Stuyvesant Town and Peter Cooper Village; rent control for upscale apartments; Fannie Mae and Freddie Mac bailout.

In October, I wrote about Stuyvesant Town and Peter Cooper Village in New York, a multi-billion dollar apartment community boondoggle for which some state employee retirement systems are on the hook as lenders.

Politicians in New York are now putting pressure on Fannie Mae and Freddie Mac to guarantee the loan payments.

The main reason that the loan payments are in default and in need of a bailout is that the landlord lost a court battle (in 2009) to "decontrol" the tenants' rents. Middle (and higher) class tenants are living in upscale apartments at rents that are far below the market rate. Those below-market rents are now being subsidized by various teachers' retirement plans from across the country, Fannie Mae and Freddie Mac and, ultimately, the taxpayers.

The American Spectator article linked above is significant not only for its description of the consequences of the government bailout, but for its depiction of life under rent control in New York. As municipalities become more oppressive in their regulation of rental properties, our own reality will get closer to the world that the Spectator describes.

Check back here later for more updates on rent control and the consequences for investors and tenants.

Tax sales and title defects in Harrisburg, PA

I wrote earlier about tax sales, and the likelihood that an increase in property taxes and related expenses would lead to more properties being exposed to tax sales, as owners abandoned their already marginal properties in the face of these new and higher expenses.

Once a property has been sold at a tax sale, that property suffers from a title defect. The former owner can file suit to recover his old property at any time, claiming that he did not receive proper service of process of the then pending tax sale. Service of process is a constitutional issue that can not be eliminated by city ordinance or other local measure.

Once a tax sale takes place, the only way to eliminate with certainty the resulting title defect is to file a quiet title action against the former owner (or have the former owner sign a deed in favor of the buyer). These curative actions are expensive and uncertain. It is impossible to determine how much such an action will cost because it is unknown whether the former owner will fight or whether the buyer can even find the former owner.

For this reason many former tax sale properties sit with title defects unresolved. With unresolved title defects, such a property usually can not be sold or financed. Without financing, the property cannot be fixed or renovated. The properties continue to deteriorate, contributing to blight within the city.

Every year a few investors take the necessary steps and spend the money required to clear their tax sale properties of title defects. They clear these properties one lawsuit (or one quitclaim deed) at a time. Meanwhile, hundreds more properties are exposed to new tax sales (and new title defects) every year. Every year the city gets deeper in the title defect hole, as more tax sale defects are created than are resolved.

The City of Harrisburg owns hundreds of properties that were unsold at prior tax sales. Countless more have been purchased at tax sale and remain burdened with the same title defect(s). Increasing the tax rates will only compound the problems. Fewer investors will attempt to purchase these properties and undertake the expense involved in clearing the title after the cost of such ownership has been drastically increased, as the City's consultant now proposes.

Tax sale title defects will now be made more burdensome, and will contribute more to the downward spiral in the real estate market.

Harrisburg tax increases, tax sales, title defects

I wrote last week of a recommendation by consultants hired by Harrisburg to double the property tax for city properties (plus large increases for trash, sewer and water). I have written of potential consequences from these increases, including increased litigation over property assessment, downward pressure upon prices and values and financial distress for owners.

Another consequence of the proposal would involve local taxes. Investors whose cash flow does not cover a property's expenses will often simply allow the property to be auctioned at tax sale. This is particularly true where the investor cannot sell the property because the property value has declined below the balance on the investor's loan(s). Doubling the property tax will increase the likelihood of properties being sold at tax sale, as more properties will suffer from negative cash flow as a result of the newly imposed tax costs (and related municipal charges).

Contrary to popular belief, an increase in properties being sold for unpaid taxes does not mean that more properties will be available for investors to purchase. It means, instead, that more properties will suffer from title defects. These title defects inhibit sales, financing and repairs, thus contributing to the general decline in the real estate market.

Check this post for future updates on the consequences of tax sales and resulting title defects.
------------------
Update - click here for more detail on title defects resulting from tax sales.

Harrisburg property tax increase; declining values and increasing costs

I wrote earlier this week about recommendations from consultants to the City of Harrisburg that the city raise property taxes by 117%. These recommendations also included large increases in water, sewer and trash fees. I wrote yesterday about the negative effect of these increases on the bottom line for investment properties within the city and, ultimately, on the assessed values of such properties.

This proposal (or anything remotely similar) would have far reaching consequences beyond the assessments and the tax revenues generated therefrom. Major property tax increases depress real estate prices. A sudden decrease in values resulting from a tax increase would trap owners in their properties. Properties with cash flow insufficient to support the new taxes (as well as the prior expenses and the mortgages) will be harder to sell for an amount sufficient to payoff the mortgages. This will be especially true if some city investors manage to sell their properties in order to avoid the new expenses, thus driving down prices in general.

Owners of investment properties might actually be trapped in their city properties. Situations like this often end up being resolved through foreclosure and/or bankruptcy. We could very well be entering a period of general decline in the city, characterized by falling values, higher taxes, abandoned and foreclosed properties, and deferred maintenance.

Harrisburg; Real estate taxes; Municipal charges; market valuation; assessment appeals

Two days ago, I linked to a story about the possibility that Pennsylvania's capital city would more than double property taxes, while raising fees for municipal services like trash, sewer and water. I speculated on the effect such increases would have on real estate values and prices.

Harrisburg quadrupled the trash rates only two years ago. Doubling those rates now (as the current recommendations suggest) would amount to an eight fold increase since the end of 2007. Raising property taxes by 117% on top of the trash increase (together with 20% increases in the already-high sewer and water rates) would seriously affect the bottom line of investment properties within the city. An adverse affect on the profitability of investment properties is more than a mere academic or political matter. Operating revenue is a major component in valuation of investment properties. When net revenue declines, market value declines also.

Harrisburg skyline (city-data.com) - the battleground for upcoming assessment wars




A reduction in the market value of investment properties will result in applications by owners for a corresponding reduction in the assessed value of those properties. While local tax authorities will be reluctant to approve such reductions, the courts are the final arbiters of such matters. Declining real estate values (with the resulting loss of tax revenue) will offset many of the gains the city hopes to realize by raising taxes.

Assessment litigation, already common in Harrisburg and Dauphin County, PA, will become even more common for many years to come if the latest tax recommendations are enacted.

Real estate prices, gasoline prices and economic forecasting.

Clients and friends often ask me to speculate as to when real estate prices will once again resume their previously inevitable and endless increase. After I finish laughing, I tell them I do not like to speculate on the future direction of real estate prices, especially when government programs and/or increased taxes and municipal charges can distort prices and delay a market recovery.

Rather than try to interpret events or statements coming out of Washington, you should look to the best indicator of future trends in prices and the economy as a whole. This indicator is as close as the gasoline pump that you pass on the road every day.

Pick one gasoline station (because they all vary slightly) and make a mental note of the price each time you drive past it. Changes in the price (even slight changes) tell a story. When the price begins to tick upwards, it might mean that the 2009 stimulus package is finally creating the hyperinflation so many of us expect. When the price moves downward, such a move might reflect continued weakness in the economy. A move in either direction might reflect production changes by OPEC or changes in demand in foreign countries, as foreign economies react to the worldwide credit collapse of the past 3 + years.

Gasoline prices tend to move in the same direction as commodities in general, such as metals or farm products. The skyrocketing gasoline prices of 2008 coincided with large spikes in the prices of other commodities, especially metals.

While changing prices on your local sign won't tell you exactly which scenario(s) is playing out, these movements will give you a starting point if you know what to look for. More importantly, they will tell you what is about to happen with the economy. A major spike in gas prices could signal the beginning of an inflationary cycle that could drag real estate prices with it. At the same time, such a spike could signal the death knell to any recovery from the recession, as gas prices directly impact transportation costs as well as manufacturing activity.

When you look at your local gas price sign, you might really be looking at the proverbial canary in a coal mine. Even if you don't know how to interpret small price changes, you still are getting better information than the analysis that comes out of your television on a daily basis. The information exists. You need only remember it from day-to-day and week-to-week.

Harrisburg City; Increased property taxes, sewer, water and trash

The City of Harrisburg is considering multiple tax increases in order to avoid bankruptcy, according to the Patriot-News today:

Buried in the 25-page report is a list of "potential deficit reduction actions" the city could take. They were not mentioned in the news conference nor fully explained in the report.

Those potential actions include doubling the parking tax, increasing water rates by 20 percent, increasing sewer rates by 20 percent, doubling sanitation fees, doubling parking violation fines, instituting five furlough days a year for employees, increasing property taxes by 117 percent in 2011, and selling the city’s parking garages.

All of these items are considered high already by local residents and investors. Increasing these items would create an negative impact on property values, especially for investment properties. All of these items would reduce NOI (net operating income), which is a major component of valuation.

As a silver lining, once the new taxes take effect, property owners could apply for a reduction in their assessment. Assessment reduction is a difficult process and involves many variables. These new taxes are only recommendations at this point, so it is impossible at this point to know exactly what will take place or how much it will affect real estate values.
-----------------------------
Update - click here for more discussion of how this proposal would affect assessments.
---------
Update - click here for a discussion of the effects on valuation and sales.
-------------
Update - click here for a discussion of the potential for increased tax sales and related problems.