Consequences To Property Tax Systems
For several years property tax reformers have been calling for a land value tax (LVT) to counteract rapidly rising home prices. A property tax system that raises the tax rate on land and lowers the rate on structures dampens the upward pressure on lot prices, encourages owners of high value sites to put idle land into productive use, and to build more intensively. Land values reflect the location value of property, that which is created by the community at large through utilities, public services, and transportation access, as well as natural amenities. Local government holds the intrinsic right to retain annual increases in value, called ‘land rent’. Thus, capturing land rents through a high tax on land assessments reimburses the community as a quid pro quo for enhancing land values. LVT also discourages land speculation by raising the cost of holding onto sites without making building improvements.
What are the tax consequences for lower income households facing economic hardship and possible displacement? Through our research we find that the answer to this question is multifaceted and not entirely uniform.
The recent study by Northwest Economic Research Center (NERC) reveals circumstances that may not benefit renter households, particularly those occupying older buildings and smaller properties. In Multnomah County the assessed values of structures decline as they age – reflecting building depreciation, including those appearing well maintained. Thus, the land-to-building assessment ratio is higher, resulting in comparatively higher LVT levies. These results are found in Inner Northeast Portland where gentrification is occurring.
Previous studies of LVT effects make it clear that multifamily land use categories face a favorable outcome due to the higher ratio of improvement value to land value (more building floor space per unit of lot area). Apartment units are regularly occupied by renters whose owners stand to benefit by the land tax. LVT favors newer and larger buildings.
Another tax consequence is attributed to the convoluted effects of Oregon’s Measure 50 that went into effect in 1995 limiting the annual increase on all property assessments to three percent. Taxable assessments (MAV) have been lagging behind real market assessments (RMV), which have been rising rapidly especially in the years following the Great Recession. The MAVs of older properties have been contracting for a longer period, newer buildings for a shorter period. By 2018 the difference between MAV and RMV assessments on post-M50 properties was 24 percentage points higher than the difference for pre-M50 properties. This gives older properties a great advantage in terms of tax burden under the existing property tax regime.
The current tax system, because it taxes land and improvements at the same limited rate, favors older and depreciated buildings, or for that matter vacant and underutilized sites. It encourages speculative land holding, and does nothing to curb the upward pressure on lot prices. This mitigates against the intended incentive effects of LVT – to encourage building maintenance and infill development.
The Community Land Trust Model
There are other ways of holding down land price inflation, a primary driver of the growing housing affordability crisis. Progressive economists are calling for residential ownership models that remove dwelling units from the private real estate market, claiming that affordability over the long run can only be sustained by intentionally holding down land values. A community land trust is such a model; it protects against economic hardship or displacement of rental occupants by providing an opportunity for lower-income households to purchase a dwelling unit. By holding perpetual ownership of land titles the land trust limits the growth of land values beneath the buildings. Legislation governing the operation of CLTs varies from state to state.
The CLT model is implemented through the transfer of affordable properties. Currently the private market corollary is the wholesale bundling of aging or distressed properties by institutional investors. This is a national trend, already evident in some Portland neighborhoods, leading to upward pressure on rents, mass no-fault evictions and displacement. This requires a novel solution that will enable renters to remain in their existing homes and neighborhoods.
As properties developed under rental assistance or other government subsidy programs subject to affordability restrictions approach their expiration date, owners may elect to convert them to market rate housing. A first step toward a solution is a “tenant opportunity to purchase”, requiring landlords to give tenants 90 days’ notice and the right of first refusal on a property sale. This measure would be much more effective if legal rights were expanded to include not only rent restricted projects but all rental buildings up for sale.
This anti-displacement measure has been taking root in cities such as San Francisco and Washington, D.C. Local nonprofit corporations are given the legal right to purchase residential buildings and keep the tenants in their existing units. In June of 2020, a bill was introduced in the California legislature that would create a statewide version of this policy.
Properties changing ownership are acquired by nonprofit land trusts that maintain permanent ownership of land. Prospective homeowners are able to enter long-term (i.e., 99-year), renewable leases at an affordable rate. Upon selling, homeowners only earn a portion of the increased property value attributed to improvements, while the trust keeps the land value remainder, thereby preserving affordability for future low-to-moderate income families. Qualified tenants must meet income guidelines.
• Value of the improvements: The taxing jurisdiction’s assessed value of any buildings that are located on CLT land should reflect the perpetual restrictions that the CLT’s ground lease has imposed on the use and resale value of these buildings. Thus, the building’s assessed value should be lower than the assessed value of a similar building that is not so encumbered.
• Value of the land: The assessed value of CLT land should never be more than the net present value of the income stream which the CLT can collect from a parcel of land in monthly fees over the term of the lease. Given that the ground lease fees are usually far below a market rent, the value of CLT land should be far below its market value. This valuation should only increase as the ground lease payments increase.
Community Land Trusts in Oregon
House Bill 2002, passed in the 2017 Oregon legislative session, requires that property owners subject to an existing affordability contact or new rent-restricted projects notify the Oregon Housing & Community Services Department two years prior to contract expiration or withdrawal from restrictions. It extends the right of first refusal to OHCS and qualified purchasers, including a local government entity or its designee when accepting a third party’s offer to purchase. Proud Ground, a CLT operating in the Portland metro area is such a qualified purchaser, a non- profit corporation organized to develop affordable housing for families and individuals who have been priced out of the housing market.
Since it was founded in 1999, Proud Ground had grown to $27 million in property assets and provides perpetually affordable housing to over 430 families. Currently it is not purchasing distressed or rent restricted rental housing units, given that its limited financial resources obligate the CLT to concentrate on volume production. Proud Ground is buying single family homes for sale, typically in urban renewal districts such as North Interstate and Lents.
State law does not extend the right of first refusal to all sales, which would be preferable. Because of the political power of property rights interests in Oregon, enabling legislation for such an expansion is not likely to see the light of day anytime soon. However, RFR is available on government owned land. Otherwise all sales to non-profit low income housing providers are voluntary.
Proud Ground is not in the business of building renovations. It purchases existing ready-to-occupy homes on the open market, then acting as a broker, finds low-income tenants pre-qualified to purchase the structures. In partnership with Habitat for Humanity, it can also purchase its newly constructed units, thus moderately expanding the supply of housing. Unlike some Midwestern or Eastern municipalities, Portland has not employed the purchase and renovation of foreclosed or tax delinquent properties with public funds. Given the high pressure housing market in the metro region, few such units are available.
Proud Ground is a partner with Oregon’s down payment assistance program, in which assistance funds are awarded to organizations throughout the state. It allows first time buyers to purchase a home with a down payment of only 3.5% of the purchase price, and limits monthly payments to 39% of household income.
In Oregon community land trusts are exempt from property taxation by virtue of the fact that they retain title to the land and provide the homeowner a 99-year ground lease with a deed restriction ensuring permanent affordability. House Bill 3275, passed in 2021, exempts the land under any home that is subject to an affordable housing covenant. In Multnomah County (encompassing Portland) the tax assessor utilizes the net present value of ground lease payments for each individual parcel held by a qualified nonprofit purchaser that is perpetually leased to lower income households at a below market price.
At present, it is unclear which counties will utilize this model. Expanding tax exemptions to other counties will inevitably have a fiscal impact on public revenues. The building tax is paid by CLT homeowners, the liability of which diminishes because of the restrictions imposed on the resale value of the buildings. In effect, all the state’s county assessors are offering a percentage discounted property tax on building assessments.
Community Land Trusts and Land Value Taxation
Tenant opportunity-to-purchase policies enacted through right of first refusal laws will not necessarily create additional housing units, but they will serve to slow the process of displacement. If a local option LVT becomes a reality, its incentive effects will undoubtedly help increase the total housing supply, discourage land speculation, and exert a downward pressure on land prices. Community land trusts are an important player in urban land markets because of their role in removing housing from the speculative market. All three mechanisms might mutually contribute to the expansion of affordable housing.
We have already seen that LVT favors newer and larger development projects, particularly multifamily housing. Given that Portland metro’s Proud Ground CLT is not currently in the business of structural renovations nor rental apartment conversions, the financial rewards accompanying a tax shift from the current system to LVT are not likely to show substantially. Evidence from previous studies indicates only moderate differences between current and LVT taxation in tax burden among the existing single family housing category.
However, this CLT is now looking into the possibility of using Portland’s newly implemented Residential Infill Project (RIP) amendment to the zoning code allowing the conversion of single family zoned lots to small scale attached housing styles. This type of infill development will decrease the land-to-building assessment ratio. Shifting the tax rate onto land values and off buildings lowers the tax burden. A conversion on a single family zoned lot is unrealistic unless the parcel is vacant or underutilized. Under the current tax system taxes would be very low, but would increase under LVT due to the heavy tax rate on land value. New construction on the same site would result in a downward tax shift compared to the present MAV equal rate tax.
A recent study by Common Ground OR-WA modeled this redevelopment scenario. The overall difference in tax levies on a duplex conversion when changing to LVT with 90 percent of the total rate on land assessments amounts to nearly $5,000 annually. The total tax benefit for constructing a triplex or fourplex building on an underutilized lot is over $6,000.
Even if Proud Ground continues to concentrate on single family ownership, the tax benefit of LVT is still evident when targeting vacant or underutilized lots for new construction. The RIP zoning amendment limits the internal space to 2,500 sq. ft., sufficient for the family occupancy units that Habitat is building as infill. In this case the total tax difference is estimated at nearly $3,000 annually. In either event, the prospects for new construction would be tempered by high construction costs, a contingency the CLT is currently not in a position to realize with its limited financial resources. A new source of public funding would need to be available to enable its expansion into an area that is usually occupied by community development corporations. Meantime, it will be seeking attached units already converted by other developers.
At this point, the principal benefit of land value taxation will consist of its ability to open up the regional housing market by discouraging property owners from holding onto sites that are not fully utilized. This increases the supply of existing homes for sale, a goal that Proud Ground and other non-profit housing providers are actively pursuing.
Another benefit of LVT concerns the current gap between MAV and RMV assessments. Proud Ground is beginning to expand its geographic field into Portland’s Outer Southeast neighborhoods that have been trending slower in land value growth. The NERC study previously cited revealed growing distortions across the county in MAV assessments, resulting in inequitable tax burdens. For example, the 2017-18 MAV assessments in Portland’s inner northeast were only 29 percent of real market value; whereas in outer southeast neighborhoods the ratio was 55 percent. These outlying areas have been absorbing an unfair share of the total county tax burden. Changing the property tax to the LVT system using RMV assessments will correct this distortion, reducing owner’s tax burden.
At the heart of metro Portland’s housing crisis is lack of supply, out-of-reach housing prices, and unaffordable rents. The problem is so critical that far-reaching solutions are needed. No amount of local or federal government subsidies can begin to address the actual barriers to abundant and affordable housing. Following the example of European countries, we will have to move a greater portion of dwelling unit inventory out of the private real estate market into the non-profit sector. The social housing model most available in the U.S. is the community land trust. Yet, expensive land is a major barrier to their expansion. We are under no illusion that a politically acceptable revenue neutral LVT can sufficiently curtail escalating land prices. Unless land tax rates are raised much higher, possibly offsetting other regressive local taxes, the tax shift effects of LVT will be modest. Cities can go a step further through land banking that directly transfers property to CLTs, but to keep available sites out of the reach of speculative investors the right of first refusal will have to be extended to all sales. LVT, through its built-in incentives, can play a role here too, by encouraging owners to sell or redevelop unproductive land, ultimately increasing the supply of housing.
By Tom Gihring, Research Director