Chapter 4 Notes: Government Controls and Real Estate Markets

Chapter 4: Government Controls and Real Estate Markets

Limits on Ownership

• Various government and private controls limit real estate ownership, including:

  • Division of use or possession

  • Complete restrictions

  • Share in value

  • Removal

• These limits arise from:

  • Eminent domain

  • Police power (regulatory)

  • Taxation

  • Private liens

  • Deed restrictions

  • Easements

  • Leases

Land Use Regulation

• Land use is heavily regulated in society.

Features of Real Estate Causing Market Distortions

• Several features of real estate contribute to market distortions:

  • "Spillover" effects from nearby land uses.

  • Uniqueness of location (absolute monopoly).

  • Unknown quality or condition of existing structures.

  • Instability of land uses around residential neighborhoods.

Market Failures in Real Estate

• Resulting Market Failures in Real Estate

  • Utilities as "natural" monopolies

  • "Holdouts" in land assembly efforts (roads, other public uses)

  • Construction quality hidden

  • Buyers unable to judge natural risks (hurricanes, earthquakes, fires)

  • Buyers unable to judge adequacy of structure quality (wind tolerance, resilience against shocks, fire safety and resistance)

  • Incomplete information

More Market Failures

• Externalities:

  • "Spillover" effects of land use for which initiator is not held accountable.

  • Examples: traffic congestion, storm runoff, emissions (smoke, gases, particles, noise, light), urban sprawl, disorderly extension of urban infrastructure

• Uncertainty of residential values:

  • Effect of non-conventional structures.

  • Effect of nonresidential land uses.

  • Effect of non-conventional population –e.g., students

The "Revolution" in Land Use Controls

• Pre-1970: Limited land use controls.

  • No land use plans had force of law.

  • Zoning was limited in function, focused on single-family homes, and nonexistent in many areas.

• Environmental movement of the late 1960s.

  • Rachael Carson: Silent Spring.

  • Love Canal.

  • Notion of "spaceship earth".

Critical Questions on Land Use Planning

• Will land use planning solve market failures?

• At what level should control be imposed?

  • For subdivisions?

  • For streets and utilities?

  • For schools?

  • For water resources and drainage control?

  • For transportation systems?

  • For rivers and wetlands?

  • For ecological and endangered species?

Comprehensive Planning

• What is required?

  • Project future population growth.

  • Determine requirements for water and waste disposal.

  • Project needs for public services (utilities, streets, schools, parks and recreation, safety).

  • Projected demand for various land uses (public, residential, nonresidential).

  • Design compatible arrangement of needed land uses (land use map).

Challenges to Comprehensive Planning

• Changing notion of “best practice”.

  • Cul-de-sacs or grid streets?

  • Mixed density and mixed use or containment of nonresidential use?

  • How much mass transit?

• Limited actual experience to rely on (little more than 30 years).

• Insufficient theory and information.

• Inability to foresee the future well.

Traditional Planning vs. New Urban Planning

• Traditional:

  • Separated uses.

  • Automobile-oriented.

  • Priority placed on easy ingress and egress.

  • Uniform density.

  • Cul-de-sac hierarchy in neighborhoods.

• New Urban:

  • Mixed-use.

  • Public transportation.

  • Pedestrian-oriented.

  • Sidewalks.

  • Houses close to street.

  • Rear alleys.

  • Grid streets with restricted traffic flows.

Traditional Land Use Controls: Building Codes

• Older than zoning (circa 1900).

• Issues of safety:

  • Fire: Materials, alarms, electrical and gas systems.

  • Sanitation: Plumbing, water, and HVAC requirements.

  • Injury: Design and strength.

• Continue to evolve:

  • Effect of Hurricane Andrew, 2004-5 hurricanes, Katrina.

  • New technology (e.g., smoke detectors).

  • Changing perception of needs (e.g., bedroom windows large enough to step through).

Traditional Land Use Controls: Zoning

• Features of traditional zoning:

  • Use classifications: Residential, commercial, industrial, automotive.

  • Use districts (zoning map).

  • Setback requirements (side, front, and back).

  • "Bulk" or density limits (minimum lot size, height limits, maximum floor area ratios).

  • Special use districts: Service stations, hospitals, churches, private schools, cemeteries.

Traditional Land Use Controls: Subdivision Regulations

• Features of subdivision regulations:

  • Standards for streets, sewers, and water systems.

  • Adequate water supply for fire safety.

  • Adequate drainage and run-off retention.

  • Open spaces.

  • Lot layout.

  • Easements for utilities.

  • Traffic and pedestrian safety.

Traditional Land Use Controls: Planning and Zoning Administration

• Planning and Zoning Commission created in the zoning ordinance.

  • Appointed by elected officials.

  • Ultimately is advisory to elected officials.

  • Oversees implementation of the ordinance.

  • Considers requests for specific changes.

  • Requested changes must:

    • Be compatible with a comprehensive plan.

    • Be justified if they require change in the comprehensive plan.

    • Not have undue effect on surrounding land uses or the community.

Traditional Land Use Controls: Board of Adjustment

• Required in zoning ordinance.

• Appointed by elected officials.

• Reviews petitions for variances.

• Decisions are final rather than advisory to the elected officials.

• Only appeal is through the courts.

Traditional Land Use Controls: Site Plan Review

• May be the same as planning and zoning commission.

• Review subdivisions and most other building site plans.

  • Public review (neighbors and others).

  • Public offices (public safety - fire, police, emergency vehicles; utility officials; school officials).

• Informal procedure allows criteria and rules to change with public pressure.

• Most “treacherous” step for proposed new development?

Zoning Issues and Concepts

• Legality of zoning established by USSC: Village of Euclid versus Ambler Realty - 1926.

• Nonconforming use: Use conflicting with zoning map, but existing prior to its enactment.

  • Cannot be substantially changed.

  • Must be continuous.

  • Can be “amortized” away (e.g., billboards).

• Variance: Exception to requirements granted due to hardship.

  • Common example: waiver of setback requirement.

• Exclusionary zoning (unreasonable lot size; inadequate provision for low- and moderate-income housing).

Land Use Controls and Market Failure

• Do Land Use Controls Solve the Problem of Market Failure?

• Does zoning raise the cost of “threshold” housing unnecessarily?

• Does it interfere with economically efficient land use patterns?

  • Example: Does zoning make neighborhood services excessively remote?

• Does low density resulting from zoning contribute to urban sprawl?

• Houston: effective land uses without zoning?

Newer Approaches to Land Use Control: Planned Unit Development

• Detailed development plan negotiated with authorities.

• Mixed-use.

• Mixed density.

• No standard setback requirements.

• Open community spaces.

• Community recreation and other facilities.

Newer Approaches to Land Use Controls: Performance Standards

• Storm runoff limits.

• Noise and emission limits.

• Traffic impact limits.

• Tree removal restrictions.

More New Land Use Controls

• Favorite of economists (in principle).

• Despised by many in the building community.

• Appear to be used more as revenue sources than tool to guide land use.

• Impact fees.

• Temporary moratoriums.

• US Supreme Court refuses to review Petaluma, Ca. limit on the number of new housing units.

• Also Boulder, Co., and Boca Raton, Fl.

• Growth restrictions.

Form-Based Zoning

• Land uses are determined not by prescription but “organically” based on:

  • Development density

  • Street character

  • Parking arrangements

  • Walkway character

  • Structure shapes and sizes

  • Foliage character

How Form-Based Zoning Works

• Example: Denver, Colorado

• Non-residential uses will select as their business requires:

  • Neighborhood shops versus large urban stores

  • Small local offices versus financial centers

• Households will select a form that suites their location, household, and lifestyle preference: rural, suburb, urban core

• Within broad categories, land uses can go anywhere

Environmental Controls

• Sample of Environmental Controls since the Late 1960s

  • Clean Air Act

  • Clean Water Act

  • Comprehensive Environmental Response Compensation and Liability Act (CERCLA)

  • Occupational Safety and Health Act (OSHA)

  • Endangered Species Act

  • Increasing limitations on “fracking”

Hazardous Materials

• Some Hazardous Materials

  • Asbestos and fiberglass

  • PCBs

  • Leaking underground storage tanks (LUSTs)

  • Radon

  • Mold

Limits to Regulation

• Is there a limit to regulation?

• Pennsylvania Coal Company v Mahon (US Supreme Court, 1922):

  • Courts must balance public safety and welfare against taking of property

  • At some point eminent domain must be used. (Murr v. Wisconsin now before USSC)

  • Minority opinion in the case: “We are in danger of forgetting that a strong public desire to improve the public condition is not enough to warrant achieving the desire by a shorter cut than the constitutional way of paying for it.”

Power of Eminent Domain

• Eminent domain: Right of government to acquire private land, without the owner’s consent, for public use, with due process and just compensation

• Inverse condemnation

• Condemnation: Legal procedure for exercising the right of eminent domain

• Public use versus public purpose

• Just compensation based on highest and best use

• Problems of excessive use

Eminent Domain Controversy

• Concept of "public use" expanded to "public purpose"

• US Supreme Court in 1954 allowed condemnation of “blighted areas” for private redevelopment

• Michigan Supreme Court in 1981 allowed condemnation to enable GM manufacturing facilities

• Wide-spread subsequent condemnation of “blighted areas” for private redevelopment

• Driven by local government hunger for an increased property tax base

• Kelo v. New London Ct., 2005

  • U.S. Supreme Court allowed use of eminent domain to obtain non-blighted property for private redevelopment

  • Left it to states to decide whether to intervene

  • Most states initiated legislation to limit use of eminent domain

  • Congress enacted law to prevent application of Federal monies for such use

  • Most states moderated the proposed laws to limit eminent domain

A Larger Perspective on “Kelo”

• New London, Ct., had been long recognized as an abandoned and depressed community.

• A community/state plan of redevelopment had evolved, with subsidies from the state.

• Achievement of the plan required removal of all of the houses in the Kelo area.

• “Kelo” can hardly be viewed as an isolated or arbitrary taking.

• Greatest significance of the USSC “Kelo” decision?- Shift of authority back to the states.

Property Taxes and Real Estate

• Can property taxes reduce property values and property wealth?

• Can an efficient property tax enhance property values and property wealth by the services it funds?

Property Taxes

• A primary source of local government revenue

• Reliable and countercyclical

• Many taxing authorities

  • City

  • Improvement districts

  • County

  • Transportation authorities

  • Schools

  • Water management districts

Property Exempt from Taxes

• Property Exempt from Taxes

  • RELIGIOUS ORGANIZATIONS

  • STATE PROPERTY

  • NONPROFIT ORGANIZATIONS

  • HOMESTEAD

  • EDUCATIONAL INSTITUTIONS

Determination of Tax Rate

• Tax rate (RT) is calculated as:

  • RT = \frac{\text{Total budget of Taxing Authority - Income from other source}}{\text{Total assessed value - Total value of property exemptions}}

  • RT = \frac{(EB - IO)}{(VT - VX)}

  • Example:

    • RT = \frac{(65,000,000 – 25,000,000)}{(2,500,000,000 - 500,000,000)} = 0.020

    • A tax rate of 2 percent or 20 mills.

Property Tax Calculation

• Example:

  • Market value: 150,000

  • Assessed value: 135,000 (0.90 × MV)

  • Less: exemptions: 25,000

  • Taxable value: 110,000

  • Taxing Authority Millage Rate Taxes Levied

  • County 8.58 943.80

  • City 3.20 352.00

  • School district 9.86 1,084.60

  • Water mgt. district 0.05 5.50

  • Total 21.69 2,385.90

Special Assessments

• Taxes for specific public improvements affecting a property, such as street, sewer, etc.

• Usually charged on a per front foot basis.

• Example: Street improvements of $500 per running foot of street.

  • For lot with 100 feet of frontage:

    • 100 \times 0.5 \times $500 = $25,000$$

Special Assessments and Community Development Districts

• Many large subdivisions have private community development districts

• Create and maintain neighborhood infrastructure

  • Utilities

  • Drainage and water retention

  • Streets, bikeways, walkways

  • Recreation facilities

• Issue tax-exempt bonds and impose property assessments to pay the obligations

• Have the same lien priority as property taxes

An Example CDD Community in Florida: The Villages

• Retirement community in north-central FL

• 10 CDDs provide every community service except criminal law enforcement

• Population of over 100,000

Issues with Property Tax

• Regressive?

  • May be regressive viewed alone

  • Not necessarily regressive if resulting public services also are considered

• Uneven across geographic areas and property types

• Distorted by differential protection laws

  • California – Proposition 13

  • Florida – “Save our Homes” Amendment

• Poorly administered