housing – Thinking About Becoming a Real Estate Developer?

Social Costs are Seen, Financial Costs are Felt

Question: Why should we focus on reducing the number of vacant homes in cities?

One answer: Vacant homes become a financial drain on that city’s resources.

For example, the cost to demolish one vacant home could reach up to $20,000. Sometimes more.

There are social costs as well…

Neighborhoods with high concentrations of vacant homes become breeding grounds for crime: social costs.

Yet social costs are not always correlated to dollars and cents. Social costs are sometimes deemed to be someone else’s problem.

But are social costs really someone else’s problem?

Social costs attributed to vacant homes lead to financial costs incurred by a city, by that city’s stakeholders and by that city’s taxpayers.

Social costs do affect those who may (at first) believe one vacant home in another part of town is not their problem.

A New Yorker living in Tribeca or on the Upper East Side is part of the New York City family. As such, they pay New York City taxes.

So, while there may be no vacant homes in Tribeca or the Upper East Side, Tribeca and the Upper East Side are still linked to the poorest neighborhoods in New York City. To the Morrisania neighborhood or the Crotona neighborhood in the Bronx, where just about 4-out-of-10 live below the poverty line.

Be it Morrisania or be it Tribeca. Be it Crotona or be it the Upper East Side. Each neighborhood – all four of them – is still part of the New York City family.

Let’s say there is a foreclosure in Crotona. And let’s say that foreclosure in Crotona becomes a vacant home.

Increased police patrolling in Crotona might be enacted. So as to avert utilization of that vacant home for illegal purposes.

More police cars driving through Crotona becomes a financial cost which addresses the social cost. That financial cost is a New York City cost: a cost bourne by Crotona, a cost bourne by the Upper East Side, a cost bourne by Tribeca.

The cost of the vacant home to Crotona is obvious: Lower home values. An overgrown yard. Broken windows. Possible break-ins. More police cars driving by.

The cost of that vacant home to the Upper East Side or to Tribeca? Less obvious. Yet real, nonetheless.

Homeowners on the Upper East Side and Tribeca contribute to New York City police officer salaries too.

IMPACT FEES

Come January 31st, each of New Jersey’s 564 municipalities is required to file their own resolution with the State, adopting affordable housing obligations for their municipality.

Come June 30th, each of New Jersey’s 564 municipalities is required to submit their affordable housing plan to the State, for their municipality.

Last October, the New Jersey Department of Community Affairs released New Jersey affordable housing requirements. These will need to be completed by 2035. And here they are…

A) Create 84,698 new affordable housing units.

B) Preserve an additional 65,410 existing housing units.

140,00 homes built or renovated over the next ten years. That’s a lot of homes. That’s a lot of infrastructure needed.

Impact fees…and Trenton.

The Municipal Development Impact Fee Authorization Act – presently in committee in Trenton – would, if passed, broaden New Jersey municipalities’ ability to pass through development-related costs to real estate developers. By broadening the scope for how impact fees can be collected by municipalities.

New Jersey is one of 22 states which presently authorizes the collection of impact fees by a municipality. Different states may refer to “impact fees” though their own state vernacular. For example, in Kansas – Kansas does authorize impact fees – impact fees are also referred to as adequate facility taxes. Or excise taxes.

At the present time, in New Jersey, the impact fees which can be passed along by municipalities to developers are pretty much limited to off-site improvements which arise as a direct consequence of the development. Direct consequence?

My humble opinion…

The way impact fees are levied upon developers in New Jersey today seems a bit…unjust. Tilted too far in favor of developers. At the expense of municipalities. See, direct consequence.

For example, an increased allocation of funds – and personnel – will likely be required in order to accommodate the higher number of classroom students which will be arrived at through the construction of new homes within any municipality. New homes are built. New families move in. Families have kids. Kids go to school.

Yet, in New Jersey, this increase in education funding which will be required by a municipality – as a result of new development – is not able to be passed through to real estate developers by way of impact fees. Though they should be able to be so.

Because any increase in education funding needed in order to accommodate larger classroom sizes – or additional teachers – which comes about as a direct result of development is as much of a direct development-related cost as one can think of. It’s attributed to…the building of new homes. Isn’t it?

Education funds for a New Jersey municipality – collected through impact fees charged to real estate developers – should be permissible.

Larger classrooms. Additional teachers. Potentially, the construction of a brand new school. These are a few of the costs – real costs – that a municipality will incur as a result of an increase in the student population. Because new homes were built in the municipality.

One proposed solution? A boardening of the scope for the collection of impact fees by New Jersey municipalities.

Whereas critics of increasing impact fees may view additional impact fees charged to developers as impediments to growth, that argument is easily overcome.

Impact fees can be collected in lieu of local property tax hikes. Furthermore, impact fees are specific to the development at hand. To the area being developed. As such, the implantation of impact fees enables the broader property tax-paying populace to not be unduly burdened through an increased annual property tax bill. To fund development in town…which really does not directly affect them.

ABANDONED HOMES

Processes to consider when thinking through how to transition abandoned homes from absentee owners to developers could include: a) land banking, b) spot blight eminent domain, and c) receivership. Tools. Why focus on this problem? Why cultivate ideas? Why develop solutions?

Abandoned homes become financial drains on a city’s resources. For example, the cost to demolish an abandoned home?Demolition costs could reach up to $20,000. Per home.

And there are social costs as well…

Neighborhoods with abandoned homes become breeding grounds for crime. For drug use. For violence. Social costs.

But social costs are not always correlated to dollars and cents. Furthermore, social costs are often viewed as someone else’s problem.

But are social costs easy to understand? Are social costs someone else’s problem?

Social costs attributed to abandoned homes correlate to financial costs. Financial costs incurred by the city. Financial costs incurred by the city’s stakeholders. Financial costs incurred by the city’s taxpayers.

Social costs attributed to abandoned homes affect city residents who may – at first – believe abandoned homes would not be a problem affecting them.

For example…

A New Yorker living in Tribeca or on the Upper East Side is part of New York City. As such, they pay New York City taxes. So, while there may be few abandoned homes in their neighborhood, Tribeca and the Upper East Side are still coupled to the poorest neighborhoods in New York City. To the Morrisania and the Crotona neighborhoods in the Bronx.

In Morrisania and Crotona, nearly 4-out-of-10 live below the poverty line.

Let’s say socioeconomic challenges in Morrisania or Crotona lead to a foreclosure in either neighborhood. That foreclosure, then becoming an abandoned home.

Increased police patrolling is one byproduct of abandoned homes. Enacted to prevent neighborhoods from spiraling into crime magnets.

Increased New York City police patrolling in the Bronx is a financial cost. Which addresses the social cost. And that is a New York City cost. A cost which is bourne by…Morrisania residents. A cost which is bourne by…residents on the Upper East Side. A cost which is bourne by…residents in Tribeca. A cost which is bourne by…Crotona residents.

Redevelopment

Within a Redevelopment Area, a municipality’s goal could be to transition residential, commercial and industrial properties within the Redevelopment Area into vibrant community assets. The pursuit of which could take on a community-centric theme. Renovations, repurposing properties, new home construction… Goals pursuant to the redevelopment of properties within a Redevelopment Area.

Redevelopment of properties within a Redevelopment Area could start out with a city council resolution. To redevelop properties. With the resolution, a planning board might then choose to construct a Redevelopment map. With a Redevelopment map – and upon notification to the public of an upcoming hearing – a planning board could then look to adopt a Redevelopment resolution. The resolution could recommend the establishment of a Redevelopment Area within the municipality.

Potential steps a municipality could consider beginning with in order to establish a Redevelopment Area within the municipality…

You can direct any comments or questions to Ted Ihde.

email: authortedihde@gmail.com

direct: 816-699-6804

Tax Incremental Financing

When you are considering whether to pursue a real estate development project, reaching out to local government officials regarding the availability of tax incremental financing is one step you can take.

Tax incremental financing – TIF –is a development subsidy whereby the municipality diverts future property tax revenue towards economic development. The origin of tax incremental financing traces back to the State of California. And to 1952.

In order to establish a TIF subsidy, an urban renewal district – a TIF district – is first drawn up by the municipality.

With tax incremental financing, the municipality will be diverting increases in property taxes within the urban renewal district from the municipality, to development. It’s a subsidy. With a lifespan of twenty or twenty-five years.

The foundation for TIF? Development leads to increases in property values within the TIF district. As well as in surrounding neighborhoods. The theory? Increasing property values, which lead to an increase in property tax receipts collected by the municipality, offset TIF subsidies.

Density Bonus Programs

Density bonus programs are developer incentives. They function as “build catalysts.” Catalysts which make it worthwhile – and economically feasible – for developers to undertake the construction of inclusionary housing projects. In summary, a density bonus program permits an increase in allowed dwelling units per acre – DU/A.

Here is how a density bonus program works…

Density bonuses enable developers to build in excess of a site’s base zoning. In exchange for the municipality permitting a developer to build unit totals which exceed standard allowances, the developer is required to designate a set number of units built as income-restricted affordable housing.

Density bonus programs are enacted through local ordinances. Ordinances amend zoning codes. The process of having zoning codes amended, through ordinances, accompanies the implementation of density bonus programs. This is so because standard zoning codes – prior to the codes being amended – would not authorize the developer’s proposed build, if not amended. The intended outcome? Construction of more affordable housing units.

Density bonus programs establish developer thresholds. Once the threshold is met by the developer, the developer qualifies for the density bonus.

Typically, density bonus programs allow for increases of between 10% and 20% over baseline permitted density. This, in exchange for the developer’s commitment to the provision of a pre-set number of affordable housing units.

Redevelopment Area: New Jersey

In a designated Redevelopment Area, a municipality’s goals could be focused upon transitioning now non-performing residential, commercial and industrial properties to vibrant community assets. The pursuit of which could take on a community-centric theme. Renovations. Repurposing properties. And reconstruction too. Each of these being potential goals pursuant to redeveloping non-performing properties in designated Redevelopment Areas.

Steps taken by a municipality in their progression towards neighborhood revitalization in Redevelopment Areas – progression, coupled to a redevelopment plan emanating from city hall – often starts off with a city council passing a resolution. Following the resolution, the planning board then might construct a Redevelopment map. With a Redevelopment map formulated – and upon notification to the public of a scheduled hearing – a planning board could then potentially adopt a Redevelopment resolution.

A Redevelopment resolution could recommend the establishment of a Redevelopment Area within a municipality. There is quite a bit more technical minutiae to this process, needless to say. Yet, in summarily-simplified terms, this is one we can thus arrive at the designation of a Redevelopment Area within a municipality.

Chicago

55,000 – Fifty-five thousand would be the number of non-performing residential structures in the city of Chicago five years ago…in 2019.

32,000 – Thirty-two thousand would be the number of vacant lots in the city of Chicago five years ago…in 2019.

In order to increase Chicago’s property tax base, vacant, abandoned and distressed residential structures will need to be renovated, in scale. Thus, transitioning now non-performing “black holes” on Chicago’s balance sheet to investors. And to owner-occupying homebuyers. Intended outcome? The undergoing of substantial numbers of inner city renovation projects of non-performing residential structures. The transformation of what can now be categorized as city liabilities, into city assets.

How about vacant Chicago lots?

Non-performing lots in Chicago need to be conveyed – in scale – to new property owners. Property owners who pursue the building of new homes on the vacant lots.

As new homes are built on what are now vacant city lots, a new revenue source for the city – coming by way of property taxes paid to the city…property tax amounts which are based upon assessment values for properties which have newly-constructed homes on them – is established.

While Chicago is saddled with substantive numbers of non-performing residential structures, the establishment of processes which reduce the number of vacant lots has been a priority for the city.

For example…

Between the years 2015 and 2019, Chicago proceeded to sell in excess of 1,000 (out of approximately 11,500) vacant lots. Five years. Over 1,000 lots sold. On average, over 200 vacant lots sold per year. For five years. Pretty good!

The Chicago Large Lots Program…

Through a program Chicago established to address challenges linked to the high number of vacant city-owned lots – this program being, the Large Lots Program – neighborhood property owners were able to purchase up to two vacant lots from the city. One condition of the lot acquisitions being, the lots purchased needed to be properties on streets on which buyers already owned real estate.

The sale prices of those lots sold through the Large Lots Program? $1 each.