Economic Arguments forPreservation: Do the Math to Make the Case Della G. Rucker, AICP, CEcD Wise Economy Workshop For National Preservation Conference October 21, 2011
Our Plan:• What’s the problem?• Who benefits?• Introduce a key idea• Figure out what we are measuring• (Prove that you can) Do the math
The Problem:Property owners sometimes want totear down or mess up buildings forreasons preservation people can’tfathom: o “But it’s such a beautiful building!” o “Why on earth would they want a parking lot rather than that building?” o “Don’t they understand what that will do to the neighborhood?”
More of the Problem• Three different definitions of value: o Property owner o Business owner o Local government/community• Three different time frames• Responsible to three different groups
A quick sketchDefiner Type of Time frame Responsible value toProperty owner Cash flow from Short Self/other owners rent of buildingBusiness owner Business revenue Longer Self/partners/ investorsCommunity Quality of life Longest Self, other residents, other parts of community
More of the Problem:• The property owner will do what’s in his or her best interest.• Their best interest may not be the same as the best interest of o Businesses in that building, o Other business owners or property owners nearby o Area residents o The local government
The Real ProblemWhen property owners make choices that impactthe economic health of others, they have created an externality.
Concept #1: Externalities• “An external effect, often unforeseen or unintended, accompanying a process or activity.” (dictionary.com)• When I make choices in my economic self-interest, and those choices impact someone else, those impacts are the externalities of my choices.
Common externalities• I let my kids scream wildly in the back yard, and my neighbor’s sick daughter couldn’t sleep.• I dumped chemicals in the back of my lot, and now the EPA has to clean it up.• I don’t maintain my building, and the value of buildings around me goes down.
Who gets stuck dealing with most of our externalities?
A solution:The more we can convince elected officials of the impact that preservation decisions will have on their community’s financial health - the more they see that poor preservation choices create negative externalities – the more likely we are to persuade them that it is good public policy to support historic preservation.
What economic issues do governments deal with?• Private sector: o Growth o Profitabillity o Stability o Vacancy• Public sector (fiscal): o Tax revenues o Costs of services
What kinds of externalities can botching up a building make for other property owners?• Make area less appealing for customers-• Decrease rental/property value of spaces• Decrease amount of affordable space for new businesses.
What kinds of externalities doesthis create for local governments?• Loss of property tax revenue• Loss of space for creating new employment• Loss of sales tax revenues.• Increased public safety costs• Loss of support for infrastructure repairs
A hypothetical ValueBuilding A $100,000Building B $300,000Building C $80,000Building D $150,000 Avg Letter Dist: $166,000Building E $200,000Building 1 $100,000 Avg. Number Dist $159,000Building 2 $250,000Building 3 $175,000Building 4 $150,000Building 5 $120,000
Keys to success:• Use the largest samples you can.• Double check your math.• If using Auditor data, know when the last assessment was and, if they typically undervalue, by how much.
If it’s not working• Look at more areas• Partner with a similar community to get more sample areas• Look for unusual factors in the area you’ve chosen. Are some closer to the highway than others? Further from the center of town? Larger or smaller buildings?
Estimating the impact on theability to grow new businesses• Especially important when demolition of a commercial or potentially commercial building is proposed.• Premise: small businesses are extra important to a community because they create most of the new jobs. o But they have different space needs than established businesses. o Older buildings often fit this best.
Econ concept #2: Opportunity Cost• The money or other benefits lost when pursuing a particular course of action instead of a mutually- exclusive alternative. (www.dictionary.com)
Types of opportunity costs• I decide to quit my job and go back to grad school so that I can move into a better position in the future.• I buy the last piece of vacant land in town and build houses on it instead of a factory.• We tore down the smaller, inexpensive spaces in town, and now small businesses have no where to get started.
Estimating lost revenues - property taxes• The parts: o Assessed value (link) o Property tax rate (millage) o Adjustments, deductions, rollback, caps, etc• The formula: o Assessed Value X Millage – Adjustments = Property tax obligation
Estimating opportunity costs from lost income/earnings tax• The parts: o Estimated number of employees • Actual (might be low) or • Potential based on national/regional average per square feet o Income/earnings tax rate o Estimated percent of employees paying income taxes to locality (may be receiving reciprocity or abatement)• The formula: o (Employees X income tax rate) = income tax obligation
Estimating opportunity costs from lost sales tax• The parts: o Estimated sales • Actual (might be low) or • Based on typical local experience, or • based on national/regional average per square feet o Sales Tax rate • May differ from one county or city to next • May have different parts (part to state, part to county)• The formula: o Estimated sales X sales tax rate = sales tax obligation
Other types of taxes:• Business Establishment-type taxes• Tax on profits• Tax on personal property or inventory• Tax on holdings• Capital gains• Etc., etc., etc…..
So…you’ve done the math, now what?• Share your findings• Show your work• Remember that it’s an estimate, not a precise measure• Use it as one of the tools in your toolbox – it’s not the only one.