Thursday, May 29, 2014

Short Term Solutions

So it seems there are a lot of NOLA culture warriors who have discovered the existence of short term rentals, and point to this practice as if it were both new and one of the root causes of the housing affordability and scarcity problem in New Orleans.

For me, short term rentals can pose a very real problem in certain contexts, but there are pros and cons to the practice. In general, I find the cons arise as mainly as a symptom of a larger structural problem that isn’t nearly as sexy to talk about.

Property tax policy.

If you think you’ve heard tune before on Hurricane Radio, that’s because you have. All the talk of “gentrification,” “development,” “luxury apartments,” “blight,” and “short term rentals” can sound like a bunch of complex and intractable problems that have no solutions. It can make you want to throw up your hands (metaphorically or physically) in frustration. That’s something that happens when you focus on the symptoms of a larger problem – you’re trying to fix what’s broke without trying to break what doesn’t need fixing. Focus on the root concern, even with a little bit of non-expert attention, and you’d be surprised what solutions you start to see. That’s where empowerment comes from, because there is something tangible you can start to advocate for in making a change.

Taking current property tax policy into consideration (at least that which I can research online), here are some ideas I came up with that might mitigate the short term rental crisis through policy in less than 5 steps: 

1. Have a high property tax rate, but allow the property owners to apply for itemized deductions.

2. Have a huge homestead exemption tied to a percentage of assessed property value as opposed to a set amount.

3. Generous (and possibly increasing) property tax deductions based on proof of long term renters, or low rent charged.

4. Smaller property tax deductions based on self-identification of short-term rental usage.

5. Proven violations of housing ordinances result in revocation of all deductions; finding of demolition by neglect allows assessment to look at property’s market value as if not neglected.


Now, I’m no expert on these matters, and some of these ideas may not be good ones. I’m not addressing how the assessor’s office comes up with property assessments, because I can’t seem to find that online. But some of these ideas may be workable. They sure help me think about short term rentals, land use, and gentrification in different ways. Lord knows, it sure beats complaining about how “hipsters” ruining New Orleans.

I could go into long-winded detail on almost all of them, but I'll focus this on how the Homestead Exemption (HE) is right now calibrated too low to help anyone with a house that's worth more than $100,000.

And you don’t have to take my word for it, you can go directly to the New Orleans Assessors’ Office to see how this works. Right now, here are the two basic property tax equations used to estimate your tax, as published on their website.

10% of property value = assessed value.
(Assessed value - $7500 HE) * .14706 + modifications = Your Property Tax

Do you see where the problem is here? The example uses a $100,000 home, and by that measure, the $7500 Homestead Exemption seems very reasonable. That’s because $7500 subtracted from $10,000 is a 75% discount. Looking at property value history of almost any property on Zillow, you can see how stable property values were right up until the flood. When this HE was adopted in the 80s (I think), it was probably very reasonable for most of the homes in NOLA.

Using The Lens Property Tax Calculator, a homeowner with a HE pays $450.45 on a $100,000 home.

But THESE days, median property values in NOLA are FAR higher than $100,000, especially for in-demand neighborhoods. What does that HE look like for a $300,000 home? Still $7500. But this time, subtracted from $30,000 assessed value. That’s only a  25% HE discount.

Again to our calculator, we find that if your home is now worth $300,000, you're paying $3425.85.

That may sound “progressive” from a taxation standpoint – the more your property is worth, the less percentage your discount is – but it isn’t calibrated to protect middle class and working class property owners who have seen their home values jump from $100K to $300K in the last decade without an associated increase in wages. In this way increasing home values added to inflation collude to increase tax liability on homeowners. This is especially true at the low end of the home ownership scale – as those properties have seen the biggest increase, percentage wise, in tax liability. In effect, those who already lived in the grand dames of New Orleans homes haven’t had a tremendous increase as percentage, because that $7500 discount already didn’t mean much to their property tax liability.* But folks who bought or moved or lived here 15 or more years ago because regular home values and rents were affordable have been the hardest hit with these increases. Heaven help those folks who are on a fixed income.

And as with all things, if you’re renting at an affordable rate 10-15 or even 5 years ago, and the value of that property goes up and increases your landlord’s property tax liability, they’ve got to raise your rent. It doesn’t matter that neither you nor your landlord’s other wages have increased. They’re paying more so you’re paying more, and if you can’t afford it you have to find somewhere else to stay. If they can’t afford it, they’ve got to sell or renovate the property as a new luxury apartment.


I thought we were just talking about short term rentals, not why people are getting priced out of the places they’ve lived for 20 years? Isn’t that more the gentrification issue? Exactly – when the root cause of these issues is founded in the same policy, addressing the root policy will address multiple issues.

Short term rentals are in demand because NOLA is such a destination. Property owners facing these high percentage property tax increases in recent years have to make money on their property or sell. Here' we're not really talking about HE anymore, we're talking about rents going up and up and up while affordable housing options become scarce.

With short term rentals, they stand to make more money on their now high-tax-liability investment by competing directly with the overpriced hotels and legal B&B’s. While it is risky, a potential return of $2000 for a week is far greater than long term renting at $1400 a month. You only have to STR 8 weeks a year to make as much as you would with one long term renter at those prices, which means that you’ve got 44 more weeks of the year to simply put money in your pocket. That’s a CRAZY market incentive, and one reason you see people coming to NOLA, buying $300K homes in cash, and just leaving them on the STR market year round. It is one of the best investments anyone can make anywhere under the current land use policies in NOLA.

The fact that the city government actually benefits more from that arrangement, both in terms of property taxes collected and tourist money spent on something other than hotel rooms (where most of the money goes to the state), and ALL your market and government incentives are set up to promote the current state of affairs. Of course the city isn't interested in cracking down. If you want to change that state of affairs, you’ve got to address how property taxes are handled in this city.

Especially now that the Louisiana legislature has voted to put even more property tax hikes on the ballot this year.

*If my math is right (and it may not be), HE on a $750,000 property is a 10% discount, while a HE on a $900,000 property is just over a 9% discount. While that could translate to a few thousand dollars, that’s barely a 1% difference, and the demographic that owns homes at that price is the one best able to handle such an increase.

On the other hand, If your home went from $100,000 to $300,000, you’re HE discount on property tax has completely inverted from 75% of assessed value to 25%, and that's happened to the population least likely to be able to pay for that increase.

Wednesday, May 28, 2014

Letter to Louisiana Representative Nick Lorusso

Good evening, Representative Lorusso,

I am writing to urge you to vote NO on SB 469 that should be coming to the Louisiana State House floor later this week.

While there has been plenty of talk about the lawsuit that has been brought by the Southeast Louisiana Flood Protection Authority - East, I find myself agreeing that this issue should be decided in a court of law rather than by retroactive legislative action. Not only do I believe in the non-partisan mission of the SLFPA that was created after the 2005 flood in order to keep politics out of flood protection, but I believe the attempts to undermine the SLFPA by the governor's office and legislature to be wrongheaded in politics and policy.

As a resident, worker, and taxpayer, I am less worried about lawyers fees than I am about oil companies sticking me and every other taxpayer with the bill for the messes they have made. More than just the tax burden of private interests being shifted to the public dime, every year, the coast gets closer to the city of New Orleans, makes everyone in the coastal parishes more vulnerable to flooding and storm surge, and threatens to drive more Louisianans from their homes. If the oil companies are found to have caused even part of that, they should be held responsible for cleaning up their own messes. The place to find that out is in a court of law.

It is time to stand up for Louisiana being a state of laws instead of a state of special interests. Please vote NO on SB 469.

Thank you for time.

Monday, May 26, 2014

Rising Tide 9 Request for Proposals

Got something to say about New Orleans & the Gulf Coast? Know some expert knowledge on a topic folks don't talk about enough? Working on a project to improve the city? Just want to go further than complaining about stuff on social media?

Here's your chance:

Rising Tide is still accepting programming proposals for Rising Tide 9 in September.

Make it happen.

Thursday, May 22, 2014

High Rent is Public Policy

Let's say some politician wants to raise your taxes and give that money to a group of millionaires so they can make tens of millions of dollars off a transaction instead of just several million dollars that they could make anyway?

Would you vote for that politician?

What if the transaction in question includes illegally destroying millions of dollars worth of historic properties and replacing it with a new illegal property worth even more millions of dollars.

Would you start feeling like you're getting the short end of the deal?

I wrote about this the other day, and everything I've seen since then only reinforces my belief that the developers of this project are getting one over on the property tax payers and rent payers of New Orleans. When city land policies create incentives that reward real estate speculation over getting properties back into commerce, what you end up with are developers who buy up valuable properties and neglect them. Why spend money to fix a place up now when you can wait, let it fall apart, and build a $100 Million hotel in its place? The term for this is "demolition by neglect," and while some penalties exist for people who do that, the penalties aren't usually enough to discourage this type of behavior.

Especially if the payoff is a $100 Million hotel.

But just how much does this affect the average property tax or rent payer in New Orleans? In the first case, it moves the tax burden from one property onto another. If developers are sitting on valuable land and letting it deteriorate, that land isn't as valuable as it could be. As the years go by, the property continues to deteriorate, and the developer's property taxes on that valuable parcel actually GO DOWN. Since property taxes go to pay for things like street paving, streetlights, transit service, Fire Departments, Police Departments, sewer and water lines, parks, public schools, 911 service, and other services and amenities that increase a community's standard of living, those services end up suffering when there isn't enough money to pay for them. Add on things like consent decrees, and your city has to raise property taxes to make up the difference. You've got to pay for those somehow, and you do that by raising property taxes. When property taxes go up, landlords have to charge more in rent to cover the increases.

Next up, you've got the issue of artificial scarcity. The more real estate speculators and developers sitting on deteriorating property means there's less property for things like housing and businesses. Supply and demand tells us that if there's less of something in demand, the price of that goes up, too. That further compounds the problem through additional increases in property taxes as working properties become more valuable and accrue higher tax liability. This leads to increases in rent as landlords raise rent to cover increased costs, and now you're adding to the cost of goods and services as businesses have to charge more to cover the cost of their rent increases.

Rhetorical question: Y'all know any cities that have trouble delivering public services, despite having really high property taxes, rising rents, and restaurants charging $12 for a cheeseburger?

Just how much are you paying out of your pocket so the rich can get richer? That's a question I don't know how to answer, but I found some clues on the internet that help me put it into perspective. The first tool is an online portal that lets you search public property tax records. Using this, we can see how valuable the corner of Canal & Tchopitoulas is according to public record. With this tool, you can see what the land + building are supposedly worth, you can see the assessed value (what the building is taxed on). After finding that out, I've run the values through The Lens property tax calculator to see what the owners of this land might be paying in property tax (this property is in the Downtown Development District, so I'm not sure if that's a break or an upcharge). Just an estimate based on the following info.

My numbers say that's $38,647 a year. For the whole block. I bet the t-shirt & liquor shop on the corner pays for that in a month during Carnival.

Sounds like a lot at first blush. But keep in mind where these properties are located. This is right down the street from the Riverwalk, Ferry Terminal, the "most valuable property in the city" WTC. (Remember when developers estimated condos in the WTC may go for $360 to $600 per square foot? There's a reason folks are fighting for a piece of that pie.) According to Latoya Cantrell, "this site could host a landmark development that would produce millions in tax dollars and spur further development." Put it this way,do you think the owner would offload 105 Tchop if you offered him $350,000 for it? These properties are far undervalued, even if they need some work.

Based on my own generous (and completely uneducated) estimates this week, the potential value of renovating these buildings into 2 bed 2 bath condos produces property worth $16,000,000. That's a property tax value of around $238,000 a year, and that did NOT include developing the parking lot or t-shirt shop. We'll call that the high end.

But we don't have to look at my uneducated numbers, we can go right back to the assessor's website and start looking around the block to see what nearby buildings are worth. Hell, just using the values on one side of the block (422 Canal) should give you an idea of what the other 4 buildings could be worth. If they were only comparable to the highest value building in the group, the property tax for the set would be upwards of $80,000. Again, that's not including anything put on the parking lot.

Adding insult to injury, the line sold to people is that those pesky preservationists and city bureaucracy are blocking development this city desperately needs! They'd rather have falling down buildings than fancy hotels! Back in reality, fixing up the existing properties would earn the owner millions of dollars right now. The only thing keeping those buildings falling apart is the fact that, when they finally do fall apart, the city will throw the zoning restrictions in the trash can in exchange for a shiny new hotel.

How did I figure out how much this was costing me? Your mileage may vary, but I started by looking up where I lived and comparing the numbers. I started looking at other properties around town I'm familiar with. I looked up real estate prices on Zillow to see how much homes in my neighborhood were selling for, and comparing the asking price of those homes against the tax record value of a four story, historic building on the corner of Canal & Tchopitoulas. Which did I think could command more dollars on the open market? I have my answer:

Somebody else is making millions while I'm paying higher rent for streets full of potholes.

Tuesday, May 20, 2014

Empty Buildings & Rising Rents

I'm no real estate expert, but something is out of whack with affordable living in New Orleans. People I know who lived here before The Thing often cite how much living space they could get with a much lower pricetag, and this seems to be backed up with the triumphalism of actual real estate folks singing the praises of higher home values in the new New Orleans. There's a palpable sense of nervousness among those of us who will be forced to find somewhere else to live if these trends continue.

The insanity in this market is actually caused by something very simple: more people are looking to live in or visit desirable areas of Orleans Parish than exist places for them to stay. Cost increases really can be boiled down to something as simple as supply and demand, but that's where the simplicity ends. Causes of housing scarcity in high-demand areas - that's where things start to get interesting. Getting deeper into those weeds, you start to figure out that the fundamentals of this market are all messed up, and that mess is what drives up costs for everyone without much rhyme or reason.

As an example, let's talk about the guy who owns a bunch of historic but unused buildings at the foot of Canal Street. This is blocks away from the inexplicably empty "most valuable piece of property in the city," and the owner would like to tear down these units and put up a big $100 million hotel. Of course, preservationists are against allowing this, and the plans for the hotel appear to violate the area's zoning anyway. While this sounds like another episode of nosy neighbors putting the brakes on badly needed economic development in New Orleans, I've got a different set of questions.

With property values skyrocketing all across the city, people getting priced out of their homes by rising property taxes and flood insurance premiums, how is this guy sitting on an entire block of underutilized, historical housing stock in one of the most high demand neighborhoods in the city?

I mean, if he's a honey badger type of dude who just doesn't give a crap about paying massive property taxes on empty buildings, there's not much we can do about that. But I generally subscribe to the "follow the money" school of thought - millionaire property owners generally don't happily hand over piles of money to governments without A) expecting something in return or B) considering that cash an investment on potential later earnings. There has to be some incentive at play.

In this case, the later earnings are easy to spot: the $100 Million hotel will turn a tidy profit in this city in that neighborhood, and will do so for years and years. But here's the rub: those potential earnings have to be enough to justify not only sitting on those mostly empty properties for years, but also foregoing the serious money he'd make in the short term by getting those properties back into commerce. That's a LOT of opportunity cost money he's spending on long term potential earnings.

Let's not kid ourselves, that's a BIG problem. If your city's real estate market is set up to reward speculators from keeping high dollar, high demand properties off the market and out of commerce, you've got a completely upside down incentive structure. An incentive (or disincentive) structure like that will do more damage and drive up cost of living more than all the short term rentals laid end to end.

How much money are we currently talking about? Luckily, the folks at The Lens have a property tax calculator set up so we can make some guesses. Again, I'm no real estate expert, but I'm going to take a stab at how much historical stock buildings are worth at the foot of Canal Street by looking at the prices of nearby properties on Zillow.

Oh, look. The cheapest property on the next block is a 1 bed, 1.5 bath condo for $255K. Go up to 2 bedroom, 2 baths, and you're talking an average of $500K per unit.

Let us look at these properties with a conservative estimate and find out just how much potential is being wasted here. Right now, there are three buildings on Tchopitoulas, one building on Canal, a parking lot, and a one-story t-shirt and liquor store on the corner. Let us posit that each floor of each of these buildings could be renovated into two 2 bed, 2 bath condos per floor. That's a potential of 32 units. With each unit averaging $500K (based on Zillow proximities), we can figure out what those properties would hypothetically be worth with a simple equation:

32 X 500,000 = $16,000,000

Are we talking real money yet? Yeah, it may not be close to $100M, but $16M in potential short term value is a lot of cash to leave on the table chasing a potential development that isn't allowed by zoning. That's especially true when you consider the parking lot and t-shirt/liquor store are building sized parcels that can be upgraded into buildings as big if not bigger than the existing 4 buildings. Two hypothetical new buildings raised to 5 stories and similarly subdivided would add 10 more units, or hypothetically $5,000,0000 in additional value.

Using The Lens' handy property tax calculator, we can estimate that the property taxes on just the 4 existing buildings as divided into hypothetical units is just over $238,000 per year. For the purposes of this mental exercise, we're not counting the parking lot or the t-shirt & liquor store potential. But a quarter million a year just on those hypothetical properties ain't chump change.

So how is this guy sitting on these potential millions in real estate potential while paying piles of cash in property taxes? The rub is, he's not. I wouldn't even begin to know how to check the records and see what he is actually paying, but I'd wager it ain't close to the potential those properties are worth, even in my hypothetical exercise. No, I'm sure those buildings are assessed as unoccupied and in disrepair, and don't command the assessment value of renovated property. If his tax liability was closer to what those properties could potentially be worth, he'd have less incentive to keep them out of commerce, underutilized, banking on a potential pie-in-the-sky future development. The structure of the market, absent incentives that reward speculation, would demand he get renovations underway to get the most out of those parcels.

So what does this have to do with housing prices and rising rents in the rest of the city?

First of all, think about those upside down incentives and spread them all across the city. Speculation & sitting on underutilized properties is rewarded over getting properties back into commerce. That's a big, big problem when your real estate market's prices keep going up and up and up because there are more people who want to live and visit here than there are places for them to stay. This isn't just about a block of historical buildings at the foot of Canal Street. This is about shuttered buildings on Canal Street in Mid-City, parking lots in the CBD, weed strewn empty lots in Gert Town, empty shopping centers on Paris Avenue, blighted motels on Tulane Avenue, every "church" that owns falling down properties that they never use, every non-profit sitting on land in the Lower 9th Ward.

Second, those upside down incentives have to be paid for somehow. Every blighted house or empty building isn't contributing much property tax to the city's coffers, so those costs have to be spread out among those properties that ARE back in commerce and have folks living in them. That translates to higher property taxes, higher fees, higher rents (and higher median rents for those on housing assistance), and less city services. I mean, you know how the Mayor comes on TV, hat in hand, and asks to raise everyone's property taxes? Next time he does that, think about the $238,000+ left on the table by some dude who wants to tear down historical buildings and chase hotel chain money.

But I'm no expert in stuff like this. I could be completely wrong. All this could be the result of hipsters.

Related posts:

The G Word (Gentrification)
Short Term Thinking (Short Term Rentals)