Real Estate Economics 156 Foldvary

Governmental restrictions, taxes, and takings .

The real property tax is actually two taxes combined in one payment.

It is a tax on land value and a tax on the value of the improvements.

Each tax has a different economic effect.

Each tax has a different moral justification.

The government in effect is a co-owner and has rights to the rental of the property and some rights of possession, including both use and transfer.

The power of the state of California over land under "private" title is bounded only by the constitutions of the USA and California.

The property tax, especially on land, is suitable to local government revenue because real estate is relatively immobile. Land is totally immobile and cannot be hidden.

The real property tax is ad valorem, meaning according to market value.

But the tax is not based on the actual market value.

In California, the real property tax was changed in 1978 by Proposition 13.

The tax is one percent of the market value at the time of purchase.

The tax may not increase by more than 2 percent per year.

So the tax is paid on the assessed value. Also, a portion of owner-occupied real estate value is exempt as a homestead.

Subtracting the exempt value gives us the taxable value.

The tax rate is then applied to the taxable value.

So two houses can have equal market value but get taxed unequally.

The official who estimates the property value of real estate is called the assessor, and the process is called assessment.

An owner may appeal the assessment to an appeal board or a court.

Cities also levy extra property taxes and special assessments, often on the square footage of improvements. These are often called “parcel” taxes.

There are also charges such as for garbage attached to property txes.

Governments also levy development impact taxes, often misleadingly called “fees”.

These help finance the infrastructure provided by government.

They can be per dwelling unit or per 1000 square feet of improvements.

Government can also transfer ownership to itself.

If the title holder dies without a will and without heirs, then the propety is transferred to the state.

This is called "escheat" and applies to any property, such as a dormant savings account.

The state may also transfer and take real estate by force.

This power is called eminent domain.

The Fifth Amendment to the US Constituion limits the power of eminent domain: private property may only be taken by the state for a public use, and with just compensation.

That power has been extended to alleged public benefit, forcibly transferring real estate to another private owner.

This confiscation of real estate is called a “taking.”

Zoning and other regulations are not considered takings unless most of the value is taken.

Civil asset forfeiture.

Property used in connection with a crime can be seized by the government.

This is so even if the owner of the property was not involved in the crime.

As an allegedly civil action, it is the property, not the person, which commits the act.

"Seizure does not require evidence that the owner of the property violated any law.

The case is against the property, not the owner -

nor does it require the criminal conviction of anyone, owner or user.

It is up to the owner who wishes to get his property back to demonstrate,

in a civil action, that it was not used to commit a crime."

This is the opposite of the legal principle of innocent until proven guilty.

It is based on deodand, in ancient English common law,

when the king could seize property that was used in a crime against him or his property.

Deodand is derived from Deo dandum - to be given to God -

and is used to designate the instrument which has caused the death of a man.

The deodand is forfeited to the king and was formerly applied to pious uses.

The law enforcement officials keep the loot,

so the incentive is, what?

For drugs, prostitution, and other crimes.

When a husband was caught using a car jointly owned with his wife to pick up a prostitute,

it was legitimate for the entire care to forfeit--including the wife's share.

As an allegedly civil action, it is the property, not the person, which commits the act.

"Seizure does not require evidence that the owner of the property violated any law.

The case is against the property, not the owner -

nor does it require the criminal conviction of anyone, owner or user.

It is up to the owner who wishes to get his property back to demonstrate,

in a civil action, that it was not used to commit a crime."

On October 2, 1992 Malibu California millionaire Donald Scott was shot to death inside his own home, during a raid by Los Angeles Sheriff's Department and agents from five federal law enforcement agencies. The Scotts were awakened by the sound of the police breaking down their door. Scott's wife, Frances, ran downstairs to find her house swarming with men with guns aimed at her. She screamed "don't shoot me, don't kill me." Donald Scott, recovering from recent cataract surgery, got his gun and ran to the defense of his wife. When he emerged at the top of the stairs, holding his gun over his head, the officers told him to lower the gun. As he did, they shot him to death. The warrant was for evidence of the cultivation of marijuana, but no illegal activity was discovered at the Scott ranch. The report of the Ventura County District Attorney, Michael Bradbury, concluded that the police lied to obtain the search warrant, that there had never been any marijuana cultivation on the property, and that the raid was motivated by a desire to forfeit the multi-million dollar ranch. Despite the DA's dramatic conclusions, no officer was ever indicted, or even lightly disciplined for the lies or the killing.


Inverse condemnation occurs when an owner claims that the government has reduced the value of his property to the extent of taking it, such as by construction that never ends.

The government also has police power, the power to restrict behavior.

This goes back to English common law, which has a concept of nuisance.

Injured parties can sue to prevent the behavior or seek compensation.

But today's governmental police power gives the government the authority to control land use in any way that government officials choose, subject to the constitution as interpreted by the courts.

Most cities have a general plan for economic changes and development.

The plan is enforced by zoning and other regulations.

Zoning is a division of the territory in a city into districts, each of which is designated for particular uses such as residential, commercial, and industrial.

Zoning started less than 100 years ago.

Zoning can also require minimum lot sizes, density, setbacks, and height limitations.

Another rule is the floor-area ratio, the ratio of total floor area and total land area.

Recently, zoning has been liberalized to allow clustered housing in residential associations, with houses closer together but more open space.

There is also performance zoning, where the rule is based on an outcome such as density rather than a method.

City governments also offer to set aside the zoning in return for providing open space or other amenities.

There is also "inclusionary zoning" that mandates low-income housing.

Zoning has been criticized as being too rigid, violating property rights, inefficient, and subject to corruption.

Some cities have no zoning, Houston being the largest US city without it.

Instead, there are private covenants and easements, which are private, voluntary, market ways of handling land use.

People call a regulation "smart" in order to imply that its opponents are studid.

"Smart growth" is a system of regulation that includes urban growth boundaries and light rail.

San Jose and Portland are examples.

In San Jose, the light rail has been criticized as a waste of resources.

Smart growth increases congestion and raises land values.

Real estate owners may seek a “zoning variance” to be exempt from some zoning rules when they impose a hardship.

There can also be nonconforming uses which continue after the zoning is put in, use which in some cases is only for some time interval.

Building codes.

Detailed rules for the construction of new buildings and alternations to old buildings.

Building codes are justified by as helping to ensure safety, but in practice,

many building codes are not necessary and protect construction companies from competition.

There are also regulations on development, issued by city councils, county boards, and planning district boards.

The plan or plat of the subdivision has to be approved.

The master deed and bylaws of homeowner associations have to be approved.