Land Speculation and TOD
Houston Tomorrow linked to a report on TOD that I found pretty interesting. The report basically broke down the impact of transit on property values as measured across the country for the last ten years or so. They found that the majority of the value of the transit line actually accumulates prior to the transit line being built.
The report then references Houston as an example of how this can actually hamper TOD:
In regions like the Twin Cities, Houston, Denver and Charlotte, asking prices for properties adjacent to planned new light rail lines have increased substantially based on the expectation of future development opportunities. The increasingly high-profile nature of transit and TOD projects is putting a spotlight on the potential of properties near transit. Along some lines this is resulting in a significant amount of new development, such as parts of Charlotte’s South Corridor. In other cases, the combination of high land costs and high construction costs is stifling new development near the transit line in favor of locations further from transit. In Midtown Houston, for example, most of the recent new development in the neighborhood consists of relatively low-density townhouse and mixed-use development, which is occurring on less expensive sites located further from transit. The real estate market may eventually catch up with property owner expectations about the value of their properties, but so far speculation has choked off the potential for TOD in Houston.
This comes as no surprise to us locally. We all witnessed how property values skyrocketted in expectation of a massive redevelopment of Main St, and then because of astronomical prices most of the desired development never came.
This lead me to wonder, as I have many times, what a city could reasonably do to keep a lid on speculation and therefore facilitate redevelopment of older, largely vacant areas that are now logically located for high intensity redevelopment (ie. Midtown, East Downtown).
Two thoughts come to mind.
First, as the supply of sites in proximity to light rail increase, prices for station area land should moderate slightly. You have to have a ton of transit before the station isn’t a huge premium anymore, but the unrealized development around Main Street will hopefully keep speculation from being as rampant around the Phase II station locations, since investors would have reason not to be over-optimistic as to their ability to flip the property.
Second, we should use our high property tax rate to our advantage. What do I mean?
Let’s take a look at this property in Midtown. This is a great location, 122k square feet of available land, and they’re listing it on the market for $15.2 million. That’s a lot of money, and honestly I think it’s more than the property is worth – the proof being that it’s been sitting on the market for a long time and probably will continue to be on the market for a long time.
Now, the appraisal district seems to agree with me: they’re valuing and taxing the property at $5.3 million. (To see this tax record search ALABAMA MAIN PARTNERS LP at HCAD.)
Clearly there’s a huge difference here. At $5.3M the owners are paying about $140,000 per year to sit on the land. At $15.2M, they should be paying about $382,000 per year in taxes.
Now, I’m a big believer in free market pricing, so I’ll give the owners the benefit of the doubt and say they know what the land is really worth. It may seem steep, but obviously if they can sell it for $15M then it’s worth $15M. So my question is, why isn’t the appraisal district taxing it at $15M? After all, the owner is declaring to the world what the land is worth, why second guess him?
If we practiced this policy city wide, taxing any property on the market at its list price for the year instead of it’s previous appraised value, we would probably see prices come down a lot in the main redevelopment areas of Houston, which would result in a lot more redevelopment activity actually taking place.
The reason I like this idea the most is that it places no unreasonable restriction or infringement on people’s ability to price their own land, but it encourages people to tone down their greed a little bit and not hold out for an unreasonable price unless they’re willing to pay for it. Also, it would serve as a strong discouragement for speculators who only ‘flip’ land (which adds no value) rather than assembling land (which could add significant value).
So what do you all think? Is this a good idea, or do you have a better one? What other kinds of things can we do to limit the negative impacts of speculation and encourage redevelopment in these prime areas?
Categories: featured, move
Tags: appraisal, HCAD, property, property tax, property values, real estate, speculation, tax, TOD
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This one is a dilemma for me. I like the idea of keeping land costs low, but I don’t like the idea of higher taxes. Since however, we waste taxpayer dollars on so so many other worthless causes and special interest projects; I wouldn’t be opposed necessarily to the idea of giving TIRZ-style developer incentives for building affordable housing / mixed use developments with the hope being that redevelopment will create a larger tax base which will in turn pay back the incentives…
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Seems like just requiring sales price disclosure and basing assessments off of sales prices + annual adjustments / comps would be more logical, simpler to administer, and have the same intended effect as what you are suggesting – and it could be applied throughout Texas. I’ve seen plenty of properties listed on the market for upwards of $400k and pulled them up on HCAD and they were appraised at $200s – so if someone is going to buy that house at $400k, currently the expectation is likely that they too will be able to use the protest system to keep the appraised value down in the $200s somewhere. See http://www.mysanantonio.com/business/real_estate/Property_tax_protests_pay_off.html (Kuff posted about this as well). This disparity just gets larger and larger as the price of the home or land goes up.
Bottom line – if they are listing that property in Midtown for $15 million, then when the sale occurs the sale price would be transparent, and that becomes the base point appraisal for that property and would also be used in all comps for that neighborhood. The expectation that you could pay taxes on only $5 million would be gone. My guess is this change would knock millions off of the ultimate sales price for the Midtown property.
I’m guessing this would ultimately have a benefit for denser TOD, because instead of paying taxes on a $1 million townhome or home near a rail stop (instead of the present distorted system where the owner is probably paying for an appraised value of $650k), more people will be encouraged to pay for denser and slightly smaller properties with a slightly lower tax burden.
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@Bobby,
I slightly disagree with you here – the ideas is not to raise taxes, it’s to assess the taxes we currently have realistically. We don’t need to throw even more subsidy money at speculators, that just rewards them for their behavior.
As far as credits for affordable housing… there may be a time and a place for that, but I’m not sure that it’s needed here.
@ Mike
I think you’re exactly right, and the step you’re suggesting (making the sales price the value baseline automatically) should have been taken a long time ago. That would certainly help keep prices down.
My thought is, however, I’d like to find some way to discourage ‘flipping’ land – buying it with the deliberate intention of reselling it without even touching it a year or two later for 10x the price. That activity makes a few people rich to the detriment of the rest of the city.
Now, I can’t think of any reasonable way to regulate it – I mean, what if someone buys a lot with good intentions then finds themselves forced to sell for some good reason, it’s not necessarily greed that’s motivating them.
The issue is when speculators lock up a huge area of town (Midtown along Main St.) and then all hold out for these insane prices. How can we encourage them to hurry up and sell?
Your suggestion to base the taxes on the sale price would certainly put a real ‘check’ on the escalation of existing structures, but with vacant land people are already expecting the appraisal to skyrocket when they build on it. With residential I can see there being increased price sensitivity (since there’d no longer be a way to pay tax on a value lower than the sales price), but I don’t see the same degree of impact on commercial development, since the developer would usually continue to own the improved property for a while after acquisition and development.
So, can we either apply the taxes on the real value of the land (it’s sale price) while it’s being listed, or retroactively after the sale? I don’t know how it would work, but as a city we should be looking into this.
I’d like to see our system rely more on the market to determine values, and therefore taxed land at whatever the seller thought it was worth rather than some government produced estimate. The closer we can get to that, the more we give people a reason to price their land rationally if they want to sell it.
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Bobby,
The light rail in midtown is already in a TIRZ. How’s that working out? Well, the TIRZ has been spending lots of money rebuilding street and sidewalk infrastructure. The sidewalks they improve to a more urban style with wider paths with benches and trees.
A current project is the McGowen reconstruction. A previous project is Elgin through Midtown.
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Thought this might be relevant to the discussion:
http://bubblemeter.blogspot.com/2009/07/abolish-all-taxes-except.html
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>>I’d like to see our system rely more on the market to determine values, and therefore taxed land at whatever the seller thought it was worth rather than some government produced estimate.
Well, if we were to somehow tax based on listing prices as well, we’d also probably have to have some way of regulating that – because given what you are suggesting, the seller thinks their property is worth $0 when it comes time to pay taxes on it and will try to find loopholes in your system. I mean, correct me if I’m wrong but there is nothing to prevent me from listing my property for $1 million and then saying “No thanks” to the first bidder that offers me that – “I have others interested that might outbid you” – as we saw in the California real estate bubble, houses were routinely selling for 125%+ of list – but I don’t even have to have any other bidders, I could just say “No – I don’t feel like selling today”.
So one way or another I think you are looking at the sales price being the key determinant in the tax rates, but I suppose if you wanted to look at the list price as well, you could do that – but either way involves some degree of government regulation to ensure transparency and that people are not cheating the system – for instance if the owner rejects an offer at list price than the tax appraisal automatically goes up 10%, or whatever. Without that, your suggestion might just incent the owners in Midtown to lower their sales price by $5 million with no intention of actually selling at that price, and then we are right back where we started.
Also, remember – the government would not have to “estimate” so much if the “free market” would just report sales prices transparently to them. A key to a good free market is transparency, and right now in Texas property dealings we do not have that – and it’s not government’s fault – it’s people (and realtors and agents who benefit from their knowledge in the current power structure) who don’t want property dealings to be public record – for whatever BS reason.
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Mike,
I see your point about creating loopholes.
What about assessing the tax retroactively, much in the same way they do when land looses its agricultural exemption?
Correct me if I’m wrong, but as I understand it when land is converted from agricultural to some other use the tax for the last five years is reassessed minus the ag. exemption, therefore a big load of taxes end up being due.
The mechanism is already in place for that, so we could easily collect back taxes on a property at it’s sale value.
The downside I see to that is that it’s hard to tell if something happened that really did increase the value of the property in less time than that – for instance if a lot has previously been surrounded by mostly other vacant lots, but now it has two skyscrapers beside it, then obviously the value has changed a lot in a short period of time.
Anyway, it’s an interesting idea, so keep thinking about it.
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Andrew –
First of all, this is a fantastic site – I just came across it today for the first time (I’m in San Antonio).
With respect to taxable values, asking prices can be a bit misleading. For instance, your example (listed for $15.2mm) may include lots of design work, environmental & other due diligence, carry costs, demo & abatement costs, etc. These costs can really add to a land basis (up to $20/sf). Although, from the looks of things, that asking price appears to have more to do with a bad purchase during the recently-passed run-up.
The only way around the current appraised value conundrum is for TX to pass mandatory disclosure laws, requiring property owners to disclose the precise purchase price for property at the time of acquisition. Otherwise, local appraisal districts have to guess at values using crappy information (and risk litigation if the owner wants to fight). It’s a bad system that really stacks the deck against the public.
Speculators are, unfortunately, an unchangeable part of the real estate development business. They contribute nothing, and add significant costs to projects. But there’s really no way to eliminate them from the “process”, even if you tax the hell out of them.
I actually believe that cities do a disservice to the redevelopment of urban neighborhoods by making massive public investment prior to a critical mass of development (of course, we can argue endlessly about how to define “critical mass”). What I mean by that is speculators and obstinate/unrealistic long-time property owners (who are actually worse to deal with than speculators) are the people who see most of the benefit of the public monies being spent.
For instance, in SA, we just spent $86mm extending the Riverwalk north of downtown to the Pearl Brewery (currently being redeveloped). A great project, to be sure, but what do you think happened to the owners’ opinion of their values now that their property is adjacent to a beautiful public amenity (as opposed to an overgrown drainage ditch)?
So the public spent the money, which will ultimately create exponential property value increases for the existing owners. But those higher values make it even tougher for developers to make projects financially viable. And when projects are “on the verge” of being financially viable…….we all know that design quality starts to suffer.
Sorry to rant – again, a great website and good discussion.
Chad.
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