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REAL 4000 (3)
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Lecture 2

REAL 4000 Lecture 2: Real Test 2
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Department
Real Estate
Course
REAL 4000
Professor
Buschbom
Semester
Spring

Description
Test 2 February 13, 2017 Chapter 4 – Government Controls and Real Estate Markets Introduction • There are 4 basic powers of government: o Police Power ▪ Maintain Health, Safety, and Welfare ▪ Basis of Majority of Zoning Laws o Eminent Domain ▪ Acquire Private Property for Public’s Use o Taxation o Escheat (Don’t worry about) ▪ Confiscate land w/o ownership (residual owner) ▪ Goes back to crown law and feudal ownership Economic Rationale for Government Intervention in Real Estate Markets • There are also a variety of economic justifications for government intervention into real estate markets • Some of these include: o Monopoly power ▪ Uniqueness of location gives every property a locational monopoly ▪ However, the likely existence of close substitutes erodes a lot of this power ▪ The holdout landowner can exploit their monopoly position against the good of the community • Provides the rationale for the power of eminent domain o Externalities ▪ Many, many examples of spillover effects (both positive and negative) ▪ Traffic congestion ▪ Urban Sprawl o Incomplete information ▪ Uncertainty over construction quality Land Use Controls: Building Codes • What are they? o Detailed standards for the construction of new buildings and alteration of existing ones o Certificate of occupancy (OC) is issued if finished construction meets the code requirements • What purpose do they serve? o Promotion of public health and safety (fire, sanitation, and injury) o Promotion of energy conservation • Note: The stringency of building codes is a major determinant of the cheapest housing that can be build in a community • In other words there is an inherent trade-off between housing affordability and the strength of local building codes Land Use Controls: Zoning • Definition: o Regulation of land use, population density, and building size by creating geographical districts of similar uses • Zoning regulations typically limit: o Type of use o Intensity of use (development density) • Zoning code example: o Athens-Clarke county ▪ Permitted uses ▪ General Regulations • Zoning variances o What are they? ▪ Permission granted by government for a landowner to use a property in a way that violates zoning regulations o What purpose do they serve? ▪ Prevent undue hardship on a property owner • Nonconforming Uses o What are they? ▪ Existing property use that is inconsistent with the current zoning regulations o Why do they exist? ▪ Usually arise because the use predated the zoning regulation o Nonconforming uses are typically prohibited from: ▪ Enlargement ▪ Rebuilding or reconstruction after a specified percentage of damage or destruction ▪ Changing to another nonconforming use ▪ Resumption after a stated period of discontinuance Criticisms of Traditional Zoning • Zoning raises the cost of “threshold” housing unnecessarily o Especially true for minimum lot size regulations • Land use controls interfere with economically efficient land use patterns o I.e. zoning makes neighborhood services excessively remote • The low density development patterns resulting from zoning contribute to urban sprawl Techniques for Limiting the Intensity of Use • Building height restrictions • Bulk restriction o Specify the percentage of a lot’s area that may be occupied by structures • Minimum lot size • Setback requirements • Limits on floor-area ratio o FAR = Building ft^2/ Lot ft^2 Eminent Domain • Definition: o The government can acquire land for public use as long as just compensation is paid to the owner o How is it determined whether a property owner has been “justly” compensated? ▪ Just compensation typically defined as “fair market value” • How does a government exercise its powers of eminent domain? o Through the process of condemnation • What must the government prove in order to acquire land through their power of eminent domain? o The land is needed for a public use o The landowner is being offered just compensation • Compensation is NOT usually required for: o Loss of business profits o Moving costs o Cost of securing replacement housing o Adverse impact on the values of neighboring properties Property Taxes • Property taxes are ad valorem taxes o The tax base is the value of the property rather than the income generated by the property • Property taxes are administered using a “millage rate” o The millage rate states the $ of tax that must be paid for every $1,000 of taxable value • The property tax bill is calculated by multiplying the millage rate by the assessed value of the property (net of exemptions) and dividing by 1,000 Calculating your Property Tax Bill • Step #1: Local government assesses the property and attempts to estimate the market value of the property o Market value is the most probable selling price o i.e. suppose that the market value of our home is $200,000 • Step #2: The assessed value is usually some percentage of market value o In Georgia, assessed value is 40% of market value o Thus, the assessed value of our home is $80,000 • Step #3: Are you eligible for any property tax exemptions? o These include: ▪ Homestead exemptions for primary residences ▪ Elderly homeowner exemptions ▪ Many others o Exemptions do not eliminate property taxes o They reduce tax bills by excluding some of the property’s assessed value from taxation ▪ Suppose that we are eligible for $10,000 in exemptions ▪ Thus, we will have a taxable value of $70,000 • Step #4: Multiply your taxable value by the millage rate to compute your taxes due o Suppose that our millage rate is 20 mills o Our taxes due would be: Chapter 5 – Market Determinants of Value Where Cities Occurred • Preindustrial: Fortress or religious center • Transition points in trade routes o From river to ocean (New York, New Orleans, Hamburg, Rotterdam) o Intersection of rivers (Pittsburgh, St. Louis) o From water to rail (New York, Chicago, Minneapolis, St. Louis) o From rail to rail (Chicago, Atlanta) • Natural resources o Mining (San Francisco, Denver, Pittsburgh) o Oil (Houston, Dallas, Beaumont-Port Arthur) Greatest Cities have Experienced Sequence of “Bases” • Minneapolis and Chicago o Trapping and fur trade, agriculture, industrial, service, finance and control • Pittsburgh o River trade, coal and iron, steel, commerce and services, research and health care • Detroit o Fur and agricultural trade, iron and steel, automobiles Why Cities Exist • Economies of Scale (singe industry) o Growth within a locality that creates special resources and cost advantages for an industry ▪ Specialization labor • Silicon Valley • Performing arts in New York, Los Angeles, Nashville • Economies of Agglomeration (Multiple industries) o Specialized resources emerge in response to demand from multiple industries ▪ Airport and transportation infrastructure ▪ Financial services and banking ▪ Communications and media Economic Base • Economic Base: Activities that bring income into a city o Export activities: Products or services provided to the outside world (most manufacturing; higher education and research, advances health care) o Activities that attract money (retirement, tourism) • Secondary (local) Activities: Activities that recirculate income in a city (local government, local merchants and services) Economic Base Multiplier • The idea: As goes the base, so goes the city • Multiplier effect: Base income is re-spent, producing additional income o Multiplier effect is greater when the city is: ▪ Most isolated ▪ More diversified ▪ Larger ▪ The base activity uses more local goods and services Location Quotient as a Quick Indicator of Economic Base 1. Compute the percentage of total local employment in a given industry a. Example – Suppose education is 20% 2. Compute the same percentage for the national economy a. Suppose education in the national economy is 9% 3. Compute the ratio of local to national percentage: a. Location quotient = 20% / 9% = 2.22 • Interpretation: Local economy has 2.22 times the normal education employment; excess is presumed to be export employment Supply Factors Affecting a Community Economic Base • Test question: Factors affect this: • Labor force characteristics o Special skills and experience o Education level o Unionization o Work ethic • Quality of life • Leadership o Financial support o Government support (subsidies, land use regulation) • Climate Bid-Rent Curves • We assume: o All employment and exchange is at a city center o Individuals can “rent” a lot o Individuals have direct access to the city center via one route o Bid-Rent Curves – Basic Example LOOK ON SLIDES 11-13 Bid-Rent Curves – Factors Affecting Curve • What factors affect a bid-rent curve? o Number of bidders (commuters or firms) ▪ More bidders  demand increases  steeper bid-rent curve  higher land rent o Wage rate (time cost) of commuters ▪ Higher wage rate  higher transportation cost  steeper bid-rent curve  higher land rent o Speed of travel ▪ Slower speed  longer commute time  higher transaction cost  steeper bid-rent curve  higher land rent o Frequency of trips ▪ More trips per month (or more workers per household)  higher transportation cost  steeper bid-rent curve  higher land rent Slides 15 – 28 Variations on Intra-urban location patterns • Comparison goods and clustering o Buyers want to compare many goods o Rationale for shopping malls o Motivation for “new car row” • Industry economies of scale and clustering o Suburban office parks o Research universities o Tourist attractions o Restaurants Some Implications for Real Estate Market Analysis • Location within the urban matrix is the most meaningful notion of location o Distance from relevant activities o Relevant linkages depends on type of land use • Urban growth is not uniform; there are both emerging and declining nuclei • The transportation network and urban patterns respond to technical and market changes, but very slowly – over many years Technical Changes from 1920 to the Present • Automotive revolution o Increasing role of auto transportation o Birth and advancement of the truck o Expansion of highways • Technology advances o Industrial production has consolidated and become more automated o Computing power and internet infrastructure needs required upgrades in existing office building and caused some buildings to become obsolete or inferior Chapter 7 – Valuation Using the Sales Comparison and Cost Approach Introduction • Why must we estimate the value of real estate? o In other words, why can’t we just observe the market value of a piece of real estate? ▪ No two properties are alike ▪ Infrequent transactions ▪ Immobility of real estate means that properties are strongly affected by local market trends • Real estate appraisals are formal estimates of the value of a piece of real estate • Real estate appraisals are used by: o Buyers and sellers o Lenders o Insurance Companies o Courts Valuation Concepts • Most of the time the appraiser’s job is to estimate the market value of a property o Market Value: Most probable selling price under normal market conditions • Market value should be contrasted with investment value o Investment Value: The value of the property to a particular investor • Finally, the appraiser’s job is to use information on transaction prices to estimate value o Transaction prices: the amount actually paid for a property in a completed transaction o Represents the factual information that provides the starting point for estimates of value • Why might market value and investment value differ? o Market participants differ with regard to their future outlooks for a property o Market participants have differences in their access to financing o Market participants have different tax situations o Market participants have different required rates of return • Both market value and investment value are concepts o Meaning we never know what they actually are The Appraisal Process • Guided by the Uniform Standards of Professional Appraisal Practice • Basic Process: o Step 1 – Identify the problem ▪ Who will use the appraisal? ▪ What will the appraisal be used for? ▪ What type of value is to be estimated? o Step 2 – Determine the scope of work ▪ If/how the appraisal will deviate from typical appraisal practice o Step 3 – Collect data and describe the property ▪ Subject property characteristics ▪ Market characteristics ▪ Comparable property characteristics ▪ Investment market characteristics o Step 4 – Perform data analysis ▪ Market analysis ▪ Highest and best use analysis o Step 5 – Determine the value of the land ▪ Determined using the highest and best use as though vacant ▪ Highest and best use as improved is used to help determine whether the property should be treated as a redevelopment opportunity o Step 6 – Apply t
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