Madison’s flirtation with property flipping to turn a profit is a financial risk better left untaken, according to critics who say the city has no business playing the land market.
“How do we know what the economy’s going to do in the future?” said Alderman Jed Sanborn. “How do you figure in other costs? What about the restrictions we have on the land and how that affects a buyer’s interest?
“It’s why this whole idea is so foolish. The city’s role is not to be land speculators.”
Yet the city’s 2010 budget allows for a land bank, which authorizes borrowing up to $5 million to buy property. Alderman Mark Clear, who proposed the budget amendment so the city could buy up struggling properties in a weak economy, used the long-vacant Union Corners development site in the city as an example of the type of property that could be targeted. He said there are no negotiations under way to buy the land.
The Common Council would have to approve any land bank purchase.
“I’m certain it will be controversial any time there is a vote,” Clear said. “There are some people who say this is bailing out developers, and there are others who say this is taking advantage of distressed developers. It’s not necessarily automatic.
“But in the end, it comes down to a political fight, and it’s also possible nothing may happen.”
The political fight could center on the potential for the city to lose money in a deal, particularly considering the cost of the land and the lost property taxes once the city buys the land.
“Any time you deal with a property owner and start adding on top to come to a selling price, it’s going to be harder to sell that land,” said Konrad Opitz, president of Madison-based Opitz Realty Inc.
Using Union Corners as an example, the city can identify generally how much a deal could cost. According to the city assessor’s Web site, the Union Corners property generates, on average, just less than $91,000 in property taxes each year.
According to Dane County’s land assessment Web site, the Union Corners property is assessed at roughly $4.5 million.
If the city borrowed $4.5 million to buy the property at its assessed value, City Comptroller Dean Brasser said, the loan would be paid off in 10 years, with a minimum 10 percent principal payment each year and a 5 percent annual interest payment.
Holding the property for one year, then, would mean at least a $225,000 loan payment and almost $91,000 off the city’s tax roll, meaning the city would need to raise the selling price by more than $300,000 to turn a profit. That would likely double each year the city does not sell the land.
That does not figure in interest on the loan or maintenance costs for the property.
“And that’s under the assumption the city buys it at the right price and can get it turned around and moved out in a year or two,” Opitz said. “What happens if it gets stretched out, and the city’s holding onto it for five, six or seven years?”
Clear said the instructions for how to use the land bank have not been finalized, but likely will be ready in January for city approval. If the city does not use the land bank next year and the economy improves, Clear said, he would not support renewing the land bank in 2011.
“It’s not our place to be doing this kind of thing if the markets are working properly,” he said.
Sanborn said it’s not a good idea no matter what the economy is doing.
“If it could turn a profit and everything would be perfect, then fine,” he said. “But that’s not the world we live in. We shouldn’t be taking chances. This shouldn’t have been put in the budget in the first place.”