“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.
Two or three developers (depending on whichsourceyouread) 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.
Just in case there was any doubt, Pam Martens in Counterpunch gives us a report on the Lower Manhattan Security Coordination Center, where feeds from sophisticated spy cameras are integrated to essentially track anyone and everyone on the streets who might interest our supervisors. What’s news here, tho I suppose I already suspected it, is that partners in this operation are not just the NYPD, but also “the same firms under investigation in 50 states for mortgage and foreclosure fraud and widely credited with causing the Nation’s economic collapse.” Presumably they have added some of the proceeds of their crimes to the $150 million public money that’s been used for this project.
It’s difficult to believe that Chicago doesn’t have something similar.
Meanwhile, and I suppose it’s more relevant to us here, the CTA will be paying up to $58,000/month, plus commission, to Goldman Sachs and other “financial advisors.” The Authority assures us such amounts “are comparatively very small compared to the billions of dollars in much-needed funding CTA would secure” if such commissions are paid. “Funding” more likely means “loans” or “new ways of packaging existing streams of money” rather than any actual additional resources or capture of land value which transit could create.
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.
A relevant query from Mohamad Tarifi showed up on the Facebook LVT group:
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.
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).
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.]
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.
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.
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.
