Sunday, November 1, 2009

Compensating Justly? What Is the Property Being Condemned at the Atlantic Yards Site Really Worth?

Atlantic Yards Report has an extremely fascinating article that compares the prices Forest City Ratner seeks to pay for property, when abusing eminent domain, against various measures of what that property is actually worth in the market. (See: Friday, October 30, 2009, What's a Prospect Heights condo worth? ESDC low-balls Goldstein (who once walked away from $500K profit) and overpromises the public.)

Needless to say, the prices that Forest City Ratner wants to pay by virtue of using the eminent domain club are a lot lower than fair market.

Wyldely Off For Starters

Needless to say? Maybe not. What provided background for AYR’s analysis was a recent Brian Lehrer discussion of eminent domain (part of its election issues series- 30 Issues Day 6: Eminent Domain, Monday, September 28, 2009) where Dana Berliner, senior attorney at the Institute for Justice, and Kathryn Wylde, president & CEO of the Partnership for New York City, debated eminent domain. Ms. Wylde, a dependable apologist for eminent abuse, routinely maintains that fair compensation is always scrupulously paid, something we have taken issue with her about in previous posts. (She also maintains, incorrectly, as she did on the program, that eminent domain is never used unless a careful cost benefit analysis has determined that the ensuing project will be a net benefit to the community. Ms. Wylde takes this position while supporting use of eminent domain for the proposed Atlantic Yards basketball arena, documented as a $220 million net loss to the public. The arena was a subject of the Lehrer program’s discussion.)
(Click on the above image to enlarge it. For more about it click here.)

Paying Less (Per Square Foot) Than Ratner Would Seel Property For (Per Square Foot)

The Atlantic Yards Report post is fascinating because it does such a good job of elucidating a subject that certainly needs it.

First, the AYR post makes clear that Forest City Ratner wants to pay less for property than it cost before the market escalated in the last real estate boom and less, on a square foot basis, than they would themselves expect to sell similar property for. But, as we will explain, that difference is just a fraction of profit total spread they hope to collect by paying less than market.

Atlantic Yards Report noted that Forest City Ratner wanted to pay Daniel Goldstein an `estimated’ $450 per square foot for his condo in the Atlantic Yards footprint while at the same time FRC is getting state agency blessing to proceed with its (no-bid) mega-monopoly based on a (suspect- we’ll get to that) KPMG market survey that says that the current condo market in Prospect Heights is $470-$1225 p/s/f. Further, as AYR notes, FCR estimated in 2006 it would get $850 p/s/f for its proposed Atlantic Yards condos.

Paying Less For Property Than It Was Bought For Before the Market Escalated

Atlantic Yards Report “estimated” the $450 p/s/f offer to Goldstein based on the fact that during the Lehrer program Mr. Goldstein phoned in to speak about the absence of “just compensation,” saying that Forest City Ratner was offering below the $466 p/s/f Goldstein paid in 2003 explaining, "It is even below what I paid for the place... over six years ago, and everybody knows the market is not lower.”

Even More Greedy Than It Sounds

Expecting to pay half or less for property, when looked at on a square foot basis (the $450 vs. the $850 to $1225 p/s/f), may already sound really greedy. That’s at first blush. In a moment we’ll explain why it is substantially even more greedy than simply comparing these per square footage numbers might indicate. But before we explain why its substantially more greedy let us be meticulous and explain why the above gap in figures is probably slightly less greedy than it sounds.- Yes, that sounds as if we are geekishly taking you on something of a mathematical roller coaster, but at least no one should say that we aren’t going out of our way to be fair and to say something potentially nice about Ratner.

When Trying to Say Something Nice about Ratner Maybe You Can’t Anything at All!

The reason why what we have described already is only slightly less greedy than it sounds is that the high number in the range given for those “surveyed” market values, the “$1225 p/s/f” figure, doesn’t represent reality. It is virtually certain that the number was deliberately inflated to support a legal fiction that the development monopoly government officials want to confer upon Forest City Ratner isn’t really destined to result in Ratner’s keeping most of the megadevelopment acreage as undeveloped parking lots for several decades. Oops: That doesn’t sound very nice! Just goes to show you: Even when one goes out of one’s way to say something nice about Ratner one discovers more greed under another rock.

Taking Greed to a Previously Unknown Zone

Now, back to why referring simply to “square foot” prices for condominium apartments doesn’t convey the full measure of Ratner’s greed. Daniel Goldstein’s apartment is in a nine-story building. As Atlantic Yards Report references in its article, the Ratner megadevelopment involves an override of local zoning and procedures whereby Ratner is proposing to ultimately create the densest area in North America. Goldstein’s nine-story building is supposed to be replaced by a forest of 50- and 60-story buildings. Assuming, conservatively, that Goldstein’s apartment will be replaced by development that is four times the current density, and assuming conservatively that we should use the $850 p/s/f condo figure, this increase in density transmutes the square foot value of Goldstein’s apartments in development terms to $3,400 p/s/f ($850 p/s/f times 4). Then the gap between what Ratner is offering Goldstein and what the unit is really worth is $450 vs. $3,400 p/s/f.

How a Condominiums Price Would be Negotiated in a Fair Market Transaction

Assume that Ratner had to approach the owners of the Goldstein’s condominium building in a fair market transaction without using the threat of eminent domain. Under the by-laws of the condominium all the unit owners would have to get together and consider the offer. The by-laws almost certainly provide that an offer would be accepted only if a supermajority of the unit owners agreed. (Unit owners in the minority might have additional protections.) Before they agreed to a sale the unit owners would want to be getting a fair market price. They would factor in the development value of the building in determining that price. They would be looking for Ratner to pay a substantial portion of the above $3,400 p/s/f development potential of the site. That, by the way, would be market value.

Magically Minting Money to Pay For Condemnation Awards (Not Out of Ratner’s Pocket)

As Atlantic Yards Report describes, Ratner, using the threat of eminent domain, paid other individual condominium unit owners in Daniel Goldstein’s building more than the $450 p/s/f Ratner is estimating to be offering Goldstein. With the threat of eminent domain behind him Ratner paid substantially less than $3,400 p/s/f and using “gag order, non-disclosure, and tout-for-the-project” agreements kept secret what was actually paid to individuals accepting the deals. AYR notes, referencing court records, that in 2005 there was an offer of $850 p/s/f. FCR’s offer of a higher prices was facilitated not only by the upzoning but also by using taxpayer money to make the payments.

Eminent Domain Abuse Coupled With Upzonings Degrades Quality of Urban Design

Because the upzoning is effectively funding the real estate acquisitions, we are seeing a pattern with developer-initiated, developer-driven eminent domain where the eminent domain is routinely accompanied by abnormal boosts in density within boundaries coterminous with the developer’s monopoly ownership. That doesn’t make for the best urban design.

Monopoly’s Theft of Value From Neighboring Property

Even in the adverse setting of a condemnation proceeding, a condemned property owner is (and should be) entitled to legal (and constitutionally specified “just”) compensation which should include the portion of the prospective development value of their property that can be reasonably anticipated. That is “reasonably anticipated” under normal circumstances. . . That doesn’t mean that the unit owners in Daniel Goldstein’s building should be entitled to the full aforementioned $3,400 p/s/f associated with the huge upzoning because not all of that upzoning should have been anticipated. Entitling them to all that money would be unreasonable (irrespective of all the money from the zoning going into Ratner’s pocket) because no normal prior owner could reasonably envision or expect to benefit from the unreasonable way that density has been selectively piled onto the Ratner site or the politically connected zoning override used to do it.

Properly, while a portion of the upzoning of the Ratner site is attributable to the condemned properties being taken away from their legitimate owners through eminent domain abuse, there is another portion of the abnormal zoning increase that is instead attributable to neighboring properties that will no longer be eligible for their own future zoning increases because of the density that has been shifted over and piled exclusively on the Ratner mega-monopoly site. In effect, the abnormal density heaped on the Ratner monopoly steals property value from the surrounding neighborhood property.

Transaction Costs: Why The Value of Property Is NOT What Was Paid For It

As noted, the estimated $450 p/s/f being offered to Goldstein is less than the $466 p/s/f he paid for his property in 2003. But say that Goldstein had just bought his condominium for $466 p/s/f and imagine that he was being compensated a day later. Can it be argued that it would be fair to pay him exactly the $466 p/s/f he paid? There are those such as Kathy Wylde who act as if this would be absolutely fair. (Goldstein was unaware when he bought his apartment that he was about to be faced with an attempt to seize his property for development.) From the Lehrer program we gather that Ms. Wylde is apparently content to pay Goldstein less than he paid for his unit. But someone like Wylde would likely argue that to pay Goldstein exactly what he paid for his unit a day after he brought it would be fair: The fact that he bought it on Tuesday at $466 p/s/f is very good indicator of its market value so that paying him $466 p/s/f the day afterward ought to constitute full market compensation.

That, of course, ignores the fact that people don’t ordinarily buy property and sell it a day later at the same price. It ignores that fact that eminent domain condemnations create forced takings which compel transactions to occur on timelines that would never otherwise be applicable. People don’t buy and immediately thereafter sell property because there are all sorts of expensive transaction costs incurred each time they turn property over. They must pay a broker perhaps 6%, they must pay their lawyer. They will probably have to pay to take out a mortgage, perhaps paying down the interest rate with substantial up-front points. The same interest beneficial rate may not be any longer available. They will have moving costs, decorating and renovating costs and costs for new appliances. There is all the time they will have invested to look for the property. There will even be the cost of their time to notify all their contacts of their address changes. They may have other costs like applying to send their children to new schools or looking to find those new schools. If you start thinking about why exactly you don’t want to move next week you can probably readily think of many more of the costs that should be added to the list.

Taken to an extreme, one can recognize that most people if they were forced to sell and re-buy a new home every year or every six months would soon be bankrupted by the recurring transaction costs. The fact is that hidden in all real estate prices is the legitimate expectation that homeowners and other real property owners will manage the their ownership so as to amortize the transaction costs over an appropriately extended period of time. If people are knowingly going to occupy properties for shorter periods of time they make appropriate adjustments; they rent, they take smaller apartments. People also time the moves they make to comport with projected changes in life, having one or more children, retiring, taking a new job, starting a business. If you force a different schedule on them, then in the free market they are going to demand a price high enough to compensate them for the extra transaction costs plus all the extra inconvenience togther with their emotional attachment to their investment. That’s a price Ratner doesn’t want to pay and Kathy Wylde defends Ratner’s not having to pay it. As noted, she defends Ratner’s paying even less.

Are Eminent Domain Transaction Costs Exceptional? Indeed.

We could go on to explain that having your property taken by eminent domain actually has extra transaction costs associated with it beyond merely the forced timing of the transaction. Your ordinary lawyer is not going to be able to represent you. (It is an experience you will not have in common with most of friends as would be the case with a traditional real estate transaction. You are going to be lonely when trying to compare notes with your fellow citizens.) Eminent Domain introduces unknowns and costly uncertainty into one’s life. This can be enormously expensive for a business owner trying to maintain and work with clients and/or tenants. Eminent domain is also likely to depress the value of your property (and your business). Certainly, it will stop its escalation.

In law school we were taught to pay attention to the filings by government that foreshadowed the use of eminent domain. We were taught that the government would try to get something on record as soon as possible to freeze real estate values and that pending eminent domain needed to be researched and discovered because of the way that it would likely depress real estate values. Of course, in law school in the 1970's we were thinking conventionally in terms of eminent domain for publicly owned facilities, not in terms of establishing huge no-bid developer-initiated mega-monopolies under the pretextual rubric of “economic development” or faux findings of “blight”in prime neighborhoods.

Not to Be Overly Academic About It: What’s Really at Issue

Perhaps we have allowed ourselves to get overly academic in this post. We don’t believe that people like Kathy Wylde are actually concerned with the academics of determining what is a fair price for people having their property taken by condemnation. We don’t believe their concern is actually whether megadevelopments like Atlantic Yards that abuse eminent domain will be a net plus or a net loss for the community. We are not certain apologists like Ms. Wylde even have a real concern for what these amorphously-shifting projects will actually finally be. What we see is Ms. Wylde reflexively promoting eminent domain and reflexively promoting its abuse to create a no-bid mega-monopoly for the politically connected Ratner. We see this done with no apparent regard for the public costs and irrespective of the absence of perceptible public benefit.

1 comment:

Market Urbansim said...

I don't have many major disputes with the general idea of your post, but please reconsider using your $3400/sf estimate. Quadrupling the allowable density does not quadruple the value of already built property.

First, the property is already constructed. The actual development value is probably actually less than the proposed price, because costly construction is needed to achieve the same number of square feet. I would guess the value of developable land in that area to be say 100/sf of built space. If quadrupling of the allowed density were allowed, that would peg the value to a developer at $400/sf. This is even lower than the KPMG number you cite. The value may be higher, even much higher, but not $3400/sf. (I realize the value to the developer is the assemblage and therefore greater than market, but I think your analysis vastly overestimates the value, but more importantly is not an accurate technique.)

Second, simply quadrupling the value is not a valid technique, even when ignoring the replacement value of the already constructed unit. There are diminishing returns to higher density. It would take a more complicated analysis that takes into consider higher construction costs for new construction of denser housing vs already built..., etc.

Don't get me wrong, I'm against eminent domain in all its form, and think they should at least pay the upzoned value, since they bare given special privileges that were not offered to the current owners. Perhaps they should pay the appraised value plus a pro-rata share of the upzoned land rights. You are making some great points, but I just want to discourage you from using invalid techniques to analyze this.