Great work, Greg. In my own writing on the logic of moving to land's rental value as public revenue, I make the argument that buildings are a depreciating asset requiring ongoing expenditures for maintenance. Then, every decade or so a building owner must put out a large expenditure for systems replacement. An annual tax on the depreciating value of a building imposes a heavy penalty on owners who are on a lower, fixed income. Also, if it makes sense to impose an annual tax on a person's most important depreciating asset, then the same flawed logic should apply to all depreciating assets -- to our automobiles, our computers, our televisions, our refrigerators, etc. etc. etc.
Hopefully, the work you are doing will result in the expanding recognition of "best practices."
Another reason why it might be "overvaluing" low value parcels is zoning/speculation.
Zoned capacity essentially creates a floor for every lot. The demand for high value lots essentially spills over and anything that has a SFH zoned capacity is equivalent, regardless of lot size.
So you don't get a continuous function all the way from the floor to zero.
The reason why assessment agencies typically rely on the income approach for commercial properties is because of the idea that a rational owner will already be using the land for its "most valuable use", and that can be very influenced by the regulations of the city.
I don't know the specifics of Baltimore, and I totally agree that they should reassess the buildings. However, the income approach can be very important *in the presence of growth-stifling regulations*
Let's take your example: A parking lot is assesed at $15 per square foot, and a mixed-use building in front is assesed at $77 per square foot. That's probably because the commercial building is getting roughly +5x the revenue of the parking lot.
On a hypothetical free market economy, the owner of the parking lot would probably just end up converting his parking lot into another mixed-use building! (Depending on both interest rates and his personal risk appetite)
However, in many cities two things prevent this from happenning:
1. The presence of regulations, such as *minimum parking requirements*.
2. The irrationality of the owner (probably he thinks that is preferrably to have a parking lot and pay less taxes, even if it ends up being less profitable).
The first one can be kind of a justification for paying lower taxes: If the city is going to force you to pay taxes as if you owned a mixed-use building, it should not ban you from building a mixed-use. (This is a hypothetical example, I don't know the specifics of Baltimore).
The second one isn't a justification at all (if you are an irrational investor, then just sell to somebody who isn't).
Therefore, I think that if the city is going to do away *completely* with the income approach for commercial properties, it should also do away with the regulations that are keeping these properties from reaching its full potential.
Yes, and I should've mentioned there are good reasons for the income-generating approach, and I think it will always be useful.
Though, it does lead to this weird situation: land is not always developed to its highest use because folks can sit on land and wait for its value to appreciate.
There are some parking lot requirements for C-1 zoned parcels but they do not appear to be strong, and certainly not 90% ground floor like Royal Farms. Therefore, I think this problem persists.
I do need to think more through this problem, and explore how it translates to other parcels and other jurisdictions. More of an open thought from me.
Absolutely, I think that all of these lessons are worth discussing at length, specially as the appetite for LVT grows more.
BTW I think that OpenAVMKit is great at what it does: Value land. The issue now is how to translate that assesment into a legislation that effectively promotes progress.
My general takeaway from this discussion is: "The *less* regulations exist in a city (or in a specific zoning area inside the city), the *more* will LVT incentivize and unleash prosperity."
If all income accrued by governing bodies was distributed to all Adult Resident Citizens as a Dividend (ARCD) FULLY instead of fed into the bottomless budget, that way it would benefit all the people firstly who would spend the money and pay in various taxes to cover the cost of running the government.
If a region generates profit it is due to the citizens who have signed the social contract with the government. It is not due to government departments, corporate tax breaks, visitors, migrants, asylum seekers or non profits. The government must be funded by PROFIT MAKING and possibly wage earning activity by those that see value from operating in the region.
In the book "Number of the Beast" by Robert A Heinlein the protagonists were jumping around in alternate realities and found one where property tax was self assessed but you essentially set your selling price that could be force purchased by anyone if your estimate was low. To forestall the sale you would have to reassess your property and pay 3 years of difference in tax estimates.
I would love to see a system that was self regulating and promoted the individual or the economically productive corporation/landlord who was paying income taxes. Idle land with low tax burden as a convenient write off against profits is a scam that should end.
The governments should NEVER sell a profitable asset. It should be used to increase the citizen dividends until such a point that people are raised above the bread line with the dividend alone. This will empower everyone.
-----
As an aside I recall Louis Rosmann (of YouTube fame) explaining on a few occasions how the market price of property in NewYork (that he fled) was held artificially high because most of the property was investment property and the banks were financing it. The banks gave loans against potential rental value which means high rentals was needed to get loans even if the units were vacant. High rental values then fed back into higher prices and so on. All the parasites were rubbing their hands and the regular traders and small enterprises were being victimised for unprofitable space. A lot that is wrong in the world is due to perverse incentives that have been put in place by those that benefit from the results and have the power to make legislation to promote these incentives.
Great work, Greg. In my own writing on the logic of moving to land's rental value as public revenue, I make the argument that buildings are a depreciating asset requiring ongoing expenditures for maintenance. Then, every decade or so a building owner must put out a large expenditure for systems replacement. An annual tax on the depreciating value of a building imposes a heavy penalty on owners who are on a lower, fixed income. Also, if it makes sense to impose an annual tax on a person's most important depreciating asset, then the same flawed logic should apply to all depreciating assets -- to our automobiles, our computers, our televisions, our refrigerators, etc. etc. etc.
Hopefully, the work you are doing will result in the expanding recognition of "best practices."
Thanks for what you are doing.
Ed Dodson
Thanks Ed!
Another reason why it might be "overvaluing" low value parcels is zoning/speculation.
Zoned capacity essentially creates a floor for every lot. The demand for high value lots essentially spills over and anything that has a SFH zoned capacity is equivalent, regardless of lot size.
So you don't get a continuous function all the way from the floor to zero.
Something to look into for sure!
Great article, really hopeful for the future!
The reason why assessment agencies typically rely on the income approach for commercial properties is because of the idea that a rational owner will already be using the land for its "most valuable use", and that can be very influenced by the regulations of the city.
I don't know the specifics of Baltimore, and I totally agree that they should reassess the buildings. However, the income approach can be very important *in the presence of growth-stifling regulations*
Let's take your example: A parking lot is assesed at $15 per square foot, and a mixed-use building in front is assesed at $77 per square foot. That's probably because the commercial building is getting roughly +5x the revenue of the parking lot.
On a hypothetical free market economy, the owner of the parking lot would probably just end up converting his parking lot into another mixed-use building! (Depending on both interest rates and his personal risk appetite)
However, in many cities two things prevent this from happenning:
1. The presence of regulations, such as *minimum parking requirements*.
2. The irrationality of the owner (probably he thinks that is preferrably to have a parking lot and pay less taxes, even if it ends up being less profitable).
The first one can be kind of a justification for paying lower taxes: If the city is going to force you to pay taxes as if you owned a mixed-use building, it should not ban you from building a mixed-use. (This is a hypothetical example, I don't know the specifics of Baltimore).
The second one isn't a justification at all (if you are an irrational investor, then just sell to somebody who isn't).
Therefore, I think that if the city is going to do away *completely* with the income approach for commercial properties, it should also do away with the regulations that are keeping these properties from reaching its full potential.
Yes, and I should've mentioned there are good reasons for the income-generating approach, and I think it will always be useful.
Though, it does lead to this weird situation: land is not always developed to its highest use because folks can sit on land and wait for its value to appreciate.
There are some parking lot requirements for C-1 zoned parcels but they do not appear to be strong, and certainly not 90% ground floor like Royal Farms. Therefore, I think this problem persists.
I do need to think more through this problem, and explore how it translates to other parcels and other jurisdictions. More of an open thought from me.
Absolutely, I think that all of these lessons are worth discussing at length, specially as the appetite for LVT grows more.
BTW I think that OpenAVMKit is great at what it does: Value land. The issue now is how to translate that assesment into a legislation that effectively promotes progress.
My general takeaway from this discussion is: "The *less* regulations exist in a city (or in a specific zoning area inside the city), the *more* will LVT incentivize and unleash prosperity."
Alternatively, if LVT were implemented, resulting pressure might drive a rapid cleanup of the unnecessary regulations.
Lars and Greg are successfully doing what the Fels Commission failed to do
If all income accrued by governing bodies was distributed to all Adult Resident Citizens as a Dividend (ARCD) FULLY instead of fed into the bottomless budget, that way it would benefit all the people firstly who would spend the money and pay in various taxes to cover the cost of running the government.
If a region generates profit it is due to the citizens who have signed the social contract with the government. It is not due to government departments, corporate tax breaks, visitors, migrants, asylum seekers or non profits. The government must be funded by PROFIT MAKING and possibly wage earning activity by those that see value from operating in the region.
In the book "Number of the Beast" by Robert A Heinlein the protagonists were jumping around in alternate realities and found one where property tax was self assessed but you essentially set your selling price that could be force purchased by anyone if your estimate was low. To forestall the sale you would have to reassess your property and pay 3 years of difference in tax estimates.
I would love to see a system that was self regulating and promoted the individual or the economically productive corporation/landlord who was paying income taxes. Idle land with low tax burden as a convenient write off against profits is a scam that should end.
The governments should NEVER sell a profitable asset. It should be used to increase the citizen dividends until such a point that people are raised above the bread line with the dividend alone. This will empower everyone.
-----
As an aside I recall Louis Rosmann (of YouTube fame) explaining on a few occasions how the market price of property in NewYork (that he fled) was held artificially high because most of the property was investment property and the banks were financing it. The banks gave loans against potential rental value which means high rentals was needed to get loans even if the units were vacant. High rental values then fed back into higher prices and so on. All the parasites were rubbing their hands and the regular traders and small enterprises were being victimised for unprofitable space. A lot that is wrong in the world is due to perverse incentives that have been put in place by those that benefit from the results and have the power to make legislation to promote these incentives.