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Article Excerpt
We analyze appreciation rates across comparable designated and undesignated neighborhoods in Memphis, Tennessee. Using appreciation rates potentially nullifies the objection to using assessed values in such an analysis while also mitigating some of the bias inherent in the differences between otherwise similar designated and undesignated neighborhoods. Nonetheless, in accord with the previous studies, after controlling for numerous housing characteristics, we find that properties in neighborhoods designated historical by the Memphis Landmarks Commission had appreciation rates above those in other similar neighborhoods. We also find that new properties benefit as much, perhaps even more, than older properties from being in a historic district.
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The designation and preservation of historical sites is an increasingly widespread tool in urban design and planning. In part, its application is intensifying because there are few vocal opponents to preserving our cultural heritage. It is implicitly an urban-oriented policy because nearly all of the U.S.'s historic building stock is located in its cities, and, moreover, older neighborhoods often are the parts of cities in greatest need of external stimuli. Thus, public incentives encouraging private investment in historic properties have attributes that give them the appearance of being a partial remedy for a myriad of urban problems.
To date, a national tax credit up to 20% of the rehabilitation costs is available to owners of historic property. Additionally, 15 states offer state income tax credits and 25 states permit some form of property tax abatement that benefits older, if not strictly historic, stock (Beaumont and Pianca 2001). To qualify for many of these incentives, properties often must be officially designated as being "historic," be eligible for such designation or be a "contributing" building in an officially designated historic district. Thus, historic designation can be bestowed either on individual sites or on entire neighborhoods. In addition to the explicit tax benefits, designation often can add a certain cachet to a property.
But designation is more than just an information transmission device or a means of catching a tax break. Typically, it also restricts use of the property, restricts the types of refurbishment and rehabilitation that can be undertaken and burdens property owners with responsibilities for upkeep and maintenance that go beyond those found in usual zoning and building code regulations. Indeed, in the case of neighborhood designation, regulations that often accompany historic preservation appear to provide a mechanism ensuring neighborhood upkeep (Leichenko, Coulson and Listokin 2001, Coulson and Leichenko 2004). Inefficient levels of maintenance are a result of a prisoner's dilemma-like interaction in which property owners have an incentive to invest only in low levels of maintenance, regardless of their neighbors' maintenance behavior. The natural upshot is that all neighbors can wind up employing this strategy, resulting in an overall downward spiral in the quality of housing stock in the neighborhood. In such a situation, everybody is made worse off than if they all had agreed to provide high levels of maintenance. The restrictions embodied in the designation of a historical neighborhood may have the potential to induce owners to internalize this neighborhood externality that comes about when maintenance drops below efficient levels. Thus, at least from a theoretical perspective, compliance with preservation restrictions could overcome the momentum of low levels of neighborhood-wide investment in properties.
But the restrictions that come with designation are a double-edged sword. Stringent building codes also can discourage the restoration of older properties (Saltzman 1995). In particular, by their very nature they restrict the way in which property may be altered or refurbished and may require large maintenance expenditures to preserve or restore the historical character of the building or neighborhood or may significantly delay revenue generation on the property. Perhaps the most common theoretical argument is that designation can prohibit a property from attaining its highest value and best use. For example, it could detract from a property's value by prohibiting its conversion to another land use, such as from a current single-family property to a multistory office building. Thus, the ultimate effect of designation on property values is theoretically ambiguous.
The empirical literature on the topic reveals mixed results, though it is fair to say that studies of historic designation have discovered that it leads to higher property values. Some of the earliest studies of the price effects of designation involve simple comparisons of neighborhood averages. Examples include Scribner's (1976) study of Alexandria, Virginia, and Rackham's (1977) study of the Georgetown area of Washington, DC. Both found that their focal historic districts had higher property values than those of comparison neighborhoods. Heudorfer (1975), on the other hand, found that historic areas in New York City had lower prices than the putatively comparable undesignated neighborhoods. In the largest "comparison" study we know of, Shipley (2000) undertook a comprehensive examination of designated property in Canada and, by comparing average appreciation rates of designated property and nonhistorical property on a city-by-city basis, found that in most cities designated properties had greater appreciation rates than other properties.
Obviously, by comparing average property values without controlling for other differences between designated and undesignated lots, structures or neighborhoods, the aforementioned analyses are neglecting other possible explanations for the observed differences in historical and undesignated property values. Regression models using individual properties as the unit of observation can overcome this problem. As it happens, regression-based studies also have generally confirmed a positive effect of designation on property values (Ford 1989, Asabere and Huffman 1994a, Clark and Herrin 1997, Leichenko, Coulson and Listokin 2001). Alternatively, however, others (Asabere, Huffman and Mehdian 1994, Asabere and Huffman 1994b) find that the special restrictions on designated multiunit properties had adverse effects on their values in Philadelphia.
Because, from a theoretical perspective, the extent of preservation that arises from historical designation depends primarily on the trade-off between the internal and external impacts of the regulations related specifically to designation, one might expect that associated price impacts might depend on the stringency of those regulations (only in the case of local regulations--national designation has the same basic influence everywhere, although there are cases where a property has both). Schaeffer and Millerick (1991), in a study of Chicago, find that national designation has a positive impact but local designation has a negative impact, which they attribute to its greater regulatory stringency. Coulson and Leichenko (2001) also found national designation of individual properties to be more value enhancing in their study of Abilene, Texas.
Finally, whatever the effect of designation and preservation regulations on the historic property, undesignated property that shares a border with historic ones should unambiguously experience positive impacts because they bear none of the cost of the regulation and experience a presumably positive externality--that of basking in the glow of an enhanced and maintained property. While Clark and Herrin (1997) did not find any such increases, Coulson and Leichenko (2001) found strong positive price effects from having a number of historical properties in the same census tract in their study of Abilene, Texas. (1)
Much of the literature focusing on historic designation's effect on property values has done so by analyzing the differences across neighborhoods that are subjectively deemed to be similar. Unfortunately, it undoubtedly is quite...
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