Government Controls and Real Estate Markets

Chapter 4:
Government Controls
and Real Estate Markets
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Limits on Ownership
This chapter examines the government

limitations on real property ownership
Limitations on Ownership
Division of
Complete Restrictions Use or Share in
Removal On Use Possession Value
Police
Police
Eminent
Eminent Regulatory
Regulatory Taxation
Taxation
Domain
Domain Power
Power
Deed
Deed Easements
Easements
Liens
Liens Restrictions
Restrictions
Leases
Leases
Copyright © 2018 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Land use is one of the most regulated
activities in our society.
 Why?
 Must it be this way?
Features of Real Estate that
Cause Market Distortions
 “Spillover”effects from nearby land uses
 Uniqueness of location (absolute monopoly)
 Unknown quality or condition of existing
structures
 Instability of land uses around residential
neighborhoods
Resulting Market Failures in Real Estate
 Monopoly
 Utilities as “natural” monopolies
 “Holdouts” in land assembly efforts (roads, other public uses)
 Incomplete information
 Construction quality hidden
 Buyers unable to judge natural risks
 Hurricanes
 Earthquakes
 Fires
 Buyers unable to judge adequacy of structure quality
 Wind tolerance
 Resilience against shocks
 Fire safety and resistance
More Market Failures (continued)
 Externalities
 “Spillover” effects of land use for which initiator is
not held accountable
 Traffic congestion
 Storm runoff
 Emissions (smoke, gases, particles, noise, light)
 Urban sprawl
 Disorderly extension of urban infrastructure
 Uncertainty of residential values
 Effect of non-conventional structures
 Effect of nonresidential land uses
 Effect of non-conventional population –e.g., students
The “Revolution” in Land Use Controls
 Pre-1970: Little interest in land use controls

 No land use plans had force of law
 Zoning very limited in function
 Focused on protection of single-family homes
 Did not exist in many areas
 Environmental movement of late 1960s
 Rachael Carson: Silent Spring
 Love Canal
 Notion of “spaceship earth”
Some Critical Questions:
 Will land use planning solve market failures?

 At what level should control be imposed?
 For subdivisions?
 For streets and utilities?
 For schools?
 For water resources and drainage control?
 For transportation systems?
 For rivers and wetlands?
 For ecological and endangered species?
Is Comprehensive Planning The Answer?
What is Required?
 Project future population growth
 Determine requirements for water and waste
disposal
 Project needs for public services (utilities,
streets, schools, parks and recreation, safety)
 Projected demand for various land uses (public,
residential, nonresidential)
 Design compatible arrangement of needed land
uses (land use map)
Challenges to Comprehensive Planning
 Changing notion of “best practice”

 Cul-de-sacs or grid streets?
 Mixed density and mixed use or containment of
nonresidential use?
 How much mass transit?
 Limited actual experience to rely on
(little more than 30 years)
 Insufficient theory and information
 Inability to foresee the future well
Traditional Planning vs.
New Urban Planning
Traditional New Urban
 Separated uses  Mixed use
 Automobile oriented  Public transportation
 Priority placed on  Pedestrian oriented
easy ingress and  Sidewalks
egress  Houses close to street
 Uniform density  Rear alleys
 Cul-de-sac hierarchy  Grid streets with
in neighborhoods restricted traffic flows
Traditional Land Use Controls:
Building Codes
 Older than zoning (circa 1900)

 Issues of safety
 Fire: Materials, alarms, electrical and gas systems
 Sanitation: Plumbing, water, and HVAC requirements
 Injury: Design and strength
 Continue to evolve
 Effect of Hurricane Andrew, 2004-5 hurricanes,
Katrina
 New technology (e.g., smoke detectors)
 Changing perception of needs (e.g., bedroom
windows large enough to step through)
Traditional Land Use Controls: Zoning
 Features of traditional zoning

 Use classifications: Residential, commercial,
industrial, automotive
 Use districts (zoning map)
 Setback requirements (side, front and back)
 “Bulk” or density limits (minimum lot size, height
limits, maximum floor area ratios)
 Special use districts: Service stations, hospitals,
churches, private schools, cemeteries
Subdivision Regulations
 Features of subdivision regulations
 Standards for streets, sewers, and water systems
 Adequate water supply for fire safety
 Adequate drainage and run-off retention
 Open spaces
 Lot layout
 Easements for utilities
 Traffic and pedestrian safety
Planning and Zoning Administration
 Planning and Zoning Commission created in the

zoning ordinance
 Appointed by elected officials
 Ultimately is advisory to elected officials
 Oversees implementation of the ordinance
 Considers requests for specific changes
 Requested changes must:
 Be compatible with a comprehensive plan
 Be justified if they require change in the comprehensive plan
 Not have undue effect on surrounding land uses or the
community
Board of Adjustment
 Required in zoning ordinance
 Appointed by elected officials
 Reviews petitions for variances
 Decisions are final rather than advisory to the
elected officials
 Only appeal is through the courts
Site Plan Review
 May be the same as planning and zoning
commission
 Review subdivisions and most other building
site plans
 Public review (neighbors and others)
 Public offices (public safety - fire, police, emergency
vehicles; utility officials; school officials)
 Informal procedure allows criteria and rules to
change with public pressure
 Most “treacherous” step for proposed new
development?
Zoning Issues and Concepts
 Legality of zoning established by USSC: Village

of Euclid vs. Ambler Realty - 1926
 Nonconforming use: Use conflicting with
zoning map, but existing prior to its enactment
 Cannot be substantially changed
 Must be continuous
 Can be “amortized” away, (e.g. billboards)
Zoning Issues and Concepts (continued)
 Variance: Exception to requirements granted

due to hardship
 Common example: wavier of setback requirement
 Exclusionary zoning (unreasonable lot size;
inadequate provision for low- and moderate-
income housing)
Do Land Use Controls Solve the
Problem of Market Failure?
 Does zoning raise the cost of “threshold”
housing unnecessarily?
 Does it interfere with economically efficient
land use patterns?
 Example: Does zoning make neighborhood services
excessively remote?
 Does low density resulting from zoning
contribute to urban sprawl?
 Houston: effective land uses without zoning?
Newer Approaches to Land Use Control:
Planned Unit Development
 Detailed development plan negotiated

with authorities
 Mixed use
 Mixed density
 No standard setback requirements
 Open community spaces
 Community recreation and other facilities
Newer Approaches to Land Use
Controls: Performance Standards
 Storm runoff limits

 Noise and emission limits
 Traffic impact limits
 Tree removal restrictions
More New Land Use Controls
 Impact fees
 Favorite of economists (in principle)
 Despised by many in the building community
 Appear to be used more as revenue source than tool
to guide land use
 Growth restrictions
 Temporary moratoriums
 US Supreme Court refuses to review Petaluma, Ca.
limit on the number of new housing units.
 Also Boulder, Co. and Boca Raton, Fl.
Another Way? Form Based Zoning
 Land uses are determined not by prescription but

“organically” based on:
 Development density
 Street character
 Parking arrangements
 Walkway character
 Structure shapes and sizes
 Foliage character
How Form Based Zoning Works
 Within brod categories, land uses can go anywhere

 Households will select a form that suites their
location, household and lifestyle preference: rural,
suburb, urban core
 Non-residential uses will select as their business
requires:
 Neighborhood shops vs large urban stores
 Small local offices vs financial centers
 Example: Denver, Colorado
http://formbasedcodes.org/codes/denver-comm
ons/
Spaceship Earth?
 What are other effects of the “spaceship

earth” scenario?
Sample of Environmental Controls
since the Late 1960s
 Clean Air Act
 Clean Water Act
 Comprehensive Environmental
Response Compensation and Liability
Act (CERCLA)
 Occupational Safety and Health Act
(OSHA)
 Endangered Species Act
 Increasing limitations on “fracking”
Some Hazardous Materials
 Asbestos and fiberglass

 PCBs
 Leaking underground storage tanks
(LUSTS)
 Radon
 Mold
Is there a limit to regulation?
 Pennsylvania Coal Company v Mahon (US
Supreme Court, 1922):
 Courts must balance public safety and welfare
against taking of property
 At some point eminent domain must be used. (Murr
v. Wisconsin now before USSC)
 Minority opinion in the case: “We are in
danger of forgetting that a strong public desire
to improve the public condition is not enough
to warrant achieving the desire by a shorter cut
than the constitutional way of paying for it.”
Power of Eminent Domain
 Eminent domain: Right of government to

acquire private land, without the owner’s
consent, for public use, with due process and
just compensation
 Condemnation: Legal procedure for exercising
the right of eminent domain
 Public use vs. public purpose
 Just compensation based on highest and best use
 Problems of excessive use
 Inverse condemnation
Eminent Domain Controversy - I
 Concept of “public use” expanded to “public

purpose”
 US Supreme Court in 1954 allowed condemnation of
“blighted areas” for private redevelopment
 Michigan Supreme Court in 1981 allowed
condemnation to enable GM manufacturing facilities
 Wide-spread subsequent condemnation of

“blighted areas” for private redevelopment
 Driven by local government hunger for an
increased property tax base
Eminent Domain Controversy - II
 Kelo v. New London Ct., 2005
 U. S. Supreme Court allowed use of eminent domain
to obtain non-blighted property for private
redevelopment
 Left it to states to decide whether to intervene
 Most states initiated legislation to limit use of

eminent domain
 Congress enacted law to prevent application of
Federal monies for such use
 Most states moderated the proposed laws to
limit eminent domain
 http://www.youtube.com/watch?v=4N1svad
JQ40
A Larger Perspective on “Kelo”
 New London, Ct. had been long recognized as an

abandoned and depressed community.
 A community/state plan of redevelopment had
evolved, with subsidies from the state.
 Achievement of the plan required removal of all of
the houses in the Kelo area.
 “Kelo” can hardly be viewed as an isolated or
arbitrary taking.
 Greatest significance of the USSC “Kelo” decision?-
Shift of authority back to the states.
The Effect of Property Taxes on Real
Estate
 Can property taxes reduce property
values and property wealth?
 Can an efficient property tax enhance
property values and property wealth by
the services it funds?
Property Taxes
 A primary source of local government

revenue
 Reliable and countercyclical
 Many taxing authorities
 City
 Improvement districts
 County
 Transportation authorities
 Schools
 Water management districts
Property Exempt from Taxes
 Religious organizations
 State Property
 Nonprofit organizations
 Homestead
 Educational institutions
Determination of Tax Rate
Total budget of Income from
Tax rate = -
Taxing Authority other sources
Total assessed Total value of
-
value property exemptions
( EB  I O )
or RT 
(VT  Vx )
(65,000,000 - 25,000,000)
RT =
(2,500,000,000 -500,000,000)
= .020
Or, a tax rate of 2 percent.
Or 20 mills
Computing Tax Liability
Market value $150,000

Assessed value 135,000 = (0.90 x MV)
Less: exemptions 25,000
Taxable value $110,000
Property Tax Calculation

Taxing Authority Millage Rate Taxes Levied
County 8.58 $ 943.80
City 3.20 3.52.00
School district 9.86 1,084.60
Water mgt. district 0.05 5.50
Total 21.69 2,385.90
Special Assessments
 Special assessments: Taxes for specific public

improvements affecting a property
 Street, sewer, etc.
 Usually charged on a per front foot basis
 Example: Street improvements of $500 per
running foot of street
 For lot with 100 feet of frontage:
100 x .5 x $500 = $25,000
Special Assessments and Community
Development Districts
 Many large subdivisions have private

community development districts
 Create and maintain neighborhood infrastructure
 Utilities
 Drainage and water retention
 Streets, bikeways, walkways
 Recreation facilities
 Issue tax-exempt bonds and impose property
assessments to pay the obligations
 Have the same lien priority as property taxes
An Example CDD Community in
Florida: The Villages
 Retirement community in north-central FL
 10 CDDs provide every community service
except criminal law enforcement
 Population of over 100,000
http://www.thevillages.com/AboutUs/aboutu
s.htm
Issues with Property Tax
 Regressive?
 May be regressive viewed alone
 Not necessarily regressive if resulting public services
also are considered
 Uneven across geographic areas and property
types
 Distorted by differential protection laws
 California – Proposition 13
 Florida – “Save our Homes” Amendment
 Poorly administered
Summing up
 Land use must be regulated due to market

failures
 The concept of spaceship earth has
brought a revolution in land use controls
 Traditional controls: building codes,
zoning, subdivision regulations
 “Post-revolution” controls: impact fees,
performance standards, PUDs,
environmental laws
Summing up more
 When regulation goes too far: eminent

domain
 The problem of expanding use
 Property taxes as a double edged sword.
 Efficient and reliable tax.
 Can be inequitable and distort land use
End of Chapter 4

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Government Controls and Real Estate Markets

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Chapter 4:

This chapter examines the government

 Pre-1970: Little interest in land use controls

 Will land use planning solve market failures?

 Changing notion of “best practice”

 Older than zoning (circa 1900)

 Features of traditional zoning

 Planning and Zoning Commission created in the

 Legality of zoning established by USSC: Village

 Variance: Exception to requirements granted

 Detailed development plan negotiated

 Storm runoff limits

 Land uses are determined not by prescription but

 Within brod categories, land uses can go anywhere

 What are other effects of the “spaceship

 Asbestos and fiberglass

 Eminent domain: Right of government to

 Concept of “public use” expanded to “public

 Wide-spread subsequent condemnation of

 Most states initiated legislation to limit use of

 New London, Ct. had been long recognized as an

 A primary source of local government

Market value $150,000

Taxable value $110,000

Property Tax Calculation

 Special assessments: Taxes for specific public

 Many large subdivisions have private

 Land use must be regulated due to market

 When regulation goes too far: eminent

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