Tuesday, January 5, 2016

Accessing costs

One of the most contentious issues in human dynamics involves the allocation of costs for items that are held "in common".

Many anthropologists believe that "hydraulic" projects like irrigation canals and drainage ditches were the test bed that created workable government institutions.  The Wikipedia article (attached) makes the spurious claim that these institutions were voluntary.

Today's discussion at coffee involved assessments for drains but it could have just as easily applied to roads, bridges, access to cable TV or public transport.  Its broad applicability makes it a dandy topic for blogging.

Starting simple

Imagine a subdivision.  The public road runs at the bottom of this map.  For this first swing at the problem, let's pretend that the road up the center of the subdivision does not exist.

Lot A has access to the public road and gains no advantage from the private drive.  The addition of the private drive does not cause the value of the lot to appreciate.

Lot B cannot run a drive to the public road due to a wetland. The private drive must extend 250 feet to be functional for Lot B.  The addition of the private drive raises the value of Lot B from approximately \$5000 to approximately \$30,000.  It makes economic sense to build the first 250 feet of the private drive if it can be done for less than \$25,000.

Lots C and D have a value of approximately \$3000 if the private drive stops 250 feet from the public road.  It needs to extend another 350 feet to be of any value to them.  The value of the lots both go to \$20,000 if the drive extends that far.  It makes economic sense to extend the drive another 350 feet if it can be done for less than \$34,000 (2X(\$20,000-\$3000)).

Lots E and F, G and H, I and J all require an additional 300 feet and all stand to gain \$17,000 in value.

Lots K and L also require an additional 300 feet but stand a net gain \$35,000 each.

Allocating costs

One approach is to charge all 12 lot owners the same amount.  This has the advantage of simplicity but the disadvantage of hidden subsidies which leave some owners feeling bruised.
 A is happy but C and D feel gouged.
Another approach is to charge based on number of incremental feet connecting each lot creates.
 This is another approach.  It is probably economically cleanest to associated incremental costs assessed to incremental benefits accrued due to major capital improvements.
A third approach is to charge each lot proportional the incremental value building the drive created.

 There is little conflict if the cost of building the drive is less than \$100/foot.  Every lot shows a net gain from building the drive.  There is no conflict if the cost of building the drive is greater than \$230/foot because everybody loses and the drive will not be built.  The highest degree of conflict will occur if the cost of building the private drive is in between those two costs.  Incidentally, the cumulative "break-even" point is \$128/foot.

 There is little conflict if the cost of building the drive is less than \$40/foot.  Every lot shows a net gain from building the drive.  There is no conflict if the cost of building the drive is greater than \$120/foot because everybody loses and the drive will not be built.  The highest degree of conflict will occur if the cost of building the drive is in between those two costs.
 Picture reposted for convenience
It seems to be a common pattern for the lots that are furthest from the public road sell first.  That suggests that the lots closest to the public road are, in some ways, subsidizing the rearmost lots.  One proposal is that the lots closest to the public road bear all of the burdens of the HOA covenants but the benefits are the most diluted due to close proximity to non-HOA houses.

Maintenance

Maintenance is different than major capital improvements.  Activity based accounting principles tells us to associate costs back to the products, events, actors that created those costs.

Applying ABA principles to maintaining the private drive suggests that costs should be apportioned proportionate to the distance from the public road.  Owners of lots L and K drive more feet on the private drive per month and thus trigger more maintenance.

Games that get played

Some developers will sell slightly less than half the lots in a subdivision.  Still having the majority of the votes, they can push through road surface upgrades (like paving) and jack up the prices on the remaining lots.  The developer get the benefit of having previous home owners subsidizing the cost of paving and can reap a disproportionate share of the benefit.