I recently read “The Public Wealth of Cities,” which argues that municipalities should boost public investment by tapping more value latent in their real estate and commercial assets.
“Cities that have a good understanding of the assets they own and that govern them well to help develop the city and earn a return can spend and invest more without raising taxes,” the authors write. “Unlocking public assets should be a core urban renewal strategy.”
Intrigued, I researched my home city of Oceanside.
Indeed, Oceanside potentially leaves substantial public wealth unmined. Even while implementing “cost containment” measures and new taxes to address the fact, as financial forecasts observe, that “[o]ver the past decade, revenues have not kept pace with growing costs associated with providing municipal services and facilities.”
A coronavirus-induced fiscal squeeze will only exacerbate this deeper structural problem. With budget season and local elections approaching, public officials should prioritize optimizing the city’s capital assets — especially its sizable real estate portfolio.
The same undoubtedly goes for other municipalities; indeed, scores of strictly local/regional public agencies, including districts and authorities of all sorts, control tens of thousands of acres countywide.
While the Oceanside city government owns over 2,200 acres (excluding roads and river segments), making it the jurisdiction’s largest property owner by far, it’s hard to know those properties’ full worth. Following government accounting norms, Oceanside values capital assets at book value: the original acquisition cost, minus (except for land) “depreciation,” a dubiously termed accounting device.
But this method doesn’t reflect market value: what someone would actually pay today for real property, which has likely appreciated enormously. In turn, it can’t fully reflect useable net worth — equity or revenue-generating capacity, which the city could sell for profit or borrow against.
The $90 million valuation of city land reported in the city’s financial statements doubtfully captures market potential even remotely.
On average, Oceanside land alone (not including improvements) yields about $530,000 in assessments per acre, according to county tax parcel data, which I analyzed using mapping software. Just 122 acres of large commercial land assess at $118 million.
The city’s statements note that assessments represent “the only data currently available with respect to the actual market value,” despite the “limitations” of state-imposed caps — i.e., true market values would frequently be much greater.
Even if the city shifted to market valuation, it’d still need to evaluate assets’ prices relative to demand under alternative land-use scenarios. “[S]ome governments are in a unique position to affect highest and best use [value maximization] through their ability to change what is legally permissible,” says the Governmental Accounting Standards Board. “However, the presumption is that a government’s use of … property, as it is currently zoned, is its highest and best use.”
Without routinely up-to-date comparative market analyses, that presumption lacks justification. We should quantify the unrealized wealth that a local government might conjure simply by easing land-use restrictions, and thus the relative value of alternatives.
For example, Oceanside land zoned for multi-family or condos assesses at $1.8 million ($3.5 million, with improvements) per acre on average; versus about $27,000 ($55,000, with improvements) per acre for city-owned land, including taxable private uses. San Diego’s Otay Mesa Enhanced Infrastructure Finance District reckons new multifamily units would assess at up to $325,000 each; versus $1.50 per square foot for the same land left undeveloped. So it plans to increase multifamily units sixfold, among other development, piling $970 million of cumulative tax increment revenues into infrastructure.
Oceanside conducts market-based alternatives analyses sometimes. The example below articulates at least plausible trade-off costs. We should measure and communicate all public asset management decisions similarly — as a matter of course on the balance sheet, not ad hoc and buried in voluminous reports, where common citizens (like me writing this article) would have great difficulty finding them.
- In 2012 the city entertained residential-and-commercial redevelopment of the publicly-owned Center City Golf Course, which could’ve yielded $80 million of tax basis, not including sale/lease profit. Instead, the city maintained the golf course use, which yields $530,000 in assessments.
- In 2015, the city sold an acre portion of a downtown parking lot to a developer for about $460,000. That land, now residential-over-retail, assesses at $4 million ($13 million, with improvements).
- In 2014 the city agreed to sell two downtown blocks to a hotel developer for $1.5 million. The hotel is still under construction; county data doesn’t yet show an assessed value. But another nearby hotel assesses at $15 million ($65 million, with improvements). The new development will yield some $31 million in total net new taxes over the next 15 years, according to a city report.
Dan Brendel is a resident of Oceanside