Unfortunately there has been a campaign by people calling themselves “urbanists” who are trying to both be in favor of density, not supportive of NIMBYs, and advocates of linkage tax, a scheme that won’t help density and truly is about squashing growth. Dan Bertolet has essentially demolished the foundation of their argument (undertaken more for providing intellectual validation of the linkage tax to politicians who have already decided to support it. Owen Pickford and his land value case is to linkage taxes what Colin Powell’s weapons of mass destruction speech at the UN was to the Iraq invasion).

Along with Bertolet’s good work to put this specious argument down, a great set of comments on a Facebook thread about linkage taxes came together over the weekend. The exchange was between two really smart guys who actually know something about real estate, David Neiman an architect and builder and Ben Broesamle who is studying real estate and has worked in the field. Check out the math.

The point of posting this exchange in the raw is to show that people who do the work get how the linkage will screw up the financing of actual projects and add to rent prices. Compare this to the what I call the Pickford Papers, which are an amalgam of facile arguments about land value and citations of studies (that Bertolet shows actually are full of evidence to support counterarguments about their view).

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  David Neiman Ben, I came up with the same numbers, that the linkage fee adds about 5% to the costs of a housing project. since higher costs translates to more debt which requires a debt coverage ratio in order to sustain it, that translates into a need for the market rents to move up 6.5% to absorb the fee.

  Yesterday at 7:03pm · Like · 1
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  David Neiman Once the market moves up, the costs have been transferred over to renters, Sawant holds a rally to declare that she really stuck it the fat cats this time, and we get ready to crank up the fee rates for the next election cycle.

  Yesterday at 7:08pm · Like
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  David Neiman But here’s the worst part: housing market is huge and includes every renter. When market forces cause rent escalation, everybody pays it, not just folks living in new development. 125,000 apartments times $1600 average rent equals $2.4 billion of rent every year. 6.5% of that is $150 million of rent increases in order to collect $40 million of linkage fee.

  23 hrs · Unlike · 1

Broesamle then runs through some of the issues with financing created by linkage.

And Broesamle doesn’t just spout jargon, here’s the math.

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  Ben Broesamle Numbers:
  Scenario 1 ($350 psf base cost, $22 tax):
  -$350 Total Development Cost per SF
  750 Gross SF per Unit
  100 units
  $3.00 psf / per month gross income
  5% vacancy
  $6,841 opex per unit
  6% exit cap, 6% exit closing costs
  2 year construction period
  IRR: 11.09%
  80% Loan-To-Cost (constraining)
  Leveraged IRR: 23.82%
  
  Increase development costs by $22 (6.29%)
  Required gross rental income increase to achieve same IRR: 
  
  ******5.43%******
  
  There’s your answer.

  22 hrs · Like · 1
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  Ben Broesamle There are a lot of assumptions in there that might be a little off. But it was quick math, and it illustrates the point.

  22 hrs · Like
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  Ben Broesamle Given that land is only about 12-18% of project costs to begin with, land owners would have to cut their price by between one half and one third before they sell to achieve the same result. This bring me back to my jumping up and down about “sticky” markets: land prices going down due to a tax on development anytime soon is less likely than developers waiting for rents to go up before they begin construction. Therefore, if any of you rent like I do, we are the ones who are all S.O.L..

  21 hrs · Like
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  David Neiman Ben, I think you’ve hit on the essence of the problem. There aren’t that many landowners willing to take a 33% haircut.

  21 hrs · Unlike · 3

Don’t get the numbers or what the hell all that stuff means. Join the club. The point is that real estate investment and development is a complicated business, too complicated to be left to be managed from the armchairs of the City Council, and certainly not by guys in their pajamas writing a blog. Peoples livelihoods, both builders and renters, are at stake. It’s too important to be left to the amateurs at City Hall and some “urbanists.”

I’ll leave the last work to Rob Harrison, of the Harrison Plan for Roosevelt.

Rob Harrison So…no land sale, no development. No development, no linkage fee.

21 hrs · Unlike · 2