Sand cost-benefits
I’m a numbers guy. I hate to admit that given the time and effort I put in college taking subjects that avoided the use of numbers. But even as a Political Science major I found myself drawn to the ‘dark’ side of the discipline — polling and empirically based studies. The 30 years I spent as a banker also contributed to my “numbers problem.”
In our sit-down discussion with Chairman Paul Tine and President John Bone at The Outer Banks Chamber of Commerce, one of the first questions we asked was to supply a number justification for beach nourishment projects — dollars spent on nourishment versus dollars saved. For the true business news junkie, we were looking for a return on investment argument.
Tine mentioned how complicated it was to measure all of the aspects of the economic impact of potentially lost beaches. And, after writing an article on the economic impact of one small house in Nags Head, I am somewhat inclined to agree with Mr. Tine. Basically, I analyzed the tax and gross rental income for one oceanfront cottage and extrapolated the numbers to about two dozen homes in Nags Head scheduled for removal.
Our readers, posting comments, ran with those numbers in all manner of interpretation. Some decided the entire $36 million project must be for the benefit of those 24 homes only. Others chose to compare writing off a home to writing off a depreciated business asset without noting that old business assets are typically replaced. Others tried to guess at the total tax value covered by the project, underestimating by as much as 60 percent in some cases.
The numbers game is a tough hurdle for nourishment proponents. Let’s take all of Nags Head as an example. According to town staff, all property east of the “Beach Road,” or in South Nags Head, east of Old Oregon Inlet Road, is considered “oceanfront.” Obviously, this includes some non-oceanfront homes in places like the Village district and most of South Nags Head proper.
Regardless, the town and county assign an assessed value on the Nags Head oceanfront at just over $1.1 billion. So, do we think spending $36 million to save $1 billion in tax value is worth it? Since the Nags Head project is expected to last five years at minimum, perhaps the equation should be $36 million in expense to save $5 billion of tax assessments over the course of the project’s expected life.
But tax value is just that . . . a number. A billion dollars in tax value doesn’t generate a billion dollars in revenue to the town or the local economy. As far as the town is concerned, those properties generate about $1.6 million in property tax. Over five years, that would rise to about $8.3 million, not even close to the project amount. However, the county also collects $2.8 million annually from the Nags Head oceanfront. Add the town and county take from property taxes together for five years and we have $22 million in property taxes at risk. We still haven’t reached the level of expense for nourishment.
Local and state government currently collects 12.75% in sales tax on all rentals in the project area. Not hard to measure, but since the data would have to be segregated from the non-project area it would consume considerable staff time.
Going forward, the numbers become much easier to imagine than to measure. We would need to consider the gross rental income on each property, a significant portion of which is captured by the local economy in the form of profits and operating expenses. Operating expenses pay the salaries of local workers who arrange rentals, man the desk at the hotel or repair the air conditioning at a rental home.
Beyond these numbers, which I suspect would easily surpass the cost of the nourishment project, we come to intangibles. For example, each renter spends a certain sum of money on dining, groceries, entertainment and shopping. While opponents of nourishment believe that lost rental space on the oceanfront merely shifts to other existing rental properties (under the theory that we are never 100 percent leased up in the summer), proponents of nourishment might respond that there is a finite limit to such shifting and eventually the loss of rental space would begin to outstrip our ability to absorb these renters in other properties.
Settling on such a number would be subjective and open to debate.
And, it is fair for critics to point out that every property in the proposed project zone is not currently threatened, nor are those properties likely to be threatened even over the next five years. This argument places nourishment proponents in the unenviable position of having to sell a $36 million insurance policy.
On the other side of the equation, the entire oceanfront of Nags Head accounts for 37 percent of the town’s total property tax collections. Even if the town could cut expenses as properties are lost, it is safe to assume that full time residents on the west side of U.S. 158 can ill afford to absorb the property tax increases they would face if 37 percent of the current town revenue from that source washes out to sea; not to mention the loss in gross revenues and sales taxes.
As one can see, there seem to be infinite possibilities in measuring the true economic numbers relative to nourishment. Yet, in spite of the difficulty in determining those numbers and the fact that many citizens might be confused by their complexity, it seems to me that our elected officials have not done a good job in justifying the expense of nourishment and defining the hard dollars at risk if we do nothing. It should be within their grasp to identify all of the property tax, sales tax, gross rental income, and even the average amount of money each visitor spends while vacationing here. We should be able to identify the true number of properties that are reasonably expected to be lost over the course of five years if we don’t replenish the sand.
Projections on how much taxes would rise on the west side of each town if oceanfront property washes away can be conservatively estimated. The number of local jobs directly tied to the oceanfront and the dollar value of those jobs is also a number we should be able to uncover.
Sure, some people might be confused. And those who believe nourishment is folly because of ecological damage or the futility of fighting the forces of nature aren’t going to be swayed by economic arguments in any event.
While not a scientific sampling, the comments sections of our stories on nourishment reveal the public is looking for economic answers and they are not convinced by the current “just do it” argument proffered by nourishment advocates. As expensive as these projects are, justifying the huge price tag on a leap of faith that the economic return is there, somewhere, is not enough. Show me. Show us.
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RDS says:
This is a key statement: “Identify the true number of properties that are reasonably expected to be lost over the course of five years if we don’t replenish the sand.”
These rentals are businesses with life spans and, like you point out, an ROI that is not infinite. Every investment depreciates to the point that you take it off your books.
As businessmen, we make hard decisions based on dollars, not on a real estate salesman-turned-mayor’s clever pitch.
Good stuff, very good stuff.
Bob O says:
You are right, Russ, the economic argument needs more explanation with numbers. I remember hearing a consultant speak about 15 years ago, and he came up with a 1000 to 1 cost benefit ratio, but he used multipliers and a lot of assumptions. We’ll get hard numbers together, then everyone can make their own assumptions on multipliers, etc.
RDS, I don’t think homes are usually just taken off the books. Most people repair, repaint and maintain their investment, and continue to collect the income.
Thanks for the clever comment, but I’m much more of a property manager than a salesman. So I’ve been making those hard business decisions since 1986 in Nags Head. And if you check the NC Employment Security Commission,
http://esesc23.esc.state.nc.us/d4/QCEWLargestEmployers.aspx , then click Dare County, you will find that I’m the largest private employer in Dare County, behind the Dare County Schools and Dare County. So I think I’ve got the credentials to argue about business decisions without the smoke about being a real estate salesman.
Bob O says:
A quick addition – I laughed at the guy that said 1000 to 1 cost benefit. And the NC Employment Security data is quarterly, and I looked at the 3rd quarter of 2009, it’s the most recent.
RDS says:
I stand corrected.
More Info says:
The State of North Carolina has “invested” (That is tongue in cheek) a lot of money into a Beach Inlet Management Study that was SUPPOSED to, among other things, come up with a funding scheme to create a dedicated State funding source for Beach Projects. After nearly a year of delays in releasing the report, we still wait. Part of the study included some detailed work conducted by Dr. Chris Dumas of UNCW. A summary of his findings is available at:
See slides 28-33.
Peter Griffin says:
A few points worth mentioning:
1) There’s no guarantee a nourishment project will last 5 years. It could, but it probably won’t. Regardless, sooner or later it will all disappear…and then what? Anybody care to comment on what happens then?
2) A significant portion of gross rental income IS NOT captured by the local economy in the form of profits and operating expenses. The vast majority of profit from oceanfront properties goes to property owners, 90-95% of whom live somewhere other than Dare County (go ahead and check). Sure, some profit does stay, but how much is up for debate.
3) Operating expenses pay the salaries of local workers who arrange rentals, man the desk at the hotel or repair the air conditioning at a rental home…and they will continue to do so even if a bunch of oceanfront properties aren’t there in a few years.
4) With the second lowest tax rate among NC coastal counties (with a beach) and with one of the lowest municipal tax rates in the state, property owners absolutely CAN absorb the property tax increases they might face, even if 37 percent of the town’s tax base washes out to sea (**See item 6 below). They just wouldn’t want to.
5) Even if the town could cut expenses as properties are lost, the burden on ALL property owners – not just full time residents – would be a fraction of the total amount lost due to changing economics such as changes in supply/demand, scarcity and assumed values (all of which would stabilize, or even increase, property values).
6) If the entire Nags Head front row washes out to sea, you have WAY bigger problems than how to recapture that lost value!!
The bottom line is that there is so much more to consider when evaluating the pros and cons of beach nourishment than listening to some pro-nourishment group repeatedly proclaim “No Beaches, no Business.”
Do your homework people!!
Russ Lay says:
Peter: I’ll let others go into detail, but to set the record straight, I’ve looked at hundreds of rental property tax returns over the past 16 years here on the OBX. Very few of them, east or west side, seasonal or year round, show positive cash flow (and I mean real cash flow, not IRS taxable income). In fact, east of the bypass or anywhere on Hatteras, any home purchased post 1999 probably doesn’t generate enough gross income to cover debt service, much less other expenses. I’d be happy to discuss off-site.
Thanks for posting!
Mark says:
to Russ
I think rental homes, when it comes to claiming taxes, are like small business owners not claiming all of their income, it just isn’t done.
Mark says:
to Peter
4) the real estate taxes are very low here
it is because of the beach, the tourist that come here spending their money, keep all our taxes low
that’s why we need to save the beaches…
Peter Griffin says:
Russ: My “Do your homework people!!” line was in no way directed towards you, and I’m sorry if it came across that way (after re-reading it, I can see how it might be interpreted that way).
It was simply meant to summarize everything in my post…that there are so many more issues that need to be examined before $36 million is spent on a project that clearly has dubious benefits and possibly significant costs (other than monetary).
Now to your post: Are you saying that most OBX property owners, including those that rent houses for $10,000/week, are losing money?
RDS says:
Russ, I assume you’ve factored in resale value since ’99 as well. Values were increasing 30% per year at times. Weekly revenue is not the whole picture.
The bulk of RE investment profit comes from appreciation. The weekly rentals are often just a way to service the debt, so of course you’re not talking about an immediate “in the black” situation.
Russ Lay says:
@Peter: I didn’t take the “homework” phrase as personal. I figured it was a general exhortation! To answer your question, yes…most of the rental homes lose money. If you have a $1.75M home that you financed 100% (which most are these days, sadly), your debt service is $132,000 at 6.5%. If you get $10,000 a week for the entire summer (which you won’t) that would only gross $130,000 for a 13-week season. Take 12% for rental management and your already way under water. Add utilities, etc and its a loser. Even if you put 20% down, you have to factor that into your ROI..still a loser unless and if you sell with capital appreciation, which right now is going in reverse. Go to a two-row back new home, where sales prices broached $550-600K and rents there often gross less than $60,000 and the losses are even worse. As someone told me this morning, “if rental properties are a business model, its a lousy one”. Which is why, as a banker married to a CPA I never once thought about buying one.
@Mark–I was taking gross rents, not tax rents. Since most are in rental programs which the rental companies are required to report, there is little way a rental owner can hide his or her rents from the IRS.
GB says:
To add another perspective — the best very best rental properties (from an income perspective) in the 700K to 2 mil price range for sale right now have gross returns around 10% and net returns in the 4% to 5% range when all expenses—taxes, mgt, pool, utilities, maintenance, insurance are considered. This does not include debt service. Most rental properties do not have numbers that come close to these numbers—these are for the very best from an income perspective.
In 2004 through 2006 the best weekly income properties had gross returns of 5%…barely enough to cover expenses but no debt service whatsoever. Russ’s analysis on this is on track. There are other reasons to buy and Peter is also right in pointing out that appreciation is and was a powerful force and motivation for the purchase of many of these homes.
A 1% occupancy tax increase, or an increase in insurance rates or any other increase in expenses will push many owners into the red or further into the red. If an owner struggles to pay the mortgage and the utilities, they are likely to defer maintenance first (directly affecting our local workforce and the quality of our rental inventory). Too often now some owners are forced to walk away, which hurts us all in reduced values, lost tax revenue and empty beds. Most owners of rental homes in my experience are middle-class families, not super-rich investors. The reasons why they invested in the first place can be debated and questioned, but the reality is that it’s in all of our best interests now to help keep costs (taxes) low for these owners to mitigate the spread of foreclosures and deferred maintenance. 2010, 2011, and 2012 are not years to raise taxes—the proverbial camel is loaded with 4 bales of hay and another straw will break its back.
Bob O says:
GB, I have the same concerns about that camel. He’s been loaded down with more than 4 bales of hay for a long time. And that load has kept increasing as your camel got older. He needs new knees, and Nags Head can be the first leg.
I posted a brief “Numbers” piece on http://www.nagsheadblog.com. Please take a look and comment. Sorry for the poor formatting, but the bottom line is $72 million in direct taxes over 5 years. A lot of hay.
Herman Blume says:
Using GB’s logic, it would be prudent for the federal government (i.e. Nags Head) to protect my 401(k) (i.e. beachfront house) when the market tanks (i.e. is threatened by erosion) so I’ll have more money to spend when I retire (to prevent foreclosure and support the local workforce). But if I asked federal taxpayers to bolster my retirement savings, I’d be run out of town.
What’s the difference?
Bob O says:
The difference between your 401k and the beach is the recreational value for people all over the East Coast that come to the Outer Banks and Nags Head to visit the beach. Your 401k doesn’t generate the tax revenue to local governments that the beach and the properties on or near the beach do. Nags Head has done a particularly good job in providing the public with access to the beach, 40 access points in 11 miles of beach.
Herman Blume says:
Bob O: What are the recreational benefits of the Nags Head BN project?
Herman Blume says:
Bob O: Your numbers are very impressive. The project EIS, however, provides a very different and – I believe – more realistic scenario.
According to Table E-6 of the EIS, 76 properties MAY have to be abandoned in the absence of a beach nourishment project.
The net present value of property tax revenue not generated by these 76 properties (if they are lost) over the projected 10-year life of the project is $658,746 to Nags Head and $1,116,518 to Dare County for a total loss of $1,775,000 (NOTE: these values are based on 2006 property values AND inflated by 4.8%/year).
How do you reconcile your coastal expert’s projected property tax revenue loss of $1,775,000 (with no beach nourishment) and your estimated loss of $26,823,259.77 in only five years? That’s a pretty significant difference.
GB says:
Bob –I will check out the numbers and comment. Thank you.
Herman–I am opposed to beach nourishment and opposed to a tax increase, but also am a realist and very pragmatic. If NH is going to nourish, then I will do everything possible to
1. make sure any tax is as fair and low as possible and 2. make sure that environmental concerns and other risks are fully discussed, investigated, and understood by as many people as possible. My comment above will hopefully help us all better understand the realities of a complex tangle of situations, motivations and consequences and make better decisions.
I don’t want a bailout…but I don’t want our local government to make things worse by increasing occupancy tax. If the owners vote to increase their own taxes–then that’s their decision and another matter.
Herman Blume says:
GB: I’m neither for nor against beach nourishment. I just think if a community wants to spend $36 million on a project that has dubious benefits and potentially staggering costs (economic, fiscal and social), it is critically important that the process be fully vetted and completely transparent.
The reason Bob O’s numbers are so much higher than those in the EIS is because Bob includes every property east of the Beach Road, while the EIS includes only those properties likely to be impacted by beach erosion over a 10-year period (the estimated life of the project).
In other words, according to the town’s own experts, the primary economic benefit of a $36 million beach nourishment project is the preservation of 76 properties and about $1.775 million in local and county tax revenue.
Even when you add in occupancy and sales tax and use economic multipliers (which are more voodoo than anything), the costs of beach nourishment FAR outweigh the benefits.
GB says:
Herman–We are in agreement on vetting and the reason for the discrepency in Bob’s numbers. Check out his blog and the comments and links that follow the numbers piece. http://nagsheadblog.com/2010/03/24/the-numbers-on-nourishment.aspx#Comment
Herman Blume says:
GB: That link is what I am referring to. And I enjoyed reading your comments.
Here’s a thought, what if the town invested $36 million in a program that purchased and removed vulnerable/condemned oceanfront structures? Probably not an optimal solution, but if the town waited until properties were damaged, condemned or encroaching on the public beach, their value would be considerably reduced (maybe 80%) and property owners would likely be more amenable to a buyout.
Sure, some tax revenue would be lost, but it would be a relatively small amount over a longer period of time.
GB says:
To make retreat in some areas a more viable political alternative some assistance/compensation needs to be considered for the owners facing the loss. Philosophically I am not in 100% agreement, but practically speaking it would be expedient and help the community as a whole and the owners in need.
One way to do this would be to reinstate the Upton Jones Amendment, which provided help through the federal flood insurance program.
“The Upton Jones Amendment to the NFIP was passed in 1988. The Upton Jones amendment created a new type of coverage to assist owners of properties which were threatened by erosion and in danger of collapse. It allowed owners to such properties to make claims on their NFIP flood insurance policies to cover the cost to relocate or dismantle the threatened building. Theoretically, this saved the NFIP money by avoiding larger claims after the buildings are destroyed. The Upton Jones program was rescinded by the 1994 NFIP Reform Act, and now FEMA administers several grant programs which can accomplish some of the goals of Upton Jones.” –from Answers.com
Upton Jones Amendment definition also from answers.com: “Amendment that modifies the Federal Flood Insurance program by providing relocation and acquisition coverage for structures in imminent danger from an encroaching shoreline. This amendment enables the Federal Flood Insurance Program to pay up to 40% of the policy to property owners who relocate structures in imminent danger and up to 110% of the policy to property owners who demolish those structures and remove the debris. A prerequisite for the property owner to receive these funds is for the property structures to be declared uninhabitable by the local permit authority and to be subject to erosion or to be within the geographical boundaries of an erosion zone that has been included in a program approved by the state. Under the Federal Flood Insurance Program, residential structures on the shore can be insured against floods for a maximum amount of $185,000 and $60,000 coverage for contents within the structure.”
Herman Blume says:
I noticed Bob O hasn’t addressed the disparity between his numbers ($53,000,000 over ten years) and those of the town’s consultant ($1.775 million) regarding the potential ad valorem tax benefits of a $36 million beach nourishment project. Bob?
Bob O says:
Sorry, Herman, I’ve been on the road for the past several days.
I don’t see where the Appendix E analysis considered occupancy or sales tax revenue generated by the properties, and that’s actually a larger component than property tax. I have called the firm that did the analysis, and asked for a better understanding or description. I’ll try to get them to post here.
The http://www.nagsheadblog.com discussion seemed pretty straightforward. You can discuss whether it is 85% or 90% or 80% of the revenue that is generated on the ocean, but it’s a big number. Likewise, part of the sales tax goes to the state, and part goes to the county and towns, but it’s all revenue to the government, and would have to be replaced (or expenses cut) if lost.
And over 5 years, it looked like nourishment could protect $72 million of revenue – not property value, but tax revenue.
Herman, we could buy the homes off of the beach, and it may be less expensive than suing them off the beach. But I maintain that we have to keep a clean and usable public beach, and it’s very difficult to do with homes near to falling in, and the time it takes to go through the legal process to have them removed. And when the home or hotel is gone, we don’t get any more tax revenue from it. The end result of this method of dealing with erosion is a retreat back to the road. It makes sense to me to try nourishment as a method of keeping the tax base intact, and continuing to generate tax revenue. Certainly there is a big cost to nourishment, but the alternatives, retreat in the long run, and sandbags in the short run, are worse.
I am still looking fo rsome of the other answers (1990 status, etc.) Sorry, busy week.
Carey Kelley says:
Has any one that is in opposition walked the beach from NEW pier south.
I have owned for 5 years in Nags Head and am appalled at the condition of this area. You should be ashamed of yourselves to let it get to this. When ever I heard the words Outer Banks I thought immediatly of Nags Head and beaches, these aren’t beaches they are dumps. Talk about costs how much will it cost to demo the Comfort Inn, the Yatchsman, the Whalebone motel, Owens motel, etc., and how much revenue will be lost there?
I took video today and would love to see what all the folks on YouTube would think of Nags Head. I am in total disbelief that you could even consider letting this continue.
This has gone on for 20 years and and no one has made a decision and the beaches of Nags Head are embarassing.
I had family down and even though they stayed for free, will be going elsewhere because when they attempted to walk the beaches thru all the DEBRIS they ran into motels and ran out of beach since the ocean was all the way to the dunes. I never would have believed that an OCEAN community could allow this. Unbelievable.
Local says:
Mr. Kelley, everyone who opposes it has walked that stretch. We live here, and all agree it’s a mess. We disagree on how to clean it up.
The challenges are huge. We’ve never had a way to fund the massive cost of sand pumping. Our beach is 70 miles long. Permits are hard to come by. And the erosion in those spots has wiped out earlier projects.
The only success locals can point to is in Kitty Hawk, where the town removed a row of rental structures, nourished a nice dune, and now the beach is in good shape. Nags Head does not want to consider that solution.
Carey Kelley says:
So removing all the hotels make sense? And when the beach continues to erode the new pier property should also be torn down when there is no parking lot?
Local says:
It does make sense. Like you said, it’s a business. Musty, less desirable lodging must be taken out of the equation eventually. You wouldn’t pay 36 million to repaint and rebuild a 70s Ford Pinto.
NH has 5-10X the lodging it had when those old, moldy, outdated structures were built 40 years ago. Those investments made their money back many times over. Time to move them and have a nice wide beach again.
Carey Kelley says:
So how much are you willing to spend if they walk away, and since that is your answer then it should be easy to get all who agree to pay for it. I hope you can get them to do it soon so I can have my family back to a wide safe beach.
Ray says:
If and when the County of Dare or any of its local municipalities starts using tax dollars to (1) demolish and/or tear down, or (2) remove private cottages away from the oceanfront you will see the biggest voter outcry ever heard on the Outer Banks. And, if I live long enough to see it, I will be right there fighting it with all my might. The inevitable cost of retreat is not a burden that should be bore by non-oceanfront investors or the average citizen of Dare County.
Carey Kelley says:
So you have no solution to your towns situation?
Bob O says:
Ray,
What if it costs less to remove the house than to sue the owner to remove the house?