In yesterday’s posting, I discussed the notion of winning and losing in politics, and of how the results are rarely decisive. Some of the rationale was based on an essay entitled “How to Understand Politics,” by Harvey Mansfield. (See previous post.)
Despite the proposed evaluation of rental levels for commission-owned property – in one case, there is no rental charge – the anticipated adjustment of rental levels still may not meet normal criteria for establishing rents at fair market value. That is, not unless there is a paradigm change regarding such benefits in Somerset County Government, both at the Freeholder level, as well as at the Parks Commission.
As Mansfield explains, the reason for this is straightforward: “Politics is not an exchange between the bargaining positions of a buyer and a seller in which self-interest is clear and the result is either a sale or not, all without fuss.” If the proposed transaction between buyer and seller – in this case, between the Parks Commission as property owner and the employee as lessee of the property – is not on the open market, then politics get in the way of free-market workings and alter the outcome.
With regard to Parks Commission property, it’s arguable whether the commission should even own housing for rent to its employees, at any price. There is too much room for actual or perceived conflict of interest.
That the Parks Commission owns homes is simply an accident of its land acquisitions for open space and for recreation. The current situation is not the result of a direct intent to purchase housing for employee rental – at least we all should hope it isn’t.
Inadvertently ending up with a stock of publicly-owned homes situated on recreational and park property creates the problem of what to do with these assets. Such a situation makes it much too easy to find reasons for why a few Somerset County Parks’ employees have been offered these homes at below-market rents – properties which otherwise might be used in the public interest or disposed of.
And it becomes just as easy for the commission to make claims for why one or more of these rentals may have been part of negotiated packages when employees were hired. At least one tentative reason put forth in the press is that the salary (or salaries) of employees may have been discounted, as part of an arrangement which included housing. If this is the case, there should be written employment contracts on file which definitively state that, as well as what the higher imputed salary would be in the absence of such a rental.
Sunday, July 29, 2007
Saturday, July 28, 2007
The Freeholders, the Parks Commission, and Politics
I like to get up early on weekends, before anyone else is up and about. It’s time for a shower and shave, brewed coffee, a light breakfast, and a table set for my wife. It’s also a time when the rest of the town is mostly still getting its Z’s – a good occasion to do some quiet reading and thinking.
In so doing, I came across an essay in the August/September issue of FIRST THINGS, entitled, How to Understand Politics. I suppose we could all use some of that knowledge; certainly, I could. The article was authored by Harvey Mansfield, a professor of government at Harvard – but I won’t hold that against him, since his thoughts seem to be particularly cogent, and he seems to express a genuine degree of humility in articulating them.
Mansfield claims that, “Politics … is a series of victories and defeats in which every victory for one side is a defeat for the other … many of them ephemeral, but some of them decisive. He goes on to say, the struggle, “… rarely ends in final victory. The left will never finally defeat the right, nor vice versa.”
The contest now taking place in public meetings, as well as in the back rooms of Somerset County political power brokers about what to do with the Parks Commission, fits that description. It is also prophetic. Institutions don’t go down easily, and that applies to the Parks Commission and its supporters.
By transferring purchasing, procurement, finance, and engineering responsibilities to the county itself, you might think that there is not enough left for the Parks Commission to remain intact, and that the Commission should be dissolved.
But you would be wrong, because the factors which go into the final decision won’t be the normal ones which you might expect. To completely eliminate the Parks Commission would, as Mansfield outlines above, involve a decisive defeat for the political forces in the community who don’t want to see that happen. They may or may not have good reasons for their choice – we don’t know, because, so far, the debate is not being conducted in the public square, and we are not participants.
What we should recognize is the probability that, when the dust settles, there will be a compromise which will leave the Parks Commission still intact, but outwardly crippled.
That’s not a good role for any public body. And, if this is the direction which the freeholders decide to pursue, then it is their responsibility to define exactly what they expect of this down-sized Parks Commission; because, remember, under the law it will still be a completely autonomous body acting in that capacity, and not in an advisory mode. So, then, will there be enough real work for 9 appointed commissioners to do?
In so doing, I came across an essay in the August/September issue of FIRST THINGS, entitled, How to Understand Politics. I suppose we could all use some of that knowledge; certainly, I could. The article was authored by Harvey Mansfield, a professor of government at Harvard – but I won’t hold that against him, since his thoughts seem to be particularly cogent, and he seems to express a genuine degree of humility in articulating them.
Mansfield claims that, “Politics … is a series of victories and defeats in which every victory for one side is a defeat for the other … many of them ephemeral, but some of them decisive. He goes on to say, the struggle, “… rarely ends in final victory. The left will never finally defeat the right, nor vice versa.”
The contest now taking place in public meetings, as well as in the back rooms of Somerset County political power brokers about what to do with the Parks Commission, fits that description. It is also prophetic. Institutions don’t go down easily, and that applies to the Parks Commission and its supporters.
By transferring purchasing, procurement, finance, and engineering responsibilities to the county itself, you might think that there is not enough left for the Parks Commission to remain intact, and that the Commission should be dissolved.
But you would be wrong, because the factors which go into the final decision won’t be the normal ones which you might expect. To completely eliminate the Parks Commission would, as Mansfield outlines above, involve a decisive defeat for the political forces in the community who don’t want to see that happen. They may or may not have good reasons for their choice – we don’t know, because, so far, the debate is not being conducted in the public square, and we are not participants.
What we should recognize is the probability that, when the dust settles, there will be a compromise which will leave the Parks Commission still intact, but outwardly crippled.
That’s not a good role for any public body. And, if this is the direction which the freeholders decide to pursue, then it is their responsibility to define exactly what they expect of this down-sized Parks Commission; because, remember, under the law it will still be a completely autonomous body acting in that capacity, and not in an advisory mode. So, then, will there be enough real work for 9 appointed commissioners to do?
Thursday, July 26, 2007
Park Commission Makes Early-Morning Decisions
Today’s 7:00 am meeting of the Somerset County Park Commission at its headquarters in North Branch Park, Bridgewater, was filled to capacity. Of about 80 attendees present, 50 filled all the chairs in the meeting room, while the remainder spilled out into the corridor and reception area. At least half of the audience wore either the distinctive green jerseys of Somerset County Park employees, while several sported the brown shirts of county park rangers.
The meeting opened with four commissioners offering their resignations. (See Martin Bricketto’s 9:30 am breaking news story at http://www.c-n.com/apps/pbcs.dll/frontpage).
Most of the meeting, however, was taken up with a review of recommendations made to the Somerset County Freeholders as contained in the Wolff & Sampson $150,000 report. Freeholder Rick Fontana went down the list, point-by-point, as the Somerset County Commission responded to each one, either agreeing or not.
The commission concurred with most of the recommendations, with some notable exceptions. One of those is that the rents to park employees on commission-owned homes should be reviewed for increases to fair-market value. However – and this could be a loophole – it was proposed that the rents charged to county employees should be set at what is “the custom and usage in the industry.”
Interpretation: Charge Somerset County park employees a rental in line with what other counties in New Jersey charge their park employees for renting publicly-owned homes, not what a New Jersey citizen would pay to rent similar properties on the open market.
Furthermore, some of the other park entities in New Jersey don’t even rent public property to their park employees. There is no open competition for Somerset County Commission-owned rental property (you have to be a park employee to get a home!). Therefore, fair market value needs to be assessed by an evaluation of rental values established in the real world, not by a contrived evaluation that does not represent the real market for housing.
The meeting opened with four commissioners offering their resignations. (See Martin Bricketto’s 9:30 am breaking news story at http://www.c-n.com/apps/pbcs.dll/frontpage).
Most of the meeting, however, was taken up with a review of recommendations made to the Somerset County Freeholders as contained in the Wolff & Sampson $150,000 report. Freeholder Rick Fontana went down the list, point-by-point, as the Somerset County Commission responded to each one, either agreeing or not.
The commission concurred with most of the recommendations, with some notable exceptions. One of those is that the rents to park employees on commission-owned homes should be reviewed for increases to fair-market value. However – and this could be a loophole – it was proposed that the rents charged to county employees should be set at what is “the custom and usage in the industry.”
Interpretation: Charge Somerset County park employees a rental in line with what other counties in New Jersey charge their park employees for renting publicly-owned homes, not what a New Jersey citizen would pay to rent similar properties on the open market.
Furthermore, some of the other park entities in New Jersey don’t even rent public property to their park employees. There is no open competition for Somerset County Commission-owned rental property (you have to be a park employee to get a home!). Therefore, fair market value needs to be assessed by an evaluation of rental values established in the real world, not by a contrived evaluation that does not represent the real market for housing.
Monday, July 23, 2007
Renting a $1,500,000 Home in Bridgewater
In the last posting of this blog on Saturday, July 21, we saw how a home in Bridgewater valued at $500,000 and renting for $2,000 monthly would provide a 4.8% yield to the owner. This was based on the criterion that the rent for a home needs to be kept in line with its worth. It was also pointed out that 4.8% is the gross yield, and does not include any estimated costs for grounds maintenance, upkeep, utilities, taxes and mortgage interest, if any.Now, let’s turn to a $1,500,000 property and its potential rental value. After applying the same computations, I had to catch my breath; because, in order to achieve the same 4.8% yield as that for a home valued at $500,000, the rent needs to be $6,000 monthly. That’s right! It may sound like a great deal of cash – and it is – but prestigious properties don’t come on the cheap, and the economic concept of keeping the rent charged for a home in line with its value still applies.
Hypothetically, if the owner of a home valued at $1.5M wants to be generous, ignore business and economic realities, and decide to charge $2,000 monthly (the same rent as in the previous example for a $500,000 home) the gross yield drops to a mere 1.6%.
Raising the rent on a $1.5M property to one of the following amounts, $2,500, $3,000, $3,500, $4,000, or $5,000, would yield returns of 2.0%, 2.4%, 2.8%, 3.2%, and 4.0%, respectively.
The report issued by Wolff and Sampson implies that certain Somerset County Park employees are being charged below-market rents; it also questions “the circumstances surrounding various improvements, paid for by the Commission.” If so, this begs the question: What other, non-economic factors may be in play for why this is happening?
The photo above is that of a Bridgewater property owned by the Somerset County Park Commission. It is being rented to its director at $500 monthly. If, as has been reported in the press, this home has a value of $1.5M, the yield is only 0.4%.
Saturday, July 21, 2007
What’s a Fair Rent for Parks Employees?
On July 15, an area newspaper reported that the Somerset County Parks Commission Director, “…pays $500 a month for a $1.5 million historic colonial home on 25 acres in the Martinsville section of Bridgewater.” It also stated that there are 10 more homes rented to employees; another one is occupied rent free.
Should homes be rented to park employees? Let’s, for a moment, assume that the answer is yes – at least tentatively. The next question then becomes: What should the rental fee be? Is there an economic answer to the question? Yes. There are valid formulas for computing rate of return (or yield) on a real estate asset, based upon maintaining a proper relationship between the value of a home and its rent.
One of these formulas is simple and provides direct results. For example, let’s assume that a property in Bridgewater is worth $500,000 and is rented to someone at $2,000 per month: The yield to the owner is 4.8% per year.
Example #2: If the rent on this same $500,000 property is reduced to $500 per month, the rate of return to the owner plunges to 1.2%, an unacceptable return to the owner, under any reasonable business scenario.
Moreover, in order to keep these examples plain, none of the owner’s cost, such as grounds maintenance, upkeep, and taxes, if applicable, have been factored in.
In the next posting, you will see the results of a similar analysis for a home worth $1,500,000.
Note: Detailed explanations and spreadsheet formulas are not in this blog to keep it as brief and clear as possible.
Should homes be rented to park employees? Let’s, for a moment, assume that the answer is yes – at least tentatively. The next question then becomes: What should the rental fee be? Is there an economic answer to the question? Yes. There are valid formulas for computing rate of return (or yield) on a real estate asset, based upon maintaining a proper relationship between the value of a home and its rent.
One of these formulas is simple and provides direct results. For example, let’s assume that a property in Bridgewater is worth $500,000 and is rented to someone at $2,000 per month: The yield to the owner is 4.8% per year.
Example #2: If the rent on this same $500,000 property is reduced to $500 per month, the rate of return to the owner plunges to 1.2%, an unacceptable return to the owner, under any reasonable business scenario.
Moreover, in order to keep these examples plain, none of the owner’s cost, such as grounds maintenance, upkeep, and taxes, if applicable, have been factored in.
In the next posting, you will see the results of a similar analysis for a home worth $1,500,000.
Note: Detailed explanations and spreadsheet formulas are not in this blog to keep it as brief and clear as possible.
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