Knock Them Down Economics
I wanted to share some of the financials and economics around the ‘Tear It Down’ strategy as a follow up to my post from yesterday.
I’m showing my work below in the Excel file but let me highlight my conclusions as to why this strategy is financially unworkable.
First a few assumptions and clarifications:
1) The city does not ‘save’ money by pursuing demolition at the county level. The expense is still incurred at $12K per demo at the county level to which city taxpayers contribute. As this is a discretionary expense, no money is saved only in a comparative sense of what we would pay if the city did it. If we wanted to save money, we would not pursue demolition at all; that would be zero dollars.
2) For analysis purposes I selected a side street which reflects the area characterized by the editorial. All the numbers shown and calculated are from county tax rolls of assessed values and tax rates.
3) I used the tax incentives outlined in the post here to calculate the cash flows to the city
4) I’m glad to explain other details if anyone wants to clarify or challenge my approach.
That said, here is what I found:
1) The total costs for the city to demo the 17 properties (demolition + purchase through eminent domain) to create a green space would be $510K.
2) The total return to the city assuming brand new 2 families were built with 1500 sqft of living space at $80 per square feet at the incentivized tax rate would be $291.5K.
3) This means the city would be at a loss of $219K via demolition of this street.
4) In order for buyers to build and purchase $120k homes in said area, I calculated with modest assumptions of risk/return of 6% annual appreciation in home values that investors would need to get $202K for their home in 10 years when they sold.
What perplexes me are the following contradictions inherent in this approach:
1) We need wide scale demolition in response to lack of housing demand while offering tax incentives to promote building in order to drive demand
2) We will spend significantly more in demolition than what we will receive in tax revenue as a way to save tax payer dollars
3) We will expect rational investors to build new homes in blighted areas at 5X multiples of surrounding home values
4) We will accept as reasonable that buyers will expect their home values to exceed $200k in 10 years in once blighted areas.
I do not see a way that this strategy is remotely feasible on a broad scale when it is not even feasible for a small street. The numbers just don’t work.
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