The presence of a large number of potential suppliers of housing services helps to ensure that no single landlord will be able to set rents arbitrarily. This factor is reinforced in blighted areas by the large number of vacancies and the premium that landlords place on maintaining a full building. If one building is vacant, there is the strong temptation for the owner to cut rents somewhat in order to attract new tenants. Several landlords interviewed announced that they were forced to cut rents during a period of slack demand. Others observed that rather than cut rents they offered extra services such as free paint. the first month's rent free, or some other method of passing on effective rent reductions to new tenants without being forced to lower rents for existing tenants. In addition, several landlords noted that once they had found a good tenant, they were reluctant to drive the tenant away with higher rents. This activity on the part of the landlords indicates that the suppliers of low income housing compete among themselves for tenants and for tenants' good will. While this view does not deny the existence of many large owners oblivious to tenant demands, it does present the possibility that enough competitiveness occurs to guarantee that tenants would benefit from property tax reductions. Abandonment In the final stages of blight residential properties are abandoned by their owners. The mere fact of abandonment does not signify that public policy has failed. Durable goods of all types must be replaced at the end of their useful life. If old houses of bad quality were abandoned for the same reasons as old cars or old washing machines, the proper policy response would be simply to expedite removal or replacement of the old stock. It is the premature abandonment of still useful housing which represents wastage of valuable social capital. While the main focus of this study was not abandonment, in blighted neighborhoods investors were questioned about the process that produced abandonment. Many of these investors had abandoned residential properties or foresaw likelihood that they would be obliged to abandon properties in the near future. Respondents emphasized that abandonment is a neighborhood phenomenon. Once a neighborhood has deteriorated seriously, there is an effective ceiling to the rents that can be charged there, regardless of an individual building's quality. In the blighted neighborhood in Philadelphia this ceiling was $50 per month; in Baltimore, about $55. Once blight has progressed to the stage of abandonment, costs, too, become a function of neighborhood conditions, for vandalism and theft account for a greater and greater proportion of operating expenses. For the eleven buildings in the sample which investors reported to be in imminent danger of being abandoned, annual losses due to vandalism and theft averaged more than 35% of annual gross rents. In two cases, loss due to vandalism exceeded the building's entire rent roll. The category "vandalism and theft" also represents the most rapidly accelerating cost item, a fact which leads investors to identify it as the primary cause of abandonment. Because the cost squeeze leading to abandonment is so determined by neighborhood conditions, sound buildings and dilapidated ones alike are likely to become unprofitable to operate. The tragedy of abandonment is that structrally sound buildings have to be written off because they happen to be located in what have become socially undesirable neighborhoods. Public policy in some instances has contributed to the premature abandonment of sound housing. Unrealistically stringent housing codes were frequently listed by investors as precipitating abandonment. Indeed of the 11 properties in our sample about to be abandoned, all of the owners cited housing codes as one of their main problems. Given the effective rent ceiling that exists in blighted neighborhoods, if costs of operation are increased greatly because of the maintenance necessary to keep a property at code standard, the building may cease to produce a positive cash flow. In several cities, laws now permit tenants to pay their rents into escrow accounts as long as code violations persist. Faced with the impossibility of generating a positive cash flow if he maintains the building at code standards, and the impossibility of collecting rents if he maintains the building below code standards; the investor inevitably turns to abandonment as the only way out of his cash drain. In principle, property taxes also could serve as a precipitating cause of abandonment. This chapter has shown that in several blighted neighborhoods property tax payments approach 20% of gross rents. If the city enforced payment of this tax as long as a property remained in operation, the profitable life of a structure, to the owner, might fall far short of its economically useful life. At a given level of maintenance costs, the building might produce a 15% return on gross rents and still be profitable to operate, before property taxes, but produce a 5% cash loss after property tax payments. If the owner could avoid the tax by abandoning the building, it would be rational for him to do so. Alternatively, the city might reduce assessments to reflect the very limited asset value of the property. The investor then could continue to operate his property for some years more. In practice, the property tax has not greatly encouraged abandonment, because few cities enforce payment of the tax in badly decayed neighborhoods. None of the 11 properties in our sample classified as in imminent danger of abandonment was paying full property tax. Several were paying no tax at all. Three others were three years in arrears, the maximum period the city permitted before seizing the property for tax sale. At the margin, the property tax typically does not figure prominently in the abandonment decision because, long ago, the investor stopped paying this tax. If the property tax has played a subsidiary role in producing abandonment, it may play a central role in frustrating the recuperation of badly blighted neighborhoods. Even the worst neighborhoods may revive with changing economic circumstance. Changing employment patterns, rediscovery of a neighborhood's historical or architectual appeal, urban renewal, some success in limiting vandalism and crime - any of a series of possible events can rescue a neighborhood from the edge of decay. Lincoln Park in Chicago and Fox Point, Providence are now sharply upward transitional neighborhoods, but 20 years ago they were severely blighted. In other upward transitional neighborhoods, boarded up buildings shared the same block with major rehabilitation projects. Properties which at one time seemed headed for abandonment became profitable to operate and upgrade. However, if properties like these carry with them large accumulation of unpaid back taxes, investors will be extremely reluctant to acquire them, even if present prospects are more hopeful. The necessity of acquiring not just title to a property, but responsibility for its back debts to the city, increases significantly the level of profit an investor must expect to earn before he will operate a property. If a neighborhood as a whole is saddled with such debts, investors are unlikely to risk revitalizing it. The burden of unpaid back taxes hinders the market in real estate just as high rates of present taxation do. Both serve to discourage potential investors from acquiring properties and operating them at their optimal quality level. Several investors and assessors suggested that the city ought to restore the market in these neighborhoods by forgiving back taxes upon transfer of title to new investors. Before receiving this credit, the new investor would have to present evidence that he had returned the building to a high level of occupancy either through selective rehabilitation or changes in management style. This would encourage transfer of stock in blighted neighborhoods to those who propose to use it productively. CHAPTER V DOWNWARD TRANSITIONAL NEIGHBORHOODS The problems of the downward transitional neighborhoods are in many ways representative of the overall problems confronting the center city. The facts of an aging housing stock, the growing exodus of white middle class population and the increased concentration of the old, the poor, and the disadvantaged in the central city neighborhoods are all too common. The role that property taxation can play in the dynamics of downward transition will be investigated in this chapter. The discussion will first present a brief outline of several of the neighborhoods included in our survey. It will then proceed to outline the major issues delineated by investors in response to our questions regarding the role that property tax plays in the declining neighborhood. Finally, the discussion turns to an analysis of neighborhood efforts to arrest the downward spiral, and to the role that local and Federal officials can play in assisting these efforts. THE NEIGHBORHOOD Several downward transitional neighborhoods in our sample were in the process of racial succession. Some respondents felt that the downward transition was caused by the influx of blacks or other minorities into an area. Others pointed to the fact that the decline in the quality of housing in the neighborhood was well-advanced prior to the in-movement of minorities. Both explanations do injustice to the dynamics of downward transition, as the example of the Logan Square area of Chicago will demonstrate. Located in the Near North West side of Chicago, the Logan Square 109 |