Chapter 4: Government Controls and Real Estate Markets PDF

Chapter 4: Government Controls and Real Estate Markets Florida State University – Real Estate Principles Limitations on Ownership Division of Complete Restrictions Use or Share in Removal On Use Possession Value...

Chapter 4: Government Controls and Real Estate Markets Florida State University – Real Estate Principles Limitations on Ownership Division of Complete Restrictions Use or Share in Removal On Use Possession Value Police Police Eminent Eminent Regulatory Regulatory Taxation Taxation Domain Domain Power Power Deed Deed Easements Easements Liens Liens Restrictions Restrictions Leases Leases 2 Florida State University – Real Estate Principles Land use is one of the most regulated activities in our society.  Why?  Must it be this way? Florida State University – Real Estate Principles 3 Features of Real Estate that Cause Market Distortions  “Spillover”effects from nearby land uses  Uniqueness of location (absolute monopoly)  Unknown quality/condition of existing structures  Instability of land uses around residential neighborhoods Florida State University – Real Estate Principles 4 Resulting Market Failures in Real Estate  Monopoly  Utilities as “natural” monopolies  “Holdouts” in land assembly effort (roads, other public uses) Florida State University – Real Estate Principles 5 Resulting Market Failures in Real Estate  Incomplete information  Construction quality hidden  Buyers can’t judge natural risks  Hurricanes  Earthquakes  Fires  Buyers can’t judge safety of structures  Wind tolerance  Resilience against shocks  Fire safety and resistance  Present physical condition Florida State University – Real Estate Principles 6 More Market Failures (continued)  Externalities  “Spillovers” for which initiator is not held accountable  Traffic congestion  Storm runoff  Emissions (smoke, gases, particles, noise, light)  Urban sprawl  Disorderly extension of urban infrastructure  Uncertainty of residential values  Fixed location magnifies vulnerability to externalities  “Undesirable” structures nearby  “Undesirable” land uses nearby  “Undesirable” households –e.g., students Florida State University – Real Estate Principles 7 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  Smoke detectors required  Climb-through bedroom windows replace obstructive designs Florida State University – Real Estate Principles 8 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 Florida State University – Real Estate Principles 9 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 Florida State University – Real Estate Principles 10 Traditional Land Use Controls: Planning and Zoning Administration  Ordinance creates planning/zoning commission  Appointed by elected officials  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 harm surrounding land uses, or the community Florida State University – Real Estate Principles 11 Traditional Land Use Controls: Board of Adjustment  Typical in zoning ordinance  Appointed by elected officials  Reviews petitions for variances  Decisions are final rather than advisory  Only appeal is through the courts Florida State University – Real Estate Principles 12 Traditional Land Use Controls: Site Plan Review Board  A planning and zoning commission sub- group?  Reviews subdivisions and site plans for buildings  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 Florida State University – Real Estate Principles 13 Zoning Issues and Concepts  Legality of zoning established by USSC: Village of Euclid vs. Ambler Realty – 1926  Nonconforming use: A use conflicting with, but created prior to, the current zoning ordinance  Must be allowed… but  Cannot be substantially changed  Cannot be interrupted  Can be “amortized” away, (e.g. billboards) Florida State University – Real Estate Principles 14 Zoning Issues and Concepts (continued)  Variance: Exception to requirements granted due to hardship for the property  Owner must have no reasonable conforming alternative  Problem must be unique to the property  Variance must not change neighborhood character  Common example: wavier of setback requirement  Exclusionary zoning  Unreasonable lot size;  Inadequate plan for low, moderate-income housing Florida State University – Real Estate Principles 15 Do Land Use Controls Solve the Problem of Market Failure?  Does zoning raise the cost of housing?  Does it interfere with efficient land use patterns?  Ex: Does it separate households from needed services?  Does low zoning density add to urban sprawl?  Houston: effective land uses without zoning? Florida State University – Real Estate Principles 16 The “Revolution” in Land Use Controls  Pre-1970: Little interest in land use controls  No land use plans had force of law  Zoning very limited in function  Focused on protection of single-family homes  Did not exist in many areas  Environmental movement of late 1960s  Rachael Carson: Silent Spring  Love Canal  Notion of “spaceship earth” Florida State University – Real Estate Principles 17 Challenges to Comprehensive Planning  Changing notion of “best practice”  Cul-de-sacs or grid streets?  Mixed density and mixed use, or separation of uses?  How much mass transit?  Limited actual experience to rely on  Little more than 40 years  Insufficient theory and information  Inability to foresee the future well Florida State University – Real Estate Principles 18 Is Comprehensive Planning The Answer? What is Required?  Project future population growth  Determine needs for water and waste disposal  Project needs for public services  Utilities, streets, schools, parks and recreation, safety  Project demand for various land uses  Public, residential, nonresidential  Design a workable map of land uses Florida State University – Real Estate Principles 19 Traditional Planning vs. New Urban Planning Traditional New Urban  Separated uses &  Mixed use & mixed uniform density density  Public transportation  Automobile & pedestrian oriented oriented  Priority placed on  Sidewalks easy vehicle ingress  Houses close to street and egress  Rear alleys  Cul-de-sac  Grid streets with hierarchy in restricted traffic neighborhoods flows Florida State University – Real Estate Principles 20 Traditional vs. New Urban Florida State University – Real Estate Principles 21 Some Critical Questions:  Will a land use plan 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?  For climate concerns? Florida State University – Real Estate Principles 22 Newer Approaches to Land Use Controls: Performance Standards  Performance Standards  Storm runoff limits  Noise and emission limits  Traffic impact limits  Tree removal restrictions Florida State University – Real Estate Principles 23 More New Land Use Controls  Impact fees  Favorite of economists (in principle)  Despised by many in the building community  Now used more as revenue source than planning tool  Growth restrictions  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. Florida State University – Real Estate Principles 24  Another Way? Form Based Zoning  Form Based Zoning: Land use control not by use classification but by “character”  Based on:  Development density  Street character  Parking arrangements  Walkway character  Structure shapes and sizes  Foliage character  Link to form-based zoning diagrams:  https://transect.org/transect.html Florida State University – Real Estate Principles 25 How Form Based Zoning Works  Designate areas by development character:  Natural: rural character, house-like structures  Suburban: “residential subdivision” style  Off-downtown: “townhouse” character  Near-downtown: “garden apartment” style  Urban core: “central city” character  Each area allows a wide range of uses  Households select an area by their preferences  Firms select an area best for their business Florida State University – Real Estate Principles 26 Form Based Zoning: Live Examples  Denver, Colorado http://formbasedcodes.org/codes/denver-com mons/  Miami, Florida www.miami21.org  Websites with information, links and videos:  https://formbasedcodes.org (Form-Based Code Institute)  www.planetizen.com/definition/form-based-codes (Planetizen) Florida State University – Real Estate Principles 27 Spaceship Earth?  What are other effects of the “spaceship earth” scenario? Florida State University – Real Estate Principles 28 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” Florida State University – Real Estate Principles 29 Some Hazardous Materials  Asbestos and fiberglass  PCBs  Leaking underground storage tanks (LUSTS)  Radon  Mold  PFAS Florida State University – Real Estate Principles 30 Is there a limit to regulation?  Pennsylvania Coal Company v Mahon (US Supreme Court, 1922):  Must balance public welfare vs property rights  Increased restriction finally triggers eminent domain  Minority opinion in the case framed the issue: “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.” Florida State University – Real Estate Principles 31 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  Condemnation: Legal procedure for eminent domain  Inverse condemnation: owner of severely regulated property sues to force use of eminent domain Florida State University – Real Estate Principles 32 Eminent Domain Controversy - I  Concept of “public use” expanded to “public purpose”  1954: US Supreme Court allowed condemnation of “blighted areas” for private redevelopment  1981: Michigan Supreme Court in 1981 allowed condemnation of Polish neighborhood for GM manufacturing facilities  Wide-spread subsequent condemnation of “blighted areas” for private redevelopment  Concern about excessive use  Driven by local government hunger for increased property tax base Florida State University – Real Estate Principles 33 Eminent Domain Controversy - II  Kelo v. New London Ct., 2005  U. S. Supreme Court allowed taking of non- blighted property for private redevelopment  Left it to states to decide whether to intervene  Most states moved to limit use of eminent domain  Congress enacted law to prevent application of Federal monies for such takings  Most states finally tempered their proposed limits Florida State University – Real Estate Principles 34 A Larger Perspective on “Kelo” The “Little Pink House” of Susette Kelo 1. New London, Ct. long a depressed community 2. A community/state redevelopment plan resulted 3. The plan required razing all houses in Kelo’s area  So, “Kelo” hardly an isolated or arbitrary taking  And it did not change the meaning of property  Greatest significance of the USSC “Kelo” decision?- Shift of authority back to the states Florida State University – Real Estate Principles 35 The Effect of Property Taxes on Real Estate  Can property taxes reduce property value?  Can a well-used property tax increase property values? Florida State University – Real Estate Principles 36 Property Taxes  Largest source of local government revenue  Reliable and countercyclical  Many taxing authorities  City  Improvement districts  County  Transportation authorities  Schools  Water management districts Florida State University – Real Estate Principles 37 Property Exempt from Taxes  Property with property tax exemptions  State property  Religious use and owner  Nonprofit use and owner  Educational institutions  Homestead (partial)  Homes of veterans and other special groups (partial) Florida State University – Real Estate Principles 38 Determination of Tax Rate Total budget of Income from Tax rate = - Taxing Authority other sources Total assessed Total value of - value property exemptions ( EB  I O ) or RT  (VT  Vx ) (65,000,000 - 25,000,000) RT = (2,500,000,000 - 500,000,000) =.020 Or a tax rate of 2 percent. Or 20 mills 39 Computing Tax Liability Market value $150,000 Assessed value 135,000 = (0.90 × MV) Less: exemptions 25,000 Taxable value $110,000 Property Tax Calculation Taxing Authority Millage Rate Taxes Levied County 8.58 $ 943.80 City 3.20 3.52.00 School district 9.86 1,084.60 Water mgt. district 0.05 5.50 Total 21.69 2,385.90 40 Florida State University – Real Estate Principles Special Assessments  Special assessments: Taxes for specific public improvements affecting a property  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 ×.5 × $500 = $25,000 Florida State University – Real Estate Principles 41 Special Assessments and Community Development Districts  Many large subdivisions are private community development districts (CDDs)  Create and maintain neighborhood infrastructure  Utilities  Drainage and water retention  Streets, bikeways, walkways  Recreation facilities  Fund through tax-exempt bonds  Impose property assessments to pay the obligations  Enjoy the same lien priority as property taxes Florida State University – Real Estate Principles 42 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 125,000 in 2022 www.thevillages.com/AboutUs/aboutus. htm Florida State University – Real Estate Principles 43 Issues with Property Tax  Regressive?  Can be regressive if viewed alone  Less likely if resulting public services are considered  Uneven across communities and property types  Distorted by taxpayer protection laws  California – Proposition 13  Florida – “Save our Homes” Amendment  Too often poorly administered Florida State University – Real Estate Principles 44 Limits on Ownership This chapter examined the government limitations on real property ownership Florida State University – Real Estate Principles 45 Summing up  Land use must be regulated due to market failures  The concept of “spaceship earth” brought revolution in land use controls  Traditional controls: building codes, zoning, subdivision regulations  “Post-revolution” controls: impact fees, performance standards, PUDs, environmental laws, form-based zoning Florida State University – Real Estate Principles 46 Summing up more  When regulation goes too far: eminent domain  The problem of expanding use  Property taxes as a double-edged sword.  Efficient and reliable tax.  Can be inequitable and distort land use Florida State University – Real Estate Principles 47