This is a vexing problem I was made aware of by friends that are in the retail business, renting their stores from landlords. It's really brutal. Retailers take on all the risk, put in the work to revitalize a neighbourhood, and their reward is that when lease renewal comes up in 10 years, it spikes and they're faced with a choice of being displaced or handing over an enormously increased part of their margins to the landlord which has done literally nothing.
The others that benefit are the nearby condo developers, that take photos of cool retail in the area to put into their brochures in order to help sell their product. They benefit from the land speculation and the work from others.
I don't really have a solution except that I can see that the landlords benefit from scarcity, and their leverage and ability to raise rents would be lessened if there was more viable retail spaces to take advantage of.
So the city could help retailers by dramatically liberalizing retail zoning and allowing more competitive high streets to develop. This could take the edge off being forced to move by a landlord jacking up rent.
> Retailers take on all the risk, put in the work to revitalize a neighbourhood, and their reward is that when lease renewal comes up in 10 years, it spikes and they're faced with a choice of being displaced or handing over an enormously increased part of their margins to the landlord which has done literally nothing.
This happens on the personal side as well, where property tax rates are artificially depressed - or more accurately, subsidized - until the property changes hands. When we bought our nearly 30 year old house that had had zero improvements, additions, or renovations since initial construction, our property tax bill increased 300% and has since "stabilized" to +10% a year.
What is truly insidious about this is that it's impossible to guess or estimate until you've already purchased the home, and by then it's too late to do anything about it except complain at the courthouse, which might get you a year's abatement if you're lucky.
If we let property taxes just be whatever they "should" be without penalizing home-buying in the process you could at least know what you'd be paying rather than having to factor in a 3-5x increase.
> If we let property taxes just be whatever they "should" be without penalizing home-buying in the process you could at least know what you'd be paying rather than having to factor in a 3-5x increase.
I wouldn't be surprised to hear this varies by jurisdiction. In CA, which has large property tax jumps on sales thanks to Prop 13, it seems like you can know the annual property taxes in advance. The sale price is the taxable valuation* and you can find what the local tax rate is (or you can infer it pretty closely from another recently sold home's public municipal taxes paid).
So solves one problem, but is still problematic :)
*I assume this is the general case, anyways; maybe there's details I'm forgetting about separate tax rates on the land and the improvements; the split of the overall proper value between those two categories was mystifying when I bought...
The hand-wavy explanation is that in the late 70's when this initiative passed (Prop 13), home values were rising rapidly due to an influx of people moving to the state and higher inflation rates of the times. Many people that owned homes, including those that had purchased their homes and retired, were getting priced out of their homes on the property tax rates. There are other rationales or rationalizations depending on where you come down on it. But Prop 13 was intended to slow property tax growth while you owned the property, with assessment reset to full market value at sale time.
There seems a bit of inner conflict in what you're saying. If retailers "revitalizing a neighborhood" leads indirectly to them getting priced out due to rising land values, isn't it also true that poor people living in the neighborhood get priced out at the same time? Is it a good or bad thing to make a neighborhood more hip, is the retailer a hero or a villain?
It's absolutely the case that poor residents get priced out and do not necessarily benefit from a neighbourhood becoming hip.
The cool new retail is tangentially to blame through second order effects, but the real problem is the inflexibility of the system in responding to change which results in a shortage of housing, which means that the disruptive impact on low income persons is really severe as they have no where to move to when things become more expensive or they are evicted.
Much like how the solution to increasing retail rents is more flexibility in retail zoning, so to is the solution for increasing rents.
It's less of a big deal if a cheap lame neighbourhood suddenly becomes cool if you can easily bail out because there's plenty of affordable apartments elsewhere. The problem we're in is that there's a general shortage and so in many places, losing a long held apartment is like an existential crisis because everywhere else is even more expensive and there's a shortage.
Another approach is that in redeveloping "cool" areas we could increase land/property taxes and developer fees so as to recapture the land lift and divert toward public realm projects that benefit existing long time residents. The area becoming cool and getting new condos pays for the new pool and new below market housing.
Should be mentioned as an aside that the actions themselves of poor people can ultimately gentrify a neighbourhood just as much as retail. A neighbourhood can become known for a vibrant arts/music scene that ultimately gentrifies it not just because it has some bars, but because the working artist residents are they themselves creating the attracting works in putting on events and shows. They earn a meagre income as working artists but ultimately may displace themselves as condos come advertising themselves on the scene that they've created.
Cyclical neighbourhood change I think is inevitable so I think what we really need to focus on is not necessarily finding ways to keep neighbourhoods the same, but giving people and retailers options so that when change happens, it's not disruptive and painful.
Depends whether or not the city allows other neighbourhoods to exist/grow/change. If the total floorspace in the city is fixed in regulations, then ofc anything done to improve conditions will hurt people on the bottom. The people who can afford a "revitalized neighbourhood" would happily live in brand new housing built on top of land in the nearby mansion district, displacing no one, but city planners do not allow that - new apartments can only be added to the city stock by destroying old ones, new store floorspace can only be added by destroying old etc. This forces everyone to play musical chairs with too few chairs and the only winners are those who own the chairs.
I heard that in Japan, it's common for condo developers who want to buy out smaller buildings to compensate the owners with an equal amount of floorspace in the new building - not sure how common that practice actually is, but what a way to align incentives!
I think a common thing in Greece was that owners themselves would redevelop their properties much denser, retaining an apartment or two of equal floorspace to their own home, and then leasing or selling out the others to fund the redevelopment of lot.
This sort of flexibility would be really welcome in North America but SFH neighbourhoods are frozen in stone, so when the nearby high street becomes cool, all the little former working class single family homes become million dollar homes that can only be purchased by the rich, and the working class people that may have previously rented them are booted out to who knows where.
You aren’t looking at it in the long term view. Yes that works for people who have been living by there for 40 years since the area was not so nice. But how they are rich (housing value increase) and no one new who is not rich can move it. Eventually the people who have been there long will die and it will only be for the rich.
I've seen a similar thing happen (though more rarely) where a retailer owns the building or space, and after 10 or so years, looks up and realizes they could make more take-home by renting it out.
In truth, retail is a pretty awful business. People love the romanticism of it and the "simplicity", but really it's a shit way to make money the vast majority of the time.
$100k of money sitting on shelves depreciating. Narrow hours when most of your business comes, but need to hang around all those other hours for the trickle of other customers. Dealing with theft. Dealing with bottom tier workers. Dealing with the general public
It's really best when you are already retired and just want something to do for fun.
Vanity shops/restaurant projects by rich spouses are very much a thing in some rich towns as well.
People who are doing it for fun since they have nothing else to do with their time and this also hurt competing businesses that actually need to make money.
That said it would probably be fun way to engage with the community in whatever retirement hobbies you have. Like a daytime cafe / nighttime lounge / listening bar / art gallery thing haha.
You do need some staff you can trust to deal with all the not fun parts. Anyone who has worked retail as a teen knows what that’s like.
This isn't really accurate. It actually takes a decent amount of work and capital input to get a set of retail buildings into usable shape and keep them that way. The internet caricature of landlords is that the buildings just popped into existence one day and the landlords rent them out, but there's obviously more to it. I know several attempts at retail real estate development that flopped and lost investors a lot of money.
There's also a risk involved in renting out the properties. Not all tenants will pay the rent, and when they stop paying for long enough you have to evict. It takes a long time to get someone's business out and turn the property over so a new business can move in. The rents have to be adjusted to compensate for some of that loss, but in a downturn (e.g. COVID) the losses can all sync up at once and torpedo the financial model used by the landlord.
Retail spaces also need to be kept up. It's common in my area for groups to buy out blocks of spaces and overhaul the old parking lots, landscaping, lighting, traffic patterns, and security so that they go from being sketchy run-down locations to something safe and inviting.
I'll probably get downvoted for trying to add some balance to the conversation because this is an internet comment section and my comment wasn't "landlords bad", but retail property investment isn't really a magical safe investment like everyone assumes. Keep that in mind if anyone hits you up for an investment opportunity related to one.
There is risk in choosing tenants for sure, though it is usually the case that the retailers themselves are putting in the expense and sweat equity into renovating a space. Sometimes this is cost shared, often it isn't.
I know my retailer friends painted their store themselves.
It is in the scarce retail environment where landlords have the least amount of risk around choosing a tenant because if one fails they can easily get another. So a city adding more retail zoning would increase vacancy, increase risk to landlords and hopefully reward good retail tenants.
>This isn't really accurate. It actually takes a decent amount of work and capital input to get a set of retail buildings into usable shape and keep them that way. The internet caricature of landlords is that the buildings just popped into existence one day and the landlords rent them out, but there's obviously more to it. I know several attempts at retail real estate development that flopped and lost investors a lot of money.
Nobody develops the sort of organic small scale anything anymore because the caricature informs the local government who then sink their teeth in at every turn and the end result is that the only people doing new development or refreshing stuff at great expense are corporations capable of fending off the government or rich enough to play along.
I think big players also have significant risk exposure during black swan events and the timeline of their operations makes those incidents not entirely unlikely to occur. It's sort of like insurance - most of the time they just get to extort rent, but sometimes they get crushed, too.
Check the 5-year on Hudson Pacific. They're down 96% and dropping. They own a significant number of downtown commercial properties in SF and LA. They're completely underwater, their spaces are barely half full, and they can't lower rents without violating their bank loan covenants.
Of course, if the commercial landscape hadn't shifted in a way nobody could predict then, yes, they'd likely have continued to print money for the foreseeable future. Instead, they're left holding a very heavy bag and will take it to the grave.
Anybody who has entered the retail business as a renter for the past 15 years has made a mistake. Because land lords do this to everybody. If their goal wasn't to suck the lifeblood of people and businesses, then they would have invested their money into something different than becoming landlords.
If you have a great retail idea, then you need to get investors behind you so that your company can outright own the stores. Otherwise you will be leeched on endlessly. It's incredibly hard to get on top if you're depending on the good will of landlords.
Solution: Online shopping until the bubble collapses.
Spitballing solution: In addition to LVT, rental tax? Nah, that just drives the purchase price to a higher level. Hmm. Also it drives up the cost of the minimal viable business (hence the coffee sheds in parking lots).
We are in commercial zoning oversupply to be honest. New retail units going up all the time under apartments failing to lease because there is only so much retail demand, at least at the prices offered but we know people would rather take a loss from an empty unit they can write off than actually lower rent and underlying asset value they use for collateral for loans.
There are too many factors that intersect to lead to these outcomes that make it easy to detect any one silver bullet. Valuing a property based on rents seems to be another big issue since it sets up incentives to increase rent and valuations even when the real estate market doesn't support that rent increase.
That's a nice just so story for the cases in which a landlord benefits due to the success of his tenant. Now do the ones where the property value goes down because of any of a zillion other factors.
CRE has historically provided very good and stable returns, especially compared to retail businesses who face extreme failure rates and risk; trying to compare the two is insulting.
It's almost like you could describe the physical store as the means of production so what we're talking about is the worker's relationship to the means of production.
You might say: but what abou the owners? Many such small businesses are just jobs you buy. Many don't survive when the owners don't move on or the business sells for what's a relatively low price given the turnover.
I'll give you another real world example of this distortion: NYC"s so-called "zombie stores" [1].
I keep thinking about a statement made by Xi Jinping in 2016: houses are for living, not for speculation [2]. Many China critics liked to point to the Evergrand collapse as some gotcha but what really happened is that the CCP intentionally just popped the real estate bubble, taking the position that affordable housing was more important than inventor returns.
Why do I bring up housing? Because as intentional policy decisions increase the cost of construction, it also makes commercial real estate more expensive. Even if you ignore the increased construction cost, every commercial space becomes more expensive because it's an opportunity cost to not build housing there in a speculative market.
Increased rent and increased property costs are an input into everything you buy and are killing the businesses people seem to like and the so-called "third spaces" a lot of people talk about.
And why? Because a plurality of Americans (if not an outright majority) see themselves as "temporarily embarrassed millionaires" [3] and future real estate moguls.
The physical store is not the "means of production" in urban areas, but a closer analog is the piece of paper that allows a given square foot of floorspace (for any use) the right to exist within the city for a given period of time. You could call this piece of paper a floorspace factory, since it's the limiting factor. Somehow we have decided it's best to have as few floorspace factories as possible.
Too late in certain markets like LA. They already built out all the flat land for the most part by the 90s. Only way to go now is to go up. There is no more land to go out. Look at the satellite map, development from ocean to mountains.
Except regulations are what got us here in the first place? At least in the US, zoning is a recent invention with racial motivations. Cities want to be dense because that is the cheapest way to build. That is why basically every city older than a 100 years old that hasn't been wrecked by zoning is dense. Suburbs are an unnatural product of abundant land in the US, the invention of automobiles, and zoning.
It's environmental as much as it is zoning that drives the development you see.
You literally can't build the kind of "concrete jungle" that you used to be able to because of environmental.
Like a store with a few parking spaces up front, the building and an alley around the back to one parking space (for the staff) and the dumpster is literally illegal without a multimillion dollar stormwater treatment system or a bunch of extra land (i.e. suburban sprawl).
This is also why you only ever see <low number> family houses on 1/16th to 1/8 acre (depending on the sqft of the house + parking) and the it jumps right to N-over-Y megacorp apartment blocks (maybe with retail on the bottom).
The state claims jurisdiction on pretty much all the "seriously heavy" industry people like to trot out as though it would be in your back yard if not for zoning. The local towns don't get much of a say and even when they do the projects are high dollar enough that if the town won't grant it then they'll win on appeal and it'll be no big deal.
Aaaand, the real kicker is that the towns typically can't fight too hard because a lot of zoning provisions they'd use are not up to the legal standard it takes to do battle with a megacorp and they'd rather keep them on the books as they are than have the megacorp's lawyers pick them apart.
So you can still have Chernoybl in your back yard with zoning.
Zoning is about 100 years old, and it's not the reason Manhattan doesn't have enough groceries. And ultimately, market forces almost always win over regulations.
Reformulate the question: why do people tolerate living in dense tiny apartments, without easy access to necessities like childcare and grocery stores?
You don't need tiny apartments to have density. You can do it with smaller single-family houses on smaller lots, narrow one-way streets, and alleyways for parking instead of driveways and garages. This is how the pre-war streetcar suburb of Riverdale, Toronto is designed [1] and it has much higher density than the rest of the city.
That's a propaganda channel that "conveniently" ignores everything against their narrative.
These kinds of density still require cars. Unless you want to have a stay-at-home spouse who can do full-time housekeeper duty (like in that Toronto neighborhood).
On paper though, if the area becomes nicer, they should be raising their prices to reflect that. The landlord asking for a larger cut because the value of the storefront has increased, should be a signal to raise your prices to pass the cost along.
As a bit of a "cute downtown" junkie, I can assure you that those quaint town stores have crazy prices, but people pay them.
Unfortunately city planners are the original "scientific" central planners and they have decided that legal floorspace (residential, commercial, retail, all of it) should exclusive & scarce, with predictable results.
It is difficult to simply raise prices when your business is not a necessity but a luxury, because there is a tipping point where customers will decide they can just do without whatever you have on offer. Customers can be awfully price sensitive beyond even what would be economically rational. They might balk at a pint of beer going up by $3 while they pull down four or five figures of income a month.
I hear people talk about this all the time and I know I am guilty of it too:
1. Go into a store to check out a product in person or try it on.
2. Leave and buy it cheaper online.
I try not to. Sometimes it's because the store doesn't have the exact color or model I want. Sometimes the point in time when I'm shopping happens to not be when I'm ready to buy and when I am ready, it's a hassle to go back to the store. But sometimes it's just being lazy and cheap.
I'm surprised the article didn't mention an obvious (but extremely difficult) answer:
1. Levy taxes on online retail companies. Scale so that the larger the business is and the greater the fraction of their business is online, the higher the tax.
2. Use that to subsidize or lower the taxes on smaller, in-person focused businesses.
Taxes are the single best lever we have to architect incentivizes to improve the world for the public. It's a shame that government and politics in the US is so broken that we can't really use it effectively.
A classic “just do LVT” situation. It’s amusing because Henry George wrote down exactly what to do 130 years ago and we’re still arguing about it. Just read the book people!
The most chaotic solution I can think of would be making Felix Margolis, who joins Fannie Mae and Freddie Mac and gives out 30 year tiny interest loans to help first time small business owners buy the property instead of renting it. A beautiful crop of thriving businesses started in 2027 at the low low price of commercial real estate prices climbing imto the stratosphere so no small business started in 2040 being able to rent more than a square foot.
Always in agreement to such initiatives. I do think a barrier to adoption is the space of possibilities is quite large and generally not well organized around a specific proposal or mandate, so opposition to these initiatives can pick them apart of details. Especially since opposition is usually much more engaged in local governance.
It's somewhat complicated to understand, but I think this is an opportunity for strong communicators to present to a public that is much more receptive toward these ideas.
I don't think there is a connection. The situation where the landlords capture most of the increase in value that a cluster of retailers create, would not be affected if we switched from taxing the landlords on the value of their land and building, to taxing them just on the value of the land.
The trick is that land alone can command higher tax rates than land+buildings without negative economic effects, due to land having an inelastic supply. A community could therefore tax land value at ~100% and capture the entirety of the value increase that'd otherwise end up in landlords' bank accounts. Combine that with UBI or some other means to redistribute that captured value and literally the only “losers” in this scenario are the landlords (and only to the extent that they'd no longer make money on renting out land; slashing the building tax to zero would make those landlords less disincentivized to maintain and upgrade their buildings).
In the immediate order of things yeah, tenants aren't going to receive any relief from taxing land. The benefit lies in the second, or maybe even third order of effects that LVT produces.
Do we want the landlords to just sit on all of that value they're accumulating or do we want to take in more tax revenue (not a higher tax rate) as their land value increases and then do something for the common good with that additional tax revenue? Maybe tax relief for businesses, or social programs that reduce the cost of living for the workers. Or even better, encourage the landowner to further develop their land to get a better return, potentially benefitting tenants and the nearby community? Because that's what LVT does, or at the very least enables.
It can be transferred by lowering sales or corporate taxes. It is also indirectly transferred by encouraging more valuable land use around the retail like public transport or complementary businesses.
> Two thirds of new American homes are in some sort of community association, typically homeowners’ associations, but also co-ops, and condominium associations, and 30 percent of American homes overall. Buyers opt into these associations, pay annual fees in the thousands of dollars, and suffer their annoying restrictions and demands because they create amenities: quiet, cleanliness/tidiness, safety, or things like public pools and parks.
Uh... People "opt-in" to homeowners' associations because two-thirds of new builds impose them. Municipalities don't want to accept new roads, so developers can get things built through privatization.
>But homeowners would likely be willing to share value too
No, they wouldn't. That is why property tax rates (and hence land value tax rates) have so many laws capping them and otherwise limiting them for all the important voting blocs (old people, military, big business, etc).
See California prop 13, that voters passed. See Oregon measure 5 and 50, also passed by voters. And politicians wouldn't dare touch these.
>In American cities, there is an issue with value capture. One party creates the value (in this case retailers), another party (landowners or homeowners) captures it.
This phenomenon is not restricted to American cities. It will broadly exist in all human societies with flattened or top heavy population age histograms. The old are the most populous and knowledgeable (and motivated) to structure society so that the non working (themselves) can capture the most value. Hence, the popularity of earned income tax instead of marginal land value tax rates. The goals of the wealthy and the old (and the ones with aspirations to be wealthy) align to support rent seeking policy.
A perennial cause for revolution around the globe.
It’s a bit ironic. In an effort to horde wealth, the wealthy bring about their own ruin. Though I suppose if you die before the revolution that’s alright for you
Revolution has never changed this status quo. Just results in violence, then once the ship rights itself the social order is back to how it was with an oligarchical elite extracting value from labor. In fact I don't think there has ever been a single case of labor unshackling itself from the yoke of the oligarchy.
If there is a natural human condition, it must be this, just because of how sustained this pattern has been over the course of what tens of thousands of years to today, even in the face of modern technology and more universal awareness that this is how the world actually works.
I never considered how a street with lots of cool shops could create value for homeowners and commercial real estate owners without necessarily creating value for the businesses that were responsible for making it cool.
I don't think that any of the suggested solutions would work, as they all involve the government and taxation - which can only destroy value, IMHO.
Creating a cool vibe certainly has value and can contribute to price appreciation in the community, but ultimately capitalism is not based upon creating vibe but upon selling products and services.
One of the stronger arguments for LVT is that land is inherently inelastic, and thus taxing it doesn't create inefficiency (deadweight loss).
Other taxes like sales tax destroy value because they create a deadweight loss by preventing transactions that would otherwise occur. Land supply is constant, so LVT is purely a wealth transfer, and does not create inefficiencies.
It seems like a reach to say that taxation inherently destroys value. For example, in my country I think universal education, roads, universal healthcare, and border control probably all provide value in excess of their cost, and no one has proven a method of funding those things other than taxation. I guess “value” is a subjective idea, though.
>as they all involve the government and taxation - which can only destroy value, IMHO.
My government and taxation provides the police, the courts, the schools, the roads, the sewers, the power, etc. Seems like a little bit of a value add.
I think you've misread the OP's point. It's not that the government doesn't provide the police (although it doesn't - the taxpayer pays for the police and staffs it). It's that government policies and regulations to try and change fundamental market forces create extremely obvious problems, although they aren't always obvious to the myopic voter.
You’re very close to asking whether capitalism leads to the best quality of life, if you think of quality as going beyond the availability of products and services.
People who grew up in Soviet-era poverty of course see this differently than comfortable middle class people who feel alienated by soulless suburbia.
I think the article could be read as a way to reconcile the two.
Value creation not captured is the definition of a positive externality, and landlords being able to extract that value despite not creating them is an example of rent seeking. Aiming to address these does not somehow question capitalism.
How does this survive contact with the triple net lease? You pass the bond and the property tax is immediately due from the tenant. Congratulations, you destroyed all the businesses.
Destroy the businesses, rental prices go down, land value tax rates punish land owner for keeping land empty, so either land owner sells the property to someone who can make the numbers work, or land owner accepts lower profits.
Obviously, there is pain for the current players, but long term, the landowner should not be able to extract so much profit margin without also providing sufficient utility, such as operating an in demand business.
Something to be said about the number of vampires out there. I think about my own apartment complex. Less than half a dozen units owned by a single landlord. They pay a handiman probably less than $1000 worth of work on the property a year, really nothing major every happens. They pay a crew to come by once every other month and trim the bushes and blow everything out, mostly because the city has fire code saying the bushes cannot touch the structure. Whatever the cheapest two man crew for that costs I guess.
And for that couple hundred in upkeep maybe they pay a year, my landlord clears probably between 150k to 200k in rent doing nothing at all. I think they actually own a couple more similar properties so its more than that.
So here is this couple in this city, that has found for themselves a way to pull out at least 200k from the local economy, and contribute basically nothing back at all. They don't otherwise work. They just cash checks pretty much and text the handiman when an tenant texts them. Imagine how cheap my rent would be not having to pay for these vampires considering actual costs of this building. Probably like $50/mo each between all of us tenants would be plenty to cover typical yearly overhead. I'd certainly go out to eat a ton more and heavily support local economy if I was only losing $50 a month of my pay to rent. I'd probably get away only having to work 10 hours a week. But no I work 40 hours and give them like 30% my gross because my landlord needs 200k to do nothing. Literally all they do is suck my blood. Their whole existence based on sucking my blood.
You’re not just paying the landlord, you’re paying to outbid all the other people who want to live in that space. Even if you could somehow remove the landlord from the equation, there’s no way you’d get your place for $50/month.
We must differentiate between capital and land. They aren’t the same thing. OP is saying that his landlord is profiting off land. This is indeed doing nothing, and has nothing to do with the time value of money, in the sense that the time value of money is due to capital, not land.
This is a common misunderstanding. Henry George made it very clear in the 1890s where the distinction lies.
Because we've spent the last 50 years with housing inflation above wage inflation and compound interest is the most powerful force. Tax burden has moved ever more to the working classes and away from the wealthy. So we're making less and the price has gone up.
it’s illegal to build more of them in almost all places in the US. San Jose, a city of over 1M people, was zoned 96% SFH until like 5 years ago.
So prices do existing ones are high. Labor is taxed heavily compared to rental income so it’s a slog to break into the capitalist class. This wasn’t the case 50 years ago though, because we let people built apartment buildings then. So plenty of people could buy in at that time.
No money for down payment. Mortgage on the median home would also be another 3-4 grand a month. Hardly any inventory much below the median as usually that is just offered for rent.
But currently, most of the high intensity retail areas tax the landlords on the value of the land PLUS the value of the building ( "improvements" ). They owe this tax even if the building is empty.
How does switching to a land value tax, which only taxes them on the value of the land, help at all ?
I think it makes a lot of sense. Like if you have a $100k empty lot taxed at 1% of total value, and you build a $200k house on it, then your taxes go from $1k to $3k, which somewhat disincentivizes building. You might feel pretty comfortable sitting on the lot at $1k/year, especially if values are increasing at more than a few % per year. But if you tax only the land at 3%, then your taxes are already $3k. There’s no disincentive to build, and it’s a lot more uncomfortable to sit on that empty lot, so you develop it or sell it to someone who will.
In urban and suburban areas, it benefits society to have more development on a given piece of land. Taxing the land only does not mean the nominal tax liability goes down. Taxing the land only means the land owner is incentivized to do something with the land. The more productive the use, the better for their bottom line, and the better for society.
Easiest example is having an empty lot or a detached single family homes taking up 0.2 acre lots in the middle of a city that could house 10x as many people on the land. Right now, leaving it underutilized makes it a cheap savings account for the landowner. Developing it is work. So let's incentivize the development taxing the land only (can be the same or more), so that the only way it makes sense to control that land is to do something sufficiently useful with it.
how many retail storefronts do you think Phil Levin and Ben Southwood have started?
how many retailers do you think they've talked to? rents could drop to zero, and people would still be buying more shit off amazon than from stores. i can't comprehend how they can go from talking about amazon being the cause of foot traffic reductions, and then the non sequiter comes, "We risk losing something that makes cities what they are, because we don’t have a good model for letting retail capture the value it creates."
hospitality is a different thing entirely. rents could drop to zero, and restaurants and hotels will still be going out of business due to reduced conference tourism. and anyway, they are alcohol (drugs) businesses. they make profit from alcohol. the food, the concept, all that stuff is a hook for alcohol.
The whole discussion about "fixing" cities is stupid. Dense cities can't be fixed, and using ad-hoc regulations like this is just like plugging the holes in a dike with fingers.
Next you'll find that you also need to do the same for schools. But schoolteachers won't be able to afford living near the areas that they serve. So you need subsidized housing for them.
Oh, and the same for kindergarten. But what about at-home childcare? And so on.
And no, "land value capture" won't fix it. You'll just move the complexity from giving out subsidies into assessing the value of kindergartens and schools.
If you get rid of a lot of inefficiencies (unnecessary parking, land use segregation increase travel distances, and restrictions on multi family apartments), there will be so much more space available that it would lower housing prices by a lot for everyone. The tax revenues can also offset other taxes like income or sales taxes which also reduce inefficiency.
Are you saying that cities can’t be fixed because they’re already fine, or because they’re irredeemably awful, or just that the notion of “fixing” them is inherently ridiculous?
The problem with US cities is that they're not dense enough. Most of the US has spent the past half-centry actively making new high-density construction illegal or incredibly expensive, so everything is operating within the bounds of 1970s-80s construction being reused over and over again because it was grandfathered in.
People being forced by economic forces to move into uncomfortable and unaffordable dense cities. This in turn creates disadvantaged underclass with no hopes for a better future. And even European social safety nets can only do so much.
While just hours away from dense cities, the apartments are often literally free. With copious space and easy access to basic services.
This results in rising crime. The downward trend that started in 90-s had been reversed. And the crimes of despair, mainly drug-related crimes, are rising faster than violent crimes.
The others that benefit are the nearby condo developers, that take photos of cool retail in the area to put into their brochures in order to help sell their product. They benefit from the land speculation and the work from others.
I don't really have a solution except that I can see that the landlords benefit from scarcity, and their leverage and ability to raise rents would be lessened if there was more viable retail spaces to take advantage of.
So the city could help retailers by dramatically liberalizing retail zoning and allowing more competitive high streets to develop. This could take the edge off being forced to move by a landlord jacking up rent.
This happens on the personal side as well, where property tax rates are artificially depressed - or more accurately, subsidized - until the property changes hands. When we bought our nearly 30 year old house that had had zero improvements, additions, or renovations since initial construction, our property tax bill increased 300% and has since "stabilized" to +10% a year.
What is truly insidious about this is that it's impossible to guess or estimate until you've already purchased the home, and by then it's too late to do anything about it except complain at the courthouse, which might get you a year's abatement if you're lucky.
If we let property taxes just be whatever they "should" be without penalizing home-buying in the process you could at least know what you'd be paying rather than having to factor in a 3-5x increase.
I wouldn't be surprised to hear this varies by jurisdiction. In CA, which has large property tax jumps on sales thanks to Prop 13, it seems like you can know the annual property taxes in advance. The sale price is the taxable valuation* and you can find what the local tax rate is (or you can infer it pretty closely from another recently sold home's public municipal taxes paid).
So solves one problem, but is still problematic :)
*I assume this is the general case, anyways; maybe there's details I'm forgetting about separate tax rates on the land and the improvements; the split of the overall proper value between those two categories was mystifying when I bought...
As far as I know, my area doesn’t do that. The assessments go up over time, but there’s no large jump on transfer of ownership.
The hand-wavy explanation is that in the late 70's when this initiative passed (Prop 13), home values were rising rapidly due to an influx of people moving to the state and higher inflation rates of the times. Many people that owned homes, including those that had purchased their homes and retired, were getting priced out of their homes on the property tax rates. There are other rationales or rationalizations depending on where you come down on it. But Prop 13 was intended to slow property tax growth while you owned the property, with assessment reset to full market value at sale time.
The cool new retail is tangentially to blame through second order effects, but the real problem is the inflexibility of the system in responding to change which results in a shortage of housing, which means that the disruptive impact on low income persons is really severe as they have no where to move to when things become more expensive or they are evicted.
Much like how the solution to increasing retail rents is more flexibility in retail zoning, so to is the solution for increasing rents.
It's less of a big deal if a cheap lame neighbourhood suddenly becomes cool if you can easily bail out because there's plenty of affordable apartments elsewhere. The problem we're in is that there's a general shortage and so in many places, losing a long held apartment is like an existential crisis because everywhere else is even more expensive and there's a shortage.
Another approach is that in redeveloping "cool" areas we could increase land/property taxes and developer fees so as to recapture the land lift and divert toward public realm projects that benefit existing long time residents. The area becoming cool and getting new condos pays for the new pool and new below market housing.
Should be mentioned as an aside that the actions themselves of poor people can ultimately gentrify a neighbourhood just as much as retail. A neighbourhood can become known for a vibrant arts/music scene that ultimately gentrifies it not just because it has some bars, but because the working artist residents are they themselves creating the attracting works in putting on events and shows. They earn a meagre income as working artists but ultimately may displace themselves as condos come advertising themselves on the scene that they've created.
Cyclical neighbourhood change I think is inevitable so I think what we really need to focus on is not necessarily finding ways to keep neighbourhoods the same, but giving people and retailers options so that when change happens, it's not disruptive and painful.
This sort of flexibility would be really welcome in North America but SFH neighbourhoods are frozen in stone, so when the nearby high street becomes cool, all the little former working class single family homes become million dollar homes that can only be purchased by the rich, and the working class people that may have previously rented them are booted out to who knows where.
For various reasons it’s extremely rare for retail businesses to own the buildings they operate out of.
Just like saving a (healthy) life is a good thing, even if you can spin some stories about the dignity of death or whatever.
$100k of money sitting on shelves depreciating. Narrow hours when most of your business comes, but need to hang around all those other hours for the trickle of other customers. Dealing with theft. Dealing with bottom tier workers. Dealing with the general public
It's really best when you are already retired and just want something to do for fun.
People who are doing it for fun since they have nothing else to do with their time and this also hurt competing businesses that actually need to make money.
That said it would probably be fun way to engage with the community in whatever retirement hobbies you have. Like a daytime cafe / nighttime lounge / listening bar / art gallery thing haha.
You do need some staff you can trust to deal with all the not fun parts. Anyone who has worked retail as a teen knows what that’s like.
https://shoppingcenterbusiness.com/retail-condominiums-break...
But in general most US cities have an excess of retail space. Eliminating a lot of it would probably be a net positive.
> landlord which has done literally nothing
This isn't really accurate. It actually takes a decent amount of work and capital input to get a set of retail buildings into usable shape and keep them that way. The internet caricature of landlords is that the buildings just popped into existence one day and the landlords rent them out, but there's obviously more to it. I know several attempts at retail real estate development that flopped and lost investors a lot of money.
There's also a risk involved in renting out the properties. Not all tenants will pay the rent, and when they stop paying for long enough you have to evict. It takes a long time to get someone's business out and turn the property over so a new business can move in. The rents have to be adjusted to compensate for some of that loss, but in a downturn (e.g. COVID) the losses can all sync up at once and torpedo the financial model used by the landlord.
Retail spaces also need to be kept up. It's common in my area for groups to buy out blocks of spaces and overhaul the old parking lots, landscaping, lighting, traffic patterns, and security so that they go from being sketchy run-down locations to something safe and inviting.
I'll probably get downvoted for trying to add some balance to the conversation because this is an internet comment section and my comment wasn't "landlords bad", but retail property investment isn't really a magical safe investment like everyone assumes. Keep that in mind if anyone hits you up for an investment opportunity related to one.
I know my retailer friends painted their store themselves.
It is in the scarce retail environment where landlords have the least amount of risk around choosing a tenant because if one fails they can easily get another. So a city adding more retail zoning would increase vacancy, increase risk to landlords and hopefully reward good retail tenants.
Nobody develops the sort of organic small scale anything anymore because the caricature informs the local government who then sink their teeth in at every turn and the end result is that the only people doing new development or refreshing stuff at great expense are corporations capable of fending off the government or rich enough to play along.
https://finance.yahoo.com/quote/HPP/
Check the 5-year on Hudson Pacific. They're down 96% and dropping. They own a significant number of downtown commercial properties in SF and LA. They're completely underwater, their spaces are barely half full, and they can't lower rents without violating their bank loan covenants.
Of course, if the commercial landscape hadn't shifted in a way nobody could predict then, yes, they'd likely have continued to print money for the foreseeable future. Instead, they're left holding a very heavy bag and will take it to the grave.
If you have a great retail idea, then you need to get investors behind you so that your company can outright own the stores. Otherwise you will be leeched on endlessly. It's incredibly hard to get on top if you're depending on the good will of landlords.
Solution: Online shopping until the bubble collapses.
Spitballing solution: In addition to LVT, rental tax? Nah, that just drives the purchase price to a higher level. Hmm. Also it drives up the cost of the minimal viable business (hence the coffee sheds in parking lots).
Allowing more supply is the only good answer.
It all gets filled up with an expansive lobby and amenities.
Makes the surrounding street life dead.
You might say: but what abou the owners? Many such small businesses are just jobs you buy. Many don't survive when the owners don't move on or the business sells for what's a relatively low price given the turnover.
I'll give you another real world example of this distortion: NYC"s so-called "zombie stores" [1].
I keep thinking about a statement made by Xi Jinping in 2016: houses are for living, not for speculation [2]. Many China critics liked to point to the Evergrand collapse as some gotcha but what really happened is that the CCP intentionally just popped the real estate bubble, taking the position that affordable housing was more important than inventor returns.
Why do I bring up housing? Because as intentional policy decisions increase the cost of construction, it also makes commercial real estate more expensive. Even if you ignore the increased construction cost, every commercial space becomes more expensive because it's an opportunity cost to not build housing there in a speculative market.
Increased rent and increased property costs are an input into everything you buy and are killing the businesses people seem to like and the so-called "third spaces" a lot of people talk about.
And why? Because a plurality of Americans (if not an outright majority) see themselves as "temporarily embarrassed millionaires" [3] and future real estate moguls.
[1]: https://www.nytimes.com/2024/08/06/nyregion/pharmacies-vacan...
[2]: https://en.wikipedia.org/wiki/Houses_are_for_living,_not_for...
[3]: https://www.goodreads.com/quotes/328134-john-steinbeck-once-...
Using all kinds of regulations to ignore the market signals usually points out that you're doing something wrong (not _always_).
You literally can't build the kind of "concrete jungle" that you used to be able to because of environmental.
Like a store with a few parking spaces up front, the building and an alley around the back to one parking space (for the staff) and the dumpster is literally illegal without a multimillion dollar stormwater treatment system or a bunch of extra land (i.e. suburban sprawl).
This is also why you only ever see <low number> family houses on 1/16th to 1/8 acre (depending on the sqft of the house + parking) and the it jumps right to N-over-Y megacorp apartment blocks (maybe with retail on the bottom).
For example zoning keeps industry away from residential, preventing disasters like the West Texas Fertilizer explosion.
Aaaand, the real kicker is that the towns typically can't fight too hard because a lot of zoning provisions they'd use are not up to the legal standard it takes to do battle with a megacorp and they'd rather keep them on the books as they are than have the megacorp's lawyers pick them apart.
So you can still have Chernoybl in your back yard with zoning.
Reformulate the question: why do people tolerate living in dense tiny apartments, without easy access to necessities like childcare and grocery stores?
[1] https://www.youtube.com/watch?v=MWsGBRdK2N0
Sure, it starts with "just do row houses" and "missing middle" and in two generations it becomes "we should allow SROs".
> [1] https://www.youtube.com/watch?v=MWsGBRdK2N0
That's a propaganda channel that "conveniently" ignores everything against their narrative.
These kinds of density still require cars. Unless you want to have a stay-at-home spouse who can do full-time housekeeper duty (like in that Toronto neighborhood).
As a bit of a "cute downtown" junkie, I can assure you that those quaint town stores have crazy prices, but people pay them.
1. Go into a store to check out a product in person or try it on.
2. Leave and buy it cheaper online.
I try not to. Sometimes it's because the store doesn't have the exact color or model I want. Sometimes the point in time when I'm shopping happens to not be when I'm ready to buy and when I am ready, it's a hassle to go back to the store. But sometimes it's just being lazy and cheap.
I'm surprised the article didn't mention an obvious (but extremely difficult) answer:
1. Levy taxes on online retail companies. Scale so that the larger the business is and the greater the fraction of their business is online, the higher the tax.
2. Use that to subsidize or lower the taxes on smaller, in-person focused businesses.
Taxes are the single best lever we have to architect incentivizes to improve the world for the public. It's a shame that government and politics in the US is so broken that we can't really use it effectively.
- I like to shop IRL, and the opportunities to do this pleasurably are going extinct
- I live right by Hayes valley, which they start out with.
- I'm also a member of "The Commons" which they mention at the end. I love what it's trying to do: creating a new social 3rd space in SF.
It's somewhat complicated to understand, but I think this is an opportunity for strong communicators to present to a public that is much more receptive toward these ideas.
Do we want the landlords to just sit on all of that value they're accumulating or do we want to take in more tax revenue (not a higher tax rate) as their land value increases and then do something for the common good with that additional tax revenue? Maybe tax relief for businesses, or social programs that reduce the cost of living for the workers. Or even better, encourage the landowner to further develop their land to get a better return, potentially benefitting tenants and the nearby community? Because that's what LVT does, or at the very least enables.
So it directly solves for this problem by giving store owners more power in negotiations (I’ll just move across the street)
Uh... People "opt-in" to homeowners' associations because two-thirds of new builds impose them. Municipalities don't want to accept new roads, so developers can get things built through privatization.
No, they wouldn't. That is why property tax rates (and hence land value tax rates) have so many laws capping them and otherwise limiting them for all the important voting blocs (old people, military, big business, etc).
See California prop 13, that voters passed. See Oregon measure 5 and 50, also passed by voters. And politicians wouldn't dare touch these.
>In American cities, there is an issue with value capture. One party creates the value (in this case retailers), another party (landowners or homeowners) captures it.
This phenomenon is not restricted to American cities. It will broadly exist in all human societies with flattened or top heavy population age histograms. The old are the most populous and knowledgeable (and motivated) to structure society so that the non working (themselves) can capture the most value. Hence, the popularity of earned income tax instead of marginal land value tax rates. The goals of the wealthy and the old (and the ones with aspirations to be wealthy) align to support rent seeking policy.
It’s a bit ironic. In an effort to horde wealth, the wealthy bring about their own ruin. Though I suppose if you die before the revolution that’s alright for you
If there is a natural human condition, it must be this, just because of how sustained this pattern has been over the course of what tens of thousands of years to today, even in the face of modern technology and more universal awareness that this is how the world actually works.
I don't think that any of the suggested solutions would work, as they all involve the government and taxation - which can only destroy value, IMHO.
Creating a cool vibe certainly has value and can contribute to price appreciation in the community, but ultimately capitalism is not based upon creating vibe but upon selling products and services.
One of the stronger arguments for LVT is that land is inherently inelastic, and thus taxing it doesn't create inefficiency (deadweight loss).
Other taxes like sales tax destroy value because they create a deadweight loss by preventing transactions that would otherwise occur. Land supply is constant, so LVT is purely a wealth transfer, and does not create inefficiencies.
My government and taxation provides the police, the courts, the schools, the roads, the sewers, the power, etc. Seems like a little bit of a value add.
People who grew up in Soviet-era poverty of course see this differently than comfortable middle class people who feel alienated by soulless suburbia.
I think the article could be read as a way to reconcile the two.
Obviously, there is pain for the current players, but long term, the landowner should not be able to extract so much profit margin without also providing sufficient utility, such as operating an in demand business.
And for that couple hundred in upkeep maybe they pay a year, my landlord clears probably between 150k to 200k in rent doing nothing at all. I think they actually own a couple more similar properties so its more than that.
So here is this couple in this city, that has found for themselves a way to pull out at least 200k from the local economy, and contribute basically nothing back at all. They don't otherwise work. They just cash checks pretty much and text the handiman when an tenant texts them. Imagine how cheap my rent would be not having to pay for these vampires considering actual costs of this building. Probably like $50/mo each between all of us tenants would be plenty to cover typical yearly overhead. I'd certainly go out to eat a ton more and heavily support local economy if I was only losing $50 a month of my pay to rent. I'd probably get away only having to work 10 hours a week. But no I work 40 hours and give them like 30% my gross because my landlord needs 200k to do nothing. Literally all they do is suck my blood. Their whole existence based on sucking my blood.
This is a common misunderstanding. Henry George made it very clear in the 1890s where the distinction lies.
So prices do existing ones are high. Labor is taxed heavily compared to rental income so it’s a slog to break into the capitalist class. This wasn’t the case 50 years ago though, because we let people built apartment buildings then. So plenty of people could buy in at that time.
How does switching to a land value tax, which only taxes them on the value of the land, help at all ?
Easiest example is having an empty lot or a detached single family homes taking up 0.2 acre lots in the middle of a city that could house 10x as many people on the land. Right now, leaving it underutilized makes it a cheap savings account for the landowner. Developing it is work. So let's incentivize the development taxing the land only (can be the same or more), so that the only way it makes sense to control that land is to do something sufficiently useful with it.
how many retailers do you think they've talked to? rents could drop to zero, and people would still be buying more shit off amazon than from stores. i can't comprehend how they can go from talking about amazon being the cause of foot traffic reductions, and then the non sequiter comes, "We risk losing something that makes cities what they are, because we don’t have a good model for letting retail capture the value it creates."
hospitality is a different thing entirely. rents could drop to zero, and restaurants and hotels will still be going out of business due to reduced conference tourism. and anyway, they are alcohol (drugs) businesses. they make profit from alcohol. the food, the concept, all that stuff is a hook for alcohol.
Next you'll find that you also need to do the same for schools. But schoolteachers won't be able to afford living near the areas that they serve. So you need subsidized housing for them.
Oh, and the same for kindergarten. But what about at-home childcare? And so on.
And no, "land value capture" won't fix it. You'll just move the complexity from giving out subsidies into assessing the value of kindergartens and schools.
Moscow did just that in 90-s. They allowed densification without any regard for parking spaces.
Guess what happened? I give you three guesses.
Smaller cities, sparse cities like Houston, and special-purpose dense cities (like college or military towns) are fine.
Singapore is frequently held up as a model by many on this very website.
And the US cities resisted the urbanism blight for longer than Europe thanks to a much better design.
And Europe is now paying price for its density obsession. You see it as a rising tide of far-right movements in Europe.
While just hours away from dense cities, the apartments are often literally free. With copious space and easy access to basic services.
This results in rising crime. The downward trend that started in 90-s had been reversed. And the crimes of despair, mainly drug-related crimes, are rising faster than violent crimes.