Month: September 2021

Long read on the effects of mountaintop removal on a family in W Virginia…the land they owned was eventually enclosed by mining operations, and they were offered a buy out. They won the battle — to keep the land — but lost the war, as they watched it become degraded by the mining operations, tailings and runoff that destroyed the natural unspoiled beauty that made the land valuable to them.

In the end, nine family members agreed to sell, but six refused, and Jerry was one of them. Arch [Coal] sued all of them, arguing that storing coalmine debris constituted, in legal terms, “the highest and best use of the property”. The case reached the West Virginia supreme court, where a justice asked, sceptically, “The highest and best use of the land is dumping?”

Phil Melick, a lawyer for the company, replied: “It has become that.” He added: “The use of land changes over time. The value of land changes over time.” — emphasis added

Surely, the justice said, the family’s value of the property was not simply economic? It was, Melick maintained. “It has to be measured economically,” he said, “or it can’t be measured at all.”

He’s not wrong. Much as I hate to find common cause with a lawyer for a coal company, land use evolves over time. I disagree that wilderness areas are used as dumping for poisonous metals but perhaps if we had a better understanding of the highest and best use of land that extended to not using it at all, we might be better off. For all the talk of urban growth boundaries, a land use tax that forced idle or disused land in cities back into productive use could be used to enforce that boundary.

The question of “highest and best use” is really at the heart of what I want to discover here. And we know that land use changes over time. Even in a suburban yard, a section of the property might be a parking space one year and a garden the next. A corner lot could become a local shop (void where prohibited by zoning). So with land in cities, where there was once farmland or one-story shops and now we see tall buildings and nothing green other than a few street trees or window boxes.

The city or county needs to manage the highest and best use on behalf of everyone but exercising that power is difficult. The land and its value would need to be separated, where the title and right to use it remains with the owner but the value — something the owner doesn’t create and has no right to claim — reverts to the commons through a ground rent or land value tax. If the city needs housing more than it needs car storage in otherwise densely-used areas, it should be able to assess tax on that value. If a developer offers $1 million/acre a year in ground rent and the owner of a surface parking lot is only paying $73,000 in property tax for a .3 acre parcel by the waterfront, the highest and best use would be whatever pays $300,000 a year. If the owner wants to pay that for its current use, that’s fine. It will likely go up year on year as other parcels are developed to their highest and best use. And that assessed tax is just on the land, not any improvement that could be built there. A split rate tax that also taxes development (at a lower rate) would be best but for now, I would be happy to see a ground rent that gets land turned to productive use, rather than as part of some speculator’s portfolio.

Any city that has a housing shortage or homelessness emergency with surface parking lots on its most valuable land is failing the people who live there, housed or otherwise.

The headline Seattle developer lands financing to turn historic Labor Temple into offices caught my eye. I know that building from my time working down by the waterfront.

Columbia Pacific Advisors Bridge Lending is providing $14.3 million in financing to stabilize the redevelopment of the historic Labor Temple in Seattle’s Belltown district.
[…]
That works out to just $430 a square foot for the land. The cost and challenge of preserving the landmarked asset likely suppressed the value.

62% of an acre, valued at $7,326,000 (the 1944 building, for all its historic significance, is valued at $500)…what if the developer didn’t have to borrow $14 million but could simply rent the land from the city? $74,000 in property taxes plus the debt service on $14 million looks like $70,000 a month in mortgage and interest. What if there was a way to get that project underway with less upfront cost?

If we use the $1,000,000/acre annual rent benchmark, that would put the annual rent at $620,000 — comparably, $70,000 * 12 months is $840,000 so a ground rent could be quite a bit less to come up with.

A ground rent — 99 years with a 2.5% annual increase — seems like a simpler way forward and represents $261,034,307.81 over a 99 year term, $2,636,710.18 annualized. This is $2.6 million of contractually guaranteed revenue Seattle could use to borrow against. The 500 acres set aside as “downtown” could yield quite a lot in revenue but also would represent a revenue stream the city could borrow against to fund some of the many needed improvements, from social housing to transportation.

She was so close, off by just one letter.

The rentier class, the landlords who make money in their sleep, own the suburbs and the intown neighborhoods. Private land ownership with its inevitable consolidation means fewer and fewer people own more and more land.

With the growth of population, land grows in value, and the men who work it must pay more for the privilege.
There it was: whenever a population converges around a certain location, the land, of which there is only a limited supply for each location, becomes more expensive to live on; people have to increasingly pay to live on land, and this in turn affects the entire economy.

This hit home with me, the idea that gentrification and displacement are somehow inevitable, as relentless and predictable as the tides when we know they are manmade, completely artificial and preventable.

Shearer is increasingly involved with efforts to protect neighbors from displacement. He bought his first home in the North Oak Cliff neighborhood of Winnetka Heights for $145,000 in 2003. Today, homes sell for three times that. Originally, Shearer was attracted to the neighborhood’s sense of community, which he claims was driven by the neighbors, not by retail and restaurants in and around the Bishop Arts district. As someone who has witnessed how gentrification has changed the neighborhood that’s been his home for two decades, he feels a duty to protect it.

“I see my role now as one of speaking out against the perceived inevitability of gentrification and displacement. So many that are either actively participating in gentrification, or passively benefiting from it, believe it will happen regardless of our actions,” Shearer says. — emphasis added

The value in the land is created by those who live and work on it, not those who own the deed to a set of map coordinates. The map is not the territory and the documents are not the land. But the deed to the land is how you access that wealth. By owning the land you claim the productive output of whatever was created on it, whether it was a restaurant with a thriving community or a factory. Land is the means of production in a post-industrial economy, even more so than it was in the industrial era. A steel mill made more money than the same land did as a farm and who claimed that value? Those who punched a time card at the mill or whoever owned the deed to the land?

We hear a lot about “neighborhood character” and how it matters but it’s often the argument of racists who want to keep their neighborhood white. A neighborhood as a collection of properties is different from a community, where people might come from outside the physical neighborhood to participate. These are in tension…as the physical neighborhood is bought and sold based on the value created by the community, the community has to relocate and rebuild that value elsewhere. Sadly, that value will be expropriated in much the same way, by the same speculators who know the price of land but never see the value of community.

If you doubt that land and location are at the heart of inequality and the widening gap between the haves and have nots, read on.

“This is a unique opportunity to obtain one of the last remaining large parcels in a location where demand for development is at a premium,” the Windermere sales pitch reads:

This property is surrounded by the demand for development in every direction. There are huge new construction projects next door, kitty-corner, across the street and down the block. Parking requirements are at a minimum, to maximize on the number of potential units.

It’s true. The Lake Union Partners-developed, market-rate, four-story Stencil mixed-use project rose on the block six years ago. Across the street, the Liberty Bank Building affordable housing and inclusive development from Community Roots Housing opened in 2019.

The whole article is about land and location…the scarcity of land and the high value created by nearby economic activity.

“I originally bought the land to have a long term location for Ponder,” Branch said. “But the value has dramatically increased to the point that it’s a lot of capital tied up in the land.”

Translation: it is no longer feasible as a retail location…the rising value has driven the taxes (based on the assessed value) higher than the retail sales can cover. He can sell and re-invest the windfall — value created by everyone else on the block — in another parcel, which will also cost more than it’s really worth, keeping the wheel turning.

The assessed value rose from $504,000 in 2017 to $1,224,000 in 2021, taxed at just under $12,000/year. For some reason the building, valued at $1,000 or less forever, was valued at $118,900 in 2017 and fell back to $1,000 the next year. So the assessed value is all land. A ground rent on that land might bring in a bit more. At $1 million/acre annually, that 1/10 acre parcel could be worth $100,000 in ground rent. That would lower the market price but with that rent, it would need to be developed. And that’s what we need. A 117 year old wood frame structure valued at nothing sitting on that prime location is not the highest and best use of that land, to use the phrase assessors use to describe their purpose.

Today I learned about Seattle’s Business Improvement Areas. I’ll have to look into that and see what it would take to make all of Seattle’s commercial property, maybe all of it, into a city-wide BIA. The value is in the land, as we see over and over again.

 

 

The first point can’t be said loud enough: you’re paying off someone else’s investment while they sleep or live their best life in Bora Bora.

If land was owned in common and ground rents imposed on all property, that money would be re-invested in the things we need, making the land work as hard as we do.

And that second point tells you all you need to know about how property ownership is subsidized: you can lower your tax burden, while building up wealth at the expense of your neighbors. If you’re paying a $1,000/month mortgage, most of that will be tax-deductible interest: call it $900 which over a year is more than $10,000, taken right off the top of your taxable income. And your buying power is increased dramatically because of how mortgages are structured: you pay almost all interest at the beginning, all of it deductible, but Uncle Sugar will give it back at the end of the year. Pay $2,000 a month, get $1900 or more of it back, a little less each month, but as they point out, your payment never changes on most mortgages.

Imagine paying $60,000 more than the asking price and thinking you got a deal…

So the seller gets $60,000 more than the asking price…

[for] an $800,000 four-bedroom townhome in Lynnwood with space for a home-office and rooms for their teenagers, he said.

and the realtor® makes their percentage.

So where did the $800,000 value come from? What makes a townhome worth $800,000? (And seriously…townhome? Call it a townhouse and be done with it.) Same as any other property…what’s around it? What investment went into those properties that make this place desirable? Good schools? Shopping? Restaurants? A park? The seller didn’t build any of that. Their taxes might have paid for some of it, same as everyone else’s, but I feel confident they listed a lot of nearby amenities they didn’t build or pay for.

Not that there is anything wrong with that. If I were selling a place that had a tremendous view, I’d mention it, even though the play of light over it was not my own work.

The point of a land value tax or a ground rent would be to recoup some that unearned value, recapturing the value of the land and location, and driving development of nearby parcels. If I am sitting on vacant land as other people develop theirs, I’m doing fine if the “highest and best use” of that land is for parking or as another brownfield or graffiti exhibit. But what if the assessor sees those nearby parcels and decides mine should be valued as if it was in productive use, rather than as a speculative asset? Am I going to sit on an idle parcel of land that is being taxed based on what it could be worth once developed? Not likely.

The neighbors around this lucky family built up that $800,000 sale price through their own investment of time and money but what do they get? Sure, they get the promise and hope that they’ll be able to do the same in their turn. But the floor under that investment, if you like, is the work of the commons, every person who funded the roads or schools or utilities that made that place worth buying into. And the rewards all get pocketed by the cartel members, the land owners, who benefit from scarcity and a system that rewards private wealth creation at public expense.

This fellow has the idea that no one gets rich from housing, not even him. Lower cost development with a cap on the sale price, in perpetuity — these will will be both 20% smaller and 20% cheaper than market rate flats.

“It turns us into these little mini-capitalists,” he says. “I don’t think housing should be an investment in that way. It’s become a casino economy because we’re undersupplying housing by a factor of two.”

How does he do it? It’s no secret. There are no tricks.

A 20% price discount on small-scale developments is difficult to achieve for private developers that want to make a profit. Pocket’s formula tackles the challenge in two main ways, one of which is the space cut. It aims for 37 sq metres (400 sq ft), compared with the UK median floorspace for flats of 43 sq m (“just under the size of four car parking spaces”, as the Office for National Statistics evocatively adds). Indeed car parking, and extra bathrooms, are among the extras Pocket eschews.

Vlessing is candid about the compromise: “If you make something bigger at 500 sq ft, my people can’t buy that.”

He has found a market niche that needs to be served.

His people are the capital’s relatively low-earning first-time buyers – the average annual income of a Pocket buyer is £39,000 – and cash buyers. Flats in outer boroughs such as Barking start at less than £200,000, while closer to the centre the prices can be £280,000 or more. Crucially, the buyers are contractually bound to pass on the 20% discount to the local market rate in perpetuity, reducing the scope for flipping.

At today’s exchange rate, that’s a $277,000 flat — to own — in an outer borough.

The model has proved durable: the 1,000-flat milestone will be reached around November. Pocket is also starting to expand into two- and three-bedroom flats, albeit at full market rates.

The company aims for a profit margin of 15% on developments, lower than the 20% to 30% enjoyed by the bigger housebuilders. In 2020, Pocket Living made revenues of £56m, nearly £20m lower than in 2019, and a pre-tax loss of £870,000 in 2019 swelled to a £6.3m loss, according to its latest accounts. Vlessing says it was an investment period, and profits will come from 2022.

What kind of planning permission would it take to do this in our housing-starved cities? He doesn’t mention the price of land but perhaps that’s part of the scheme, getting inexpensive leaseholds for unusual or small parcels. Seattle has unused land it could use for this and a lot of land locked up by speculators that could be put to use with some gentle persuasion, like zoning changes and a ground rent.

[rewrite of this piece, after a database crash]

These local newspaper stories…

“’Dystopian nightmare’ state of downtown scares off investors,” went the headline about the lowball sale in the local business press, quoting a real estate broker.

“This is another example of how some investors and developers continue to place money in the city despite its anti-business reputation and the encampments of homeless people lining some streets,” the Puget Sound Business Journal noted.

What would it take for the local business press to walk that back? Maybe this?

[T]his past week Amazon said it is hiring 12,500 people in Seattle, the most of any city, in a fall jobs blitz.

“Amazon’s hiring spree is concentrated in Seattle,” this newspaper reported, adding that this is a “degree of rebuke” to the idea the company is jilting us over the payroll tax.

After all that scene setting, we’re told that a property in downtown Seattle, right by Amazon HQ, sold for a lot less than expected…it was listed at $9 million and sold for around $6 million. That’s $6 million for a small parcel with a $1000 building — a 1937 built teardown. No one bought it for the oil change facilities. About 1/6 of an acre, but if we apply we same metric as on the Mercer Megablock, we could value that at $1 million a year per acre…so about $150,000 a year in ground rent. If it were up to me, I assess it with an eye to how close it is to Pike Place Market and the waterfront, the light rail, all that downtown goodness, and write it up to $250,000/year. If they don’t want to pay it, someone else will. Ideally, the ground is all that changes hands for a pure land deal, in which case this would likely be a lot higher while the “purchase” wouldn’t really be a thing.

By way of comparison, the current assessed value of $6,804,000 means the property tax (on the all-but-vacant lot) is $64,454.26/annually. We know that land is worth far more than that and that its value doesn’t come from the Jiffy Lube but from all the other development around it. That’s how land values have always worked.

After all, “a 45-story tower, with 32 stories of “co-living,” nine stories of hotel and three stories of common amenity space” should make some money for the developer/investor, enough to cover the rent. And nothing pleases me more than seeing landlords having to make rent through their own sweat instead of making money in their sleep.

We see stories all the time about land sales (often described as sales of a business but the land is the play in Seattle or anywhere else) but the business press never considers how a set of map coordinates could command such a high price. That lot size — 6480 sq ft — is what a single family home in the northern reaches of Seattle comes with. So why is 1/6 of acre in downtown Seattle worth $6 million when the same size parcel in Maple Leaf might be $600,000? Could it be…location, otherwise known as proximity?