The Deed Restriction Is Moot Outside of Affordable Housing Assumptions

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Thanks to the Barrington Town Council for including me in a panel discussion on affordable housing, last week, and thanks to Christine Dunn of the Providence Journal for covering the event, although she highlights an exchange that I’d thought it not worth following up on.

The question on the table was how the legislature came up with 8% of rents as a fair tax on affordable housing developments, versus regular property tax rates. The short answer is that nobody knew, although I suggested that some developer in a back room had offered it as the price at which he could make a profit.

Mike Milito, Rhode Island Housing’s chief legal counsel, offered that the law requires property taxes to be set at “fair market value,” and he suggested that 8% of rents might be just that if one takes into account the value reduction due to the deed restrictions on such properties. When he suggested that invalidated my estimate that the 8% rent tax can work out to one-fifth of regular property taxes, I let it go without reply, because, well because one makes such decisions during a live event.

But I think he’s wrong for a number of reasons. Most prominently, from the taxpayer perspective — for other residents, who have to make up the difference in tax revenue left by affordable housing and may struggle to do so — it doesn’t matter whether there’s an excuse for the lower tax rate; it’s still a gap in the budget. It’s the whole policy that creates the deficit.

Similarly, the deal is structured with the deed restriction in mind. Developers aren’t accepting the deed restriction without an entire package that makes the transaction profitable for them.  Market mechanisms have nothing to do with it; this is price fixing.

Moreover, property taxes have universally increased, while the 8% is written into statute. It may be the case that 8% of rents equated to the property tax discounted for deed restrictions in 1995, but that’s not likely to remain true after two decades of increasing tax levies coupled with legal limits on the growth in rents for these units.

That brings us back to the guaranteed profit — the very-low-risk investment — that the system sets up for developers. The subsidies from taxpayers come not only through the direct payments made on behalf of low-income families, but also through the growing gap between what affordable housing property costs the owners versus what it would be worth in a fair market.

We see this problem in any area in which the government steps in to dictate the terms of economic reality.  It isn’t actually possible to do so, and as time goes on and the distance between the actual economy and the pretend one grows larger, everybody else winds up making greater and greater sacrifices.



  • Guest

    Good Stuff.

    8%? Seriously? I pay more than 3 times that rate in North Kingstown. So now my family must pay for other peoples phones, their medical subsidies, their rent, their food and so forth. Why have I involuntarily become my brothers keeper? Because I worked hard in school, got multiple degrees and worked long hours?

    Kids today have it right–better (or easier) to play x-box, party and fail than succeed….since the looters will take it anyway.under the guise of "fairness" or "economic equality." This path leads to third-world status.

  • Dan

    Guest – The United States is a late-stage kleptocracy slowly imploding in upon itself under the weight of excesses by the Greatest and Boomer generations. Even if they haven't articulated it, the young today realize there is very little opportunity left for the talented and hard-working. Truth be told, I threw in with the looters some time ago.

  • David S

    "Truth be told, I threw in with the looters some time ago. " Dan. I am confused. What do you mean?

  • Dan

    Like many young professionals, I now view the U.S. economy as a rigged game in which most businesses and individuals have become zero-sum players in the redistributionist economy and capitalism has been subsumed under the U.S. government itself. Not being the martyr type, I decided to throw in with the powers that be, but to always use my position as a less-bad alternative to the progressive fanatics I would undoubtedly be replaced with if I left.

  • Warrington Faust

    "offered that the law requires property taxes to be set at “fair market value,” and he suggested that 8% of rents might be just that if one takes into account the value reduction due to the deed restrictions on such properties. "

    This is determining property value by the so called "capitalization rate" . As a starting point, buildings are thought to be worth "ten times the income". The "multiple" is lowered, or reduced, by property condition (which should also effect the amount and collectibility of rents).

    So, if the subsidized housing is purchased at 10 times it's actual income (I think "actual income" may be hard to determine) and the purchase price is accepted as "fair market value" and it is taxed accordingly "God should be in his heaven, and all right in the world".
    (required split)

  • Warrington Faust

    I think Justin suggested that the 8% was "suggested" by a developer, that could be. Everyone knows subsidized housing to be a game for the inside players. That always seems to be the case where the matter is "technical" and supported by federal funds, favorite players emerge. Anyone living near, or in Massachusetts, will note that there are few players in the "environmental" game other than "Clean Harbors". That does not mean no one else has the capacity.

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