Real Estate Economics 156 Foldvary
Private Communities
Spencer Heath, 1936, Politics versus Proprietorship.
The value of public services is manifested in land rent.
Idea from Henry George, Progress and Poverty, 1879.
But Heath turned the political program on its head.
George regarded the landowner as a passive receiver of rent.
Heath saw the landowner as also potentially being an entrepreneur
who could develop a whole community
and profit from the increase in the rentals.
1957, Citadel, Market and Altar.
The hotel as a proprietary community.
The word "hotel" comes from the French term for a large house or town hall.
Hotel service was started in the early 1800s.
A hotel is an organized community with services such as policing, water, lighting, transportation, streets and parks (corridors and the lobby).
Similar services as a city, but voluntary, contractual.
Hotels compete in the market.
Many common services do not have user charges but are paid from the rental that the guests pay.
The rentals are subject to market supply and demand.
If the hotel owners do not provide good service,
demand will decline and he will get less rental income.
So the interest of the management is in harmony with the interests of the guests.
Proprietary communities could form associations that could replace government.
In large real-estate complexes, the owners and managers provide administration and coordination that are more flexible and market-oriented than zoning and typical land-use laws.
grandson Spencer MacCallum carries on that theme.
Since World War II, real estate has been developed that features a unified ownership and administration of landed communities.
Examples include shopping centers, mobile home parks, medical centers, marinas, mobile home parks, and large multi-purpose complexes.
These all finance services from market rentals.
In contrast, in the viewpoint of Spencer MacCallum, state and local governments finance their activities by, as he says, cannibalizing society, with taxes on productive activity.
Society today suffers from schizophrenia.
The same agency that performs public services
also performs disservices, cannibalizing society with taxation.
Government becomes ambiguous, beneficial yet also harmful.
In his book The Art of Community, 1970,
MacCallum presents the proprietary community
as resolving the problems of free riding and transfer seeking.
Private communities combine market and government.
The two basic types are proprietary communities with a single owner, and civic associations.
MacCallum also calls proprietary communities entrepreneurial communities.
Shopping centers made feasible by the automobile.
Industrial parks. Mobile home park. University campus.
The rentals provide a quantitative measure of the successful functioning of the community.
Pathology is signaled by declining rent.
Real estate has site specific investments.
Requires complex contracts to limit opportunism.
Communities require governance, but it can be proprietary.
Community Associations
The earliest known civic associations were in London in the mid 1700s.
Lord Leicester established a park in Leicester Square,
and adjacent property owners agreed to an assessment to fund it,
which benefitted them by increasing their property values.
Another private community in Great Britain was Victoria Park, near Manchester,
which was laid out in 1837 and operated privately until 1954.
The sale of its lots carried with it "certain conditions, the 'laws' of the Park,
which would protect its amenities".
Besides annual "rates," Victoria Park levied tolls on some of its roads.
The earliest known civic associations were in London in the mid 1700s.
Lord Leicester established a park in Leicester Square, and adjacent property owners agreed to an assessment to fund it, which benefitted them by increasing their property values.
Another private community in Great Britain was Victoria Park, near Manchester, which was laid out in 1837 and operated privately until 1954.
The sale of its lots carried with it "certain conditions, the 'laws' of the Park, which would protect its amenities".
Besides annual "rates," Victoria Park levied tolls on some of its roads.
The earliest known civic associations were in London in the mid 1700s.
Lord Leicester established a park in Leicester Square, and adjacent property owners agreed to an assessment to fund it, which benefitted them by increasing their property values.
In 1775, the British writer Thomas Spence
wrote about the concept of assembling landed property and letting it out on leaseholds.
Ebenezer Howard, 1902, Garden Cities of Tomorrow. Influenced by Henry George.
Leaseholds of land.
Town and country must be married. A unity of design.
The basic idea was a "voluntary plan of public finance" using leaseholds of land:
One essential feature of the plan is that all ground rents,
based upon the annual value of the land,
shall be paid to the trustees, who, after providing for interest and sinking fund,
will hand the balance to the Central Council of the new municipality,
to be employed by such Council in the creation and maintenance
of all necessary public works, such as roads, schools, parks."
Howard envisioned combining the qualities of city and country environments. He wrote: "Human society and the beauty of nature are meant to be enjoyed together...
Town and country must be married".
The architecture of the garden city would be varied,
but there would be a "general observance of street line or harmonious departure from it,"
over which the municipal authority would have control.
The town would have a unity of design, planned as a whole.
There would be a cluster of towns around a central city.
To the lease holders, the town would issue a prospectus indicating the scope of operations.
A Board of Management, elected by leaseholders, would govern the city.
The extent of town services would be limited by the willingness of leaseholders to pay the rents. Howard envisioned charitable institutions sponsored by public-spirited residents.
Some communities in the United States such as Arden village and the Reston Association
have implemented Howard's plan to a remarkable degree.
Arden is an intentional community.
Howard's primary goal was the reform of economic arrangements
rather than mere architectural innovation.
The "Garden City" was to be a model for a large-scale reform of society.
His emphasis was on the city rather than the garden,
with a view towards decentralizing government.
Likewise, Heath and MacCallum had economy-wide reforms in mind,
with the proprietary community a building block
as well as prototype of institutional innovations.
Howard recognized two camps of reformers:
those who advocated increased production and greater efficiency,
and those who urged a more equitable distribution of wealth.
The "Garden City" approach merged both goals, in Howard's view.
The greater reform envisioned by Howard, Heath, and MacCallum would involve a decentralization of governance to the neighborhood level.
Private communities would then federate into local groups.
These would then federate into higher level associations, on up to the national level.
Early examples of developments with RCAs in the U.S.A. are Louisburg Square in Boston
and Gramercy Park in New York City, both established in the early 1800s.
Louisburg Square, established in 1828, was the first homeowners association in the U.S.,
made up of townhouses.
In St. Louis, neighborhoods with privately-owned streets were developed within the city.
By the end of the 1800s,
developers were incorporating RCAs into deeds
to support common areas and maintain architectural standards.
The first housing cooperative in the U.S. was established in New York City in 1918,
and the first condominium, The Greystoke,
was constructed in Salt Lake City in 1962.
Large-scale development began to replace lot-by-lot subdivisions during the 1960s.
Now there are over 200,000 civic associations in the US, and many abroad.
These contractual communities affect some 25-30 million persons.
Of these RCAs, 54% are organized as condominiums, 5% as housing cooperatives,
and 41% are under homeowner associations (HOAs), also called residential associations.
Over half of the RCAs are in townhouse and low-rise developments.
Over 40 million Americans live in them.
Half as condominiums. 5 percent cooperatives. Rest, homeowner associations.
Half of new homes in civic associations.
Get fewer government services than unaffiliated residents, but same tax rates.
Have streets, parks, parking, pools, landscaping, meeting room, utilities, security.
Community associations make up more than 50% of the market share of new home sales in the 50 largest metropolitan areas.
In California, nearly all new residential developments create RCAs.
RCAs may currently constitute the most significant privatization of public goods in terms of its substitution for government operations.
RCAs were once largely limited to retirement, luxury, and resort developments,
but are now available to all income levels.
The growth and success of community associations
also turns the market-failure argument for public goods on its head.
Members of RCAs are required to pay taxes for municipal services
whether or not they provide local private substitutes.
In addition, the amortization funds and the common property of RCAs
have been subject to property and income taxation.
RCA members pay local government property taxes for similar services received by other homeowners, but not by the community association residents.
Moreover, RCA owners pay a property tax on any higher land values that are due to their own services.
The use of RCAs enables developers to offer cost savings relative to autonomous housing.
By clustering and stacking units, developers reduce construction costs per unit and make more efficient use of land.
Clusters save costs in building streets and utilities, leave more open space, and facilitate the production of an environment and amenities beyond that which local government officials wish to provide and maintain.
Local governments benefit as well by receiving tax revenues
without having to supply and maintain the infrastructure.
Since the association assessments are not currently deductible from income taxes,
the federal government and some state governments also benefit from the substitution of privately provided services for those paid from tax-deductible sources.
Among the facilities operated by RCAs are swimming pools (69%), a community meeting place (46%), tennis courts (41%), playground (28%), park or nature area (20%), exercise facility (17%), lakes (16%), and golf courses (4%). Services offered include landscaping (94%), exterior building maintenance (82%), parking (79%), garbage removal (74%), water and sewerage (68%), private streets (62%), sidewalk maintenance (59%), exterior lighting (56%), passive security (39%), and active security and protection (33%).
All RCAs provide rules enforcement.
Many RCAs, especially the larger ones, hire a professional manager or management company.
Contrary to the practice of many sovereign governments,
which issue debt to finance capital goods and projects or even operating expenses,
it is typical for many RCAs to have a reserve fund for future repairs and other capital goods.
Since the capital stock is being consumed, i.e. depreciates,
it is economically appropriate for that consumption to be funded concurrently.
The annual placement of funds into a reserve account
is not an arbitrary savings account for funds left over after expenses
but a payment for an annual expense that accrues.
Associations are reported as paying 58% of what governments would spend for similar police services, and 70% of similar sovereign expenditures for street maintenance.
One factor accounting for the less efficient government service is
the independent civil service, which is less responsive to the residents.