Scenarios

A good post from TimB (here) aside from making a few excellent points asked that we look at different scenarios for demolition with Academy Street as the target area. So here are the results of the analysis with different scenarios. The assumptions are detailed in the document below but let me highlight a few points:
1) The scenarios are quite optimistic as they assume that all new homes get built and on the tax rolls on the same year as the demolition. As a result, the analysis overstates the city revenue for those scenarios with demolition.
2) The demolition cost is $9K per home as a cost to city taxpayers.
3) The analysis uses numbers available from Montgomery 2008 tax rolls and Web site. FYI: if you claim my baseline numbers from the county are wrong with no supporting details as to why, I will ban you from posting ever again.
4) The analysis assumes no eminent domain; in other words, the city forecloses on the houses due to tax liens only.
5) To keep it simpler, the analysis does not look at revenue changes to the county and school district. I’ll get back to this point later.
6) WHile TimB asked for differentiation between renovate versus demolition, the city does not realize more revenue from renovation, all things equal, so I focused on demolition only as the lower the level of demolition, the higher the revenue to the city.
Here are the numbers under several scenarios:
Scenario 1: Perfect World    (No demolition, 100% paid taxes, no foreclosures)
City Revenue NPV    $801,091.50
Scenario 2: 5 Foreclosures/ 5 Demo
City Revenue NPV    $735,541.07
Scenario 3: 10 Foreclosures/10 Demo
City Revenue NPV    $669,990.64
Scenario 4: 15 Foreclosures/15 Demo
City Revenue NPV    $609,792.32
My take-aways:
1) City tax revenues drop in proportion to the intensity of demolition. Assuming no changes in city expenses to offset revenue drop, this raises taxes on remaining parcels.
2) While county and school taxes were not included, the same drivers as (1) would work to raise county and school taxes barring a reduction in expenses
3) The analysis overstates the revenues with demolition as it assumes the following:
i) Single family homes will be built the same year as demolition with payment of a full year of taxes
ii) Investors will build single family homes 20% higher than the average value on the street
iii) Investors will view the building of homes at 20% higher market values as not too risky
iv) Buyers will purchase 750sqft homes (+/-) on that street
4) The city realizes large revenus from its user fees; as you convert multi-family to single family you are reducing the revenues per parcel as the user fees drop. THis is especially severe in areas with high concentrations of multi-family homes.
Finally an argument by those in favor of this strategy is that we will get an appreciation in overall home values in the immediate area and a spillover effect on the entire city. I think this is a plausible outcome although I cannot quantify it. However, I think this outcome comes at a price: taxes will need to rise, expenses will need to be cut or some combination thereof to make this work. Even then, this strategy entails some significant risks which may in the end cost tax payers much more than they would get in return. IMHO, I think the risk/return for this strategy is not favorable to the city.  Or put differently, I think we can get to the same place with other approaches that entail much less risk.
The bottom line is: no free ride with demolition.
Gory details:
[scribd id=20650726 key=key-2kb74j5uohogc01ngfwk]

You may also like...

11 Responses

  1. bethany says:

    Flippin’,
    I have just one thought to throw into the mix, as far as the effect on City revenues.
    I am pretty sure that I recall from my supervisor days that because the City is the tax collection agent for the school district, the City “fronts” the tax dollars to the school (ie pays the entire taxable levy to the school regardless of whether it is successfully collected). If X number of properties are on the rolls for X number of years before foreclosure, and the City has paid out the school tax to the district, without collecting all of it, there is a net loss to the city each year. (For the record, because the county collects taxes for all the towns, the county takes the hit on the other school district’s nonpaid taxes)
    Demolishing the property would stop the City from paying without being paid; keeping the abandoned properties standing means the City keeps paying the taxes it can’t collect to the school. I would assume the value of the tax loss over a few years is still less than the cost of demolition.
    I’m not sure how this would factor into the argument, but thought it was worth considering.

    • Michael Lazorro says:

      Let me make one observation. Properties that are properly assessed rarely end up in foreclosure. Why? Because taxes each year should be about 5% of value. Penalties are 24% of the unpaid taxes.(the highest penalties anywhere btw) But even with the high penalties, a foreclosure should happen after 3 years so the total taxes should be under 50% of value, if value is assessed correctly. But since assessments are wrong we have large numbers of parcels in foreclosure and those parcels have back taxes that exceed their value. The cure is accurate assessment.
      Over taxing distressed neighborhoods is a disincentive to reinvestment. Reinvestment is the goal or should be the goal of policy.

  2. Michael Lazorro says:

    Flippin,
    I can see that you put a lot of work into this – but:
    The comparison should be to the present case; the ideal case doesn’t exist.
    1. This case is abandoned properties earning zero tax revenue and draining resources (the reason they are in foreclosure).
    2. Theses properties also undermine the value of their neighbors, this factor is hard to quantify but can’t be ignored.
    3. The abandoned hulks scare away normal people and force the landlords to rent to substandard renters that are a further resource drain and tend to destroy the rental units. This generates an unaccounted for lose term in your model.
    The targeted demolition of properties that can’t be rehabbed is essential. If you model a slight increase in surrounding values caused by the demo then the present value increase supports this. There is no income decrease because the abandoned properties are not paying anything.
    Now, what your model shows is that the wholesale clearing of neighborhoods (tax paying properties that are substandard) is probably not viable. Anyway the city doesn’t usually get good properties in foreclosure.
    Now the true solution stops property from going into foreclosure in the first place. This happens in Saratoga because if an investor rehabs a dump he can make a buck. How do we establish that dynamic here?

  3. Tim B says:

    Thanks for taking me up on my question. I dug into your numbers for a while and I think most of the details are pretty accurate.
    There is one significant detail that I think you forgot about. The “perfect world” scenario is not acutally an accurate baseline to compare against. If the city is foreclosing on a property, that means it is *not* generating any city tax or user fees (otherwise, how would the city foreclose on it?). So, I think you should subtract 15 parcels worth of taxes and about 30 units of user fees and then use *that* as a baseline comparison and factor it into the other scenarios as well.
    One other thing – would it be reasonable to expect that the city would sell the property to the home builders? Not sure of what the price would be, $5000 per parcel maybe? You would probably know better than I. That would help offset some of the initial demolition costs.
    I think the appreciation of property values in surrounding homes also has to be factored in somehow. Obviously it’s hard to predict, but it seems everyone agrees it’s reasonable to expect *some* appreciation. What if you factored in a .05% per parcel demolished per year appreciation on the existing homes? Is that conservative enough?
    Bethany’s point is worth considering as well.
    So if you are agreeable to adding these factors, I’m thinking the picture may change just a bit. The loss of user fees and the tax incentive plan do add alot to the overall cost, though, that much is clear.

  4. flippinamsterdam says:

    All,
    Good points.
    I’ll take one more pass on the model as your refinements are solid points. What I need to know is the following:
    1) What is the 10 year timeline for a property that is today not paying taxes: how many years does it not pay taxes? does a non-paying home go to demolition after that time?
    2) this analysis looks at revenue to the city. In order for appreciation to matter to the city, how do I monetize the appreciation to the city as typically appreciation accrues to the home owner not the city unless a reassessment event occurs.
    3) Michael L: I’m not sure how to quantify your point #3; it seems too detailed of a point
    I want to restate that the model is currently very optimistic in the sense that rebuilding on a demod lot occurs on the same year and the taxes collected are 100% for the year built. And I’m still struggling with how we expect 700-800 sqft single family homes at 20% higher market values than surrounding homes.

  5. Diane says:

    1. Bethany is correct on the school taxes. The city fronts them. So the sooner into foreclosure and resale, the sooner that monkey is off the cities back.
    2. Homes are only demolished after all else fails. The next step will be putting them up for sale and not all homes go for 10.00. In good condition and location they may sell and have sold for 40,000.00 in some cases.
    3. I do not expect to see wholesale demo in a certian area. I expect to see houses that are in need of demo being removed.
    4. If there are or happen to be several lots together, how about new row houses for single family residenses. these would fit in nicely on say Wall Street or elsewhere for that matter and fit in nicely with our existing housing stock.
    5. Anyway to increase the 750 sq ft? Seems awfully small to me. 3 bdrm, 2 bath, family room, kitchen, laundry area and storage. If you do not build it to the right size for today’s buyer, then you have not accomplished anything? The goal is to bring in someone who can afford a starter home in the 75 to 80,000.00 range. these are working class people who can afford to buy a starter home?

    • flippinamsterdam says:

      Diane,
      The constraint on home size is the dollars per square foot of new construction. I used $80 which honestly strikes me as low. If you want more square footage, say 1200 sqft, again lower than typical new single family construction, you get near $100K for the home price. Then the question remains: do home buyers want a new $100k home in a neighborhood that was once blighted or in close proximity to other blighted areas? Or do they look around and say, I can just buy a small house elsewhere for that price without the attendant risks– that is the core problem

  6. Michael Lazorro says:

    The rebuilding scenario is unlikely. Look at the situation on the Southside. A developer bought vacant land by the infirmary but never developed it. Why would new development occur in a blighted area when it will not occur on attractive lots?
    The demoed buildings will stay as vacant lots for a long time. The rehab may make sense if the property is not too deteriorated.

  7. Tim B says:

    OK, I couldn’t resist – I ran the numbers myself. A link to the results should be in this post somplace, or embedded below if that is allowed.
    I started with your figures and then changed the baseline to reflect 10 abandoned properties that were not generating any revenue. Then I ran a scenario for those 10 houses demolished and factored in revenue from selling the properties. And I even did you a favor, I staggered the demolition and construction over 5 years. I also increased the timeframe to 14 years.
    I understand the idea of NPV, but I admit I don’t know how to calculate that, and I didn’t know what rate you used anyway, so I will leave that to you to figure out if you wish. I also didn’t figure in appreciation of surrounding homes or the school tax situation that Bethany mentioned.
    According to these figures, we start to see a relative increase in revenue starting in year 4. So this tells me that at least on paper, the strategy is viable. So unless you can point out any further major flaws with the model, I think you may have to retract the mathematical portion of your argument : )
    Of course I know there is the whole other issue of whether people will actually buy the land and build houses, which of course cannot be calculated mathematically! So we are back into the realm of speculation again…
    I don’t know anything about the developer on Southside – Mr. Lazarro, but to dismiss the idea just because it didn’t work in one situation isn’t convincing to me. I’d like to know what the developer was offering and for how much? How well did they market the properties? Does the developer have a good reputation?
    For my family, I would need larger than 750 sq ft but I would be very interested in buying a brand new house in the $100K to $150K range because most houses in that range in this area are around 80-90 years old! So I don’t see why a young family wouldn’t jump at that.
    Demolition by itself, obviously, is not the entire solution. There needs to be other improvements in our community and there needs to be a strong, well thought out marketing plan running in coordination.
    Honestly, I don’t care that much whether houses get rehabbed or demolished as long as something gets done and it works. Flippin, what is your renovation plan, do you have any numbers to support that idea? I haven’t read all your archives, so if you have outlined something already, please point me to it. Thanks!
    Scribd embed code follows (not sure if it will show, but I put the direct link in the “website” field which you can use if it didn’t)…
    Flip Pin Spreadsheet

    • flippinamsterdam says:

      TimB,
      Thanks for running with this. I’ll take a look and also respond to your other points.
      If OK with you, I can send you my Excel file via email that way you do not have to work off a PDF file. Let me know.

  1. October 9, 2009

    […] October 9, 2009 Knock Them Down Economics Redux Posted by flippinamsterdam under Uncategorized | Tags: amsterdam ny demolition, amsterdam ny revival | Leave a Comment  Fellow poster TimB ran some numbers using my scenarios as a baseline and then creating an ‘Imperfect’ scenario of which life certainly is. His original post with his analysis is here. […]

Leave a Reply