Foundations of Real Estate 3

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Limits on Ownership

This chapter examines the government limitations on real property ownership

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Land use is one of the most regulated activities in our society.

Why?

Must it be this way?

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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

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Resulting Market Failures in Real Estate (1 of 2)

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

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Resulting Market Failures in Real Estate (2 of 2)

Buyers unable to judge adequacy of structure quality

Wind tolerance

Resilience against shocks

Fire safety and resistance

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More Market Failures (1 of 2)

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

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More Market Failures (2 of 2)

Uncertainty of residential values

Effect of non-conventional structures

Effect of nonresidential land uses

Effect of non-conventional population –e.g., students

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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”

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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?

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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)

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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

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Traditional Planning versus New Urban Planning (1 of 2)

Traditional

Separated uses

Automobile oriented

Priority placed on easy ingress and egress

Uniform density

Cul-de-sac hierarchy in neighborhoods

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Traditional Planning versus New Urban Planning (2 of 2)

New Urban

Mixed use

Public transportation

Pedestrian oriented

Sidewalks

Houses close to street

Rear alleys

Grid streets with restricted traffic flows

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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)

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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

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Traditional Land Use Controls: 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

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Traditional Land Use Controls: Planning and Zoning Administration (1 of 2)

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:

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Traditional Land Use Controls: Planning and Zoning Administration (2 of 2)

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

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Traditional Land Use Controls: 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

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Traditional Land Use Controls: 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?

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Zoning Issues and Concepts (1 of 2)

Legality of zoning established by USSC: Village of Euclid versus 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)

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Zoning Issues and Concepts (2 of 2)

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)

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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?

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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

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Newer Approaches to Land Use Controls: Performance Standards

Storm runoff limits

Noise and emission limits

Traffic impact limits

Tree removal restrictions

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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.

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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

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How Form-Based Zoning Works (1 of 2)

Within broad 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:

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How Form Based Zoning Works (2 of 2)

Neighborhood shops versus large urban stores

Small local offices versus financial centers

Example: Denver, Colorado http://formbasedcodes.org/codes/denver-commons/

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Spaceship Earth?

What are other effects of the “spaceship earth” scenario?

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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”

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Some Hazardous Materials

Asbestos and fiberglass

PCBs

Leaking underground storage tanks (LUSTs)

Radon

Mold

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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.”

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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 versus public purpose

Just compensation based on highest and best use

Problems of excessive use

Inverse condemnation

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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

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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=4N1svadJQ40

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A Larger Perspective on “Kelo” (1 of 2)

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.

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A Larger Perspective on “Kelo” (2 of 2)

“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.

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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?

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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

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Property Exempt from Taxes

Religious organizations

State Property

Nonprofit organizations

Homestead

Educational institutions

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Determination of Tax Rate