One Way to Think Through the Condominium Decision

As a Professor of Finance and Economics at Wharton and a 45-year resident of Swarthmore, I have been following the recent debate over plans to build a 36-unit condominium opposite the library with more than passing interest. I’m afraid I could not resist thinking this through as an economist, and thought it might be useful to share my thoughts—for better or worse, you decide.  

First, I am a fan of Adam Smith. Markets are wonderful. They bring together folks who want to sell goods with those who want to buy, and both sellers and buyers are better off for the exchange. The condominium is no exception. I have no reason to think that the sellers are making an excessive profit—if they were, I am sure we would have seen plans for this project years before. And I have no reason to think the buyers are getting some “insider” tax break to buy their units. So as an up-front transaction, it all looks fine to me. I have no complaints. 

But Adam Smith made an important second point about markets. While sellers and buyers gain, the transaction may have important side-effects—what economists call “externalities”—that affect those not directly involved in the sale—e.g., air pollution. Much of the expressed concern over this project involves Swarthmoreans’ concerns for externalities—parking, historical preservation, aesthetics, affordable housing, crowding, and my own area of expertise, taxes. So let me share how I am thinking this through. Is the sum effect of all these externalities positive (then as a non-owner, I will be in favor) or negative (then I oppose)? I won’t tell you how I came down after adding and subtracting, but will share how I organized my thinking.

Evaluating most of the project’s externalities involve value judgements and that will be personal. But we can put numbers on the tax effects. The condominium will increase both Swarthmore’s and the Wallingford-Swartmore School District’s tax base with either of two effects, or some combination. The higher tax base will allow lower tax rates while keeping services the same, or allow an increase in services while keeping the tax rate the same. Swarthmore Borough Council and the school board will decide on the mix, but here is a range of choices. All the calculations are “back of the envelope,” but use the latest tax rates (millage) and assessed tax bases for the borough and the school district, and the proposed selling prices for the condominium’s nine one-bedroom units ($600,000), three two-bedroom units ($750,000), and 24 three-bedroom units ($1,000,000).  

If all units sell for those prices the total market value of the property will be $31.650 million. For tax purposes, what matters is the assessed value of the property—how the tax collector values properties—and in this case (using current assessment rates of .66) the property will be valued at about $21 million. The added $21 million is not “pocket change” and does make a difference for our tax payments or alternatively, resources available to our kids in WSSD.   On my wife’s sound advice, I’ll spare you the calculations.  

But the bottom line is this. We can increase school spending by $272/child every year going forward (we get a $21 million boost to the tax base every year). Or for what the borough considers a “typical” Swarthmore home with a market value of $600,000, borough taxes can be reduced by about 3 percent from $1,246 per year to $1,207 saving $40/year. School taxes on that same house can be reduced by about 1 percent from $19,348 to $19,154 or about $194/year. Total tax savings will be $234/year, for every year the condominium adds to our tax base. (You can figure your own tax savings by multiplying these savings by how proportionally more or less is the value of your house compared to the borough’s “typical” house.)  

Now comes the hard part. How will you evaluate all those other externalities that do not have an easy money measure to them? Externalities such as parking inconvenience, increased traffic and safety concerns, building design, the lost opportunity for affordable housing, sense of history to our town center? Here is my thinking—for me and me alone—but perhaps how I thought this through will be helpful.

First, I do not think parking and crowding are a big concern. We have regulations for on-street overnight parking (or can be extended). We can figure that out. The new residents will be no more than 100 and I don’t see that as a crowding problem.  

Second, affordable housing is an important issue for Swarthmore and I support any effort in this direction, both for elderly residents hoping to downsize and stay in town, and also to expand community diversity.  But that will only occur with private investment and (likely) government subsidies. I feel we should pursue both, and there is land available elsewhere in the community for such efforts. The condominium project will not significantly hurt efforts to achieve this objective. 

Third, this leaves my decision to a final balance of tax savings vs. valuing the building’s scale and design (aesthetics) and my sense of community engendered by the current town center (historical preservation). Here is how I thought through the trade-off. Based on the value of our house, we’ll save about $300 a year, every year.  Would I rather have the current town center without the condominium and lose the $300, or have the condominium and save $300? Or to put it another way, assuming I use the town center every other day, would I be willing to pay $1.65 (in “lost” tax relief) for each visit to town? The final decision will be made by our elected representatives, but for me and me alone, I’ve now made my choice.  

Bob Inman and his wife Margie Linn are residents of Swarthmore.