The case for dumping city owned property

The city is by far the largest single holder of vacant and underutilized real estate in Trenton. This is a long standing situation and is not in the best interests of Trentonians.

It is inevitable to hear Trenton politicians and citizens alike exclaim that, while the city should sell its vacant holdings, “we shouldn’t give them away”.

Oh really? And just how have the fine folks at city hall, and many of our leading activists come to this conclusion?

While it seems counterintuitive, not only should we be selling city owned property for next to nothing, in some cases, we should be paying developers to take it.

One of my earliest and most illuminating lessons about revitalization was from an article and subsequent lecture by former Trenton Housing and Economic Director Alan Mallach. Since leaving his Trenton post many years ago, Mr. Mallach has become a national figure on revitalization and has remained involved in Trenton issues. He’s a thoughtful guy and I urge students of revitalization to pay attention to him.

Mr. Mallach explained the concept that land can have a negative value. The value is computed by subtracting the cost of a development from its eventual worth. Sometimes the answer is negative. This is often the case with brownfield sites and high crime areas.

Let’s take three examples to explain the point.

Auctions are good ways to discover real value.

When the city auctions a property, it is finding a buyer who has the highest and best use in mind. For example when a developer is willing to purchase a house for $20,000 the property has a positive value. This is because the developer has calculated that with some rehab, let’s say $100,000 worth, the house is worth at least $120,000. This is the easy example.

Some buildings bring down the value of land.

114 S. Warren was supposed to be sold to Roland Pott of $180,000. However, that was not the value of the property. Instead, the property was worth only $30,000. The developer was to receive a UEZ grant of $150,000 that would offset the inflated purchase price of $180,000. Many Trentonians mistakenly read this as the property being worth $180,000. Rather, Mr. Pott was simply a conduit for transferring $150,000 of state money to the city coffers. 114 S. Warren is a disaster of a building. In fact, it’s likely the building has negative value while the land underneath is more than $30,000.

Another example is 326 S. Broad (next door to me). The owner bought the building from a speculator for $90,000 then the city condemned it (mercifully). The new owner had to demolish it, let’s say for $30,000. Now he has a $120,000 piece of dirt that’s worth no more than $20,000. Ooops!

Bad neighborhoods create negative value.

The city has many dilapidated buildings in crime ridden neighborhoods. Over the years homeowners have moved out and the property maintenance has suffered further devaluing the area. For a vacant house in this neighborhood, it will take a developer $150,000 to make the property salable. However, maximum sales prices in the neighborhood are only $80,000. In this case, the property has a negative value of, -$70,000.

This is where the trouble begins. Trentonians falsely assume that all property has positive value, so when no developer bids on the house for a minimum amount, it goes unsold. We can’t afford to let this happen anymore.

Current state programs aren’t the answer

Sometimes, the city seeks to marry state money meant to revitalize Trenton with a buyer. The problem is that the state money is given only for subsidized affordable housing. The state has enabled the poor to buy homes they can’t afford and many times with balloon payments tied to the actual cost of the home, which neighborhood values will never warrant. This is a lose – lose situation. We continue to concentrate poverty in Trenton and the owner has a better than average chance of going in to foreclosure.

One of two things needs to happen to overcome negative value

1) Spend city or state funds to correct the underlying problems

  • Brownfield remediation and crime prevention are the obvious targets.
  • Given that Trenton has neither the capability or the will to address the crime issue, brown field remediation should remain our focus

2) Find city or state funds to subsidize unrestricted purchase of properties

  • Developing one house in a negative value neighborhood won’t work
  • Underlying issues will overwhelm the value in limited re-development.
  • However, subsidizing a concentrated group of properties is feasible
  • The re-development effort creates a critical mass that creates a virtuous circle

Giving away vacant property is a good investment

A vacant city owned property earns no property tax. Assume the city sits on a property for five years (many Trenton buildings have had painted cats in their windows for much longer than that). If that property could have been renovated to be worth $150,000 it would now be paying $5000 / year in property tax at the 3.3% effective tax rate. Let’s say that after waiting 5 years, we finally find a buyer willing to pay $20,000. We will now have to wait another five years (for the abatement to expire) to start collecting taxes. If we had sold the property for nothing at the outset, we’d be $5000 ahead and would have realized the added value to the neighborhood of an improved property.

Furthermore, it doesn’t matter whether the city spent money to acquire vacant properties. Those are sunk costs. What matters is the value going forward and whether or not the property drags down its neighbors or we start collecting property taxes.

Let’s be even more aggressive about giving away our holdings.

Trenton can offer prospective homeowners and investors the option of taking either a purchase grant or the 5 year tax abatement. Given the time value of money, 5 years of $5000 in taxes on that $150,000 house has a present value of about $20,000. In effect, the city could pay home renovator $20,000 to take the property if they don’t take the abatement. The $20,000 grant is a recognition that the property has negative value (for that matter, so is the abatement).

The renovator will prefer to take the $20,000 because it can be used as part of the financing package for the project, whereas the abatement can’t. Additionally, most home buyers will illogically discount the value of the abatement because it’s not as tangible as $20,000 in upfront cash.

We need to develop a spine when dealing with investors

Any sale of city property must be accompanied with aggressive terms that insure speedy development and penalize the buyer if they are not met. Every Trentonian should complain vehemently about the city’s role deals like the one that allowed Paul Shore to buy the big houses on Greenwood Ave. and avoid putting them into use for the last10 years. In this regard the city was complicit in creating a speculator.

We can revitalize neighborhoods if we

  • Don’t assume all property has positive value
  • Give away property to hasten its redevelopment and speed up tax collection
  • Invest in brown field remediation and crime prevention with an eye towards return on investment
  • Develop property transfer programs that replace tax abatements with outright grants
  • Target transfer program at clusters that will create development critical mass
  • Put teeth into penalties for developers that don’t meet their obligations
  • Listen to Mr. Mallach more often

Link to Alan Mallach at the National Housing Institute

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6 Responses to “The case for dumping city owned property”

  • While I don’t oppose moving forward to reduce the number of properties currently owned by the City of Trenton, I do oppose giving them away or paying other to take them.

    I fully support publicly advertized auctions and negotiating with developers (developers who agree to return said property should it fail to be developed along an agreed upon timeline).

    Trenton is obviously worth something. There are enough landlords and speculators holding properties idly waiting for something to happen.

    Screw them. If you’re a businessman/woman and you are about your business, you will do everything you can to make a profit in Trenton. And I am not referring to squeezing a few hundred dollars a month out of drug dealers and undocumented immigrants. I am talking about business people who make investments with the intent of realizing profits from a better product than when they started. Thereby allowing them their reward for their money, time, energy, and risk taken AND for their making a contribution to the community. Trentonians win when real business men and women are involved.

    Let’s work with serious business men and women only! Serious doesn’t have to mean experienced. Serious means you have a plan and you implement that plan immediately after taking possession of the property. Serious also means you are willing to disclose information pertaining to your progress, e.g. status of financing, construction timeline, status of leasing property or marketing efforts.

    Since I haven’t spent any time listening to Mr. Mallach, I’ll be sure to catch myself up. For the moment, I can’t support giving anything away. I don’t think we’re that badly off. I believe that a change in the administration, alone, may elicit some much needed action in the realm of economic development.

    Regardless of my feelings, thanks for another great post.

    By the way, since you’re a rising star at TrentonSpace, maybe you’re reputation will enable you to gain access to our ‘new’ Acting Director of Housing and Economic Development. The two of you can put your heads together and see what the difference is. Does Mr. Jerome Harris currently write a powerful blog regarding Trenton’s strengths and weaknesses addressing how to turn Trenton’s weakness into strengths? It sure would be great if he did, we might then gain some insight into what his table of priorities will be. Next time, maybe.

  • Nick,

    Please do read Mr. Mallach. I obviously didn’t do a good enough job explaining why some properties have negative and zero value.

    Try this: you own a house. Then the state builds a super-highway on one side of you, a trash dump on the other and an open air drug market operates on another. Might it be possible that your property has negative value?

    This extreme case makes the point that negative valuations do happen. Brown fields are an obvious example. Trenton has a lot of Brown field sites.


  • patriciastewart:

    Dan: I agree with you. There was a similar problem with the Roebling Mansion on West State Street; the city kept looking for, I believe, $100,000. The best offer was $80,000. It took public pressure to complete that sale. But, yes, there are properties that probably could not be given away because of negative value. PatStewart

  • I’m listening and hearing. I rushed to voice my opposition. I admit there exist conditions where a negative property value may be applicable. And, agree that those conditions are rather common in Trenton. While I continue to oppose “sweetheart” deals, I am willing to accept exchanging property to developers who are committed to bettering Trenton while pursuing their business interests. Regardless, all I want, as does anyone who loves Trenton, is for Trenton to move forward.
    Again, thank you for your post(s).

  • Jonathan Rubin:

    As a developer in Trenton, who has never taken a dime from the city or state, I would have to agree with the sentiments expressed in this post. I have a lien on a valuable property which has environmental issues. The city is owed $175,000 in property taxes after my tax lien. City won’t foreclose on property due to environmental issues. City will not accept $50,000 from me for their tax lien. Owner owes the city $175,000 and me $200,000, so he has negative equity and will not sink more money in to clean up environmental issues. He therefore has not paid and will not pay property taxes. Try explaining to the idiot who run Trenton that $50,000 and steady property tax payments are better than nothing!! No body home. Primary reason is a tremendous fear/hate/resentment to any developer. Attitude is ‘if he will be making money we don’t want to let the deal happen’!!

  • [...] More on how land has negative value in the following: The case for dumping city-owned property [...]

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