Monday, March 21, 2005

The short version of why landmarking is not good for West Town.

This is the "short" version of a longer post from Saturday (see below for details).

In essence, landmarking will not be a good thing for West Town on a district-wide basis because:

1) The bureaucrats inevitably lead to additional delay, hassle, and expense, driving the good developers elsewhere, and screwing over the Average Joe who is not politically connected;

2) Landmarking will slow, if not stop, any naturally occurring gentrification and growth in an area. This disincentivizes businesses from moving into the area; developers from getting rid of the housing stock that should be gotten rid of; and encourages cheap rentals/abandonment of homes, leading to added blight in the neighborhood. If a rising tide lifts all boats, landmarking suppresses the tide from ever coming in.

3) Landmarking fixes the property tax base at an artificially low level. At the same time, the people who are hardest hit by this -- and who will bear their disproportionate share of property tax burdens -- are those who own new construction. (Math is done exemplifying this in the Saturday post below).

4) City of Chicago district-based landmarking takes away one of the major economic incentives for preserving an older home at the federal level (charitable donation of a facade). (See archived posts on this blog for details), and is not required for you to participate in the one state program available to homeowners for historic preservation of their homes.

5) Homeowners insurance. Good luck getting the lowest rates on homeowners insurance if you are in a landmarked district. We've talked to insurance brokers. It won't happen. (Again, see archived post on this blog for details as to why).

Again, let me reiterate: there is NOTHING that prevents someone who is the owner of a vintage home from putting a deed restriction on the title to their property requiring the building to be preserved, or independently pursuing landmarking of their own home. In fact, you could even offer to buy an easement to someone's home restricting teardowns, or some such.

But for those who walk around West Town, keep in mind that the ostensible goal of landmarking is to freeze the facades as-is. Ask yourself -- is this the best we can do???

Saturday, March 19, 2005

West Town meeting

There will be an open meeting for those interested in learning about the effect of landmarking sponsored by West Town homeowners.

Meeting location: Leona's, at Agusta and Damen.

Time: March 24, 2005, 7pm.

I have been asked to speak. Alert your neighbors!

Other posts to check out...

Sample letter written to Alderman Daley opposing landmarking -- see October 29, 2004 post.

The myth of the one day permit turnaround. See October 21, 2004 post.

Another Myth Debunked - Property Values Will Not Decrease After Landmarking? Also posted October 21, 2004.

Homeowner's insurance issues - reposts

From October 2004:

One gentleman that I spoke with last night told me that long ago, he had the opportunity to landmark his row home on Lincoln. Was he glad he did not! As it turned out, a neighbor wound up doing renovations to the row house next door. Could not get any indemnifications for construction-related damages. The neighbor wound up cracking his stone foundation. What was homeowner's insurance willing to pay for? Someone to caulk the crack, a minor repair. What would he have had to do if his home was landmarked? Aside from the permitting process, he couldn't have used caulk; epoxy is not considered to be historical building materials. He would have had to replace a nearly 8 foot wide stretch of stone. None of it covered by insurance Do that out-of-pocket-expense math...

And another from October 2004:

One issue that has not been given much attention is homeowner's insurance. We've done some initial checking, and it looks like if you are in a landmark district, it is extremely expensive to insure your home for replication purposes. Normally, if the roof falls in, or you have a kitchen fire and need to re-build, the insurance company assesses what it would cost to repair with modern-day materials, and that is the sum of your reimbursement. But, if you are landmarked, that won't be good enough; you are not allowed to rebuild with modern-day materials; you have to essentially replicate what was previously there, with historical materials, to historical standards, etc. Since the replication costs are outside normal insurance costs, what you have to do is massively over-insure your house to hope that the $$$ will be there. Neither Allstate nor State Farm offer policies for replication costs. [Update: we've learned that if you can get homeowner's insurance through the standard companies, it is not through their normal process; you have to go to their "high risk" program, which is completely separate from their usual homeowner's insurance underwriting process, and costs much more.] No matter what, you are looking at a jump in premiums. Yet another hidden cost of landmarking that no-one wants to talk about.

The facade donation charitable deduction - repost of information from December 7, 2004

Explanation of why I think that City-based district landmarking destroys the one federal incentive offered to homeowners to engage in historic preservation. I give you the background, bit to get straight to the point, look at the text below I've highlighted in bold purple:

An IRS publication from June 30, 2004, dealt with agency interpretations of charitable deductions for real property, whch covers facade donations. A link is provided below. Also provided below are statements by IRS officials regarding the June 30, 2004 publication and charitable contributions for facade donations.

http://www.irs.gov/pub/irs-drop/n-04-41.pdf

Note that the above IRS publication expressly states that:"If the donor (or a related person) reasonably can expect to receive financial or economic benefits greater than those that will inure to the general public as a result of the donation of a conservation easement, no deduction is allowable. Section 1.170A-14(h)(3)(i). If the donation of a conservation easement has no material effect on the value of real property, or enhances rather than reduces the value of real property, no deduction is allowable. Section 1.170A-14(h)(3)(ii)."
===
My take on the above is that if a facade donation does not reduce the value of your property, then you get NO charitable deduction. You only get a charitable deduction for preserving your facade if it lowers your property value.

Here also are statements from the IRS regarding the above publication as published in the IRS News on July 28, 2004 (sorry, I don't have a direct link available, but I can fax or email you copies if you email me at vocalneighbors@hotmail.com):
===
"IRS officials have responded to questions raised by Historic Rehabilitation Advisor, which sought clarification on several issues related to the recent publication of Notice 2004-41 on conservation easement deductions. The IRS issued Notice 2004-41 on June 30 [2004] advising taxpayers of its intention to disallow certain improper conservation easement deductions and levy penalties and excise taxes on rule breakers.

"IRS: The Notice states that the IRS is aware that some taxpayers may be claiming inappropriate deductions under Section 170 for conservation easements, and that deductions under Section 170 for conservation easements will only be allowed when all the requirements are met. The Notice applies equally to all types of conservation easements."

IRS Commissioner Mark W. Everson stated in a press release announcing the publication of Notice 2004-41 that the IRS "uncovered numerous instances where the tax benefits of preserving open spaces and historic buildings have been twisted for inappropriate individual benefit." [He continued:] “Taxpayers who want to game the system and the charities that assist them will be called to account.”

"IRS: As Notice 2004-41 points out, overvaluation of conservation easements is a major concern. However, it is not the only concern. Notice 2004-41 highlights several rules and requirements for the allowance of a deduction for a contribution of a conservation easement, and explicitly states that the rules discussed are just a few of the many requirements that must be met for a deduction to be allowed. All types of conservation easement deductions will be subject to scrutiny.

HRA posed the following question: "At the National Trust for Historic Preservation's 2002 Annual Meeting in Cleveland, OH, there was a session on conservation easements. One of the speakers said easements are typically appraised at 5-15 percent of the fair market value of the property - even higher in some cases. What's your [IRS's] reaction to that statement? Is that a fair "safe harbor?"

"IRS: There is no IRS safe harbor or any other IRS rule that provides that conservation easements are valued at 5-15% of a property's fair market value, or at any set percentage of a property's FIVE. When valuing a conservation easement, the rules of Sections 1.170A-1(c) and 1.170A-14(h) of the Income Tax Regulations must be applied on a case-by-case basis. The result may be higher or lower than the 5-15%, depending on the facts of the individual case.

"HRA: How does IRS determine whether a conservation easement dedication may be overvalued?

"IRS: The valuation of an easement must take into account several factors, such as: the current use of the property; an objective assessment of how immediate or remote the likelihood is that the property, absent the restriction, would in fact be developed; zoning, historic preservation, and other conservation laws in place that already restrict the property's potential highest and best use; whether the grant of the restriction either has no material effect on the value of the property or in fact serves to enhance, rather than reduce the property's value; whether the restriction allows for any development on the property, and the effect of the development; the access permitted by the restriction (in the case of an historic structure); whether the restriction has the effect of increasing any other property owned by the donor or a related person; and other factors (this list is not exclusive). The IRS applies these and other relevant factors to determine whether the taxpayer's valuation of the conservation easement is correct. For more information, see Sections 1.170A-14(h) and 1.170A-1(c) of the Regulations."

=====Here also is text from an article reporting on statements made by IRS counsel, Karin Gross, on facade donations (published on November 24, 2004, by the Bureau of National Affairs; anyone who wants the original send an email, and I'll send you my fax copy. Note that I provided a copy of this article to Alderman Daley last week):

“Karin Gross, acting branch chief of the Office of Chief Counsel (Income Tax and Accounting) [said] that there is a misconception among practitioners that donating the façade of an historic building automatically triggers an entitlement to a deduction for a percentage of the value of the house. Gross said that the issue that arises with respect to façade easements, as well as conservation land, is that, if the property is in a zoned area and cannot be modified, the value of the deduction may be very little. ‘You can’t get a deduction for a façade easement if you’re not giving anything up,’ she said, adding that it is an area in which the IRS thinks that there is some abuse.”

=====

My take on the above is that one of the factors that the IRS will use to determine the value of a conservation easement like facade donation, is by assessing whether the present status of the building is already restricted from its highest and best use by zoning, preservation status, and other conservation laws in place. Also, according to IRS counsel, you can't get a deduction unless you're giving something up.

We are repeatedly told that landmarking under the City's auspices means that the Landmarks Commission will be most concerned with preserving the facade of the building. That would seem to confirm that a facade donation will, under IRS rules, be viewed as already subject to restriction from its highest and best use as a result, and that given the restrictions that will already be in place on your facade, a donation of it will mean that you are not giving anything up. Hence, no deduction; hence, no more benefit, at the federal level, for preserving your facade once landmarked.

These obviously are complicated tax issues that should be discussed with competent legal counsel for anyone thinking about a facade donation.But in the larger view of things, it is wholly incorrect to suggest that landmarking a block or district will have no impact on people's ability to get a charitable donation for facade donations.

One issue that came up at a block meeting was that it seemed like there were insufficient economic incentives to encourage people to rehab and restore older buildings. Ironically, landmarking the district may reduce, if not eliminate, the one major economic incentive people have at the federal level to protect older buildings.

Top five reasons why district-based landmarking is not good for West Town

1) Landmarking adds a costly layer of bureaucracy to any building-related project (whether a store owner changing his windows, a condo association repairing a roof, or a developer putting in a single family home, and whether old or new construction), and the added expense, delay and hassle of directing all permits through landmarks commission is one that cannot be recouped, and is borne by the property owners.

2) Landmarking will stop gentrification and growth in an area. This is a good thing only for those people who want to keep out "those people," whether for elitist or racist reasons. For business owners, slowing gentrification means fewer new homes, residents, and growth -- so businesses will relocate elsewhere, or will be slow to come to the area in the first instance. For developers, they will go to other neighborhoods where they can operate profitbly, and depart the neighborhood. For homeowners, both effects will drop your property values, and will also deter those who would otherwise buy property for invest and hold purposes in the area. Narrowing the market of people looking to buy your home necessarily drops what you can get for it in the open market.

2a) And, with time, slowing the teardown/rebulding process means that you have a higher proportion of abandoned or rental properties in your area. This is death to property values. (And particularly so in an area transitioning away from being a high crime area -- abandoned or cheaper rental property is an invitation to blight, and introduction of a criminal element).

2b) And, slowing the ability to turn lower-end-use properties into either higher end single family homes or condo developments means that you do not have the market forces that drive prices higher over the long run. If a rising tide lifts all boats, landmarking suppresses the tide from ever coming in.

3) Landmarking fixes the property tax base at an artificially low level. By preventing properties from being turned over into their highest and best use, the city loses all kinsd of tax revenue -- and this effect is permanent.

3a) Owners of newer construction will most likely feel the biggest brunt of the property tax increase. An example: assume you have two small old wood frame homes with an assessed value of $200K each. That leads to city property tax revenues of roughly 4K total (property taxes are usually about 1% of the fair market value of a home). Without landmarking, these homes are torn down, replaced with a condo 3-flat and single family home, and in five years the 3-flat condos collectively are worth $1.2 million and the SF home is worth $1 million. That leads to property tax revenues of $22,000, an $18,000 annual increase. And the tax revenue increases are paid almost equally by each individual property.

Now, assume that your city government will, in fact, spend at the $22,000 level, not the $4,000 level. (Not a stretch of the imagination required for that one, is there?). Landmark before both properties are developed, your FMV will stay stagnate, if not deflate. Landmark after your condo development was built, but before your single family home is built, you have the condo owners paying $12K with the old property still at $2K, for a combined $14K. Where is the extra $8,000 in lost revenue going to come from? Well, assume that the tax rate is increased to compensate. The new construction, having such a disproportionately larger value, will not share the added burden equally with its neighbor (i.e., 4K each). Rather, it will bear six times the added property tax burden. Here's the math:

What tax rate do you need off the FMV of the property to arrive at $22K for our two properties (condo property worth $1.2 million and old SF home worth $200K)? The answer is about 1.6% of the FMV. (22,000 is 1.6% x $1,400,000). Multiply 1.6% times our 1.2 million, you get $19,200. The old undeveloped house pays $3200. In other words, over $6,000 in property tax revenues are generated from the cond folks that they would not have had to pay had the second property been developed.

Take-home-message comparison then?

Both properties developed with condos and new SF home, which occurs without landmarking: condo owners pay $12,000 in property taxes, SF home pays $10,000. About equl tax burden for each lot.
One condo property developed, old home is landmarked: condo owners pay $19,200 in property taxes, an over 50% effective increase in property taxes, even if the tax "rate" only goes up to 1.5% of the FMV. Old home pays $3200. Tax burden of the condo lot is six times higher than that of the old home lot.

4) City of Chicago district-based landmarking takes away one of the major economic incentives for preserving an older home at the federal level (charitable donation of a facade). (See archived posts on this blog for details), and is not required for you to participate in the one state program available to homeowners for historic preservation of their homes.

5) Homeowners insurance. Good luck getting the lowest rates on homeowners insurance if you are in a landmarked district. We've talked to insurance brokers. It won't happen. (Again, see archived post on this blog for details as to why).

Well, that didn't take long...West Town

Shame on me for musing on what next to do. Having been contacted by the owners of West Town, there is plenty to do.

Jonathan Fine and the Preservation Chicago folks, along with a self-appointed neighborhood organization called the East Village Association (acts in a capacity similar to RANCH and SNA) have convinced Manny Flores (1st Ward) that all of West Town needs landmarking. West Town is in the process of gentrification, with teardowns and newer condo buildings going up. Some of their members are engaging in activities which would be comical if not so tragic; people posting signs against landmarking have had them ripped down, been screamed at, been photographed and told that they are being watched. Good grief. As my darling husband says, what a bunch of @$S%--&S. (He says this when the offspring is asleep, don't worry).

And, of course, expect the Alderman to take those who have a major stake in the process to try to start the buyoff process, particularly developers with their permits, to try to make it seem like he has had full support from across the spectrum. (We got a whiff of that with Alderman Daley as well, didn't we???)

Well, at least Alderman Daley had the excuse of not being a lawyer, or at least blaming her confusion in Chuck. Alderman Flores does not.

Regrettably, Alderman Flores seems to not have absorbed his Constitutional Law (don't even get me started on ethics) at George Washington University -- my law school alma mater as well, BTW. (Insider musing - he probably had John Banzhaf for torts (they guy who says sue McDonald's for making you fat), Paul Butler for criminal law (juries should on principle refuse to find people guilty of drug cromes), and one of any number of other left-wing moonbats for professors. But the nuttiness of the Academy is a topic for another day).

Also, it seems that Alderman Flores is being seduced by the cheers of landmarking folks (feel good about using your government power to steal people's private property! (That is a taking, after all, without just compensation)). I've been told that Manny likes media attention, and his is one of the few websites with a photo gallery of the Alderman. (But then again, some of 'em ain't so great to look at, so perhaps we shouldn't judge that too harshly).

Well, maybe when the West Town neighborhood gets landmarked, and the local businesses and property developers flee, they'll stick around to give him an award. But if that is all it takes to get him on your side, I'm always happy to give out the Theiving-Politician-With-A-Smile of the week award.

(I would be willing to give him the Takes Away Your Life, Liberty and the Pursuit of Happiness award of the month, but that one, I think, was preempted by Judge Greer down in Florida, who has issued a court order to starve a mentally disabled woman to death. See http://www.nationalreview.com/mccarthy/mccarthy200503170758.asp and http://www.opinionjournal.com/columnists/pnoonan/?id=110006442 and http://www.terrisfight.org/ for the gruesome details)

Anyway, here is the scoop.

West Town is roughly the area bounded by Damen and Ashland to the east and west, and Chicago and Division to the south and north. Its proximity to the city, along with increased development in River West, has led to gentrification in recent years. This ticks off some of the old time locals, who liked things the way they were, and Jonathan Fine, who never met an old building in Chicago that could be improved.

The same myths that were told to get the Lincoln Park landmarking process underway (Landmarking will freeze your property taxes! Landmarking stops tear-downs! Landmarking adds value to your property!) are being regurgitated anew.

Once again, only a decision by Alderman Flores to not landmark the area will prevent it from happening.

I'm going to go back and update a few posts on these topics -- I've been in contact with some people who are leading the West Town anti-landmarking efforts, who will be directing people to this site.

Gotta give Alderman Daley some credit -- she was smart enough to realize that with a bunch of lawyers and sophisticated business professionals in her neighborhood -- not to mention a declared opposition candidate for the next election -- she had to at least give the illusion of a fair process. Alderman Flores isn't even bothering to give his constituents that. Not the most politically brilliant move for a guy who plainly has onwards and upwards on his mind...

Monday, March 07, 2005

Discussion of how regulating everything makes us all criminals.

One of the concepts I always found fascinating from Ayn Rand's "Atlas Shrugged" (several flaws in her philosophy, no question, but a more screaming damnation of communism than even Orwell) was the idea that the more collectivism/regulations you have, and the more subjective, rather than objective, your rule of law, the more you punish the law-abiding and empower the bureaucrats. A nice brief discussion is here:

http://www.mind-trek.com/articles/t12d.htm

This theme was given a different twist here, called "distributed governmental stupidity."
http://www.samizdata.net/blog/archives/007308.html

The authors are discussing how the use of the web and blogs can influence politicians, and hopefully prevent them from enacting more stupid laws that lead to more problems, which require more laws to bring about "solutions," which creates a whole new host of problems, and a new class of "solutions."

In my personal experience with the city of Chicago, I've witnessed firsthand how city bureaucrats (and federal agencies) can wield power to harm the average Joes who are just trying to own their home, or run their business. And argue that in doing so they are serving a larger purpose.

Not sure where I'm going with this yet. But it has given me some food for thought given how this medium was invaluable for many of you for staying informed in opposing the landmark districting initiative...

Tuesday, March 01, 2005

Alderman Daley announces...

So the people have spoken, and there will be no blanket landmarking within the Sheffield neighborhood for the moment.

After all the drama and heartache, what it all boils down to is that a mere four blocks (800 Belden, 2100 Bissell, 2100 Fremont and 2200 Fremont) expressed sufficient support from the number of ballots received that will permit her to continue discussions. (Which, based upon what she said during block meetings, means either that it probably was close to a 50:50 split, or that she got very low ballot turnout). Supposedly she will be holding another round of meetings with those block residents, along with Brian Goeken from the Landmarks Department, to see if the residents on those blocks really want to landmark themselves. No word yet on whether I'll get an invitation to present the anti-landmarks view; somehow, I doubt it. I'd be happy to debate Jonathan Fine on the issue any day though.

If you are a resident on those blocks, and receive information about the upcoming meetings, please let us know so that we can post the information; you can contact us at VOCALneighbors@hotmail.com.

What this demonstrates to me is that people care more about protecting their individual liberty and property rights than about trying to dictate how their neighbors should live. And that's a good thing, I think.

That said, I know that there are further attempts to landmark other areas, such as Howe Street, Deming, and many others in Vi's ward, and in other wards throughout the City. Let your neighbors know about this, and that they can come to us as a resource. No-one should be forced to give up their property rights without their consent. And no-one should have to re-trace our steps in figuring out what their rights are here.

There are several people who deserve to be thanked and who helped out tremendously on the organizational side. I'll send that thank-you around on our private list serve, however; no point in siccing the elitist snobs on ya just yet. ;-)

I hope that you all will continue to check in here and there. This issue raised a whole host of other items that plainly have strong interest within the community (property tax fairness and responsible land use). There also is the issue of the RANCH planning committee guidelines. Let me know your thoughts - I've learned quite a bit through this process; we have a lot of strong and smart people amongst our ranks; it would be a shame if we couldn't marshal that energy for productive uses!

Cheers,
Dee