Another recent news story, this one from the west coast, caught my eye. It seems that Amherst College, in central Massachusetts, was the remainderman for an estate left by Roger Holden, a member of the class of 1919. He died in 1968, and his widow was the income beneficiary of a trust which consisted of some beach property in Orange County, California. Capistrano Shores is about 60 miles south of Los Angeles, in San Clemente. The articles I’ve read never mention the total acreage involved, but some describe it as a 0.7 mile stretch of beach, with 90 cottages on it. At the time of his death, the land was valued at $1.5 million. Upon the death of his widow, Sylvia Holden Robb, title passed to Amherst, which recently sold the land for $58 million.

We can estimate the acreage. 0.7 miles works out to 3,696 feet. An article in the San Clemente Times says that “Capistrano Shores was founded in the late 1950s as a mobile home park. The lots — which run about 1,000 to 1,500 square feet — line the northern shore of San Clemente.” Today, the homes are all manufactured homes which bear little visual resemblance to mobile homes. Square lots of 1500 square feet would be 39’ deep; square lots of 1000 square feet 32’ deep. 90 lots times 39 feet works out to 3510 feet, not too far off the 0.7 mile figure. If we figure an average of 1250 square feet (0.0287 acre) each, we find that the land is about 2.58 acres. That means a land value, for single family housing, of about $20.7 million per acre.

You might look at the satellite photos from one of the online maps (google, yahoo, etc) using this address: 1880 North El Camino Real, San Clemente, CA. That suggests that the cottages are on Senda de la Playa. Zillow shows no transactions in the past 12 months, but that may be because the land previously didn’t change hands with the cottages.

The president of the homeowners’ association estimates that the homes, after the acquisition of the land, are worth, on average, $2.4 million each.

A real estate broker’s page lists some transactions which occurred in the past few years:

  • #15: 8 year old home, 3 bedrooms, 2 baths, $500,000. (sold) “Step off your deck onto the beach. 20 minute walk to San Clemente Pier.”
  • #85 - closed escrow 12/2004: $550,000 2 bedrooms, 2 baths
  • #17 - closed escrow 9/2004: $550,000 3 bedrooms, 2 baths, 1500 square feet. “front door 20 feet from the water”
  • #4 - closed sale 10-26-05: $550,000 3 bedrooms, 2 baths, 1500 sq feet
  • #25 $600,000, 2 bedrooms, 2 baths. step directly onto beach.
  • #49 $620,000, 3 bedrooms, 2 baths, 1400 square feet. Monthly land rent of $2600.
  • #32 $689,000 closed 08-15-05 3 bedrooms, 2 baths 1500 sq ft, furnished.
  • #1 $699,000 sold (no date) 3 bedrooms, 2 baths, 1500 sq ft; completely rebuilt 1999
  • #74 $800,000 closed 8/29/07. 2 bedrooms, 2 baths, 1200 sq ft.

Monthly land rent of $2600 (as of about 2005, it appears, for a property smaller than some others). That’s $31,200 per year in ground rent per lot. (Compare that to the annual land rent of $6,400 at Little Neck in Ipswich, MA – see yesterday’ blog entry – for a lot about twice the size!) Assuming that all 90 cottage owners at Capistrano Shores were paying that amount, the trust was receiving $2.808 million per year in land rent for perhaps 2.6 acres of land! From that, there were property taxes to be paid on the land. In California, property taxes are limited to 1.00% of the assessed value of the property, plus any parcel taxes voted locally, which might amount to an additional 0.25% of the assessed value of the property. So the 90 homeowners, in aggregate, will be paying $580,000 (the 1%) plus ~$145,000 (parcel taxes) in taxes on the land, or $725,000 in taxes on the land value next year.

But the trust was paying much less than that. The articles tells us that at the time of Mr. Holden’s death in 1968, the land was valued at $1.5 million. Let’s say that over the next 10 years, it appreciated to $2 million. In 1978, California’s voters approved Proposition 13, which limited the annual increase in assessed values to 2% per year, no matter how much the market value of the property increased. So from 1978 to 2007, the assessment increased by about 85%, which means that last year, the assessed value of this land for property tax purposes was about $3.8 million, and the property tax was perhaps $47,500 per year. The rest of the $2.8 million land rent was pure gravy, taxed only by income taxes.

On a per-lot basis, we’re talking about $31,200 in land rent and $525 in property taxes. That’s a lot of land value being privatized – 1.7% of the income goes to the commons, 98.3% to the landlord! That’s a much lower tax rate than most income taxes or sales taxes.

The $31,200 in land rent, capitalized at 5%, works out to $624,000 per lot. Multiplied by 90 cottages, that comes to $56,160,000, not far from the purchase price of $58 million.

But the cottages alone, with land rent of $31,200 (or more – that figure might have been a few years old) were selling for $850,000 to $1,200,000 before the land purchase, and are now estimated at $2.5 million each, which makes the land far more valuable than the $58 million that Amherst received for it.

I’ve made an assumption in the next paragraph that needs to be explicit, because it may be incorrect. I’ve taken the square footages in the real estate listings above to be the square footage of the cottages, which seems reasonable given the fact that all that is being sold is the cottage. But given the similarity of those figures to the average lot size, and the likelihood that lot coverage is probably more like 80% than 100%, I may be overestimating the sizes of the cottages in the next section – and thereby underestimating the selling price psf and the portion that is actually land value!

$850,000 divided by 1200 square feet works out to over $700 per square foot. $1,200,000 divided by 1500 square feet is $800 psf. But houses do not appreciate; like cars and other man-made things, they depreciate, at 1.5% per year. It is hard to imagine a new manufactured home of 1200 square feet costing anything close to that amount. Thus, a significant portion of that $850,000 or $1,250,000 is land value not captured by the land rent charge.

But most likely, the property taxes of the 90 cottages will not fully account for that portion of the value; the new landholders will get a significant bargain. But anyone who purchases a home there going forward will be paying the seller the higher amount, and will be paying property taxes based on the transaction price – quite a bit more than their long-owning neighbors. Even someone who bought in 2004 would he paying property taxes based on $550,000 plus about 8% – far less than one who paid $800,000 in 2007. So what are the implications for public policy? First, land is valuable, and makes a fine tax base. That $2600 per month, going into private pockets, is a great windfall. The $58 million going to a college is a great windfall. The people who can afford to live there don’t particularly care who they pay the land rent to. Wouldn’t it be better if we collected that value as our common treasure, instead of permitting it to be privatized, even for the benefit of a fine college?

Second, Proposition 13 is evil and unjust. The waterfront land almost certainly appreciated far more over the past 30 years than the inland properties with good views, which in turn appreciated faster than those without ocean views. Yet due to California’s Proposition 13, the property taxes on this 3 acre site increased at roughly the same rate as those of the inland properties with no views, if the inland landholder stayed put. And anyone who bought property in the intervening years has, for all the years since, been paying property taxes at a far higher rate than the Trust.

Is this any way to run a tax system anywhere, much less in a country dedicated to the proposition that we’re all created equal? Of, for and by the people? Low land taxes force state and county to impose sales taxes and wage taxes, and those fall heavily on lower-income people. (Consider Alabama, where sales taxes even on food can run 9 to 11%. Consider Philadelphia, where workers pay a 4% wage tax – and most companies choose to relocate beyond city line.)

California’s schools, once regarded as among the best in the US, have fallen far from that status in the years since Proposition 13 was voted in. There just isn’t enough revenue to support them, with the ceiling put on the property tax by Prop 13, and, worse, that ceiling has very uneven effects on California’s residents of various ages. Corporate land owners love it, and will spend good money to convince others to keep it, promoting it as tax relief for the poor widow and the average man. Hah!

Third, I am led to wonder what value Mrs. Robb’s executor declared the property to have for the purpose of estate taxes; perhaps that’s a moot point in this case, since the property was designated for the college. But in the absence of that designation, could an executor value land that produced $2.8 million in annual income at some value well below the $58 million for estate tax purposes? Do we have IRS examiners paying attention to that sort of thing? I certainly hope so – but I’m not optimistic. While I am not enthusiastic about estate taxes on general principles, I must note that, in the absence of taxes which collect land value year in and year out, estate taxes are the only way to capture that value – created by all of us, not the landholder – for the commons. Capital depreciates; land appreciates. We need to capture that gain for the commons, instead of taxing wages and sales. In this case, that value is being transferred to a private college, into a tax-free foundation worth many millions. Does it serve the commons? Well, it educates some students very well. And its endowment continues to grow, untaxed.