This is a vexing problem I was made aware of by friends that are in the retail business, renting their stores from landlords. It's really brutal. Retailers take on all the risk, put in the work to revitalize a neighbourhood, and their reward is that when lease renewal comes up in 10 years, it spikes and they're faced with a choice of being displaced or handing over an enormously increased part of their margins to the landlord which has done literally nothing.
The others that benefit are the nearby condo developers, that take photos of cool retail in the area to put into their brochures in order to help sell their product. They benefit from the land speculation and the work from others.
I don't really have a solution except that I can see that the landlords benefit from scarcity, and their leverage and ability to raise rents would be lessened if there was more viable retail spaces to take advantage of.
So the city could help retailers by dramatically liberalizing retail zoning and allowing more competitive high streets to develop. This could take the edge off being forced to move by a landlord jacking up rent.
There seems a bit of inner conflict in what you're saying. If retailers "revitalizing a neighborhood" leads indirectly to them getting priced out due to rising land values, isn't it also true that poor people living in the neighborhood get priced out at the same time? Is it a good or bad thing to make a neighborhood more hip, is the retailer a hero or a villain?
I've seen a similar thing happen (though more rarely) where a retailer owns the building or space, and after 10 or so years, looks up and realizes they could make more take-home by renting it out.
Anybody who has entered the retail business as renters for the past 15 years has done a mistake. Because land lords do this to everybody. If their goal wasn't to suck the lifeblood of people and businesses, then they would have invested their money into something different than becoming landlords.
If you have a great retail idea, then you need to get investors behind you so that your company can outright own the stores. Otherwise you will be leeched on endlessly. It's incredibly hard to get on top if you're depending on the good will of landlords.
Solution: Online shopping until the bubble collapses.
The most chaotic solution I can think of would be making Felix Margolis, who joins Fannie Mae and Freddie Mac and gives out 30 year tiny interest loans to help first time small business owners buy the property instead of renting it. A beautiful crop of thriving businesses started in 2027 at the low low price of commercial real estate prices climbing imto the stratosphere so no small business started in 2040 being able to rent more than a square foot.
Always in agreement to such initiatives. I do think a barrier to adoption is the space of possibilities is quite large and generally not well organized around a specific proposal or mandate, so opposition to these initiatives can pick them apart of details. Especially since opposition is usually much more engaged in local governance.
It's somewhat complicated to understand, but I think this is an opportunity for strong communicators to present to a public that is much more receptive toward these ideas.
I never considered how a street with lots of cool shops could create value for homeowners and commercial real estate owners without necessarily creating value for the businesses that were responsible for making it cool.
I don't think that any of the suggested solutions would work, as they all involve the government and taxation - which can only destroy value, IMHO.
Creating a cool vibe certainly has value and can contribute to price appreciation in the community, but ultimately capitalism is not based upon creating vibe but upon selling products and services.
>But homeowners would likely be willing to share value too
No, they wouldn't. That is why property tax rates (and hence land value tax rates) have so many laws capping them and otherwise limiting them for all the important voting blocs (old people, military, big business, etc).
See California prop 13, that voters passed. See Oregon measure 5 and 50, also passed by voters. And politicians wouldn't dare touch these.
>In American cities, there is an issue with value capture. One party creates the value (in this case retailers), another party (landowners or homeowners) captures it.
This phenomenon is not restricted to American cities. It will broadly exist in all human societies with flattened or top heavy population age histograms. The old are the most populous and knowledgeable (and motivated) to structure society so that the non working (themselves) can capture the most value. Hence, the popularity of earned income tax instead of marginal land value tax rates. The goals of the wealthy and the old (and the ones with aspirations to be wealthy) align to support rent seeking policy.
I don't think there is a connection. The situation where the landlords capture most of the increase in value that a cluster of retailers create, would not be affected if we switched from taxing the landlords on the value of their land and building, to taxing them just on the value of the land.
How does this survive contact with the triple net lease? You pass the bond and the property tax is immediately due from the tenant. Congratulations, you destroyed all the businesses.
Destroy the businesses, rental prices go down, land value tax rates punish land owner for keeping land empty, so either land owner sells the property to someone who can make the numbers work, or land owner accepts lower profits.
Obviously, there is pain for the current players, but long term, the landowner should not be able to extract so much profit margin without also providing sufficient utility, such as operating an in demand business.
Something to be said about the number of vampires out there. I think about my own apartment complex. Less than half a dozen units owned by a single landlord. They pay a handiman probably less than $1000 worth of work on the property a year, really nothing major every happens. They pay a crew to come by once every other month and trim the bushes and blow everything out, mostly because the city has fire code saying the bushes cannot touch the structure. Whatever the cheapest two man crew for that costs I guess.
And for that couple hundred in upkeep maybe they pay a year, my landlord clears probably between 150k to 200k in rent doing nothing at all. I think they actually own a couple more similar properties so its more than that.
So here is this couple in this city, that has found for themselves a way to pull out at least 200k from the local economy, and contribute basically nothing back at all. They don't otherwise work. They just cash checks pretty much and text the handiman when an tenant texts them. Imagine how cheap my rent would be not having to pay for these vampires considering actual costs of this building. Probably like $50/mo each between all of us tenants would be plenty to cover typical yearly overhead. I'd certainly go out to eat a ton more and heavily support local economy if I was only losing $50 a month of my pay to rent. I'd probably get away only having to work 10 hours a week. But no I work 40 hours and give them like 30% my gross because my landlord needs 200k to do nothing. Literally all they do is suck my blood. Their whole existence based on sucking my blood.
But currently, most of the high intensity retail areas tax the landlords on the value of the land PLUS the value of the building ( "improvements" ). They owe this tax even if the building is empty.
How does switching to a land value tax, which only taxes them on the value of the land, help at all ?
In urban and suburban areas, it benefits society to have more development on a given piece of land. Taxing the land only does not mean the nominal tax liability goes down. Taxing the land only means the land owner is incentivized to do something with the land. The more productive the use, the better for their bottom line, and the better for society.
This is a vexing problem I was made aware of by friends that are in the retail business, renting their stores from landlords. It's really brutal. Retailers take on all the risk, put in the work to revitalize a neighbourhood, and their reward is that when lease renewal comes up in 10 years, it spikes and they're faced with a choice of being displaced or handing over an enormously increased part of their margins to the landlord which has done literally nothing.
The others that benefit are the nearby condo developers, that take photos of cool retail in the area to put into their brochures in order to help sell their product. They benefit from the land speculation and the work from others.
I don't really have a solution except that I can see that the landlords benefit from scarcity, and their leverage and ability to raise rents would be lessened if there was more viable retail spaces to take advantage of.
So the city could help retailers by dramatically liberalizing retail zoning and allowing more competitive high streets to develop. This could take the edge off being forced to move by a landlord jacking up rent.
There seems a bit of inner conflict in what you're saying. If retailers "revitalizing a neighborhood" leads indirectly to them getting priced out due to rising land values, isn't it also true that poor people living in the neighborhood get priced out at the same time? Is it a good or bad thing to make a neighborhood more hip, is the retailer a hero or a villain?
A hero. It's pretty simple. No need to complicate things.
Just like saving a (healthy) life is a good thing, even if you can spin some stories about the dignity of death or whatever.
I've seen a similar thing happen (though more rarely) where a retailer owns the building or space, and after 10 or so years, looks up and realizes they could make more take-home by renting it out.
Stop densifying cities and start building out suburbs where the land is cheap.
Using all kinds of regulations to ignore the market signals usually points out that you're doing something wrong (not _always_).
Anybody who has entered the retail business as renters for the past 15 years has done a mistake. Because land lords do this to everybody. If their goal wasn't to suck the lifeblood of people and businesses, then they would have invested their money into something different than becoming landlords.
If you have a great retail idea, then you need to get investors behind you so that your company can outright own the stores. Otherwise you will be leeched on endlessly. It's incredibly hard to get on top if you're depending on the good will of landlords.
Solution: Online shopping until the bubble collapses.
The most chaotic solution I can think of would be making Felix Margolis, who joins Fannie Mae and Freddie Mac and gives out 30 year tiny interest loans to help first time small business owners buy the property instead of renting it. A beautiful crop of thriving businesses started in 2027 at the low low price of commercial real estate prices climbing imto the stratosphere so no small business started in 2040 being able to rent more than a square foot.
Interesting article, though I'm biased since:
- I like to shop IRL, and the opportunities to do this pleasurably are going extinct
- I live right by Hayes valley, which they start out with.
- I'm also a member of "The Commons" which they mention at the end. I love what it's trying to do: creating a new social 3rd space in SF.
Always in agreement to such initiatives. I do think a barrier to adoption is the space of possibilities is quite large and generally not well organized around a specific proposal or mandate, so opposition to these initiatives can pick them apart of details. Especially since opposition is usually much more engaged in local governance.
It's somewhat complicated to understand, but I think this is an opportunity for strong communicators to present to a public that is much more receptive toward these ideas.
I never considered how a street with lots of cool shops could create value for homeowners and commercial real estate owners without necessarily creating value for the businesses that were responsible for making it cool.
I don't think that any of the suggested solutions would work, as they all involve the government and taxation - which can only destroy value, IMHO.
Creating a cool vibe certainly has value and can contribute to price appreciation in the community, but ultimately capitalism is not based upon creating vibe but upon selling products and services.
>But homeowners would likely be willing to share value too
No, they wouldn't. That is why property tax rates (and hence land value tax rates) have so many laws capping them and otherwise limiting them for all the important voting blocs (old people, military, big business, etc).
See California prop 13, that voters passed. See Oregon measure 5 and 50, also passed by voters. And politicians wouldn't dare touch these.
>In American cities, there is an issue with value capture. One party creates the value (in this case retailers), another party (landowners or homeowners) captures it.
This phenomenon is not restricted to American cities. It will broadly exist in all human societies with flattened or top heavy population age histograms. The old are the most populous and knowledgeable (and motivated) to structure society so that the non working (themselves) can capture the most value. Hence, the popularity of earned income tax instead of marginal land value tax rates. The goals of the wealthy and the old (and the ones with aspirations to be wealthy) align to support rent seeking policy.
This is Exhibit A for why land value tax is a good idea.
I don't think there is a connection. The situation where the landlords capture most of the increase in value that a cluster of retailers create, would not be affected if we switched from taxing the landlords on the value of their land and building, to taxing them just on the value of the land.
How does this survive contact with the triple net lease? You pass the bond and the property tax is immediately due from the tenant. Congratulations, you destroyed all the businesses.
Destroy the businesses, rental prices go down, land value tax rates punish land owner for keeping land empty, so either land owner sells the property to someone who can make the numbers work, or land owner accepts lower profits.
Obviously, there is pain for the current players, but long term, the landowner should not be able to extract so much profit margin without also providing sufficient utility, such as operating an in demand business.
Something to be said about the number of vampires out there. I think about my own apartment complex. Less than half a dozen units owned by a single landlord. They pay a handiman probably less than $1000 worth of work on the property a year, really nothing major every happens. They pay a crew to come by once every other month and trim the bushes and blow everything out, mostly because the city has fire code saying the bushes cannot touch the structure. Whatever the cheapest two man crew for that costs I guess.
And for that couple hundred in upkeep maybe they pay a year, my landlord clears probably between 150k to 200k in rent doing nothing at all. I think they actually own a couple more similar properties so its more than that.
So here is this couple in this city, that has found for themselves a way to pull out at least 200k from the local economy, and contribute basically nothing back at all. They don't otherwise work. They just cash checks pretty much and text the handiman when an tenant texts them. Imagine how cheap my rent would be not having to pay for these vampires considering actual costs of this building. Probably like $50/mo each between all of us tenants would be plenty to cover typical yearly overhead. I'd certainly go out to eat a ton more and heavily support local economy if I was only losing $50 a month of my pay to rent. I'd probably get away only having to work 10 hours a week. But no I work 40 hours and give them like 30% my gross because my landlord needs 200k to do nothing. Literally all they do is suck my blood. Their whole existence based on sucking my blood.
But currently, most of the high intensity retail areas tax the landlords on the value of the land PLUS the value of the building ( "improvements" ). They owe this tax even if the building is empty.
How does switching to a land value tax, which only taxes them on the value of the land, help at all ?
In urban and suburban areas, it benefits society to have more development on a given piece of land. Taxing the land only does not mean the nominal tax liability goes down. Taxing the land only means the land owner is incentivized to do something with the land. The more productive the use, the better for their bottom line, and the better for society.
This feels like a solution at the barrel of a loaded gun.