their venture is in bankruptcy, and the only reason we get to see these details is because they’re part of a court filing. But it seems that, if everything works out as they claim, they’ll get to keep a large portion of this money.

Just for fun, we can consider what would have happened under a land value tax. If the land was taxed at something approaching its full economic rent, it would likely already be developed pretty fully because nobody could profit by holding it underused. There would likely be no bankruptcy because nobody would have loaned money on land with a modest selling price.

Value capture is different from collecting the land rent

5662410503_523564a5be_n — Photo by Sean Munson via Flickr (cc)

Henry George phrased his main proposal in various ways, from “make land common property” to the more pragmatic “abolish all taxation save that upon land values.” Certainly a land value tax is a practical way of capturing land rent, and to the extent land value figures in existing assessments and taxation we are already capturing some of it.

But it’s important to recognize that land value, or more properly the selling price of land, is only a close relative, not an identical twin, to land rent. One difference is that selling price is affected by estimates of what the future rent will be. And land selling price is much more directly affected by the cost and availability of credit than is land rent. Use of credit, in turn means an opportunity for banksters to get involved, decreasing the likelihood of real public benefit from public investment.

Which brings us to the World Bank’s 2008 report on Unlocking land values to finance urban infrastructure. This report really could be entitled “Worldwide Catalog of Methods More Complicated and Prone to Corruption than Collection of Land Rent, Which Could Be Used to Finance Some Infrastructure But More Importantly Involve Borrowing and Lending of Large Sums Which Is, After All, What The World Bank Does.” In addition to involving large loans, the outstanding feature of all of these methods is that none provide any resources for operation or maintenance, thus they can help bring about the need for new infrastructure in the not-too-distant future.

Economic divide is geographic, too

451814858_10087773c6_n — “Debt” graffito photo by Franco Folini via flickr (cc)

When I see the same theme coming from two different sources, I think there’s a trend (tho maybe it just means I wasn’t paying attention). And so we heard Meredith Whitney a few days back describing the developing divide of local and state governments, between those that are solvent (and can attract mobile, affluent residents and investors) and those spiralling down the debt hole. Now Al Lewis looks at it from the retail side– nobody wants to invest where the mundanes live, but as areas like Silicon Valley and Washington continue to prosper retail facilities are renewed and enlarged.

In a democracy of educated, thinking citizens, any state finding itself on the wrong side of this divide could reverse its decline simply by removing all taxes on wages, capital, purchases, and transactions in general, substituting a very heavy tax on land value (which ideally would include the value of mortgages on land, to be paid by the mortgage lender rather than the borrower). Unfortunately, the “investors” who control much of the land in declining areas have the resources to fool the electorate, or can work directly with elected officials to prevent effective reform.

Planned office tower may take double subsidy

rendering of 444 W Lake St proposal — 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.

Silicon Ocean

Blueseed concept proposal, one of several at their site

Blueseed plans to start operation next year of a floating city, safely outside the twelve-mile limit of U S jurisdiction, where a thousand innovators can work pretty much without the immigration hassles imposed on domestic companies. The “land” of the ocean is of course free to anyone who wants to use it, but there are big expenses in building and operating the platform. Still, they estimate living costs comparable to those of pricey San Francisco (albeit for much smaller living space.) If land in Silicon Valley was cheap, the ocean site would seem expensive, but it isn’t, so it doesn’t.

They’re entirely legal, or so it appears, and don’t seem to avoid Federal income tax altho California taxes might not apply. Blueseed “will work closely with the U.S. Customs and Borders Protection towards an agreement that follows all applicable US laws and regulations,” and it appears access will be from the California mainland so everyone not a legal U S resident will need some kind of U S visa.

But being outside U. S. territory, flying a flag of convenience, what defense has Blueseed against whoever might want to attack them? Not to worry, “pirates … don’t exist near California…” and presumably attacks by government authorities are no more likely at sea than within the country.

Bast drafts Henry George for Green Bay

Longtime HGS supporter Joseph Bast, head of the Heartland Institute, has a new policy brief (pdf), with a podcast overview, recommending that fans of professional “sports” own the teams thru nonprofit corporations. The only actual example of this is the Green Bay Packers, which originated as a for-profit organization but was bought out of bankruptcy by a fan-organized nonprofit. They would never leave Green Bay since the owners cannot profit by moving them. Thus the main lever used by for-profit teams to extort new stadiums and other favors would be broken.

Pointing out that teams currently extract monopoly rents from the community, Bast mentions Henry George but rejects George’s idea that natural monopolies should be municipally-owned. Of course, George never applied this concept to professional “sports,” which existed in his day but was nothing like what we see now. The closest I can think of is that George considered the idea of a publicly-subsidized theater to be so absurd, that he compared it to subsidy of various other industries to illustrate the absurdity of the latter.

So why don’t fans establish nonprofit teams? My personal theory is that most fans of professional “sports” are masochists and like to be abused. But perhaps I’m wrong. Bast suggests routes around other barriers including opposition of major leagues, high cost of setting up a team, and existing taxpayer-subsidized facilities which are controlled by existing monopolies.

Is the community collecting the rent at 31st Street Harbor?

linked from Chicago Public Building Commission Chicago Park District’s new harbor at 31st street reportedly cost $103 million and can accommodate 1000 boats. “Rates for the new harbor range from about $3,780 for a 35-foot slip to more than $10,000 for the longest slips of 70 feet and more, excluding taxes and a 25 percent nonresident surcharge.”

One could imagine that these figures might actually cover debt service, maintenance, and the economic rent of the lakefront location. But there’s no such indication in the Park District’s 2011-15 Capital Improvement Plan, which lists funding and projects, but makes little effort to tie the two together so there’s no indication of how much any project costs nor how it’s paid for. Nothing in the latest posted (2010) Comprehensive Annual Financial Report, either.

But in the process of browsing the District’s web site, I did discover that I would be violating their regulations if, without a permit, I post on this web site a photo that I took on Park District property.

The Public Building Commission has some information on their web site, including some contracts and many construction photos. Can’t wade thru all of the former, but they appear not to include any information on how the project is funded.

Land value impacts of Minneapolis light rail

4178887765_7f31e4d4db_m — 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.

How much is land value, really?

A relevant query from Mohamad Tarifi showed up on the Facebook LVT group:

144300721_7a8654ee4e — 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?

He doesn’t tell us which part of Southern California this is; nowadays there are plenty of places where land (and houses) are worth little. But even in prosperous times, builders of new houses typically expect the land to cost maybe 20% of the selling price for a new house, so his figure is plausible for some areas. But a new house isn’t the average house.

Routinely, in any dynamic community, houses (as well as other buildings) are demolished from time to time so the land can be re-used. When this happens, it means the land with the house on it was worth less than the bare land. The average house is somewhere along the path from “land value is 20% of total” to “land value is over 100% of total.”

The existing U S personal and corporate income tax cause an additional bias to underestimate land value. The owner of “income property” can deduct an amount from her taxable income based on the “depreciation” of the improvement, but land cannot be depreciated. And, since the U S Government has little idea what the selling price of land actually is, it is a simple matter for the “taxpayer” to overestimate the proportion of real estate purchase price which is for the improvement.

Taiwan monitors land value

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.