Sunday, July 16, 2006

Rent-Seeking

Rent-seeking. This is a major factor in business today. I know this from personal experience and speak of it from the point of view of the business space lessee. I was one (was, because we sold our successful venture); and the misappropriation of a part of our rent for undeserved landlord profit was enough to discourage me in the future from opening another business in a space that I do not own myself.

As you read through the classics of economics (Adam Smith, John Stuart Mill, Alfred Marshall), you begin to understand the idea of "rent" and its complexities. In economics, the word "rent" has a special meaning.

Rent, as most people understand it, is what you pay for your apartment or your commercial space; but in economics, "rent" is sometimes divided into several sums. The first is the compensation to the landlord for his preparation and maintenance of the land, and perhaps for the construction of the building he placed upon it. This part (let's call it Rent 1), is a normal income and profit that anyone would need to receive, in order to be motivated to prepare land and buildings for someone else's use. It is market-inspired and market-justified. No one and nothing should interfere with Rent 1.

Sometimes an apartment, a piece of agricultural land, or a commercial space becomes more expensive than it ordinarily would in minimal market-equilibrium circumstances. It brings in more "rent" than would be sufficient to cover Rent 1. This portion of extra rent (let's call it Rent 2) could be due to some special labor on the part of the landlord. Perhaps he has created an especially nice apartment, or he has leveled a field and taken out all the rocks. This is also justified profit and should return to the landlord.

Sometimes, however, the price of an apartment or a commercial space goes up a third ratchet, not because of the landlord's building or his work, but because of his tenant's extra work, or simply because of the land's situation. This we could call Rent 3.

Henry_george
[Thanks to Wikepedia for the photo.]

A fellow named Henry George wrote a bestseller back in the late 19th century, called "Progress and Poverty." He understood the inequities of the Rents 1 & 2 vs. Rent 3 dichotomy. He proposed a fascinating solution. (See below.)

In today's blog, however, I just wish to point out that from personal experience I can tell you that all rents should be returned to those who create them. In most cases, the landlord does not furnish all the work behind Rent 2 (even though he may sometimes have a role to play), but it is often the business person who spends the effort in fitting out the space and in carrying on his business in a professional way who is the real originator of Rent 2. Often, it is not the landlord who improves the land, but rather the farmer who toils it alone. Those portions of Rent 2 should return to their creators.

Sometimes, it is even the municipality in which a building is located that deserves a lot of the credit. Henry George supporters use the example of a skyscraper in the middle of the desert that would be worth nothing and would bring in no rent. The very same skyscraper in the middle of New York brings in millions. Should the landlord be the only one to profit from this true "windfall?" (And this is one of the few times when the phrase is appropriate.) After all, you cannot make more of Park Avenue. The supply is limited ("inelastic," in economic terms.)

Read Henry George's work and the solution he proposes. Some places have implemented it, and it works. The book is a great read. The man had a way with words, and he makes as much sense today as he did over 100 years ago. (Anecdote: Agnes de Mille was his niece, I believe.)

2 Comments:

Blogger LVT Fan said...

Agnes DeMille was Henry George's granddaughter. He died before she was born, but she grew up knowing his ideas, and wrote a wonderful piece, available at http://www.wealthandwant.com/HG/PP/demille_hg_bio.html

You'll find a lot more about George's ideas on the wealthandwant website.

2:00 PM  
Anonymous Anonymous said...

A Tenant’s Guide to Renting

The first challenge every tenant faces is finding an apartment for rent that suits their individual needs. For today’s tenant, the most effective apartment search can be done using an online apartment finder. Tenants should decide what they require in an apartment or house rental before beginning their search. For example: the number of bedrooms, location or distance from public transportation and how much the tenant can afford to pay in rent, furnished or unfurnished apartment, etc. By making these important decisions first, tenants can avoid renting an apartment or house only to regret it later. Many tenants today are taking advantage of the convenience of the internet to locate apartments for rent as opposed to the traditional print publications.

Once a possible apartment or home has been found, it is the tenant's duty to thoroughly inspect the premises making a commitment in the form of a security deposit. A tenant should not rely on the landlord or the landlord's agent to tell the tenant if anything is wrong with the property. The tenant must inspect the property carefully and ask questions about it.
Inspecting the condition and functionality of the following areas/features of the apartment before committing yourself as a tenant is highly recommended.
1. Kitchen appliances in working order.
2. Water pressure strong, plumbing without leaks.
3. Electrical outlets and wiring working.
4. Walls and ceiling painted or papered without cracks
5. Ventilation or air conditioning accessible.
6. Floors, railings and bathrooms in good repair.
7. Fire escape easy to use.
8. Stairs safe and well-lighted.
9. No rodents or insects.
10. Heating system in working order.
11. If furnished, check and write down condition of all furniture.
12. Windows and doors operable and weather-tight; screens provided.
The tenant should also check the security of the building to find out if there is a dead-bolt lock, security chain, or through-the-door viewer.
BEWARE OF EXISTING DAMAGES: In order to avoid being blamed for damages that already exist in the rental unit, the cautious tenant should take every step for self-protection. Before moving in (or as soon as possible thereafter), the tenant should make a list of all existing damages and repairs that need to be made. A copy of the list should he presented to the landlord and attached to the lease This way the landlord cannot blame the tenant for damages caused by others and the tenant will know what the landlord intends to repair. If the tenant keeps good records the landlord will not be able to keep the tenant’s security deposit for damages that were actually caused by others. Taking pictures before moving in is also strongly recommended.

ABOUT THE AUTHOR: Paul Rossano, associated with www.AllSpaces.com who “Conveniently Connects All People with All Spaces in All Places” has been dedicated to the Real Estate rental market for over 8 years. He has assisted over 25,000 tenants with their renting needs. Any questions about renting apartments, houses or other rentals, feel free to visit www.AllSpaces.com or email him at Paul@AllSpaces.com.

11:36 AM  

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