Gold-based lease could cause million-dollar rent hike for Forest City Enterprises - Cleveland.com.

It seems that there is a 12-story building, the Halle Building in downtown Cleveland, which is owned by Forest City, on a site of approximately an acre, which was bought a couple of years ago by a New York investor. The terms of the 99-year lease created in 1912 call for the land rent to be equal to the value of 1,693.28 ounces of gold. In 1912, that was $10,000, and over time it increased to $35,000, where it froze when FDR threw out the gold standard in 1933. The original landlord is not named in the article, but it appears that Forest City has owned the building since 1982, when the Halle department store went bankrupt. In 2006, the NY investor, Stuart Venner, bought the land for $845,000, and sued to enforce the original 1912 land rent contract. Today, that much gold is worth about $1.4 million.

Forest City appears to have renovated the building, and likely receives a very fine income from renting the office suites within it. Their revenue comes from several sources, all rolled up into a single payment from each tenant:

  • a return that relates to the building itself and the manmade amenities it offers (capital);
  • a return on the services which the buildinglord provides: building maintenance, perhaps a doorman, cleaning, trash handling, etc (labor); and
  • a return which relates to the location itself (land).

The same tenants would be willing to pay far less for identical space and amenities, if the building were 2 or 5 or 10 miles away.

Who is entitled to what? I’m not talking about contracts, or the way we’ve got things set up right now. Rather, I’m talking about what’s right and rational; what establishes good incentives, rewards productive effort, encourages redevelopment of prime sites, creates vibrant cities and economic justice and opportunity for all, and widely shared prosperity.

As Bill Pierce pointed out a few years ago,

The fact that parking lots in downtown Cleveland have sold for close to $4 million per acre indicates that owners are expecting substantial net income even after paying real estate taxes, as well as wages, insurance, and the other costs of operation.

This suggests that the land is worth more than the $845,000 that Venner paid for it, particularly since the 99-year lease is soon to expire (though of course we don’t know what that lease said about renewal terms). The $845,000 is not too far off the capitalization at 5% of the $35,000 annual rent. ($35,000/.05 = $700,000; $35,000/.041=$845,000)

I don’t question that land rent is due. That location certainly has value. But who is entitled to that economic value? Is it Forest City? Is it Stuart Venner? Or is it the city of Cleveland? Seems to me it belongs to the one who created it … and that seems to me to be the community.

I’ve not been able to find how Cuyahoga County assesses the land; residential assessments are online, but commercial don’t appear to be (a poor policy, to my mind – assessments ought to be readily available for all to see). Nor do I know how much the land owner pays in annual property tax on his holdings. But clearly right now the building owner is making a lot, and the land owner, after taxes, is not making as much as he thinks he might, and, likely, the city is receiving far less than it should, and receiving it from the wrong parties.

I don’t know anything about how Cuyahoga County finances itself; by this time next year, I’ll know more; the Council of Georgist Organizations is holding its conference there next August. Cleveland has a fine history: Mayor Tom L. Johnson, whose statue (see photo at above link) is downtown, ran a fine city about 100 years ago. (See Mason Gaffney’s New Life in Old Cities both for some history and for some recommendations for cities in the 21st century. You might also look for his paper “Repopulating New Orleans” linked from the front page of masongaffney.org.)