Land/Location-Value Research

Rebuilding After Riots

…Appears on the Robert Schalkenbach Foundation’s blog. A quote:

Rebuilding the destroyed neighborhoods of Minneapolis requires visibly building community solidarity, something land-value tax districts and a community currency would promote.

Read the full article here.

Disclosure: I sit on the Robert Schalkenbach Foundation’s board.

Minor editorial: The destruction and authorities’ response reminded me of tropical storm Sandy. Everything is fine for me, though, so I am grateful. I hope all you readers are well too through this daily dark age.

Solving the ‘Affordable Housing’ Problem with Land Value Taxes

Appears on the Robert Schalkenbach Foundation’s blog. Here’s a snippet.

Land value taxation should, in theory, raise total wages and greatly increase the housing supply; but people should be mobile too, even including nonresidents who come in to elbow out poorer ones for the benefits the system provides. In Minneapolis where I live, we have seen significant growth in high-end housing in recent years but very little for the poor.

So what can a local government do to ensure that land value taxes help the people who need help the most, rather than high-income newcomers?

Read more here.

Disclosure: I sit on the foundation’s board.

The Minneapolis 2040 Plan Is Unlikely to Provide Affordable Housing

…Appears on the Robert Schalkenbach Foundation’s Web blog.

I argue that the residential upzoning policies in the Minneapolis 2040 comprehensive plan won’t really lead to more affordable housing. Here’s a quote:

[The] Minneapolis 2040 plan does something that no other major American city has ever attempted: it shifts zoning practice away from real-estate parcels for single-family use. No, it doesn’t abolish them altogether, thus forcing homeowners to build condos or apartment buildings. Rather, the plan permits homeowners in the least developed parts of Minneapolis to upgrade their lots into duplexes or triplexes. Landowners living along transit corridors will have even greater development options. This policy, referred to as “upzoning,” is popular among urban advocates, and until now cities have only implemented it piecemeal. The plan’s purpose for these ambitious changes includes increasing the availability of affordable housing, reducing rents, and helping realize the mayor’s goal of racial justice.

You can read the rest here.

[Edit: Oh, gosh! Where are my manners? I must add for full disclosure and transparency that I sit on the board of the Robert Schalkenbach Foundation.]

Let’s Shift St. Paul, Minnesota’s, Property Taxes Onto Land!

At last, I’ve found time to write! This will be the first in a while for a while. A few months back I threatened readers with posts on real-estate mapping and assessment, and I make good on my threats.

Background: When I moved to the Twin Cities, I joined Minnesota’s Common Ground chapter, and this year its intern introduced some of us to the black arts of geographic information system/science (GIS) software. GIS is a discipline full of jargon, like “vectors” and “table joins,” that I find silly, but they’re certainly more sensible than “JD Advantage.”

The purpose of our inculcation is to help Common Ground advocate for land-value tax districts in Minnesota cities as a pilot program toward enabling municipalities to adopt split-rate taxation like Pennsylvania’s. The goal is to observe the effects of removing taxes on improvements and replacing them on locations to encourage development. Connecticut enabled a pilot program like this in 2014 (and it’s being extended), so LVT of a kind is in the policy air. So far, Common Ground’s efforts have successfully resulted in the introduction of a bill in the Minnesota House of Representatives.

Oh, and I claim zero credit for any of this.

But I do have newfound technical skills to unleash on readers (actually, a lot of the work is done in MS Excel, which is old hat around here), so with the open source QGIS and the state’s wonderful MetroGIS’s database in hand, here’s how a property tax shift would affect St. Paul, Minn.—because I was born there, and it’s the city we started our training with.


St Paul Shift Small

Click to enlarge.

What you’re seeing is the distribution of the percent changes in property taxes for each parcel, divided into negative changes (blue, decreased charges) and positive changes (red, increased charges), and excluding tax-exempt properties. Because more parcels’ property taxes would be cut by the shift (yay!) than raised, the number of blue/red parcels isn’t equal.

Here’s a histogram of the percent changes of property taxes by percentile for single-unit residential lots claimed as homesteads, which dominate the city’s land use by nearly two-thirds of all properties and are probably the most salient politically.

Distribution of Property Tax ChangesThe results for these properties is inauspicious. A bare majority, 52 percent, would get breaks, and the remaining homeowners would pay more by comparison.

I’ve included a macro table for reference below, but generally, the tax shift would move the property tax to residential parcels and off commercial lots. Vacant lots would pay more—as they should—but there aren’t many of them in St. Paul.

One of the biggest conceptual problems with estimating the effects of a land-tax shift is that the current property-tax system discriminates among property classes. Residential lots on average pay less than commercial lots—by design. Single-unit homesteaders pay on average 1.52 percent of their assessed values in property taxes, and commercial owners pay 4.24 percent. Meanwhile, vacant residential lots pay 8.08 percent, illustrating existing progressivity in the property-tax system.

Consequently, much of the effect of a property-tax shift is really just equalizing the tax rate on all parcels, eliminating discrimination among property classes. In fact, a land-value tax shift starting from a hypothetical flat property-tax rate that includes buildings is better for single-unit residential landowners. Unsurprisingly, Common Ground Minnesota explores what happens when residential parcels are treated differently than other types in its advocacy.

Let’s return to the map above. Comparing the top 10 percent of property-tax reductions to the top 10 percent of increases, the property-tax burden is lifted most from the northeast part of St. Paul and downtown, and moved to the southwest part of the city, which is mostly residential.

These results don’t fill me with warm fuzzies, but the underlying issue is not who would pay but who isn’t currently paying, i.e. it’s the land-value assessments. Minnesota requires properties to be assessed at their fair-market values. These estimates are fed into multiple formulae to arrive at properties’ tax capacities, and then tax authorities apportion levies against all properties based on these tax capacities. When properties are under-assessed, they receive a hidden tax break; when they’re over-assessed, they opposite is true. Between commercial landowners and homeowners, guess who gets the hidden breaks?

To illustrate why I think St. Paul’s real estate isn’t properly assessed, here’s a map of St. Paul’s land values per square foot, including only the bottom 10 percent of parcels and top five percent.


Click to enlarge.

I’ve zoomed the map to the southwest part of St. Paul, and while you can see that the downtown cluster includes much real estate in the top 1 percent by value, some of it streaks west along Grand Ave. There are a few other peculiar concentrations of 1 percent real estate: a few blocks south of St. Catherine University (St. Kate’s to the locals), and a few blocks south of the University of St. Thomas’ divinity school (the law school’s campus occupies a surprisingly large chunk of land in nearby downtown Minneapolis). Slightly less valuable real estate lies along University Ave. (where the light rail connects the Twin Cities) and the L-shape along Cretin Ave. and Ford Parkway.

Most of the top .01 percent is downtown (~$56 per square foot), but some of it is still in these areas. Naturally, you may be wondering why property owners with the most valuable land aren’t demanding their properties be rezoned so they can build office towers in western St. Paul. The answer is that much commercial real estate is under-assessed, and many parcels’ values are malapportioned between buildings and land. (I have an acquaintance who recently bought a decades-old house on a plot of land valued at a mere $5,000.)

Although Minnesota’s tax authorities go to great lengths to ensure assessments are fair, notably sales-ratio equalization estimates of numerous parcels, these methods only include properties that were sold in arms-length transactions. One ongoing problem I’ve identified is that commercial real estate transactions differ substantially from those of owner-occupiers. The wealthy simply buy land differently from the rest of the populace.

For example, on November 10, 2015, the First National Bank building sold for $37.25 million but its assessed value as of January was only $25.5 million. Why? Because according to the Ramsey County Assessor’s Office, it was a “Not Typical Market” transaction, so it was disqualified from the sales-ratio equalization analysis.

Here’s another fun one: A Walgreens on Larpenteur Ave. (which might actually be in Roseville) sold for $11.2 million in April 2013, but was excluded from the sales-ratio equalization study because of “unusual financing.” The same goes for the Walgreens on Ford Parkway, which sold for $13.9 million but was assessed at $3.2 million.

Other times sales that qualify for the sales-ratio equalization analysis still result in assessments that are below their sales prices, e.g. the lot on 240 4th St. East, which sold for $800,000 in March 2015 but was assessed at only $286,300 in 2016. The biggest offender I’ve found in my casual search is ten vacant lots along Dunlap St. that sold for $7.5 million and have been assessed at about $3,200 per parcel. You’d think qualified sales of vacant real estate would be assessed at something close to their sale prices, but they’re simply not. This results in large property-tax breaks for wealthy landowners and an increased burden on everyone else.

If I were a St. Paul homeowner (and I know a bunch), I would grab my pitchfork and march on the Ramsey County Assessor’s Office and demand the city’s land values, especially its commercial land, be properly assessed according to law. I’m confident that would shift some of the property-tax burden away from homeowners and onto downtown landowners without affecting their property values. Municipalities should also rely more on mass building-residual assessments to arrive at more accurate land (and building) values, echoing the negative corporate land values in 2009 that I wrote about a few months back. I believe better assessments would make land-value-only property taxes more attractive to single-unit homesteaders than the current system illustrates.


Here’s the macro table of what the LVT change would do to the majority of the city’s parcels.

Macro Tax Shift Table

Click to enlarge, if you dare.


How Much Is (Nonfinancial Corporate) Land in the U.S.A. Worth?

You wouldn’t know it from my writing, but I’ve been wading into real-estate mapping and assessment this year. For reasons I’ll discuss in future posts, I’m researching land-residual vs. building-residual assessment methodologies. Naturally, my initial Internet searches into building-residual assessments led to Georgist writings, and with good reason. Land-residual assessment, which subtracts land values from the total price, invariably leads to absurd results.

One source on the topic is Michael Hudson, whom long-time readers will recall as the economist who coined the phrase, “Debts that can’t be repaid won’t be.” Hudson gave a speech about the demerits of land-residual assessment in 2001, which he republished in 2010. He repeated a claim I first read in the superb collection The Losses of Nations: In 1993, the government valued nonfinancial corporate land at -$4 billion, and as a result, it stopped publishing economy-wide real-estate data.

1994 is the last year for which [the Fed] has estimated economy-wide land values. The problem was that the Fed discovered that its methodology produced nonsensical results – a negative value of $4 billion for all land owned by nonfinancial corporations for the year 1993. This number resulted from imputing land values by subtracting the estimated replacement cost of buildings from overall property market prices. This “land residual” method left little room for land value, for replacement values continue their rise even when overall market prices decline, as periodically occurs. In such downturns the replacement value absorbs nearly all the market value of corporately owned real estate.

It’s a damning accusation, but it’s also untrue. The Fed never stopped tracking nonfinancial corporate real-estate data. Perhaps it changed its source, but in the age of FRED, all this information is readily available. In fact, one can find three releases of the supplemental tables to the Fed’s Financial Accounts of the United States between 1997 and 1998 that indicate a residual nonfinancial corporate land value of -$4.6 billion, which appears to be what Hudson discovered. Starting with the June 1998 release, however, the residual land value for 1993 rose to $21.1 billion and ultimately to $25.5 billion when 1993 last appears (June 2000 release).

You can chalk Hudson’s mistake up to the migration of data to the Internet, or any other reason really. I don’t think it’s bad faith on his part, just bad luck. Obviously, though, there isn’t a clear conspiracy by Fed statisticians to cease reporting data that made it look bad.

Indeed, if anything, the reported data vindicate Hudson and make the financial accounts look worse: In 1996 and 2009-2010 the final residual nonfinancial corporate land value fell below zero—far lower than -$4.6 billion. More disturbingly, it’s skyrocketed since 2010.

See for yourself.

Nonfinancial Corporate Real-Estate Value

(Source: Federal Reserve (NCBEMVQ027S, RCSNNWMVBSNNCB, RCVSRNWMVBSNNCB), BEA fixed-investment price indexes (Table 1.1.9.), my calculations)

(I deflated residential and nonresidential structures by their respective BEA price indexes and then estimated the land value by keeping it in proportion to assessed fair-market real-estate values. It’s crude but “accurate,” I think.)

So at the beginning of 2010, the entire species missed out on the best real-estate deal ever: $566.83 billion (current dollars) to anyone willing to take all nonfinancial corporate land along with it. Just last week the Fed valued it at $4 trillion. And here you thought you missed out on speculating on Bitcoin.

So what should we make of this?

Are the Fed’s estimates merely imprecise or inaccurate? Imprecision just means that the land value is off by about a few trillion dollars one direction or the other. When the land value is negative, that’s just fuzzy math that ought to be improved.

By contrast, inaccuracy suggests government estimates of either the total real-estate values or the structures is systemically flawed. These properties might be worth far more than their assessed values. For instance although it’s a nonprofit, Brooklyn Law School’s 2 Pierrepont Street dormitory was ridiculously under-assessed at $3.88 million when the school sold it for $35 million. Alternatively, as I think Hudson tends to argue, the overall real-estate prices are correct but too much of their price increases are imputed to structures. He comments persuasively that “Building prices seem to be responsible for the rise in real estate prices, while land prices are held responsible for their decline.” The implication is that commercial land owners can depreciate land value.

I tend to think both inaccurate assessments of fair-market and structure values are at work, but the former is the bigger culprit. Regardless, Hudson is correct that encouraging local governments to adopt building-residual assessment methodologies would prevent absurd numbers from appearing in the financial accounts of the United States.