Category: real estate

Hate tax revaluation time? Then let’s do it more often. Seriously.

Tear-downs that make way for large new houses, like these in the Cherry neighborhood, drive up property values of smaller, older houses nearby. Photo: Mary Newsom

It’s tax revaluation time! Are you excited? We aren’t either. Seeing your property value skyrocket is only fun if you are planning to sell it ASAP.  For most of us who aren’t real estate speculators, higher values don’t mean more money shoots into our bank accounts, because we can’t easily convert property into extra income unless we decide to raise goats, chickens or marijuana in the back yard.

Nevertheless, revaluations are an important equity tool. If you wait years to do them, you’re giving a tax benefit to wealthier property owners with rising values and giving a comparative tax penalty to properties whose values did not go up as much, or not at all.

If that sounds confusing, read on.

Mecklenburg County has been revaluing its property every seven or eight years. That means someone whose mansion was valued at (we’ll keep to round numbers here) $1 million at the last valuation has been paying taxes on that figure,
even though that same mansion is now valued at $3 million. So $2 million of its value has been, essentially, tax free for some of those eight years.

Now, consider someone whose house was worth $100,000 eight years ago and is now worth $150,000. Yes, they’ve gotten $50,000 in value tax free for some of those eight years. But … compare that with $2 million.

Finally, someone whose property value went down has been paying taxes on a value that’s too high. For this particular revaluation there aren’t likely to be many who fit that description, since the 2011 revaluation came amid a deep real estate slump with hundreds of foreclosures, followed by recent years of dramatically higher land prices.

In 1990, then-Charlotte Observer reporters Liz Chandler and Foon Rhee did an exhaustive comparison of land sales prices versus assessed values from the previous revaluation in 1983. They wrote:

“Thousands of Mecklenburg County homeowners will pay more than their share of property taxes this year. And their extra taxes will allow tax benefits for a smaller group of homeowners – most with higher-priced homes. Property is being taxed unfairly because county officials are not keeping up-to-date tax values on homes, according to an Observer study of 3,425 home sales last year. That’s because the tax office only appraises property countywide once every four years.” [In recent years the county has revalued every seven or eight years.]

The reporters explained:

“If the tax burden was evenly spread this year – the last year before a new appraisal – all homeowners would pay taxes on 83 percent of the market value of their homes, the study indicates. But that isn’t the case. Areas where home values have risen sharply are likely to be taxed on less than 83 percent. And slower-growing, low- and middle-income areas are more likely to be taxed on more than 83 percent.”

The Observer research, comparing sales prices to assessed tax value, found that during those years county tax officials generally undervalued commercial property more than residential property. That means residential property owners were, in essence, subsidizing business properties. Commercial properties were, on average, assessed and taxed at 65 percent of their market value, the newspaper found, compared to an overall property valuation countywide of 79 percent of its market value. (County tax officials responded that commercial property was harder to assess.)

Some important caveats are needed:

One: A tax revaluation does not automatically mean everyone’s tax bill rises. Elected officials set a tax rate, and they can lower the rate so that, on average, no one’s bill goes up. But if your property is above or below the average, your tax bill would still change, going up or down, depending. If you’re a politician, you know rising property values will have many voters angry, even before the tax rate is set. So if they’re going to be angry regardless, it’s tempting to go ahead and bring in a bit more revenue by not setting a so-called “revenue-neutral” tax rate, since city and county needs are growing along with the population.

Two: According to analysis from Charlotte Observer writers Ely Portillo and Gavin Off, some of the highest percentage increases in value this year are in close-in, predominantly black areas: Grier Heights, Washington Heights, Druid Hills, Villa Heights and Belmont. “On average, property values in those neighborhoods increased by 126 to 156 percent. Many individual properties doubled or even tripled in value,” the Observer wrote.

That means “equity” in property assessments this year could look inequitable, if low-income and minority property owners are hit with proportionately higher tax values. (See Her home’s tax value nearly tripled.)

There is a better way. Revalue property more often. Every two years would be more equitable and  prevent the heart-stopping (and for some people, budget-busting) increases that come from long delays between revaluations. Since 1983 the county has for a variety of reasons mostly deviated from its every-four-years revaluation goal, although they say they plan to resume it.

The 1990 Observer article found that across the country, many local governments revalue more often than every eight years. The reporters wrote:

“In Phoenix, Maricopa County tax assessor Ira Friedman, said: ‘If you have spiraling increases in values, it makes sense from an equity standpoint to revalue property every year. It’s commonly done nationwide. It’s really a simple system.’ ”

Tax code uber alles

A recent piece in Smithsonian magazine, The Death and Rebirth of the Mall, points to a 1996 article by Tom Hanchett, staff historian at the Levine Museum of the New South, that I read almost 20 years ago. As always, Hanchett’s thinking and research were impressive. But this article opened my eyes to a reality: Our cities and our neighborhoods are shaped less by city planners or the wishes of the people than by intricacies in tax laws and financing strategies.

It’s like the time I realized (because David Walters told me) that the reason suburban sprawl didn’t happen in Britain and Europe the way it does in the U.S. is because the laws there don’t allow developers to build outside of the urban growth boundary. Until then I thought it was because Europeans were somehow more in tune with the beauties of nature and the importance of farms. Nope. It’s what their laws say.

Hanchett’s 1996 article, “U.S. Tax Policy and the Shopping-Center Boom,” in the American Historical Review, describes how a small change in the U.S. tax code in 1954 – creating something called accelerated depreciation – “fundamentally altered the economics of real-estate development in the United States.”

If you read the whole article you’ll get a clear explanation of things like 200 percent declining balance and sum-of-the-years’-digits accelerated depreciation. If you’re a real estate finance expert, you already know that stuff.  But here’s the key information: This tax incentive applied fully only to new construction, not to renovating existing buildings.

“Suddenly, all over the United States, shopping plazas sprouted like well-fertilized weeds,” Hanchett wrote. The
amount of shopping center square footage shot up from an average of 6 million square feet yearly in the early 1950s to an average 30 million a year starting in 1956.

The tax incentive encouraged quick turnover, selling the property after six or seven years when the tax deduction was about to end. It was a disincentive to upkeep, and by 1970 this one tax break equaled a fourth of the total federal annual budget deficit, Hanchett wrote. And like so many federal provisions starting in the 1930s, it did not assist those who would have preferred to renovate older buildings in cities, and instead helped people building new construction in the suburbs. (See “Yet another way the feds promote sprawl.”)

Has Charlotte single-family home market revived?

Tree down at site of old Charlotte Coliseum, once slated for mixed-use development. Photo: Nancy Pierce

Mecklenburg Times reporter Tony Brown pored through five years’ worth of housing permit records and concluded that July 2012, with 283 single-family housing permits, was the best July for home construction in Mecklenburg County since 2008. Maybe, he suggests, the housing bust has ended.

Construction of single-family homes is almost back to 2008 levels, when 304 similar permits were issued, Brown reports.

His article, “Residential revelry,”  is behind a pay wall, so only Mecklenburg Times subscribers can read it.

It will be interesting to see how development in the county and nearby areas plays out in coming years. Plenty of academics and others have analyzed the housing market and concluded that the country is overbuilt with single-family housing, given demographic trends (aging boomers, for instance) and modern lifestyle preferences. Will Gen Y-ers opt for suburban tract houses as they move into their 30s and 40s and start to have children? Or will they decide they can still have the urban lifestyles they’re seeking now and raise children in the city?

Will planners and elected officials allow an overbuilt single-family home market to get even more over-built, as they did for a couple of decades worth of commercial space, with the carcasses of failed stores hurting multiple thoroughfares and neighborhoods in Charlotte? Or is Charlotte a healthy enough market that housing won’t be overbuilt?

One note to consider: Unless Charlotte-Mecklenburg changes the land development rules, the question of overbuilding is mostly moot. Most subdivisions don’t need a City Council rezoning to get built; they just have to get planners’ administrative approvals for following the subdivision ordinance (and other permits, of course).

Another note to consider: A recent study found the city’s families more “asset-poor” than the state average. In Charlotte, 36 percent of residents lack a basic financial cushion to survive for three months at the poverty line if they were to lose their primary source of income.That compares to 30 percent statewide and 29 percent nationally. What do trends such as that portend for the city’s ability to absorb more single-family housing?

Final note: Remember that city of Charlotte and Mecklenburg County are not exactly the same territory.

Media-watchers with good memories will recall Tony Brown’s years as theater and arts reporter for the Charlotte Observer. He has spent more than a decade at the Cleveland Plain Dealer but has recently moved back to Charlotte for family reasons. Follow him on Twitter at @tonymecktimes.)

Housing expert: Upturn this year?

Chip Case, economist from Wellesley University and a creator of the Case-Shiller Housing Index:
“I think you’re going to see things turn this year. In the housing market. Commercial real estate is going to dominate the press in the next few months. [Because of banking issues.] But the story’s in residential … “

Case noted, wryly that his long-time Red Sox fandom proves he’s an optimist.

“Florida’s not going to die. Arizona is sick but it’s not gonna die.” His point is that people still want to live in warm areas.

“Florida and California alone are one-third of the [housing and real estate] value in the United States. California alone is a quarter of it.”

(This is at a conference on “The Next City” in Cambridge, Mass., sponsored by the Lincoln Institute of Land Policy, the Nieman Foundation and Harvard’s Graduate School of Design.)