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.
Altho Henry George’s proposal is “to abolish all taxation save that upon land values,” his objective really is to collect land rent for the community. Of course land value is, ultimately, determined by anticipated land rent, but rent is more stable.
This is illustrated by a recent article in the Wall Street Journal (“Tax Break Divides Large, Small Builders,” Feb 11 ’09). In an example cited as typical, Pulte Homes is reported to have sold, for $2 million, land they had “originally paid $28 million for.” So if land value declined by over 92%, how much did land rent decline?
Probably quite a bit less than 92%, because the $28 million was based on Pulte’s guess as to what the future land rent would be. The actual rent, the amount that someone would have paid to use the land at the time Pulte bought it, was doubtless much less than their expectation of its future amount.
Some opponents of land value taxation cite cases of great declines in land prices to claim that LVT wouldn’t be a stable source of revenue. But LVT moderates speculation, and land prices would be more stable if more of the land rent was collected for public use.
One illustration of this is that states where real estate tax is relatively high have experienced more stable prices for homes and lots.
Real estate developer Jimmy Gierczyk spent $1.5 million to build a New Buffalo station for Amtrak. It’s adjacent to his real estate development. The source article doesn’t give a lot of detail about the project, but notes that he can now more easily market his condos to Chicagoans. Who are accustomed to paying much higher prices than folks in New Buffalo, I’d guess.
All of which raises the question, why can’t Amtrak collect more of the location value it generates or preserves?