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.
My work:
[scribd id=20323888 key=key-2knd7t3psb4tw4uzt9j]

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35 Responses

  1. straightshooter says:

    I respect your opinion and appreciate you having a conversation about this.
    Your numbers are 100% false. There is NO eminent domain here. Eminent domain was never mentioned anywhere when dealing with demolition. The properties to be demolished are all city owned properties.
    You say that the only REAL savings to taxpayers would be 0 dollars spent. Either these homes are going to stay here in the city, collecting rats and health risks and creating a horrible atmoshphere for the residents in surrounding areas or we can tear these homes down. Would you suggest that we put money into fixing them up? We have already tried to sell them with no success. Demolition is the only viable option for moving forward in this city. A clean city and lower taxes is exactly what we need.

    • Michael Lazorro says:

      The cleaning of the city does not lower taxes. There is a cost to demolition. I am not saying that it is not necessary. I believe that it is required in many situations. It will not produce lower taxes except for the minor cost savings of the city’s remedial property maintenance program.
      The only way to lower taxes is through growth. Contraction produces higher taxes because the infra structure does not contract proportionately. If every house in the city were demolished there would be a water plant and a sewer plant that would need to be funded (causing a huge tax burden). This limiting case proves that contraction is not a goal. The city demolished 35% of its assessed value during the great urban renewal days; this produced the high taxes we enjoy now.
      The select demolition of derelict properties is needed to make reinvestment viable, not as a goal.

    • flippinamsterdam says:

      straightshooter,
      Let me also say that I appreciate a conversation on the subject. That said, if you want to dismiss my numbers as ‘100% false’ you need to back your assertion with a counterargument especially as my analysis was based upon some of your numbers (12K for demo and the tax incentive scheme you outlined). A few points to clarify my analysis:
      – I based the analysis on this post more so in response to the Recorder editorial that supported a widescale demolition program within the city. For such a widespread program, you MUST have eminent domain otherwise how will you acquire the swaths required to create the green space? Perhaps I mistook your position on the Recorder piece as favorable; if so I apologize. However, the Recorder strategy requires eminent domain to make it workable so if you do indeed favor the Recorder strategy you must adopt eminent domain and the requirement to buy out private property owners. That is what is reflected in my analysis.
      -I am not opposed to demolition, and have stated it multiple times, that demolition is necessary on some properties. I agree with you on this point concerning the city properties. Please read my prior posts, this is quite clear.
      – The city tax rolls have 6400+ parcels so demo’ing 80 addresses 1.2% of the problem with blight, aesthetics and housing stock. I’ll challenge you to articulate how fixing 1.2% of the problem is a game changer for the city
      – Again, even though the demo is paid by the county, the county gets a significant portion of its revenue from city tax payers. All I’m saying is that having the county pay for it is not a freebie for city tax payers. Let me make it clear: I’d pay a bit more in taxes to rid the city of blight so I’m not asking for a free ride; I’m only asking that we admit that is not a free ride.
      -Finally and respectfully, I challenge you to articulate at how we get to lower taxes.

      • straightshooter says:

        I will back my statement up even though i believe I already did in my original statement. Eminent domain has no part in the demolition discussion. Your numbers include amounts for eminent domain hence your numbers are wrong.

  2. straightshooter says:

    My comments about lower taxes was an attempt to point to the fact that demolition is NOT the only answer. I’m not saying demo will lower taxes.

  3. Diane says:

    Density Reduction is what we discussed on the Master Plan Committee. We have way too much housing stock for our population.
    The only way to resolve the issue is demolition and rebuild with single family homes. Only people in the northeast, the old mill cities, have two family homes. People want single family homes, not two family. With more one family homes you will not have the quality of life issues that plague so many neighborhoods on a daily basis. People in single family homes are generally more and better educated. That is what we need. Educated people will also demand better schools, something we need here.
    Have you ever been in any of these houses?
    I have, and there is no historical value left in them. The historical ones were bulldozsed for Dollar general, MacDonalds, and Fast Trac. And maybe a few others along the way. I do beleive we should be salvaging what we can from these homes to be sold. Other cities do it, why can’t we?
    I do not know where eminant domain comes into the picture, since these are all city owned properties.

    • flippinamsterdam says:

      Diane,
      Please see my response to SS re:eminent domain.
      Like SS, I’m going to respectfully challenge you to make a financial and economic case of how you will drive single family investment in this area in once blighted neighborhoods. Respectfully again, the Master Plan Committee endorsing such a strategy does not make it necessarily sound. The numbers and underlying economics don’t work. I can be convinced if you show me a financial and economic framework for what you’re advocating.
      To be clear, I’m not opposing knocking down 80 city owned properties. Let’s do it. But tell me how addressing 1.2% of the problem turns things around.

    • Diane, I have to disagree with your statement. There IS value in many of the abandoned homes in Amsterdam. These homes were built in the 1860’s -70’s and contain Italianate architectural detail that cannot be reproduced today. These homes have foundations built from locally mined sedimentary rock and were originally one family homes. Converting these homes back to one family homes is both economically feasible and a “green” solution. This retro-conversion is recommended in Amsterdam’s Comprehensive Plan as a means to increase owner occupied single family homes.
      I live in one of these homes that was restored to it’s one family origin. You are welcome to stop by and see what rehabbing our current stock can accomplish.
      The 3 condemned city owned homes behind my property on Forbes Street are another story. Eliminating these homes and closing off the Forbes Street merge to Rt 5 would create a great green space or park that is sorely needed in this section of the East End.

    • flippinamsterdam says:

      Diane,
      If I’m understanding ‘Density Reduction’ correctly, I think that is precisely in the wrong direction from what revives cities. Suburbanization is not the right strategy for our city– that is a losing battle.
      Respectfully submitted

      • Diane says:

        So then we are stuck with 2 family houses with welfare tenants that are taking over our neighborhoods and running off the good folks that are still here. (Not that all of these folks are touble makers.)So many of these people are also the same ones that are dragging our school system down since they will not learn English and therefore not able to pass the English language portion of the state tests. We have been converting our 2 family back to a single family. We need more of it in the city. There are currently some homes that are occupied that can be salvaged and redone.
        But most of those on the list have been stripped, caved in roofs and sinking floors. Some of the houses on the list have been there 20-30 years. Tell that what Amsterdam Housing is doing with the house on the corner of Guy Park and Clinton is good for the city. They are strictly low income housing and not for profit to boot? So they may not be paying taxes, where does that help us. Single family homes bring as I said, higher income persons, stablizes the tax base. The more educated people in a community the better chance you have of bringing in the little boutiques for Main St and being able to support them.
        We have to work from the ground up, and that means cleaning up the city too, things must be clean or you will not get the results you want. Just my opinion.

        • flippinamsterdam says:

          Diane,
          Let’s use a specific example to illustrate the problem with the underlying economics to your argument– the recently crumbled property on Clinton St. According to your approach, the best use of the lot will be a single family home. The problem is finding a rational investor who will build a new single family home on that lot. Let’s use $80/sqft for new construction: that means that building a 1000 sqft house– modest by any standard– will cost $80k which by far will be the most expensive home in that area. Well you might say, they would never build an $80k house, they would not spend more than $50k to live there. Well, that’s fine, if you assume people will build a 625 sqft house which gets you to $50k But then the real estate market does not want 625 sqft single family homes in two family blighted areas. The numbers do not work because your argument does not account for the demand side of the real estate market in terms of what home owners desire in terms of features and what they are willing to pay.
          Also I find it unsettling at your embrace of positions developed not from sound economic policy but perhaps driven more so by your social policy goals.

  4. straightshooter says:

    You will hear them soon enough. My topic here is demolition for the moment.

  5. Michael Lazorro says:

    Flippin
    The model lacks some important factors. One is the elimination of dss recipients and the savings associated with that result. The density and quantity would have to be known to have an accurate model. This and other factors should be analyzed thoroughly as the knee jerk anecdotal approach is not helpful.

    • Diane says:

      I agree that lower taxes promote growth simply by being. how do we get there? Consolidation for one thing. Then school taxes have to be addressed. They are the biggest drag on our local taxes for what is coming out of the school system. We need a constitutional convention as Michael has indicated, to reduce dss and the employees retirement program.

  6. Diane says:

    Make that address the employees retirement system.

  7. Diane says:

    As for suburbanization, bedroom community, they bring stablization. There is nothing wrong with being a bedroom community. We are no longer a mill town. Our mills do not operate as such anymore. We have a full industrial park, and other than Mohawk-Esquire we have no large plots of land to build office parks on, in the city limits. We have to live with what we have and work within our means. That means that the mall is privately owned whether we like it of not and he is paying taxes and he is also going ahead with his own monies on the bank building. (Mr. Teserio). With Centro Civico in Tax Foreclosure, they have some chunks of land in the East End that might be possibilities for developement. Now if you wanted to move the train station to the old building, that would be great, but it too is privately owned. (Terlecky Bldg would be gorgeous as a train station .)

    • flippinamsterdam says:

      Suburbanization is not the same as bedroom community. I support developing this city as a bedroom community while remaining true to the character of a city. Also I do not view the revival of this city as a mill town. I’ve been very consistent on my disdain for belief in a rebirth of this city as a manufacturing center or mill town or commercial mecca. If you want density reduction, you would never consider living within the city, you would seek the outlying towns. We cannot compete against the towns on the same parameters.

  8. w murphy says:

    I think social policy and economic policy often go hand in hand. This approach is at the heart of nearly every initiative a city embarks on- it suggests that the face you put on your city drives the investment or disinvestment in your city.
    I also think there is definitely something to the corollary of ‘Build it and they will come’, namely: ‘Knock it down, and they won’t come’. They being folks who move out of a slum house in a neighboring town to come here for an even more dilapidated home to save a few bucks. As long as we have an oversupply of excessively cheap housing, we will continue to cheapen our standards of living, school performance, and everything else. In other words if our face is ugly, our financial and social conditions will surely be ugly as well. At first glance this may sound politically incorrect and overgeneralized, but it is pretty clear that our blighted areas have become more desperate, and that our quality of life indicators (school performance, etc) have followed suit. And lest anyone get on their politically correct high horse, I am in no way suggesting that our city be unwelcome to low and moderate income housing and demographics. Amsterdam has a long, proud history as a working class town that welcomes all walks of life. But to ignore the fact that desperate housing attracts a desperate population, is simply sticking our heads in the sand. Our hard working, low-income folks deserve a better maintained neighborhood, and knocking down the neighboring eyesore offers them a respite from the six-family slumhouse with the tenants that come with it. There is a big difference between a person who seeks out a simple, affordable apartment, and one who is willing to move into squalor. Unfortunately, at present, too much of our housing stock dictates that we cater to the latter too often.
    There is indeed a large price to pay for not demolishing homes that are plaguing blighted blocks. They begin to make the immediate area unsalable, and then slowly erode every quality of life indicator for the rest of the city.
    I also disagree that opening up swaths of green space or otherwise is akin to suburbanizing our little city. It is simply recognizing that our city was built for double the population, and realty now dictates that we either right-size our city or lose it entirely. All great cities have green space, and it is not hyper-density that defines a city, it is the walkability, connection to downtown, and neighborhood churches, libraries, and central public venues. It is preserving or restoring what is central to our history (and discarding things that are beyond salvation or simply outmoded).
    I honestly don’t think any spreadsheet can capture the value of demolishing these blighted homes- in simplest form it raises the quality of life, in its most extreme form, it may offer the only hope of long term stability, and righting our course.

    • flippinamsterdam says:

      Usually we share some common ground. On this post, there is nothing but daylight between our positions.

      • w murphy says:

        Do you not agree with the premise that Amsterdam’s oversupply of excessively cheap & rundown housing is not contributing to a downward spiral in our quality of life?

      • w murphy says:

        After re-reading what I wrote I can definitely see how much of what I said could be misinterpreted- so allow me to clarify and sharpen my point.
        All cities make decisions (or non-decisions) regarding their housing stock and how it can affect the socioeconomic makeup of the community. Amsterdam, like many upstate cities, has watched its shrinking middle class slowly take on more and more of the taxpaying burden, while the low-end rental community has grown.
        We are now faced with the task of becoming more attractive to a taxpaying, middle class who might be willing to move here to try to balance out the burden of supporting those who struggle to do it on their own.
        One such example is the push to turn the Chalmers building into high-end apartments. I’m assuming part of the rationale for our city to embrace this is to address the imbalance that I spoke of above. We could have alternatively decided to turn the Chalmers building into HUD apartments if we felt that our city was imbalanced on the high end of the socioeconimic scale, and we felt there was an unmet need to serve low-income renters.
        That’s why I feel that a comprehensive plan to demolish our most dilapidated structures is the quickest way to address this imbalance. We are far too heavy on rundown rental properties in rough sections of town, and the quickest way to address this is to thin this stock out if they are indeed houses beyond hope.
        The benefit is 2-fold- it takes care of blight, and it begins to address the imbalance that has tipped unfavorably away from the middle class taxpaying population of our community. Does this mean we are community that turns it’s back on the poor? Not at all. As I mentioned before, we have a long history of modest, working class roots, and we have a community that is more than willing to provide a safety net for those in need. I personally feel that is all part of your decision to move into a city- to embrace the diversity and responsibility that come with a city’s communal spirit.
        But a balance has to be struck in order to sustain our city. Otherwise, people will simply throw in the towel and move out to the easy, breezy suburbs where they won’t be asked to carry a heavier load every year, and they can actually use the schools they pay for.

      • flippinamsterdam says:

        I think our differences lie along the following lines if I understand your position correctly (granted I may not):
        -Shortage of demand or excess of supply? I think it’s largely lack of demand for a myriad of reasons. I agree that blighted supply does not help drive demand but I think it’s more of a symptom than the problem itself.
        -Cheap housing or ‘right-priced’ housing — I think the market decides what it is willing to pay. It is cheap relatively speaking only to other communities as a consequence of supply and demand. I’d argue that lack of demand, aka growth, is the real culprit.
        -Focused demolition or widescale demolition — I agree certain homes or clusters of homes should be demolished. On a widescale basis however, I think it is a self-defeating strategy: we will eliminate homes from the tax rolls incurring expenses to do so while we shift the tax burden via higher taxes to the existing base. In the short and medium term, this creates a domino effect of disinvestment and rising taxes. In my view, it is a high risk strategy as it assumes the short/medium term hit worthwhile for an as yet undefined long term gain. Frankly I think it’s disastrous.
        -Certain or Uncertain– While my simple financial model was dismissed as overly simplistic and ‘100% false’, the irony is that no one has shown how the demolition approach works financially. Granted, my model and reasoning oversimplify and do not consider many factors but by the same token, I’m to accept the argument that a demolition approach will work based upon assertions that it must work with nothing to support it. Let me go back to my simple example with the Clinton Street property: how does the story unfold with redeveloping that site as a single family home?
        -Density Reduction or Density Maximization — I agree with your point walkability, connection to downtown, and neighborhood churches, libraries, and central public venues. However walkability and public venues are severely compromised in the current state largely as a result of urban renewal which quite effectively did just that which is being proposed — reduced density. I’d argue that we need to create a new public center with density maximization as its objective.
        I think your most recent post clarifies some common ground that we do share: rebuilding a middle income demographic and tax paying segment, getting to a more holistic approach for the whole community considerate of socioeconomic status, and again addressing the most severe cases of blight with some urgency. I hate to say, but as you put in on the table, I will: Chalmers would be a positive from both our perspectives– broadening the supply of quality housing while acting as a catalyst for demand. Regrettably it is viewed as quite the opposite and otherwise by many.
        I hope this clarifies my position as well.

      • w murphy says:

        Your post post does indeed clarify- I think we share the same basic philosophy of what a city should look like and what it shouldn’t. The one area where I think we differ a bit is your view of the Supply/Demand dynamic regarding our housing stock. It is not an either/or- it is most definitely a strong mix of both- we have an oversupply of dilapidated housing that drives things in the wrong direction. The demand side will pick up considerably if we just clean up our act and assure folks that we value tidy neighborhoods, quality schools, and decent housing. Dilapidated housing has a domino effect that creeps into every aspect of quality of life and eventually into poor quality schools- the death knell of a community.
        You may counter-argue that in essence you agree, and the way to address it is to fix up the dilapidated housing, but I think the costs of getting all of our most desperate housing in liveable condition, and then hoping it is maintained, is monumental compared to taking it down. All this with the backdrop that our population and trends don’t dictate a need for it.
        I wish we had the time and resources to address all of the issues that surround these blighted homes- that would be the ideal. Sink a couple hundred thousand into restoring each to their former glory, watch them block come back to life, and attract families that can move in and sustain them. That process would be decades in the making, if indeed it could happen at all.
        The more practical approach is taking these superfluous homes out of the picture and allowing the responsible residents in the area to begin to reclaim their blocks. Allow them to continue renovations on their historic homes, and not have to worry about the trash, vermin and overgrown weeds from the slumhouse next door to creep onto their freshly mowed property.
        I say all this with extreme reluctance that we could potentially take down properties that are part of our historic lineage. An example is the Coleco house next to Bill’s Beverage. The house is currently being restored and is a beautiful piece of architecture (Second Empire, I believe). Had it been swept up in our haste to rid oureselves of an eyesore, it would have been a true loss. Examples like this remind us that you can’t just indiscriminately swing the wrecking ball, but to idle it completely is asking for trouble.

  9. Tim B says:

    Would you be willing to re-run your numbers with a couple of modifications? Take out the cost of eminent domain (I don’t think taking people’s houses was what the Recorder was suggesting) and factor in a very small conservative increase in the overall property values of the entire city – take your best guess. I’d be interested to see how that comes out.
    I admit it is hard for me to follow all your math, I’m not all that knowledgeable about real estate – but I get the gist of what you are doing and I certainly respect the fact you have crunched the numbers like this. I also feel that what w murphy is saying may be correct too. Just for fun, why not run the numbers based on an alternate scenario where only city owned properties are demolished, and the city benefits from an overall increase in property values?

    • flippinamsterdam says:

      TimB,
      A fair request; I only ask that you help define some of the assumptions. Here are the assumptions we need:
      Scenario 1: Demolition 100%
      -Total of 80 homes today. How many homes added per year to the list over the next 10 years?
      -How many homes demolished per year?
      -$12k/ house in demolition cost county funded
      -How many years after demolition does a rebuilt house get on the tax rolls? What is the average market value of rebuilt home?
      -What is average appreciation over 10 years of housing in city with demolition? without demolition?
      Scenario 2: 80% demolished, 20% restored (4/5, if you think not realistic or a different ratio, then your call)
      -Average market value of restored home
      -How many years before restored home gets on tax rolls?
      -What is average appreciation over 10 years of housing in city with demolition? without demolition?
      Scenario 3: Per your suggestion
      Once you let me know, I’ll pull something together. Hopefully this captures what you were asking, if not, let me know as well.

      • Tim B says:

        Ok, bear with me, took a 2nd read through everything and I think I understand the discussion a little better…
        The Recorder article mentioned the idea of demolishing an entire block, but then backed away from it. Your model, as I understand it, was to demolish an entire road with 17 houses. I don’t think anyone, including the Recorder, thinks that would ever happen.
        Looking at the comments, no one so far is completely opposed to any demolition, and no one so far is completely opposed to any renovation. So it seems like the question is just a matter of finding the right balance.
        Now you have a point about the problem of building an 80K house next to a 50K house, and you also have a point when you say that 80 city owned properties out of over 6400 is a very small percentage. But, consider that there are large areas of the city that have no problem with blight, the percentage of city owned property within problem areas is actually much higher – maybe 3%. And consider that there are some streets that are not completely blighted, and maybe those are the areas to focus on.
        What if we scratch my idea for now of running city-wide numbers. Instead lets look at a different type of street and a different plan. Maybe take a street where there is a mixture of good and bad structures (maybe like Academy). Maybe 40 homes total (maybe 30 are two family), maybe 20 are in good shape or at least passable, 20 two family homes are eye sores. Maybe out of those 20, 10 are abandoned and eventually forclosed on. Maybe 5 owners are convinced to clean up their act. 5 owners are convinced to sell to the city (or maybe a little eminent domain might not be so bad?) So the city ends up with 15 houses on that street that they can either renovate or demolish. Bear in mind I am saying a street *like* Academy, where there is a combination of good houses and blight. I don’t know if this scenario is actually possible on that street.
        So why not run numbers on the following scenarios – 1. All 15 houses renovated 2. All 15 houses demolished, re-zoned and replaced with single family homes 3. 8 houses renovated, 7 houses demolished and rezoned, etc.
        How’s that for fun? Let me know if I am way off on this scenario. As far as the other parameters you asked about, honestly, your guess is as good as mine. If you actually want me to try to research some, I can give it a shot, but I probably wouldn’t contest any numbers you picked.

  1. October 5, 2009

    […] under Uncategorized | Tags: amsterdam ny demolition | Leave a Comment  A good post from TimB (here) aside from making a few excellent points asked that we look at different scenarios for demolition […]

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