Penbrook Borough litigation against investors; tax returns; municipal charges and fines.

In recent months, Penbrook Borough (Dauphin County) has demanded that real estate investors submit copies of their federal tax returns to the Borough. Those that have refused to comply have been charged criminally with filing false tax returns - even those who have failed to file any returns at all.

This summer, the Borough dropped charges against one investor that has been so charged (for fear of a civil rights lawsuit).

Penbrook has also charged investors as individuals (related to registration requirements) even though they own real estate in the name of an LLC, thus disregarding the corporate entity.

Additional lawsuits and enforcement actions remain pending against other investors (and homeowners) over minor matters.

Penbrook's employees have begun to embroil the Borough in an ever widening controversy, the outcome of which depends only on the willingness of investors and residents to appeal to the Court of Common Pleas or otherwise challenge the Borough in Court.

Highspire enacts rental inspection ordinance;

Last week, on August 17th, Highspire Borough enacted its rental inspection ordinance, requiring investors to pay for inspections of their properties once every three years and pay $75.00 per inspection per unit.

I and a representative of GHAR attended the meeting and raised many of the concerns that I have featured on this blog.

In particular, I pointed out that section 1 of the ordinance contained factual findings regarding the condition of rental properties in the Borough. I asked that the public be told the factual basis for these findings prior to any vote. I argued that the basis for any factual finding should be provided to Council before the Council actually votes. There was no answer to this inquiry.

I pointed out also the potential for reducing real estate values as a result of increased costs imposed by this ordinance.

I reminded the Council of the failure of Harrisburg's inspection ordinance over the past 15 years. In the only response of the evening (aside from the unanimous vote in favor of the ordinance), councilwoman Dorothy Matesevac stated that Highspire was not Harrisburg. As John Wayne pointed out in Rio Bravo, "I'm gonna remember you said that."

The very differences between urban and suburban areas are what require municipalities to document any factual findings regarding the condition of rental properties before adopting an ordinance of this sort. Stay tuned for further developments.

Harrisburg rental property inspection program; Harrisburg Bill # 13 of 2010

In the mid-1990's, Harrisburg City adopted its first rental inspection ordinance. The ordinance required owners of rental units to have those units inspected every three years and to pay a regular inspection fee. In the 15 years since that ordinance was adopted, the overall condition of rental properties in Harrisburg has not improved.

Early in 2010, Bill # 13 was introduced in City Council, which bill would create permits for rental owners and establish a residency requirement. (The Bill has not yet passed.) While I will explore this Bill in more detail in the future, the following language from the 2010 Bill is significant:

A growing concern exists in the City regarding the general lack of maintenance, upkeep and resultant decline in the physical condition of residential rental units. The City has experienced a greater incidence and severity of violations of City Codes at residential rental properties, as compared to owner-occupied properties. . . .

Section 8-511.2(a)

If the language of the new proposed Ordinance is to be believed, the original ordinance has not worked. Despite 15 years of inspections, the City considers the stock of rental properties in Harrisburg to be of declining quality.
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previous - Reading's failed inspection ordinance.

Highspire Borough rental inspection ordinance 582; Real estate values threatened.

As I wrote earlier, Highspire Borough has scheduled a vote on a rental inspection ordinance that will require the payment of annual fees to the Borough and the inspection of each rental unit every three years.

As of 2000, roughly 44% of the properties in Highspire were rental units. If the Borough enacts this ordinance, they will decrease the value of 44% of the real estate in the Borough. Real estate, especially investment real estate, derives its value from the net income it produces. As costs increase, value decreases. It is fair to say that if those 44% of properties targetted by the ordinance decrease in value, the other 56% will not exactly increase.

Ordinances such as Highspire's became widespread across Pennsylvania during the past decade and a half because municipal officials bought into the myth that real estate values "always go up" no matter how much that real estate is hampered by municipal interference and regulations. We are slowly finding out how much of a mistake those officials have made as real estate values stagnate while inspection ordinances fail to achieve their stated purpose.

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previous - The failure of Reading's inspection ordinance.
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update - Harrisburg's failed inspection program.

Reading Pa "Wall of Shame"; Mayor McMahon; an ineffective solution to the problem of "blight."

The City of Reading has announced a new program to fight "blight" and force property owners to clean up their properties:

Reading (RED-ing') Mayor Tom McMahon on Monday [August 2] announced a new online "Wall of Shame" featuring blighted properties.

McMahon says the property owners' names will be posted along with pictures and addresses. He says he's serving notice to property owners who fail to take action on eyesore properties.

H/T AP

The Wall of Shame is featured here - (otherwise known as "Mayor McMahon's Wall of Shame.")

This "Wall" brings to mind several points.

• Reading enacted its own rental inspection ordinance a number of years ago. Obviously, the ordinance has not rid the city of "blight."
• Many of the properties pictured on the website probably have a tax sale or two in their title history, thus making it impossible for the owner to undertake expensive repairs without first obtaining clear title through litigation.
• The local PROA chapter has identified many "blighted" properties as being owned by the City itself (much like Harrisburg). It will be interesting to see if the "Wall" ever pictures any of those properties.

The second item on the above list helps to explain the first and third items. No matter how many ordinances the City enacts or how many fees the City imposes, the City cannot legislate "blight" out of existence. Once a property has been sold at a tax sale, it becomes nearly impossible to obtain financing without litigation or a payoff to the prior owner. These properties often end up being owned by the City when no buyers can be found at subsequent tax sales.

Highspire Borough proposes rental inspection ordinance; Ordinance 582

The Borough of Highspire in Dauphin County is poised to enact a rental inspection ordinance (Ordinance 582 of 2010).

It appears that under the ordinance investors would be billed "Tri-annually" for "the total program costs." (Section 9. A.).

Owners could hire their own inspectors from a list of qualified inspectors maintained by the Borough. The cost of these inspectors would be in addition to the amounts billed by the Borough. Otherwise, the investors would have to use Borough inspectors.

This Ordinance is set for a vote on August 17, 2010.

update - Ordinance 582 and real estate values.

Food prices and farm prices to be aggravated by Russian wheat embargo

I wrote yesterday about the Russian drought and its effect not only on wheat prices worldwide, but on real estate prices and farming activity in the United States. Decreased wheat production anywhere in the world (especially in Russia) will result in higher wheat prices and will tend to increase the value of farmland.

Today, the Russian government banned the export of wheat through the end of the year. This ban will affect global wheat prices, with the resulting ripple effect on food prices and farm prices in the United States (and elsewhere):

In Chicago, September wheat shot up to 7.83 dollars a bushel from 7.26 dollars while the December contract jumped to 8.09 dollars from 7.55 dollars.

Dmitry Rylko, director of the Institute for Agricultural Market Studies, described Putin's decision as one that would be "extraordinarily painful for market participants," Interfax reported.

H/T AFP

Real estate investors have not typically been concerned with wheat prices. For those who are interested in an old fictional dramatization of wheat price speculation and the impact of global events on the individual speculators and our own economy, check out Satan's Bushel from the 1920's.



Except for the information technology, the commodity markets work the same way today as they did when the book was written.

Wheat prices and agricultural land prices

The July rise in wheat prices was the fastest in 51 years, raising fears of surging food prices and rising prices for farmland, according to an item at CNBC.com. The surge resulted partially from drought in Russia but has and will be worsened by government spending, according to hedge fund manager Jim Rogers:

Shortages in agriculture are likely to add to problems created by governments who printed money to spend their way out of the financial crisis, according to Rogers.

"It's all happening at a time when governments are printing more money… it's a very dangerous situation," he said.

"When you print money, it's got to go in a place where it can protect itself, and that's real assets," he added.

Among other consequences, the rise in wheat prices should place a premium on farmland:

"Anybody who's got potentially good agriculture land and good weather" is likely to emerge a winner out of this situation because prices of nearly all agricultural commodities are set for steep rises, Rogers said.

This news is consistent with reports of increased farming activity in places like Massachusetts and the growing trend toward urban farming across the country.

Rising commodity prices shall constitute only one factor affecting the price of real estate.
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Update here.