Real Estate Development and Market Obstruction

The city of Lafayette Indiana has just made $161,000 investment in a local neighborhood .

It’s good to be a property owner, if you are on the correct side of the street.

Markets synthesize information about goods, services, locations, impediments and a multiplicity of other factors. The information is calculated and fed back in the form of a price. For example, consider how much information is conveyed in the price of one pound of coffee sold at your favorite coffeehouse.

First, you may ask, what type of coffee? Decaf? Whole bean? Organic? Fair trade (don’t take that misnomer literally). South American? Central American? You get the idea. All of this information and more (transportation, handling, roasting, marketing etc) is all incorporated into the price. With this information in hand, you the consumer can make decisions about what product to buy, where to buy it and when to buy it.

So what?

The same process is true for real estate. The market communicates information about a specific piece of property via price. A 1200 square foot home priced $120,000 and one priced at $240,000 tells the consumer that there exists a material difference between the two. That difference can be anything from property condition, to location, or maybe amenities that come along with it, or maybe the fact that George Washington once owned the home. Nonetheless, the market has taken into consideration these factors.

But what happens when an arbitrary line is drawn around a specific group of properties by local, state or federal authorities, and designated for improvement?

Hmm, I never thought about.

First, a study is commissioned, sometimes by elected officials, their appointees or “development corporations”, paid for by taxpayers, who feel the need to act for the good of the community. The study arbitrarily determines that a specific area should be targeted for redevelopment. Once the study is released to the public, the market begins to process the information. Because real estate is illiquid the process is slow. Announce that South American coffee beans will get special treatment and watch what happens to the price of coffee. The response is immediately seen on the futures market.

What is the new information? Market intervention communicates a willingness by the authorities to support activity that may not of occurred otherwise. It also expresses a willingness to further intervene to support the stated goals. As a consequence, the market becomes distorted. The new calculus of price now will incorporate another factor; signaling.

Two identical properties, selling for the same price, literally separated by a street now have two different values. Why? Because one property, on the south side, is included in the designated area for improvement and the other property on the north side of the street, is not.

If you were interested in either building or rehabbing a property, which would you pick? Either the property in the zone designated for improvement, or the property outside the zone? Fortunately, the market will work and reflect the information in terms of price. But therein lies the problem. Why should one property value benefit from the intervention and another value diminish based upon the arbitrary drawing of lines?

Another problem with such planning is the inoculation affect of the study. The plan will become de facto policy. Future rezoning requests, site plan submissions and the litany of other administrative matters associated with real estate development will be looked at through the prism of the study.

Kinda like a self-fulfilling prophecy. Got any proof?

As much as local officials would vigorously deny favoritism for plans that conform to their vision and indifference, or outright hostility, to plans that do not meet the study objectives, it is hard to believe otherwise. Especially after spending $161,000 for the study.

The case of Herman & Kittle Properties (HKP) illustrates the problem. HKP submitted plans for the development of a tract of land in Lafayette which is outside the designated zone. Although the public reveal of the study did not occur until after HKP began the process, local officials were well aware of the scope and designated area the study encompassed. Inoculation had taken affect.

The requirements for development of the HKP land had long been established prior to the submission and prior to the study. Based on fixed rules, HKP proceeded. The plans met all the zoning requirements, site plan requirements and use requirements (all three are distinct hurdles to overcome). What should have been pro forma approval became a nightmare for the petitioner.

What kind of nightmare?

The mayor of Lafayette, Tony Roswarski, was first to express displeasure by stating “It’s just not right – it’s not how we do things here”. Apparently following the rules, regulations and requirements promulgated by local authorities is not “how things get done”. Aside from submitting oneself to the arbitrary nature of an authority, what other way was HKP to proceed?

Next, the local state representative, Sally Siegrist, sought a way to “remedy” the situation by proposing legislation to give more authority to local governments to control land use; affectively changing the rules. Outside of complete arbitrary authority, what else could they want? Thankfully this misguided plan to expand control was stopped before it got started. Wiser minds prevailed.

After that failure, Todd Rokita, U.S. House Representative for the 4th district of Indiana, which includes the Lafayette area, brought his federal weight to the petition; sending a letter to the Indiana Housing and Development Board registering his displeasure with the project calling upon the state to stop the project. Thankfully his efforts failed and the rule of law prevailed. The project was approved.

What does this example have to do with the redevelopment study?

First, regardless of well established rules, as in the case with HKP, it shows how far authorities will go to thwart a plan that does not conform to their whimsical desires. As mayor Roswarki said, “I had met with potential developers early on, and they had described the project to me. I had told them at that time I was not interested”, as if the rules meant nothing. Later the Mayor would state that plan was not right for that area of Lafayette. Maybe the petitioner should have picked land within the study zone.

Likewise, the impetuous to support efforts within the designated zone will increase. It is reasonable to assume that the same elected officials will work as diligently to get a project approved as they did to deny HKP, simply because they want it. What if two competitive projects are introduced, which one gets approved? One conforms to the standards, but projects less tax revenue than an non-conforming project promising more tax revenue? My crystal ball is broken, but I would say the non-conforming project will manage to get approved.

Second, what is the purpose of these regulations if they are arbitrarily challenged or even changed with the latest political whim? Why would a private enterprise risk capital? Land use rules are established to bring about an expected outcome if they are followed; approval of the project. Consider the costs HKP incurred simply to ask permission to use the land. Lawyers, surveyors and site plan developers, soft costs, generally add 6% to 10% to the cost of the project. Without fixed rules, the process of securing administrative approval to developing land becomes increasingly impractical, resulting in higher costs and or housing shortages.

Third, how does a market account for arbitrary intervention? In regards to the study designating a redevelopment zone, the property within the designated zone now becomes more valuable. The study immediately conveys (signaling theory) to the market a specific intent of local authorities to support projects inside the zone. Which would you develop/redevelop? In the zone, or out of the zone property? You may pay more for a property in the zone because you have a reasonable expectation of governmental support, or you may pay less for a property outside the zone because there is a lack of support.

Which begs the question that free market advocates always wonder: Why should some benefit and others lose because of an arbitrary decision made by governing authorities? Whether it is real estate or coffee does not matter. Free markets and free people depend on the simple axiom of equal treatment before the law. In Lafayette, it is pretty evident that some are more equal than others and they will be treated as such. You just have to be on the correct side of the street.

A Market Solution to Change in Property Values Due to Re-Zoning

The most common argument against rezoning property is the proposed change will decrease property value of the surrounding property.

I have often wondered, how earnest are the individuals making the argument. Do they sincerely believe it? Are the willing to invest in that belief?

Consider the following scenario: developer desires to rezone 100 acres of land to allow for the construction of 75 homes. The subject property adjoins 25 established homes. You, as one of the 25 home owners, are concerned that the proposed development will decrease your property value.

What if there was an agreement that protected both you and the developer? If your property value goes down, they pay you. If your property value goes up, you pay them. Would you enter into such an agreement?

Bad vs Evil

 

In this corner, Herman & Kittle Properties Inc (Herman & Kittle), Indianapolis property developer.  Ready to build “low income” housing, just as the politicians want.

In that corner, the politicians who make up the rules and then complain when people follow them.

The round starts with a flurry.  Quickly penning a letter to the Indiana Housing & Development Authority King Tony Roswarski asks the State to turn down the application for tax credit. “It’s just not right – it’s not how we do things here,”  Indeed it’s not.  Apparently Herman & Kittle forgot that the divine right of Kings still has power in Lafayette.  No need for that pesky rule of law (the restriction of the arbitrary exercise of power by subordinating it to well-defined and established laws). Tony knows what is right, just kiss his ring and he will tell you so.

The referee steps in and reminds King Tony he is actually an elected official and instructs the judges to subtract a point from his score.

With nimble movements, Joseph Caldron, Herman & Kittle’s attorney counters. His client is “prepared to meet the list of other stipulations laid out in the county’s land use rules.”  The politicians made the rules, Herman & Kittle simply follow them.  The Mayor’s nose is bloodied.

State House Representative Sally Siegrist, sensing the mayor is in trouble, steps in,  but  trips over her feet and falls.  Preventing complete embarrassment before she tries “a remedy in the form of a bill in the General Assembly“.   The General Assembly needs a law, to fix a law that the General Assembly wrote and Herman & Kittle are following, because they are not doing what the lawmakers, who wrote the laws, want them to do and we can not have that.  Woodrow Wilson and FDR are cheering from their grave as liberty is being buried alive.

Sensing the fight is almost over and he has almost missed an opportunity to look like a hero, the petulant U.S. Congressman Todd Rokita runs into the fray with a blistering admonition to the Indiana Housing & Development Authority,  “I urge you to consider the objections of Mayor Roswarski.”  Remarkable courage.  Another “Fire Rokita” sign just went up.

Mercifully, the fight is stopped, by a bunch of dead people who will actually decide that outcome.  The irony,  by following the rules, a bunch of dead people could accomplish what a mayor, a state house representative and a U.S congressman could not do.

Is the Wealth Gap Bad?

The wealth gap is getting a great deal of attention recently. USA Today, CNN and the Urban Institute have all recently published stories chronicling wealth gap disparities. The New York Times, after stating global inequality has stabilized, proclaimed “But here’s the bad news: The respite probably won’t last”. The criticism of the wealth gap is criticism of individual liberty and the free market.

How so?

Humans are complex and that complexity is understood by considering all the various wants and needs we have. The similarity in general wants and needs is obvious, but so is the complexity in satisfying them. Generally, humans want/need housing, but have you ever seen two homes that are identical? The exact same aesthetic inside and out? What about he music playing on Pandora?

The complexity of our desires, right down to the music we listen to, is best met by a system that allows the mutually beneficial exchange between those who create music and those who want music. The exchange benefits both parties: One party enjoys the product and the second creates income which can become wealth. As a specific musician’s music satisfies more people’s wants, their income increases to the point where profit (income exceeding expenses) is realized and wealth (the accumulation of assets) is created.

The market is a mechanism that rewards those who meet the needs of others. Those who meet the needs of others best are compensated accordingly and create wealth faster than others. Thus a gap is created between those who meet the needs and desires of others in an extraordinary way and those who do not. As strange as it seems, Taylor Swift is compensated more than the Avett Brother’s and has accumulated more wealth. There is a gap.

There in lies the problem

Critics of the wealth gap make a moral judgment that regardless of who serves the wants/needs/desires of others more, one individual or group is more deserving. This person, business or industry deserves more wealth because they are more meritorious. The Avett Brothers deserve more because their music is more authentic than Taylor Swift’s and the gap in wealth should be lessened. The beginning of the totalitarian state finds it’s roots in this shift from a free market to a planned market.

The liberty of the individual to create and maintain wealth is subordinated to an outcome of equalized wealth that authorities determine for the rest. Either taking from those who create wealth (Taylor Swift) by satisfying the needs of others in an extraordinary way and redistributing it to those who do not (The Avett Brothers) , or barring the individual from participating in the market all together.

Is there really a problem?

The wealth gap is not a problem. It is the product of individuals using their liberty to pursue interests that are most satisfying to them. Either producing goods and services for others or consuming what others produce. Those who serve many accumulate wealth.

There is a problem when there is no wealth gap. Through various means of wealth redistribution authorities attempt to equalize outcomes and inadvertently create a permanent underclass. Also, the reduction in wealth via property confiscation reduces the incentive to meet the needs of others. Fewer goods and services are produced and less wealth is created. Ultimately a death spiral occurs and we all lose.

Why do we all lose?

The satisfying of wants/needs/desires and creation of wealth benefits all, especially the poor. The gap is still there but the standard of living for the poor has increased dramatically. What were once luxuries, financially available to only the wealthy, have become ordinary possessions for even the “poor”. Refrigerators, air conditioners, automobiles, telephones, computers, washer and driers have become common place. Why? Because the creative and industrious had the freedom to serve the needs of many, lifting standard of living of both parties. The consumer has their needs met and the producer has created wealth.

State and Education, Markets or Coercion

Know Your Neighbor

How well do you know your neighbors? Besides their names, their children’s name and where they work etc.; how well do you know them?

Do you know their favorite book, movie, type of music? What about more personal details? How do they view the world? Do they have religious beliefs? Maybe eastern mysticism, pantheism? What do they believe about the origins of man? Evolution, theistic evolution, literal creation? What about how they view raising children? Do they ever consider any of these questions? Do you?

It’s pretty obvious that we know very little about our neighbors, which make sense. Individually, we are working hard to keep our own lives under control. We hardly have time to understand our neighbor’s issues.

Limited Knowledge

Nonetheless, we collectively insist that we know enough about our neighbors to solve their problems. Although it is established that as an individual I am not omniscient, we collectively believe and consequently behave like we are.

As a society we claim to know what’s best. Usually, our opinion is based upon another’s (experts) findings. But does this make sense? Does studying a matter in-depth make you more knowledgeable about those you offer advice too? Try planning and fixing meals for your neighbor. You may be a great Italian cook, but if your neighbors are vegan, your veal scampi might end up in the trash.

Humans are frightfully complicated. Regardless of the attempts by social scientists to reduce human action to determinism we are all unique. Reducing the irreducible complexity of human desires to an objective standard of “what people want” is almost non-sense. The result is so broad (food, shelter and love) that it offers no guidance to those who desire to govern others activity. Maybe those who govern should leave somethings to the individual to pursue independent of government coercion.

Many Ways or the State’s Way?

Apply this axiom to education. Is it possible to reconcile a society of unique individual’s or family’s desire for knowledge with a system that meets that need? What would it look like?

The dominant paradigm today is a forced education. The state forces the individual to pay for the system and then provides a curriculum that the state also establishes. “We will take your wealth from you and then give you the education we want for you”. Does not leave much, if any room, for individuality or innovation and what does pass for innovation is last decade’s “latest greatest”.

What does the state know about every individual and family that it governs? Very little. How successful is any endeavor where one party knows very little about the group it serves? Reading, writing and arithmetic does not qualify as “knowing your customer”.

Markets Give Diversity and Choice

Try identifying all the non-government schools that offer differing methodologies, curriculum and calendars in one paragraph. The diversity is far too great to categorize other than to say there is a plethora. Quite a contrast to the government schools touting magnet, charter, special and traditional as being “diverse”. A six pack of Crayola crayons is diverse when compared to black and white. But a 64 pack of Crayola crayons is truly diverse.

Why are there so many varieties of education offered? Because there are families willing to suffer the burden of taxation to support government education and simultaneously demand something different. They demand an education for their children that meets their personal needs and are rejecting the “least objectionable” form of state education.

One Size Does Not Fit All

These parents are rejecting the model of federal, state and county politicians, teachers, teacher unions, administrators, elected and unelected board of educations at the local and state level (state board of education officials being a separate group than the Governor, state house and senate members), focus groups and education “experts” (all, expect the unelected officials, are taxpayer supported) in favor of a model of administrators and teachers that listen to their individual desires and delivers what they want individually. Parents are rejecting the bland, monolithic and inferior state education for a choices that are market driven; their needs are being met.

The Issue is Freedom

Why would a society elect a group that insists on a system of education that demands compliance in the face of civil and some cases criminal penalties? The issue is not education, it is freedom. Milton Friedman properly observed, “Underlying most arguments against the free market is a lack of belief in freedom itself.”

The Rule of Law, or “I gotta do what to use my property?”

The Rule of Law

The rule of law has fallen on hard times, principally because the concept itself is misunderstood. Consequently the application of the principle is misapplied. Classical liberalism teaches the rule of law is the principle of protecting the broadest interest of the individual from the arbitrary use of power.

The “rule of law” restricts authoritative powers, not enhance them. Today the principle is understood to mean quite the opposite; increase authority over the individual. It is applied through administrative rules and legislation that actually increase arbitrary power.

The rule of law, applied especially to private property, is the fountainhead of both economic development and civil liberties. Risk and reward belonged to the owner of property. The risk associated with a venture was the property owner’s and so was the reward, it could not be confiscated. The “right” moral convictions were not a prerequisite for property ownership.

Social Justiced

The perversion started with the belief that laws could correct injustice (both real and perceived). Broad rules securing equality before the law gave way to narrow, targeted rules and laws to promote a specific outcome. Once the rules and laws were codified, their proponents would argue, “It’s the law” as they took your property. The divine right of king’s has been replaced with the new rule of law, is essentially the divine of right of the few.

The rule of law has morphed into a collective consensus of the few (unelected boards, citizen groups authorized by unelected boards, elected officials) to determine good/bad, ugly/pretty, sustainable/unsustainably etc.

Real Life Example

Consider the plight of Old National Bank’s sign in downtown Lafayette Indiana.

“This sign is so bad, it’s just bad”.

“It totally destroys the skyline. It’s just too big.”

“I personally think it looks tacky as hell,” said Ken McCammon, president of Friends of Downtown, “Not a fan.” At least he is honest enough to omit it is his opinion leaving the discussion open to contrary opinions.

The irony is that Old National had to go through an administrative process that was designed decades ago to correct perceived injustices (too big signs). In other words, they followed “the (new definition) rule of law” and are still considered “too big” and “too ugly”. Which creates a new problem? Will more rules and laws be enacted to correct the perceived “too big”, “too ugly” problem that the current rules and laws were to correct? When will it end?

Will rules, regulations and laws become so onerous that all economic activity must be anointed by the king? By a proletarian dictatorship? Is there a difference between the two?

Nothing New

Classical liberals saw the problem almost one hundred years ago. Dictatorship does not breed planning, planning breeds dictatorship. As the rule of law continues to be perverted, more rules and laws are necessary to continue correcting perceived problems, that in some cases are caused by the perversion itself. The political authority must claim more power over individuals to enforce more and more rules.

Old National has found that to be the case: Follow the rules made decades ago to prevent “too big/ugly (fill in the adjective of your choice)” yet their sign is still “too big/ugly/etc”. The inevitable next step according to the “new rule of law”? More rules, regulations and laws to correct the perceived wrong such that the next person will have to pay for the sins of the previous person.

Something Old

This spiral of power is best observed by a small business owner in Lafayette when lamented “Small businesses are forced to jump through multiple hoops in order to uphold a standard of historic preservation. We are limited in scale and scope as to what we are allowed by the city. And this? A bit of a slap in the face.” Indeed he is right, property owners in historic districts face burdensome regulations that others do not.

Historic property districts distort economic activity. The skewer that stuck the small business owner, intrusion in the market, is the very thing they seem to be wanting for Old National. Instead of calling for a rollback of onerous rules, he seems to be advocating for more. “Let’s share the misery”.

The rule of law was instrumental in the development of a market economy that produces unprecedented material blessing. It also allows for very rich and diverse market of ideas. Changing the principle into something different changes the structure of society. It has been tried many times and it’s failure has always been catastrophic.

How to Kill the Town of Dayton Indiana

Words are generally used to convey beliefs.

Consider the Dayton Area Community Coalition use of words: “We are residents of the town of Dayton and the extended community, and we recognize the danger profit-centered growth and development presents to our very way of life. We are in favor of growth for the town, but only on the condition that it causes the town and its residents no harm, offers demonstrable benefits, and will serve to complement and enhance our small town atmosphere.”

They are very clear, but wrong, in their beliefs: They believe there are two kinds of growth and they alone can determine good from bad. Accordingly, good growth is not profit driven, causes no harm, offers demonstrable benefits, complements and enhances small town atmosphere. At best the Coalition’s is naive, at worse it is dangerous.

In a free market economy, “not-profit driven growth and development ” is charity. Soup kitchens and homeless shelters are “not profit driven”. From the largest business enterprise to the shoe cobbler on Main Street, both have one thing in common: profit. Both must make more than it costs to operate their respective businesses (profit) or they will  cease to exist. Both are excluded from the town the Coalition hopes for. “Shame on the consumer who wants more for less, or their shoes repaired. We want charity based businesses.”

When an authoritative individual or group, makes decisions for the community in regards to what economic activities are acceptable, the free market is eliminated. Because the Coalition determines what “causes no harm, offers demonstrable benefits, and complements and enhances small town atmosphere”, there is no need for a market that sorts out these very qualities. People don’t buy what causes them harm, offers no demonstrable benefit, nor complements and enhances their life, there by enhancing the life of the community and businesses that do not meet these qualities cease to exist.

By claiming the mantle of moral arbitrator, the coalition casts those who work and shop at, for example, WalMart, Costco, Verizon Wireless, Subway as well as the for profit shoe cobbler, lawyer, hair stylist as morally inferior and relegates them to second class citizenship. Can re-education camps will soon be far behind?

It will be “soup kitchens” and “homeless shelters” if the Coalition exercises their collective will. But I doubt many citizens would consider standing in line for a free meal at a shelter “date night”. Whether it is “Hope you can believe in”, “Or make America Great Again” really does not matter when the totalitarians are in our midst on both sides of the political aisle.

If this group existed 100 years ago, the town would still be waiting for electricity, flush toilets, paved roads, pizza delivery and cable tv.