No rules, no process, no strategy: Part 3, “Utilize outside political channels or threaten to leave”

July 31, 2015 | Boston, Boston Redevelopment Authority, BRA, Development, Government, Housing, Marty Walsh, Policy, Redevelopment authorities, Tom Menino, Urban development, Urban planning | No comments 104 views

[Continued from yesterday’s Part 2 and the preceding Part 1.]

By: David A. Smith

As established in the two preceding parts, inspired by a recent article in the Boston Globe (July 16, 2015) covering a McKinsey report commissioned by the Walsh Administration on the state of the Boston Redevelopment Authority, the authority had no rules except one (please the mayor), no processes but one (respond to whatever interested the mayor), and evidently no priorities but one: downtown development. 

menino_filenes_up

How many square feet in that cornice easement?

Principal sources used or referenced in this post

Boston Globe (June 29, 2008; cobalt blue font)

Boston Globe (July 16, 2015)

Major AHI posts on the Boston Redevelopment Authority

How to lose friends and influence people (June 1, 2010)

Now that it is safe to do so (February 10, 2014); Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8

Oh, THAT money we were supposed to collect (September 8, 2014); Part 1, Part 2, Part 3, Part 4

Boston Mayor Thomas Menino waves to the crowd during a Christmas tree lighting ceremony in the North End neighborhood of Boston, Sunday, Dec. 3, 2006. (AP Photo/Michael Dwyer)

Boston Mayor Thomas Menino waves to the crowd during a Christmas tree lighting ceremony in the North End neighborhood of Boston, Sunday, Dec. 3, 2006. (AP Photo/Michael Dwyer)

A quintessential mayor

Opening this post, I said the BRA had no rules, no process, and no strategy.  That’s technically not quite right: the BRA had:

No rules … except Make the mayor happy.
No process … except Ask the mayor want he wants

No strategy … except Whatever the mayor likes this week

menino_relaxed

What’s wrong with that?

Despite Mayor Menino’s mantra of serving “the people of the neighborhoods of the City of Boston,” the BRA during his tenure was far more interested in downtown commercial development than in housing or jobs in Roxbury, Dorchester, and Jamaica Plain.  As slide 48 of the report (displayed above) states:

“Planning projects go last on each meeting agenda, sending the signal that planning is not as important as current development projects.”

Mayor Walsh appears to be seeking to change that:

In addition to the first comprehensive citywide plan in 50 years, the Walsh administration has initiated smaller community planning efforts for individual neighborhoods, such as Dorchester Avenue in South Boston and Washington Street in Jamaica Plain.

jamaica_plain

The Jamaica Plain neighborhood of Boston

dot_ave_1925

Dorchester Avenue, looking north, 1925

Dorchester Avenue was built as a turnpike, then overtaken twice, first by the railroad/ subway, and then by the Central Artery/ Southeast Expressway, which rerouted all the traffic away and killed the original economic purpose of Dot Ave (as many people call it).  Some serious planning to revitalize the area, preferably with more housing and more affordable housing, would make a great deal of sense.

dorchester_avenue_today

Spaces looking for a character: Dorchester Avenue today

To help the effort, the BRA plans to hire six new planners and is starting a nationwide search for Shen’s replacement.

Golden said he plans to fund those new jobs by maximizing rents on BRA properties.

How about trimming staff first?  Fewer staff = better decisions.

china_trade_center

Somehow, this is owned by the BRA

Renovations and better management of the China Trade Building in Downtown Crossing and the Boston Marine Industrial Park could generate an extra $6 million to $8 million a year for the BRA, McKinsey estimates.

Forget the cash flow management – BMIP is on the cusp of being worth a fortune, and the BRA has only the flimsiest idea what to do with it:

bmip_aerial

A huge flat triangle … but smack on the waterfront

The Boston Marine Industrial Park (BMIP), owned by the city’s Economic Development and Industrial Corporation (EDIC), is a 191-acre site on the South Boston Waterfront. Formerly an Army/Navy base, the site was nearly empty and abandoned until the property was granted to the EDIC between 1977 and 1983.

Back almost four decades ago, when the harbor was polluted and downtown Boston was a residential ghost town, that third-of-a-square-mile triangle was an isolated eyesore, very likely contaminated environmentally, and of negative economic value.  The BRA inherited it via its merger with Boston EDIC – EDIC doubtless a political orphan being foisted on the BRA as a price of doing business – and through patience, the urban revival, and all the development occurring outward from the Fort Point Channel in what has cleverly been named Boston’s Innovation District, the site is now at the edge of development appeal. 

boston_innovation_district

BMIP is basically under the words ‘Harpoon Brewery’

south_boston_w_bmip

BMIP was a blighted district (hence the formation of Boston’s EDIC) but the money tide is coming in

Give it another decade and it’ll be worth a mint:


Since then the BMIP has been identified as a prime location for consolidating, preserving, and growing Boston’s ocean trade, maritime industries and industrial uses. It is also intended to create and protect decent wage jobs for a variety of skill levels. Based on the BMIP Master Plan, at this time 74% of the BMIP is used/reserve for maritime industrial purposes, 22% is used for industrial, and 4% is commercial. A wide variety of tenants occupy the area including beer brewers, research facilities, and seafood processing and wholesaling facilities.

The BRA director should be spending a huge amount of strategic planning resources developing a vision/ use for the site, because as the Innovation District and Seaport District expand, BMIP will be the next to pop.  (I’m surprised nobody’s suggested it as an Olympic venue.)  Clearly, it is not:

Indeed, the audit found that the BRA has no comprehensive list of its own properties, and recommended that the agency create a new position, director of real estate, to manage its assets. Golden said he plans to hire for the job soon.

Director Golden is probably waiting for his boss to decide an overall strategy.

Then there are deeper issues of morale among the BRA’s 220 employees, which McKinsey repeatedly described as “poor.”

Judging by the comments McKinsey excerpted, ‘poor’ is a kind word:

About 70 percent of BRA employees said the agency lacks a clear vision, and they described the organization’s culture as “hierarchical, siloed, and not transparent,” according to the McKinsey audit.

bra_operational_review_Page_46

“Utilize outside political channels or threaten to leave.”

“We’ve been at this 18 months,” said director Golden.  “We’ll be at it many more.”

Very discouraging but probably true.

emma_stone_discouraged

Long way to go

No rules, no process, no strategy: Part 2, “Endlessly tied up until they just fade away”

July 30, 2015 | Boston, Boston Redevelopment Authority, BRA, Development, Government, Housing, Marty Walsh, Policy, Redevelopment authorities, Tom Menino, Urban development, Urban planning | No comments 161 views

[Continued from yesterday’s Part 1.]

By: David A. Smith

As established yesterday, the report received by the Boston Redevelopment Authority (BRA) and published with commendable transparency performed one of the functions for which management consultants are classically hired: to document via a third party what the client itself believed but would prefer not to say – namely, that under the late Mayor Tom Menino, the BRA had become ‘the mayor’s development police’, in which there were no rules but one: please the mayor.

menino_unhappy_podium

We are not amused

Boston (CBS) – Boston Mayor Thomas Menino isn’t very happy with the business improvement district that encompasses Downtown Crossing.

He says the owners of several big buildings and three McDonald’s franchises are refusing to participate.

By law, participation in business improvement districts is strictly voluntary.

In Mayor Menino’s development world, nothing was truly ‘voluntary’, because one never knew what would put one on the mayor’s bad side, and when on the bad side one could seldom escape.

Principal sources used or referenced in this post

Boston Globe (June 29, 2008; cobalt blue font)

Boston Globe (July 16, 2015)

Major AHI posts on the Boston Redevelopment Authority

How to lose friends and influence people (June 1, 2010)

Now that it is safe to do so (February 10, 2014); Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8

Oh, THAT money we were supposed to collect (September 8, 2014); Part 1, Part 2, Part 3, Part 4

While on the one hand the Walsh Administration’s commitment to transparency require no great courage, criticizing as it does only the prior administration, it sets the Walsh folks a standard to which will be forced to live up:

an_in_depth_biography

So set a standard you’re unable to meet

BRA director Brian Golden acknowledged the audit’s tough tone — “This isn’t a valentine to the agency or to its leadership” — and said there is much that needs to improve.

(Boston, MA, 01/16/14) Boston Redevelopment Authority board member Brian P. Golden listens to plans for an expansion of the Landmark Center in the Fenway during a meeting of the Boston Redevelopment Authority Board of Directors' meeting at Boston City Hall on Thursday, January 16, 2014. Staff photo by Christopher Evans

(Boston, MA, 01/16/14) Boston Redevelopment Authority board member Brian P. Golden listens to plans for an expansion of the Landmark Center in the Fenway during a meeting of the Boston Redevelopment Authority Board of Directors’ meeting at Boston City Hall on Thursday, January 16, 2014. Staff photo by Christopher Evans

I’m not hearing a valentine

“This agency is 60 years old and has had a radically different culture than the one we’ve been trying to foster,” said Golden, who was appointed BRA director last year by Mayor Martin J. Walsh with the charge to modernize its operations.

While the statement is true, it’s a bit too self-exculpatory for my taste; the BRA didn’t get the way it is now over the course of sixty years, but over the course of a single mayoralty, and while Mr. Golden wasn’t the director, he is hardly an outsider:

Golden worked in a top position at the BRA for six years before Walsh named him permanent director in December. Many of the issues raised in the audit date to his predecessor, Peter Meade, BRA director during Menino’s final three years in office.

This is the second deep review of the BRA ordered by Walsh

When the first audit was released last September, I reviewed it at length in Oh, THAT money we were supposed to collect: Part 1, Part 2, Part 3, Part 4) and for the life of me I can’t imagine how the second report could have taken ten months. 

bedazzled_sloth

I want you to witness this paper

Perhaps it took the Mayor’s office several months to bid the contract and get the consultants signed up.

bra_operational_review_Page_03

It couldn’t have taken months to interview 56 people

– and again is an implicit rebuke of his predecessor, Thomas M. Menino, who critics say was too involved in deciding what got built in Boston.

Mayor Menino was far too involved in choosing, and far too personally vindictive.

menino_godfather

The first audit found an agency still living in an era of paper records, with sloppy accounting that lost track of rent payments from tenants on its properties and of commitments and fees made by developers to build affordable housing.

Bear in mind that, to do such a poor job of administering the few and highly valuable assets it has, the BRA employs roughly 240 people.

Walsh has promised to clarify the review process at the BRA and to make the agency more open to the public and accountable for its decisions.

bra_operational_review_Page_04

Apparently it takes 240 people to approve 52 properties a year

He has also launched a sweeping new master plan for the city, dubbed Imagine Boston 2030 –

Not to diminish the publication, but rather for clarity, Imagine Boston 2030 isn’t actually a master plan, it’s a broad sketch of the elements that should be in a master plan. 

– and said the findings by McKinsey point out how much more the BRA needs to improve.  “In order for the city of Boston to continue to grow and prosper, we need the BRA to be in the strongest possible position — getting community input, guiding Imagine Boston 2030, and making the most of this historic building boom,” Walsh said in a statement.

In some ways the most damning of the many McKinsey slides is this one:

bra_operational_review_Page_28

Master plan?  We don’ need no steenking master plan!

The empty space where everyone else has a check mark speaks volumes: no planning at all.  Who needed a plan when you had a mayor who decided everything based on what he liked?

On Wednesday, Golden said he’ll replace the BRA’s head of urban design, promoting senior architect David Carlson to the job.

Mr. Carlson has been at the BRA since 1984, so he too is an insider’s insider.  No breath of change is yet blowing through the BRA.

The additional design work and added time pushes up the already steep price of developing a project in Boston, costs that are passed onto building tenants and their customers, said Barry Bluestone, director of the Dukakis Center for Urban and Regional Policy at Northeastern University.

“A lot of developers will tell us they’d rather get a quick no than a slow yes,” Bluestone said.

barry_bluestone

Barry Bluestone believes what developers say to him

Actually, no; developers would rather than a slow Yes than a quick No, but what they cannot endure is a slow Maybe followed by another slow Maybe followed by a Manana.  There’s only one reason a developer would want a quick No:

It is conventional wisdom that Menino wields the power over which projects get built, how they get built, and which get, well, not ‘rejected’ so much as endlessly tied up until they just fade away.

You see, if a proposal were actually rejected, then the BRA would have to explain why, and as any explanation would imply the existence of a rule, the rejected developer could then have sued the BRA by showing that another proposal which violated precisely the same implied rule was nevertheless approved. 

A quick No, in other words, would be a useful device only for litigating, not for processing.

The trick, said Greg Galer, executive director of the Boston Preservation Alliance, is having a review process that gives developers enough certainty while also allowing neighbors and other community members a meaningful chance to weigh in on projects before they’re approved.

galer

The passionate preservationist

All right, let’s start with some defined process and go from there.  Later on we can worry about whether the ‘weigh-in’ should be a veto, a public-consultation process, or something in between.

zenos_public_consultation_paradox

All recursive paradoxes are false, including this one

[Continued tomorrow in Part 3.]

No rules, no process, no strategy: Part 1, “Essentially no zoning rules”

July 29, 2015 | Boston, Boston Redevelopment Authority, BRA, Development, Government, Housing, Marty Walsh, Policy, Redevelopment authorities, Tom Menino, Urban development, Urban planning | No comments 127 views

By: David A. Smith

Even as a candidate Marty Walsh had to have known that upon becoming mayor he would have to reform the Boston Redevelopment Authority, which over the two decades of Tom Menino’s mayoralty parlayed its monopoly over all development approval in the City of Boston into a personal fiefdom that not only did the mayor’s bidding, and paid for its own operations by capturing a piece of the value it created by allowing some properties – and not others – to develop upward, but also effectively silenced all opposition.  But even he should be discouraged by the recent McKinsey report he commissioned; as reported in the Boston Globe (July 16 2015):

The agency charged with overseeing the real estate boom coursing through Boston is a dysfunctional bureaucracy, its system for reviewing projects erratic, with just a few powerful staffers deciding how new buildings will look using “unwritten rules,” according to a highly critical audit (link in pdf) being released by City Hall Thursday.

bra_operational_review_page_05

“Organizational health is bottom-quartile”

Simply put, the BRA had no rules, no process, and no strategy.

Candidate Walsh also presumably knew that the BRA was a mare’s nest of tangled reporting relationships, business processes, sub-fiefs and personal rivalries, and at the same time it would be running a pipeline of properties involving communities, neighborhoods, developers and bankers.  It would, in a word, be touchy.

The conclusions are particularly troubling given the key role the BRA plays in guiding Boston through a remarkable economic period, with the agency approving almost $5 billion in new developments citywide over the past 18 months.

Much of this development is pent-up demand that was stymied under Mayor Menino’s BRA, so simply the scale of development is itself welcome.

Organizationally, the mayor has proceeded cautiously.  From within he promoted Brian Golden to director, and messily fired former planning head Kairos Shen [Subject of a flattering Boston Globe profile, Boston Globe (June 29, 2008) profile, The Shaper of Things to Come; cobalt blue font. – Ed.] only in May:

Walsh has already broomed out key Menino holdovers.

In May, as McKinsey was finalizing its report, the mayor forced out [Fired – Ed.] Kairos Shen, the longtime planning chief under Menino. 

kairos_shen

Over 20 years, he worked for seven directors but only one mayor.

No mere planning chief, Mr. Shen was effectively Mayor Menino’s personal architect, as illustrated by the vignette with which the Globe opened its laudatory 2008 piece:

The architect unfurled his thick stack of drawings and designs on the table in Kairos Shen’s office. Five minutes after seeing the preliminary and confidential ideas for a new public building, Shen grabbed a red felt-tip pen and began drawing his revised version of the building on one of the now-irrelevant plans the architect had arrived with.  Once finished, his new furiously sketched diagram eviscerated the architect’s design while leaving the most basic elements of the building shape intact.  “When you come back,” he ended the meeting, “please bring two different versions of the ideas that we discussed,” meaning, of course, his red diagrams.

Even then, when the piece first came out, I thought it curious that the Globe would present as admirable a gross overreach of the reviewer’s responsibility – but it was entirely representative of Mayor Menino’s late-stage BRA, with results that we all knew and only Don Chiofaro said aloud: development was haphazard, capricious, and unaccountable:

The report, by McKinsey & Co., paints the powerful Boston Redevelopment Authority as short of critical staff, beset by poor morale, and unable to manage its own property. The process to review building designs can be maddeningly slow at times, driving up costs for developers, it says.

its_maddening

More than merely maddening, the process was spectacularly inefficient, as illustrated by slide 57 of the report deck:

“Thirty hours actual review time”

Before the developer even files its proposal, it undergoes ‘several months (highly variable)’ of ‘pre-file discussions’ whose purpose, as far as I can tell, was to find out what the mayor would like – and often that was informed by what random people who knew the mayor would like.

“You’ll have someone who says ‘we want to see a change.’ You have to redesign, go back and forth,” said David Begelfer, chief executive of NAIOP Massachusetts, a commercial real estate trade group. “It can take months.”


david_begelfer

You can get gray hair waiting for approval

Then, after the process began, it took 8 to 20 months to complete – and this is just design review, folks, not feasibility assessment, over which interval the BRA staff actually spend 30 hours – less than one person-week doing the review itself, with the inefficiency attributable to developers have to redo, and re-redo, their designs to respond to the taste police and the ultimate taste cop himself, Mayor Menino.  Consider this indictment from 2008:

Kremlin-watching is especially crucial in the Boston development process, which is marked by a level of flexibility –

The Globe’s editorial euphemism for ‘lack of rules or transparency’.

– that many developers find infuriating, but, if used properly –

How does one use caprice properly in a democracy?

– can help a builder legally violate nearly every zoning rule that applies to a particular parcel. And if the developer is building on a parcel larger than an acre –

Any multi-story building will need more than an acre for its footings and setback requirements, so the PDAs cover basically the entire commercial potential of downtown Boston.

also known as a Planned Development Areathere are essentially no zoning rules and the whole project can be designed from scratch, governed only by the rules imposed on a case-by-case basis by the BRA on issues ranging from size to use to height to setback from the road.

All this untrammeled authority was fostered by, used by, and wallowed in by Mayor Menino, who took glee (cf. the mayor’s now-infamous Godfather video mocking his feud-unto-death with Don Chiofaro) in stymieing and humiliating those who did not kiss his ring and call him godfather.

chiofaro_appealing

“What does a man have to do to get the city to use rules?”

The BRA won’t agree to anything unless it has buy-in from the mayor.  Until you have a preliminary plan that can get this support, there is no point in spending millions to get the variances and the dozens of state and local approvals from agencies and boards that hold some sway over nearly every square inch of buildable land in Boston.

This is an over-encrusted and rotten process, as McKinsey alludes:

bra_operational_review_Page_49

It couldn’t have taken months to interview 56 people

“Perception is that they rubber-stamp everything.”

Nor does the board’s composition inspire confidence, for best-in-class domain expertise is lacking.

The mayor won’t give his support if the neighborhood where the building will sit is unhappy.

Define ‘unhappy neighborhood’ – does that mean a majority? 

anna_karenina_cover

I don’t know what I want, but I know you’re not it

A vote?  A bunch of people complaining to the mayor?  One person complaining to one consigliere of the mayor?  Nobody knew.

So developers and communities do months of dances, meetings, and revisions to preliminary plans based on feedback. Then there’s – let’s call a spade a spade here – the legalized extortion known as “linkage.”  

This is a crucial part of the community buy-in process and includes developer promises of affordable housing units above the required minimums or a new park or a new firetruck or nice street lights or new sidewalks or improvements to the local elementary school – until the community is satisfied with the package being offered. Only then is the mayor happy.

Shen makes sure the entire process has happened before the developer submits what is technically the first official proposal to the BRA.

There.  Were.  No.  Rules.  There was only mayoral power (CBS Boston, November 8, 2010): 

menino_unhappy

You won’t like me when I’m unhappy

[Continued tomorrow in Part 2.]

Bon viager: Part 2, Synthesis of family

July 28, 2015 | Annuity, Apartments, Elderly, Escheat, Homeownership, Housing, Innovations, Mortgages, Paris, Rental, Tenure | No comments 147 views

[Continued from yesterday’s Part 1.]

By: David A. Smith

In exploring the en viager model of tenure, prompted by a story on BBC News (1 July 2015), we’ve established that en viager, aside from being an antiquated legal form that survives in French law (and is enjoying a revival driven by demography), also creates a synthetic family, with the elderly seller/ tenant standing in for the auntie or mother of the buyer. 

Caring for aging parents is wired into human beings.

greedy_bw

All of us are related, or so we say!

So is greed:

It’s a sign of the inherent tensions in the system that any death involving a viager is automatically investigated by the police, to clear up any suspicions.

Earlier this year, a man was charged with attempting to poison his 85-year-old viager tenant, by putting medication in her mineral water. He denied the charges.

A031_A031_C013_1010S2_0005.jpg


Here’s to back stories

It will probably contribute to a significant change in composition of the neighborhoods in France’s best cities, like Paris – and I wouldn’t be at all surprised if some enterprising French were buying them up with a view to eventual Airbnb-ing.

“Eighty per cent of French personal wealth is held in property,” Nahon says. “Liquid assets account for very little.” So when the coffers run dry, the viager system is an appealing way out of trouble.

Given the absence of alternative hybrid-tenure models as mentioned above, it makes good sense.

Genevieve Deloche is 71 and has just agreed a viager deal on her apartment in the 20th arrondissement of Paris.

Paris_20e_arr

Away from the tourists but comfortably in town

It’s a peaceful, one-bedroom place, with a courtyard full of greenery, a large basement and a garage.

“It sold very quickly. Too quickly!” she says. “Within three months. It was a shock.”

If I understand things correctly, the price of an en viager house price is set by the seller or the market, but the timing of payments – the 30% bouquet, the monthly stipend based on annuitized charitable remainder trust principles – are set by formula.  So yes, Ms. Deloche, perhaps your flat did sell too quickly – or maybe you’re healthier than the market actuarially expected.

After living there for twelve years, she says it was time to consider a viager buyer because she had no children –

There’s the inheritance and escheat-avoidance motivations in a nutshell.

– and turning seventy meant there were no tax barriers to receiving a lump sum.

I presume that’s a provision of French law akin to our IRA treatments, except as applied to

She doesn’t particularly need the down-payment, she says, but the monthly stipend will go towards “having fun” – trips to the theatre, travel and eating.

That’s a wonderful use of the illiquid equity; enjoy your life while you’re still cognizant and mobile enough to do it.

en_viager_04_genevieve_deloche_150706

I sure hope to live a long time!

With her frequent laughter, jokes and energy, Genevieve isn’t quite the image of an ailing 71-year-old that her prospective buyers might have expected.

“Typically, sellers are 70-80 years old, and female,” says Mikkael Ferrand of Viager 75, an agency based in the Paris’s smart 5th arrondissement.

en_viager_05_mikkael_ferrand_150706

Don’t get too attached to the renter, keep your eye on the property

Gender difference is real: both that for many of the older generation, women live a little longer than men (whether biology or work and life cycles is beside the point), and because if this, if an elderly man outlived his wife, he would readily be able to marry another one.

GREEDY, (background): Michael J. Fox, Nancy Travis, Colleen Camp, Joyce Hyser, Ed Begley Jr., Siobhan Fallon, Jere Burns,  (front): Kirk Douglas, Olivia d'Abo, 1994. ©Universal Pictures

GREEDY, (background): Michael J. Fox, Nancy Travis, Colleen Camp, Joyce Hyser, Ed Begley Jr., Siobhan Fallon, Jere Burns, (front): Kirk Douglas, Olivia d’Abo, 1994. ©Universal Pictures

I’m giving my money to the one who truly loves me

“They come from a generation where they haven’t worked, their husband has died and they have a tiny pension. Sometimes they get landed with a big renovation bill for the building –

That is, a condo or a co-op – and both cases illustrate the ongoing challenge of elderly aging in place in an owned multi-family building: they can be asset-rich and cash-poor – so en viager is thus likely to arise only in high-value urban environments (like Paris) because those are the places with multi-unit buildings of sufficient value that people will buy them.

– or something, and selling en viager is the only way they can pay the bills and still stay in their home.”

Ironically, though we think of family as closer than strangers, en viager transactions demonstrate that the synthetic family formed by a buyer may be more comforting than the actual serpent’s teeth of thankless adult children. 

lear_goneril

En viager it is, then!

It’s also a way of having more control over your inheritance, says Genevieve Deloche. “You can pass on your children’s inheritance to them early, at a time when they actually need it, and avoid inheritance tax too. It’s also ideal for those who don’t get on with their kidsbecause they can take the inheritance away.”

While again implied, not stated, this suggests that under French law the adult children of an elderly decedent can overturn her will and demand their blood inheritance; if so, en viager is a revenge in life, a means of spending the inheritance on oneself, or passing the proceeds to another extra-familial relative.

In around 10% of cases, says Stanley Nahon, the first children learn about a viager deal is when their parents die – and it can leave them very disappointed. But such secrecy is rare, and many children encourage their parents to release the capital tied up in their home, as a way to support themselves in old age.

my_old_lady_02

I thought I was inheriting a flat; instead I’m inheriting a burden

“Buyers, too, often see it as an ethical investment,” he says, “because it allows the elderly to stay on in their own place and avoid moving to a retirement home.”

my_old_lady_06

Have I the right to sell my inheritance?

A legacy bequest is the last gift elderly parents bestow upon their children, and it does raise the question – in moral children, anyhow – what did I do to earn this?  What use of the money can honor the memory of my late mother?  An en viager stands that morality on its head and tells the living children, I spent your inheritance on myself.

alice_father_william

And yet you incessantly stand on your head–

Do you think, at your age, it is right?”

“In my youth,” Father William replied to his son,

“I feared it might injure the brain;

But, now that I’m perfectly sure I have none,

Why, I do it again and again.”

To many an adult child, that implied rebuff from beyond the grave – a secret held until it was irreversible – must sting.

But the children of the buyers can also be in for a shock, if they inherit their parents’ viager contract. Unless they keep up the regular monthly repayments, the whole investment will be written off, and the original owner-tenant will be free to sell their property again.

Property brings out the worst in families; and sometimes the best, and it has made for great drama and black comedy, via the inheritance angle (Kind Hearts and Coronets), tontines as partnerships with no transferability (The Wrong Box):

wrong_box_mills_caine

I just need to outlive my brother by one hour … or be thought to have done so

[Side note: Tontines, originally created as a pre-corporate capital-subscription mechanism akin to limited partnerships, later evolved into microcredit and microsavings cooperatives in emerging countries and are still used for that purpose today.  – Ed.]

A film released last year focused on just these kinds of tensions, with Maggie Smith playing a dowager lady ensconced in a viager deal, and Kevin Kline the penniless son of the deceased buyer, who turns up in Paris hoping to sell his inheritance.

Propinquity can foster friendship, especially if those living in proximity have age-and-gender relationships that echo familial forms (auntie-nephew, mother-daughter).  The elderly have memories and time, and want someone with whom to share them.

Contrary to the scare stories, brokers say, positive relationships often develop over the years between buyers and sellers. They may meet for tea once a year, or send over a box of chocolates.

“It was important to like the person buying my flat,” Genevieve Deloche tells me. “To have good relations, be able to laugh a bit.”

A home is an exoskeleton around a self, a soul; when one sells it, even if one remains living in it, the buyer stands in loco filis, and it would be a rare old lady indeed who developed no maternal feelings for her eventual buyer.

Maggie Smith in My Old Lady Handout

Maggie Smith in My Old Lady
Handout

“I think of you as my son.”

I think of you as my tenant

Isn’t it strange, I ask her, to meet someone who’s gambling on how long you’ll live?

“Yes, it’s true, but I don’t care.” she says. “It’s hardly a reason to jump under a car.”

One broker told me about cases when the buyer’s gamble spectacularly failed, with sitting tenants still going strong at 102 or 103.

Something in all of us makes us root for living long and prospering in old age, so the tale of the world’s oldest viager is itself sweet:

jeanne_calment_age_50_1925

Jeanne Calment, age 50, in 1925

In 1965 Jeanne Calment, aged 90, sold her apartment in Arles to her lawyer, Andre-Francois Raffray – a man half her age. It was a viager deal, and Raffray agreed to pay her 2,500 francs (about $500) per month.  

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Ms. Calment in 1897, with a century of living before her

But Calment went on to become the world’s oldest living person, dying 32 years later at the age of 122.

Raffray himself died two years before her, on Christmas Day 1995.

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Ms. Calment in 1992, age 117

“On the same day, Jeanne Calment, now listed in the Guinness Book of Records as the world’s oldest person at 120, dined on foie gras, duck thighs, cheese and chocolate cake at her nursing home near the sought-after apartment in Arles, northwest of Marseilles in the south of France,” the New York Times reported, a few days after Raffray’s death.

“She need not worry about losing income. Although the amount Mr Raffray already paid is more than twice the apartment’s current market value, his widow is obligated to keep sending that monthly check. If Mrs Calment outlives her, too, then the Raffray children and grandchildren will have to pay.

“‘In life, one sometimes makes bad deals,’ Mrs Calment said on her birthday last Feb 21.”

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Ms. Calment at 120

She lived to 122, and died in August, 1997.

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Vive le viager!

Bon viager: Part 1, Synthesis of tenure

July 27, 2015 | Annuity, Apartments, Elderly, Escheat, Homeownership, Housing, Innovations, Mortgages, Paris, Rental, Tenure | No comments 138 views

By: David A. Smith

Just as water and ice are two forms of the same molecules, lump sums and cash flow streams can be the same present values, one just transmuted into another. 

jeanne_calment_at_117

Over the decades, ambition transmutes into experience

We’re familiar with some of the forms:

1. Mortgage loan.  Receive cash up front, make payments over future periods.

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Just hock the next three decades of your life, okay?

2. Annuity.  Pay cash up front, receive payments in the future.

annuity_or_pot_of_money

Choose one, not both

3. Life insurance.  Pay cash over time, receive lump sum in the future.

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To these we can now add a fourth, the life tenancy or en viager transactions:

4. En viager.  Receive payments over time, pay lump sum in the future.

As any pay-later strategy is fraught with collection risk, it can work only when the future payment can be garnished (as in payday lending) or collateralized – as in owned real estate such as a Parisian flat, and though the model has obvious benefits for both parties (the seller/ occupant and the patient eventual buyer), the incentives it sets up can be macabrely perverse, as reported in the BBC News (1 July 2015):

Buying a property with a sitting tenant and paying them to live there sounds like an odd investment, but the practice has been around in France since the Ninth Century – and bizarrely [Sic – Ed.] it’s getting more popular. Why?

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If you live to be one hundred, you’ve got it made. Very few people die past that age. – George Burns

We all know what it takes to sell a home: freshly brewed coffee, the smell of baking bread in the oven – but if you’re buying under the ancient French system of viager you’d do better with a pile of medicine bottles in the bathroom cabinet and a nasty-sounding cough.

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The more the buyer sees, the better your price

In a viager deal, the buyer pays a knock-down price – but only takes possession when the owner dies.

So it’s an annuity, paid by the viager buyer to the homeowner/ future estate seller: indeed, in English it’s called a reverse annuity mortgage and works like a charitable remainder trust, though those are typically used with the trust corpus, net of annuity payments, being donated to a non-profit,

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I’ll give you my money corpus when my physical corpus no longer works

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Give us your organs at death, and in the meantime give us your wallet

Like an annuity, it lasts as long as the person’s life does:

What complicates matters is that the buyer must pay the former owner (now the tenant) a monthly fee for the duration of their natural life – which could be months, years or even decades. And if all that sounds a bit like gambling on how long a stranger has left to live… well, it is.

As a curious exercise in consumer protection meets lottery tickets, the pricing of viagers is set entirely by the seller’s age (The Connexion, undated article):

How much must be paid is based on a rate calculated from average life expectancy in France. This is calculated on a graded scale laid down by French law.

If the seller is 70 years old, for example, the value of the property will be set at about 50%. This is called the valeur occupee or occupied value.

From this the bouquet, typically about 30% of the valeur occupee, must be paid in full at the beginning of the deal.

Thus we have a down payment (the bouquet), followed by mortgage-like payments (the monthly installments

For a 70-year-old seller the rate at which the remainder of the valeur occupee is paid is currently set at 7.24% a year. In this example the annual payment would be €5,068, and the monthly payment would be €422.33. This figure is index-linked and goes up every year with inflation.

At this initial rate the seller would recoup the remaining €70,000 over about 14 years.  However, if the seller dies within, say, two years, the property, with a market value of €200,000 would be in the buyer’s hands at the bargain price of just over €40,000.

The arithmetic of annuitized yield to the seller (or cost to the buyer) is complicated enough that I’ll decline to address it here, depending as it does on both inflation and seller’s life expectancy.  Likely, then, it’s made as an investment only by people who plan to live in the home after the seller’s death, and who have no need for interim liquidity in the quantum represented by the bouquet.

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Wait long enough, and the flat could be yours

En viager thus fits neatly into the typology of financial flows to trade streams of cash for money up front.

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Conversely, as the annuitized payment yield is set based on opaque actuarial tables, buyers would like to do Dial M for Murder diligence: how soon do you plan to die?

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You understand you’re an inconvenience, don’t you?

Because it’s forbidden to question the seller about his or her health, it also throws up incentives to indulge in a bit of, shall we say, theatrical behaviour.

“Some of the sellers ham it up a bit,” one viager estate agent tells me in secret. “They sit on the sofa, with a blanket over their knees, and don’t move. But actually they’re in good health.”

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I haven’t got long


But then, he says, the buyer often needs that kind of reassurance: “Some of them expect the residents to be 100 years old,” he says. “And they look for signs of illness when they visit the property – medicine bottles in the bathroom, that kind of thing.”

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Want to underwrite these?

Viager sales are a tiny fraction of real estate deals in France – less than 1%. But the popularity of this ancient and arcane way of doing business – part of French law since 876 AD – is on the rise again, as property prices in areas such as Paris remain stubbornly high.

That’s not the reason, and it’s a classic journalistic superficiality to grab the visible thing (prices are high!) and ascribe it as the cause.  In fact, en viager is a form of synthetic family, placing the buyer in the same position as an adult child of an aging parent: the adult child will inherit the estate, will maintain the dowager duchess living in the family chateau, and will provide her with a living allowance for her personal needs.  Further, as the arrangement is non-familial, we can posit that it evolved as a device to transfer dynastic wealth when there were no legitimate heirs, and to avoid having property fall into escheat:

The term “escheat” derives ultimately from the Latin ex-cadere, to “fall-out”, via mediaeval French escheoir.  The sense is of a feudal estate in land falling-out of the possession by a family into possession by the overlord.

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Escheat as defined by Dr. Samuel Johnson

For that matter, I wonder if en viager was the way a little Fitzroy born on the wrong side of the blanket was brought into the line.

For the aging elderly person, whose physical mobility is in decline and who needs help with the activities of daily life, en viager is a primitive tenure-ownership sharing model compared with (say) Accessory Dwelling Units (ADU’s) or the more modern high-tech elderly-monitoring apartments; that it is thriving and professionalized in France indicates not only that the French population is aging rapidly but also that many of them have no progeny to whom to pass their homes.

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Wouldn’t you like a nice Indian or Moroccan to care for you?

Stanley Nahon is managing partner of Renee Costes Viager, which handles 40% of the viager market in France.

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Formerly Booz, formerly KPMG, now an arbitrageur in viager

It’s an unusual asset class, which makes specializing worthwhile – as of today (18 Jul 15), the site claims 2,658 viagers for sale – and with France aging, the inventory will rise. 

He says the market is growing at an annual rate of 6-8%, and that his agency alone gets around 12,000 calls a year from elderly owners interested in a viager deal.

The growth in interest is due to the aging population, he says, and the fact that senior citizens’ pensions are falling in value as the cost of living rises.

Further, the model could be improved if in-home care could be added; perhaps a student or young couple who get a place to live in exchange for aiding their new auntie.  Naturally there’s potential for abuse, so it might be a three-way arrangement: en viager buyer seeking residual value, seller seeking care, and the young single or couple living in the apartment cheaply.  They are motivated to extend the owner/ seller’s healthspan and the public interest is served. 

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She’s old, how long can she last?

[Continued tomorrow in Part 2.]