Economic Arguments for Preservation: Do the Math to Make

the Case

Della G. Rucker, AICP, CEcD Wise Economy Workshop

For National Preservation ConferenceOctober 21, 2011

Our Plan:

• What’s the problem?

• Who benefits?

• Introduce a key idea

• Figure out what we are measuring

• (Prove that you can) Do the math

The Problem:Property owners sometimes want to tear down or mess up buildings for reasons preservation people can’t fathom:

o “But it’s such a beautiful building!”

o “Why on earth would they want a parking lot rather than that building?”

o “Don’t they understand what that will do to the neighborhood?”

More of the Problem

• Three different definitions of value:o Property owner o Business ownero Local

government/community

• Three different time frames• Responsible to three

different groups

A quick sketch

Definer Type of value

Time frame Responsibleto

Property owner Cash flow from rent

Short Self/other owners of building

Business owner Business revenue Longer Self/partners/ investors

Community Quality of life Longest Self, other residents, other parts of community

More of the Problem:

• The property owner will do what’s in his or her best interest.

• Their best interest may not be the same as the best interest of o Businesses in that building,o Other business owners or property

owners nearbyo Area residents o The local government

The Real Problem

When property owners make choices that impact the economic health of others, they have created

an externality.

Concept #1: Externalities

• “An external effect, often unforeseen or unintended, accompanying a process or activity.” (dictionary.com)

• When I make choices in my economic self-interest, and those choices impact someone else, those impacts are the externalitiesof my choices.

Common externalities• I let my kids scream wildly in

the back yard, and my

neighbor’s sick daughter

couldn’t sleep.

• I dumped chemicals in the back of my lot, and now the EPA has to clean it up.

• I don’t maintain my building,

and the value of buildings

around me goes down.

Who gets stuck dealing with most of our externalities?

A solution:

The more we can convince elected officials of the impact that preservation decisions will have on their community’s financial health -the more they see that poor preservation choices create negative externalities – the more likely we are to persuade them that it is good public policy to support historic preservation.

What economic issues do

governments deal with?

• Private sector:o Growth

o Profitabillity

o Stability

o Vacancy

• Public sector (fiscal):o Tax revenues

o Costs of services

What kinds of externalities can botching up a

building make for other property owners?

• Make area less appealing for customers-����

• Decrease rental/property value of spaces

• Decrease amount of affordable space for new businesses.

What kinds of externalities does this create for local governments?

• Loss of property tax revenue

• Loss of space for creating new employment

• Loss of sales tax revenues.

• Increased public safety costs

• Loss of support for infrastructure repairs

Fine. But words

are just words….

Do the Math: Show the impact of good decisions on property values

• Compare average property values of preserved areas to unpreserved areas with similar buildingso Common example: National Register districts compared

to non-National Register.

o It’s easier to get property value data than ever[link to auditor example]

o Can also use sales prices – get a Realtor © to help you.

A hypotheticalValue

Building A $100,000

Building B $300,000

Building C $80,000

Building D $150,000 Avg Letter Dist: $166,000

Building E $200,000

Building 1 $100,000 Avg. Number Dist $159,000

Building 2 $250,000

Building 3 $175,000

Building 4 $150,000

Building 5 $120,000

Keys to success:• Use the largest samples

you can.

• Double check your math.

• If using Auditor data, know when the last assessment was and, if they typically undervalue, by how much.

If it’s not working• Look at more areas

• Partner with a similar community to get more sample areas

• Look for unusual factors in the area you’ve chosen. Are some closer to the highway than others? Further from the center of town? Larger or smaller buildings?

Estimating the impact on the ability to grow new businesses• Especially important when

demolition of a commercial or potentially commercial building is proposed.

• Premise: small businesses are extra important to a community because they create most of the new jobs. o But they have different space

needs than established businesses.

o Older buildings often fit this best.

Econ concept #2: Opportunity Cost

• The money or other benefits lost when pursuing a particular course of action instead of a mutually-exclusive alternative. (www.dictionary.com)

Types of opportunity costs• I decide to quit my job and go

back to grad school so that I can move into a better position in the future.

• I buy the last piece of vacant land in town and build houses on it instead of a factory.

• We tore down the smaller, inexpensive spaces in town, and now small businesses have no where to get started.

What’s the opportunity cost to small business growth ?

• Compare commercial/office rate in historic or downtown area to rate for area as a wholeo A good Realtor© should be able to help you find this

information

o An affordable space is by definition one that a growing small business could use - SizeUp © is a good new tool to help figure that out.

• The fewer spaces affordable to small businesses we have, the more stuck our local economy is going to be.

A hypothetical• A review of SizeUp© or interviews with Realtors©

indicates that most small businesses (preferably focusing on a type that you know City wants, like tech or restaurants) can afford an average of $6/sf rent.

• Average rent in suburban strip area of town =$10 sf

• Average rent downtown = $5.50 sf.

• Extra credit: what % of downtown space does a proposed demo represent?

Estimating lost revenues - property

taxes

• The parts:

o Assessed value (link)

o Property tax rate (millage)o Adjustments, deductions,

rollback, caps, etc

• The formula: o Assessed Value X Millage –

Adjustments = Property tax obligation

Estimating opportunity costs from lost

income/earnings tax

• The parts: o Estimated number of employees

• Actual (might be low) or

• Potential based on national/regional average per square feet

o Income/earnings tax rate

o Estimated percent of employees paying income taxes to locality (may be receiving reciprocity or abatement)

• The formula: o (Employees X income tax rate) = income

tax obligation

Estimating opportunity costs from lost

sales tax• The parts:

o Estimated sales • Actual (might be low) or• Based on typical local experience, or• based on national/regional average per square feet

o Sales Tax rate • May differ from one county or city to next

• May have different parts (part to state, part to county)

• The formula: o Estimated sales X sales tax rate =

sales tax obligation

Other types of taxes: • Business Establishment-type taxes

• Tax on profits

• Tax on personal property or inventory

• Tax on holdings

• Capital gains

• Etc., etc., etc…..

So…you’ve done the math, now

what?

• Share your findings

• Show your work

• Remember that it’s an estimate, not a precise measure

• Use it as one of the tools in your toolbox – it’s not the only one.

Questions?

Thank you!

Della Rucker, AICP Wise Economy Workshopwww.wiseeconomy.com

513/288-6613Della.Rucker@wiseeconomy.comTwitter: @DellaruckerFacebook: Della Rucker Aicp Cecd