The winner of the second Robert L.

Foreman, MAI, Essay Contest, and the recipient of a $500 award, is Thomas A. Dorsey, MAI, SRA, of Charlotte, NC. The contest, which was co-sponsored by the Appraisal Institute and the Real Estate Counseling Group of America (RECGA), honors the memory and commemorates the career of Robert L. Foreman, MAI, an active Appraisal Institute member who passed away in late 1994.

The Influence of Government Regulations on Market Value

By Thomas A. Dorsey, MAI, SRA

Sine qua non. The Latin phrase, translated as without which nothing, is an appropriate beginning to any discussion of the relationship between government and value. In the absence of rules, regulations, and conventions, there would be no value. Conversely, value is a function of the preponderance of government regulations. They act to create, enhance, sustain, diminish, or destroy the value of real estate.

Background
Private property rights are a part of laws which guarantee personal and civil liberties. The ruling authority of government has evolved and been codified over thousands of years, from the Code of Hammurabi to the Magna Carta to the U.S. Constitution.1 Ideally, that authority is exercised equitably and in the best interest of all citizens.
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However, the policies of government and the needs of private property owners are not always in harmony. Sanders Kahn, noted appraiser, author, and instructor, once complained at the pervasive presence of government: Government has had the greatest effect distorting real estate and land use. Much of this has been the result of disjointed policies, improper knowledge, special lobbying and just plain politicking!2 Protection of private property rights has long been viewed as an important responsibility of government. In the seventeenth century, English philosopher

John Locke wrote Government has no other end but the preservation o Property.3 Early in this century, William Howard Taft offered the view that protection of property rights has the noblest of purposes: Next to the right of liberty, the right of property is the most important individual right guaranteed by the Constitution and the one which, united with that of personal liberty, has contributed more to the growth of civilization than any other institution established by the human race.4 Government influence is accepted as a given by leading educators and real estate professionals. Property is traded subject not only to private, but public restrictions or limitations.

Article V of the U.S. Constitution provides in part that No person shall...be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use without just compensation. Kahn, Sanders A., Distortions in Current Real Estate Market Said to Stem from Disastrous Government Role, American Banker, May 1972. Locke, John, Second Treatise on Civil Government (written 1681, published 1690), as quoted in The Columbia Dictionary of Quotations, Columbia University Press, copyright 1995. Taft, William Howard, Popular Government(1913), as quoted in The Columbia Dictionary of Quotations, Columbia University Press, copyright 1995.

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property. Among these are transportation needs (roads, canals, railways, airports, seaports), recreational and environmental use (parks, lakes, wetlands), and public projects (buildings, dams, etc.). While these serve a public purpose, the result can sometimes recall a basic princiTaxation pal of science: For every action, Taxes take many forms. Nearly all there is an equal and opposite reacaffect real estate, since, ultimately, the tion. What is good for some is not magnitude of a purchasers after tax necessarily good for all. net worth and cash flow sets limits on A road is planned, the affordability of real estate. property is taken, Most often when we speak of real and landowners are estate taxes, we are referring to ad valfairly compensated. orem taxation. These are property Surrounding proptaxes which are based on the assessed erties are also value of the real estate. Public policy affected, someand the political process determine times positively, the budgetary requirement of the govsometimes negatively. The road may ernment, and a portion of that create opportunities for new develrequirement is funded by assessments opment. It may be a catalyst to land on privately held real estate. use changes, with corresponding Often, this form of taxation increases in assessed values and tax is used to fund specific burdens. A higher and better use, line items and special area spurred by the new road, results in Eminent needs. School boards, change. Domain public utility The status quo is not maintained improvements, and Eminent domain is the right of the when the government exercises its drainage districts government to take private property power of eminent domain, and not rely on property taxes to for public use. As already noted, the all property owners welcome change. collect the monies necessary to their U.S. Constitution offers some protecIn another instance, a dam is built purposes. These are the more obvious tion to the private property owner: and a lake is formed. Again, the forms of real estate taxation. No person shall...be deprived of life, libproperty owners are fairly compenerty, or property, without due process of Less apparent are amounts paid as sated. The lowland owners are dislaw; nor shall private property be taken transfer and development fees. Yet, placed and the adjacent property for public use without just compensation. these too are a form of taxation. They owners find themselves owners of This does not impede the ability of are a factor in the market value of real lakefront sites. the government to take property property because they affect the cost In a third instance, a land fill prowhen it determines that it is required basis and because the process influject is created. Property owners for a public purpose. Due process and downwind lose some enjoyment of Government influence is accepted as a given by leading educators and real estate professionals. their site. In all of these instances, Property is traded subject not only to private, but public restrictions or limitations. The public restric- the marketability and value of the properties are affected. tions are powers attributed to government: taxation, eminent domain, police power, and escheat. ences the ease in which property may be bought, sold, and put to its highest and best use. Examples of transfer fees include just compensation, however, are guaranteed in the United States. There are any number of legitimate purposes for taking private

The public restrictions are powers attributed to government: taxation, eminent domain, police power, and escheat. These result in an inarguable and substantial influence on the value of real estate.

documentary stamps, transfer surtaxes, and recording fees. Even financing documents are subject to these taxes. Development taxes include impact fees, concurrency assessments, and entitlement expenses. Under different names across the country, these are preconstruction or preoccupancy assessments made to fund infrastructure needs outside of property boundaries. In some cases, a new development is penalized for timing. If its projected traffic count, utility connections, student population, or other needs are greater than existing capacity, the development may be charged with funding all or part of infrastructure expansion. To different extents, all forms of taxes influence the affordability of real estate and the feasibility of development.

Police Power
Zoning is perhaps the best example
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Government Regulations cont. from p. 17

of police power applied to real estate. The government has the ability to alter or approve land use, and this has the effect of determining what can be built or what occupancies or business uses will be permitted. The government affects the supply, and therefore the value, of real estate for specific purposes. Building codes are also an instance of government influence. By dictating construction or building materials requirements, it influences the cost of development. In changing requirements for existing properties, sale and rental values may also be affected. Government has the authority to affect cash flow and cost basis, independent of market forces. In south Florida, protection against hurricanes is a factor in building code requirements. In many California locations, improvements must meet earthquake requirements.

impact statement.6 Concerns regarding the site and its improvements include the presence of harmful materials, such as fuel tanks, hazardous materials in the soil, lead paint, and asbestos. The message is not always consistent, and government is sometimes the cause of the problem, as much as a part of the solution. For years, asbestos was a preferred and often required material in certain areas of construction. Today, it is prohibited, and properties which have asbestos are either not marketable or suffer substantial discounts associated with the cost and risk of removal.

Government Policy
Taxation, eminent domain, police power, and escheat are important means by which government exercises some influence on market value. They are not the only means, nor are they necessarily the most powerful forces. One hundred and fifty years ago, Martin Van Buren, president of the United States, is reported to have remarked: The less government interferes with private pursuits the better for the general prosperity.7 This does not appear to apply to real estate: An efficient market is self-regulating. There are very few government restrictions on open and free competition. Real estate markets, on the other hand, are not selfregulating. Federal, state, county, and local regulations govern the ownership and transfer of real estate...8 Unlike other commodities, real estate is highly differentiated, fixed in location, and inelastic. This contributes to an inefficient market. Regulations have grown through the years, affecting everything from design and materials to transfer process and financing. It is doubtful that government set out to influence the value of real estate, but this is the net result. Its purpose has always been to protect private rights, but in protecting, it cannot help but restrict, and in
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Escheat
In the end, the power and rights of the state are paramount. A property owner must have heirs or otherwise plan for the disposition of the property through a will, or trust, or other legal means. If not, following the death of the property owner, title

Unlike other commodities, real estate is highly differentiated, fixed in location, and inelastic. This contributes to an inefficient market. Regulations have grown through the years, affecting everything from design and materials to transfer processes and financing. It is doubtful that government set out to influence the value of real estate, but this is the net result.

Throughout the country, property owners must comply with ADA5 requirements and satisfy a broad range of environmental concerns. All have legitimate purpose in the protection or furtherance of public interest, and all have a cost to the real estate. Environmental concerns begin outside, where a precondition to developments of significant size generally require the preparation, evaluation, and approval of an environmental
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reverts by escheat to the state. Government ownership of a property means that it is no longer on the tax rolls. The effect is to increase the tax burden on owners of private property. And the nature of government use or timing of disposition may affect the value of the property it inherits, as well as the values of surrounding properties.

The Americans with Disabilities Act, adopted by the United States Congress in 1990; its prohibitions against discrimination include a requirement to make building facilities accessible to all citizens, regardless of physical disability. Assessments of the probable environmental consequences, required by law for federally funded projects; individual states may have additional requirements. Quotations from Our Presidents, The Peter Pauper Press, Mount Vernon, New York, copyright 1969. The Appraisal of Real Estate, Appraisal Institute, Chicago, Illinois, copyright 1992.

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Government Regulations cont. from p. 18

Income Taxes
State and federal income tax rates, along with allowed deductions and credits, have a large part in determining the disposable income of U.S. taxpayers. This, in turn, influences their purchasing power, and supply, demand, prices, and value are affected.

restricting, it influences real estate values. One business text offers a somewhat whimsical observation relative to the concerns which lead to laws: Many of the practices against which controls are aimed are not the results of studied efforts to take advantage of anybody. Like Topsy, they just growed.9 And like the concerns which contribute to the passage of laws and regulations, those same laws and regulations just growed. We are, after all, not only a democracy, but a bureaucracy. Perhaps the most powerful government force which influences market value is that which comprises the policies10 of various states and agencies. Following are examples of government policies and their effects. Note that this is not an exhaustive or comprehensive listing of policies which influence real estate values, rather, it is intended to be a representative listing.

Federal Banking Laws

Throughout the 70s, government pursued a policy of deregulating financial institutions. As the barriers between commercial banks and savings associations dissolved, commercial bankers discovered residential lending and thrifts began to offer checking accounts and commercial real estate loans. These were directions for which many were ill-prepared, and not all exercised good judgment. In the early 80s, real estate tax laws were changed, effectively devaluing commercial or investment property. Marginal as well as good loans were suddenly upside down, and the subsequent shakeout was a part of what later became the savings and loan bailout. Although not recognized as such at the time, this was truly an instance of government influence on real estate. The Resolution Trust Corporation was formed to manage the sale of assets. The supply of properties and the disposition policies of that government agency contributed to a decline in the value of real estate in certain markets.

parks, museums, and theaters has a direct affect on the ability of one community to compete against another in attracting business and industry, employment, and housing. The result of these investments is a factor in the demand for and marketability of real estate, and therefore an influence on market value. Trade and tourist districts, subsidies to attract new businesses, and economic incentives and tax breaks to encourage, attract, and retain certain industries, likewise influence value.

Energy Policy
A buzzword of the late 90s is wheeling. The energy industry is in an early stage of deregulation, and the expectation is that someday consumers will have the ability to choose between electricity companies, just as they now have the ability to select their longdistance telephone service provider. Government has a role in making this possible. Today, the Federal Energy Regulatory Commission encourages wheeling, but leaves decisions concerning the manner and timing to the states. States which are aggressive in this arena can help industry to achieve lower electrical rates through competition. And, states which have lower rates will be more successful in attracting new industry. States which are slow in taking advantage of the opportunities of deregulation risk losing business and industry. Again, government influences the value of real estate.

Local Exemptions
Florida allows homeowners a credit against the assessed value of their primary residence. In addition to a base credit, residents are eligible for additional amounts if they are senior citizens, widowed, or subject to certain disabilities. The result is that persons who qualify for the exemptions have more after-tax income and are able to afford higher-priced homes. While their actions may have a positive affect in certain market segments, the balance of the taxpayers are subject to higher taxes than would otherwise be the case. For investment properties in particular, the result is to depress values.

Public Services
The extent to which a community (and government) supports basic infrastructure needs and quality of life issues including education,

Consumer Price Index

The consumer price index (CPI),

Hoagland, Henry E., Ph.D. and Stone, Leo D., J.D., M.B.A., Real Estate Finance, fifth edition, Richard D. Irwin, Inc., Homewood, Illinois, copyright 1973. Laws and regulations related to real estate are described on what has become an information superhighway, the internet. Information concerning federal laws and regulations is available at http://www.legal.gsa.gov and related sites.

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compiled by the Bureau of Labor Statistics, is another example of governments influence on value. Although the indexs accuracy and relevance are often challenged, its influence is everywhere: About 30 percent of the federal budget pays benefits tied to the CPI; income taxes are indexed to prevent bracket creep; about 20 percent of private pensions are CPI indexed; 20 to 25 percent of union contracts tie wage increases to the CPI.11 Lease and contract payments, construction costs (including labor), and after-tax income are all, to some extent, a function of this government-compiled index. Yet, most economists agree that the index overstates inflation. A Stanford economist, Barry Boskin, estimates that cumulative additional debt from over-indexing the budget over 12 years would amount to $1 trillion. While this continues, the effect is to raise the cost and lower the return (i.e., the value) to the investor.

The Future
In order to forecast the future, one must be aware of and understand the past. Government has the power and it also has the authority. But, it is important to remember that both the power and the authority originate from the citizens. The Declaration of Independence that led to the formation of the United States set forth several concepts that were radical for their time, including: ...Governments are instituted among Men, deriving their just powers from the consent of the governed...it is the Right of the People to alter or to abolish it... These were among the cornerstones for what is now the body of law in the United States of America. They are a part of the past, and for so long as its citizens allow, the future. In a democratic society, government has the authority given it by its citizens to influence real estate values. Sometimes the administration is unbiased, other times it may appear political. Laws intended to protect may inadvertently harm. And any action of government will influence property value somewhere in some way. Nearly 30 years ago, introducing his classic text, The Valuation of Real Estate, Alfred A. Ring made the following observation: It is important to remember that value is the heart of economics. More important still is the indisputable fact that only people can make value. A sound theory of value, thus, must keep the human factor in focus and be attuned to practices that are the outgrowth of

socio-political forces that operate within a capitalistic economy where dollar democracy expresses itself in free and open market operations.13 Public service, public hearings, the voting booth, and, ultimately, the courts provide the means to equity and fair treatment for all. We the people make value. Government influences that value, on our behalf. And the government is our government, therefore it is us. Circular reasoning, but a circular argument. We have the powerthrough public policy and private actsto create, enhance, sustain, diminish, or destroy the value of real estate. And our ability, our governments ability to influence, knows virtually no bounds.

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Other Examples
The above is but a small sampling. Occupational licenses and permit fees influence use, expense, and value. Policies which allow the formation of Real Estate Investment Trusts and those which allow synthetic leases affect value. Lending regulations, rent controls, environmental policies12 revenue sharing, secondary market activity, the money supplyall are within the purview of government. The list goes on.
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Thomas A. Dorsey, MAI, SRA, is employed by First Union National Bank as a senior vice president in its Corporate Real Estate Division in Charlotte, N.C. Comments are welcome, and can be directed to TADMAI@aol.com.

Neil, Rolfe, We cant afford NOT to correct CPI error, The Charlotte Observer, March 9, 1997. The Endangered Species Act, wetlands protection policies, and coastal set-back requirements are among other examples. Ring, Alfred A., SRA, MAI, Ph.D., The Valuation of Real Estate, second edition, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, copyright 1970.

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