Short term (approximately 5 years) financial modeling used by local and state jurisdictions supports the development of high value residential units, as the cost of services for those units is mathematically less than the property taxes assessed to those units (see Par 1 of this series). This is often a critical source for funding for public services, and a key to sustainability in other parts of the jurisdiction where the cost of services exceeds the revenues. For long term analysis (10 years or more), three assumptions must be included in order for that public revenue stream to continue: 1) said units will retain the comparatively high value; 2) high value units will remain occupied; and 3) the cost of services necessary to support those units will remain less than the tax revenue generated.
The value of each unit is dependent upon the economic and market competitiveness of the older units with new units when put back on the market. In many cases, the first owners of these units had options for designing the unit to suit themselves. The selections available may not be considered fully customized, as the builder may only offer selections from a catalog. The choices made by the first owners will reflect their preferences and needs.
Once that unit is placed on the market for sale as an existing unit, the unit itself is at a marked disadvantage compared to new high end units being offered by developers. The older unit reflects the tastes and values of the original owners, as well as older technology for systems. Buyers have the option of creating their own living space through a builder, or retro-fitting or remodeling the secondary market unit. If the latter is considered, then the cost of that work enters into the purchase equation. The unit is reduced in price to accommodate the cost of remodeling, or the seller must pay for the upgrades.
Either is an effective reduction in value, with the resulting reduction in tax revenue for services. Financial modeling that is dependent upon those high value units retaining their comparative value over a longer period of time must take into account the impact of the secondary market on the property value. The adjustment to the revenue yield from the higher value units will have an impact upon the ability of the local jurisdiction to provide services to existing neighborhoods where the cost of services exceeds the revenues. This will subsequently have an effect upon the sustainability of those neighborhoods.
Part 3: Occupancy and Single Family to Multi-family Conversions