Teardowns: Costs, Benefits, and Public Policy (Land Lines Article)

Author(s): McMillen, Daniel P.
Publication Date: July 2006

Inventory ID LLA060702; English

Article

In the past decade, nearly 50 mansions have been demolished and replaced in the historic Chicago suburb of Kenilworth. Four demolition permits are currently pending review, while permits have been approved for two other historically significant houses. To slow the teardown trend, Kenilworth has enacted a nine-month waiting period between issuance of a demolition permit and initiation of the teardown process. However, the village does not have a historic preservation ordinance, and local officials generally support the rights of property owners to demolish and replace their houses. The National Trust for Historic Preservation included Kenilworth on its 2006 list of the 11 most endangered places nationwide (Black 2006).

The practice of demolishing and replacing houses in high-priced areas generates passionate controversy. The fight to save the Skiff House in Kenilworth is illustrative (Nance 2005). That property at 157 Kenilworth Avenue is one of the premier locations in one of Chicago’s most expensive suburbs, three blocks west of Lake Michigan and five blocks from the commuter train station in the village center.

The house was built in 1908 for Frederick Skiff, the first director of Chicago’s Field Museum of Natural History. This beautiful and historically significant house was designed by the architectural firm of Daniel H. Burnham, who was considered the preeminent architect in America at the turn of the twentieth century. He oversaw the construction of the 1893 World’s Columbian Exposition and helped design a series of lakefront parks as part of the 1909 Plan of Chicago.

Plans to demolish the Skiff House shortly after it was purchased in 2004 for $1.875 million created an uproar. While many neighbors supported the owner’s right to tear down the property – after all, they might want to do the same – others saw it as an assault on the community’s character. “Save 157 Kenilworth” signs began to appear in front yards throughout the village, and a neighborhood group, Citizens for Kenilworth, led a campaign to save the house. After months of controversy, and only days after an auction to sell off valuable parts of the house before demolition, a neighbor purchased the house for $2.35 million in order to save it.

Historic houses continue to be torn down in Kenilworth and elsewhere, but not all teardowns generate controversy. Residents of many Chicago suburbs have been supportive of the teardown trend. Naperville is a representative case. Founded in 1831 and incorporated in 1857, Naperville grew slowly until plans for the East-West Tollway (I-88) were announced in 1954. The population grew from 7,013 in 1950, to 21,675 in 1960, to 140,106 today.

Naperville’s downtown has undergone a renaissance over the last decade, attracting new restaurants, shops, and residences. Although the city has a historic district just to the east of the downtown area, teardown activity has been concentrated in what were formerly more humble areas. Small, older houses are being purchased for about $400,000 and replaced by much larger houses that may sell for $1 million.

The teardown trend in Naperville is illustrated by one small house being sold as a teardown, with an announcement of an upcoming public hearing posted in the yard. It is likely to be replaced by a house that is similar to the recently constructed house next door (see pages 6 and 7). Though teardown activity is not entirely without controversy in Naperville, it does not generate the same passion as the Skiff House did.

How Widespread is the Teardown Phenomenon?
Nationwide the teardown phenomenon has attracted much media and public attention. The decennial Census of Population and Housing offers a way to quantify the practice using the “net replacement method.” For example, suppose the Census lists 10,000 housing units in an area for 1990 and 10,500 units in 2000 – an increase of 500 units. Now suppose the Census shows that 800 housing units were built during the decade. Then 300 of the newly built units must have simply replaced existing units. The 300 replacement units are a crude but nonetheless enlightening measure of teardown activity in that community.

Figure 1 shows counties where at least one census tract had a net replacement rate in excess of 4 percent. Teardown activity is clustered in older urban areas in the Northeast, Midwest, and California. In fact, the map does not look substantially different from a map of population density in the United States. This simple analysis shows that replacement of the preexisting housing stock is an extensive phenomenon that is national in scope.

Nevertheless, it is surprisingly difficult to track teardown activity on a case-by-case basis. The classic teardown is a house whose sale is followed by the issuance of both demolition and building permits, but timing is a key factor in tracking these permits. If a demolition permit is issued four years after a sale, was the house really sold as a teardown? Similarly, a building permit may be issued long after a dilapidated house was demolished, yet this situation is not what most people have in mind when they think of teardowns.

Some teardowns are carried out by the current owner without a sale. Other houses are so extensively remodeled that they are effectively teardowns, even though no demolition permit is issued. Even when data on sales, demolition permits, and building permits are available, it is difficult to merge the different sources of information since they frequently come from different agencies that vary in the quality of their database management.

The National Trust for Historic Preservation has described the Chicago metropolitan area as the “epicenter of teardowns.” Aside from Kenilworth, teardowns are common in both the city of Chicago and its suburbs. The Village of Skokie (2005) surveyed 20 of its neighbors in Chicago’s near north suburbs and compared the number of detached single-family housing unit demolition permits from 2000 to 2003 to the total number of such units as reported in the 2000 U.S. Census. Thirteen of the 20 communities reported demolition permits representing more than 1 percent of the housing stock over the four-year period.

Richard Dye and I (forthcoming) have used data from Chicago and six suburban communities to document the degree of teardown activity in the region. We were able to obtain data on house sales and demolition permits for Chicago; one of its suburbs to the west, Western Springs; the northwest suburb of Park Ridge; and four suburbs on the North Shore – Glencoe, Kenilworth, Wilmette, and Winnetka.

Between 1996 and 2003, the number of demolition permits ranged from 29 in Kenilworth to 273 in Winnetka and 12,236 in Chicago. Of course, Kenilworth has only 2,494 residents, whereas Winnetka’s population is 12,419, and Chicago has 2.9 million residents. Figure 2 shows the number of demolition permits as a percentage of total housing units for each community. More than 9 percent of Winnetka’s housing stock was torn down between 1996 and 2003, and teardown rates were also quite high in Winnetka and Kenilworth. Even Chicago, with more than 400,000 housing units, had a demolition rate near 3 percent.

These six suburbs were not chosen randomly. All had high median incomes in 2000, ranging from $73,154 in Park Ridge to more than $200,000 in Kenilworth. All of these suburbs have stations on commuter train lines to downtown Chicago, little or no vacant land on which to build, and good schools and other local public services. In other words, demand to live in these suburbs is high. Teardown activity in Chicago is concentrated in comparable neighborhoods within the city, such as Lincoln Park, West Town, and Lakeview on the near north side.

The Costs and Benefits of Teardowns
Teardowns can impose significant social costs. Local residents often complain that new houses destroy the character of a neighborhood. Those houses may be built to the limits of the zoning code, tower above their neighbors, and reach to the edge of the property line. Sometimes neighbors simply dislike the design of new buildings, particularly those that replace historic houses. When tall apartment buildings replace single-family houses or two-family houses in the city, neighbors complain of the loss of sunlight, lack of parking spaces, and increased traffic congestion. The construction process itself can be noisy and disruptive. New, expensive houses may cause assessments to increase in the neighborhood. And, teardowns may reduce the stock of affordable housing.

Teardowns also carry some benefits, however. In places that rely on the property tax to fund local services, the additional revenue from high-priced replacement houses is often quite welcome. Not all teardown buildings are historic, architecturally significant, or mourned when they are demolished. Some teardowns are simply eyesores.
Some of the new houses being built today will eventually be viewed as historically significant properties in their own right. Once entire blocks are rebuilt, the new housing no longer looks out of place. It is surprising to discover how stark and incompatible some properties built in the early 1900s appear in historic photographs taken before trees grew and the neighborhood filled in with similar houses.

It also is important to recognize that teardowns may help to curb sprawl. One reason people move to the urban fringe is to build a new house in a contemporary construction style. Allowing people to tear down a small, outdated house and replace it with a modern house may induce them to stay in centrally located areas. In general, encouraging housing and economic growth helps maintain the vitality of previously developed areas, which is a strategic complement to anti-sprawl policies designed to limit growth at the fringe.

Policy Responses
Local jurisdictions have been creative in responding to teardowns. Some policies are designed to the slow the amount of teardown activity by making it more costly, through demolition fees and fines for illegal demolitions. Others, such as a moratorium on new demolition permits or an enforced waiting period between permit issuance and the time when demolition can start, are simply designed to cool a potential teardown fever. Such policies also raise the cost of teardowns by making developers wait for some time after purchasing a property before being able to recoup their costs. Complementary policies include landmark designation and historic district designation, which make it more difficult or even impossible to tear down existing structures.

Policies on the other side of the balance sheet may give developers an incentive not to demolish existing structures. Communities may offer tax breaks to owners who rehabilitate existing houses rather than demolish them to build new ones. Or, owners may be granted variances from restrictive zoning provisions in order to enlarge rather than demolish an existing house.

At the same time, jurisdictions often use zoning to influence the type of new housing that is built in their community. Lot-coverage and floor-area restrictions are used to ensure that new structures do not dwarf their neighbors. Other policies include maximum building sizes; set-back and open space requirements; and restrictions on such design elements as garage and driveway locations, roof pitch, bulk limits, solar access, and the alignment of the new house with neighboring structures. Many communities have design review boards that can revoke building permits for structures that are not in compliance. These standards are not always clear beforehand, however, and they can increase the level of uncertainty for developers, delay construction, and raise costs.

Even if communities do not attempt to curb teardown activity, they often adopt policies designed to reduce the disruption caused by new construction. The builder may be required to notify neighbors when construction is about to begin, and a time window may be imposed for completion of the building. Construction activity may be limited to certain hours of day, the site may need to be fenced, and work vehicle and dumpster location requirements are often imposed. Communities also may require that contractors be bonded and certified.

How successful are these policies in slowing the rate of teardown activity? As we have seen, the Skiff House was saved because Kenilworth’s nine-month waiting period between permit issuance and the start of demolition provided enough time for a buyer to step forward before the house was razed. However, the potential for profits in such transactions make it difficult to stop teardowns completely. If a developer can purchase an existing property for $300,000, demolish it for $20,000, and spend $400,000 to build a new house according to current construction standards, then he has incurred $720,000 in costs. With new upscale houses routinely selling in excess of $1 million in communities with many teardowns, it should not be surprising that developers continue this practice.

Implications for Land Values
Assessors encounter enormous difficulties in placing a value on land in built-up areas. When few vacant lots exist, it is nearly impossible to find enough sales of vacant land to assess the value of land accurately. In the absence of direct land sales data, land values can be estimated by subtracting construction costs less depreciation from the sale price of improved properties in the area.

Statistical analysis of mass appraisal data can account for such structural characteristics as square footage in order to control for the contribution of the building to total property value. With a complete set of these characteristics, the residual from the regression reflects the contribution of location to property value – in other words, land value. Unfortunately, any unobserved structural characteristic will also be part of the residual.

Teardowns can help estimate the value of land in developed areas. Consider the earlier example of a property that is purchased for $300,000, demolished for $20,000, and replaced by a million-dollar house. If the developer could purchase a vacant lot of the identical size next door for $290,000, which property would he prefer? If there is no salvage value for parts of the existing house, it will cost the developer $320,000 before it is possible to build on the lot with the existing house. Yet the vacant lot is available in the same general location for $30,000 less. The vacant lot is preferable even though it does not include a house – in fact, it is preferable precisely because it does not include an existing structure.

If the price of the vacant lot rises to $310,000, the developer still obtains a lot that is ready to build upon for $10,000 less than the cost of building on the neighboring lot. Only at $320,000 will the developer be indifferent between the two lots. It follows that the value of land in this case is $320,000. This key insight leads to an extremely useful method of valuing land in areas experiencing teardowns. The value of land is simply the sales price of a teardown property plus any demolition cost.

An important implication of this line of reasoning is that only location determines the value of a teardown property; characteristics of the structure are irrelevant except insofar as they influence demolitions costs or salvage value. This implication is somewhat surprising to people who think that a historic house has intrinsic value. Though it is tempting to think that the Skiff House in Kenilworth is worth approximately $2 million because of its historic and architectural value, a vacant lot next door would sell for nearly the same price. Any house near Lake Michigan in Kenilworth will sell for well more than $1 million. The conclusion to be drawn is simply that land is expensive along Chicago’s North Shore.

Richard Dye and I (forthcoming) test the prediction that only location characteristics influence sales prices in our sample of seven communities in the Chicago area. Our measures of location include such variables as lot size, distance from the nearest commuter train station, and proximity to Lake Michigan. Structural characteristics include such variables as building size, age, and whether the house is built of brick and has a basement, garage, or fireplace. We identify teardowns as houses for which a demolition permit was issued within two years of a sale. As predicted, structural characteristics do not significantly influence the sales price of teardown properties. Teardowns are purchased for the land underneath.

Final Thoughts
The teardown phenomenon is not new. Houses have been demolished and replaced for as long as they have been built. American cities grew rapidly in the late nineteenth and early twentieth centuries and again in the years just after World War II. Tastes now appear to be changing toward larger houses with spacious rooms and high ceilings. Many people find the existing housing stock less desirable than new construction. In this situation, it is not surprising that buyers purchase, demolish, and build new houses, especially in high-demand areas. The trick for local governments is to keep the costs of teardown activity from overwhelming the less obvious benefits.

Daniel P. McMillen is professor in the Department of Economics and the Institute for Government and Public Affairs at University of Illinois at Chicago. He has published widely in urban economics, real estate, and applied econometrics. He is a visiting fellow in 2006–2007 at the Lincoln Institute. Contact: Mcmillen@uic.edu.

References
Black, Lisa. 2006. Kenilworth added to list of endangered historic towns. Chicago Tribune, May 20.

Dye, Richard, and Daniel P. McMillen. Forthcoming. Teardowns and land values in the Chicago metropolitan area. Journal of Urban Economics.

Nance, Kevin. 2005. Teardown ‘madness has to stop’: Developer rescues historic Burnham house, but says it’s just a start. Chicago Sun-Times, November 6.

Village of Skokie. 2005. Comprehensive Plan Appendix C: Near north suburban housing activity study. Click here.