The High Price of Cheap Buildings
This article is part one of a two-part series by Strong Towns member Will McCartney. Keep an eye out for part two, which will be released tomorrow.
The rubble of the Surfside condo collapse. (Image via WikiCommons.)
Earlier this summer, the 12-story Champlain Towers South beachfront condo collapsed in Surfside, Florida. The final death tally stands at 98 people, making it the fourth-deadliest structural failure in American history. While the engineers paraded into press conferences and experts brought onto news channels are quick to dismiss this collapse as an outlier, it is important to ask what forces are at play here, and to wonder if this is a foreshadowing of what is to come. Perhaps this is what happens when we build for economic—instead of human—purposes.
It is no revolutionary claim to say that we find ourselves in an age of consumerism. While it is not the subject of this piece to dive into the abstract economic discussion of free-market versus consumer capitalism, one can look around and quickly come to the conclusion that economic decisions today are usually predicated on desire, not need. In other words, modern American capitalism is governed not by production, but by consumption. How is this done? By planning obsolescence.
In 1932, a real estate broker named Bernard London wrote a now-famous essay entitled "Ending the Depression Through Planned Obsolescence". In it, he outlines a solution to the Great Depression: government-mandated lifespans of consumer products and hefty taxes levied on “continued use of what is legally ‘dead’ ”. While this sounds draconian (I encourage a reading of the entire essay), much of what London was proposing is now standard practice. What was the “solution” for the economic consequences of the coronavirus pandemic? At least two stimulus checks, with some folks receiving as many as four. In both cases, the purpose is to incentivize consumption; to have the nation spend its way out of an economic downturn. This is because our economic system has a need for liquidity, the ability to easily convert assets into cash. Planned obsolescence generates these desired economic transactions, which can result in lots of growth. But the problem with this growth is that it comes at the cost of long-term prosperity.
For most consumer goods, planned obsolescence means that when a knob on your toaster breaks or your phone’s battery gets old, you just throw it out and buy a new one. But buildings aren’t quite that simple. How can the obstinacy of a physical structure be reconciled with the economic demand for liquidity? By planned structural obsolescence, which I define as using designs, methods, and materials that ensure the structural “physical” life is the same as the economic “useful” life of the enterprise that first builds the structure. While this results in a much more liquid—much more profitable—real estate market, there is a high price to pay for this opulence. Planned structural obsolescence also manifests itself in crumbling infrastructure, perpetually deferred maintenance, and, tragically, the needless death of nearly 100 people in Surfside.
I want to make it clear that my argument is not simply that my particular preference for well-built structures is inherently better. While I firmly believe that there are compelling aesthetic, psychological, and even moral reasons for building to last, what I am trying to articulate in this two-part series is not a defense of my personal taste, but that by building disposable structures, we are leading ourselves toward a socially, economically, and environmentally ruinous future.
Image via Pxhere.
How We Got Here: The Financial Incentives for Short Building Lifespans
Until relatively recently, I was more puzzled by disposable building than concerned by it. It didn’t seem very common sense to me to build for the short term when, with a marginal investment, you could build for the long-term instead. The rhetorical situation that I was asking was this: if you could spend 50% more on construction costs, but quadruple the longevity of the structure, isn’t that a no-brainer? Put simply, it seemed to me that the prevailing attitude was penny wise and pound foolish. But what I discovered is that the economic calculations that determine structural decisions like building materials and construction methods are not straightforward at all. In fact, I would argue that they are counterintuitive.
The depreciation of American real estate as encouraged by the tax code offers remarkable incentives to build disposably. Additionally, there is a tax loophole that encourages liquidity, which makes it nearly impossible to economically justify a multi-century structure, even if it would cost the same amount to build! The first number to point out is 39. Thirty nine years: that is the depreciation schedule for a commercial building, as established by the IRS (residential buildings are even shorter, at only 27.5 years). What does that mean? For financial matters, the “useful life” of commercial buildings is set at 39 years. When an individual or a corporation constructs a new building or buys an existing one, they are able to claim a tax deduction for that up-front capital cost, spread out over the length of the depreciation schedule. That deduction is calculated assuming straight-line depreciation: the difference between the initial cost and estimated salvage value at the end of the period is divided evenly over 39 years. It’s difficult to over-emphasize how advantageous this deduction can be; in many situations it exceeds the yearly income from that property.
In order to maximize this deduction, the tendency is to build so that the salvage value is as minimal as possible. In a hypothetical situation, a company wants to build a 40,000-square-foot commercial building for $10 million. If it is built using structural masonry with a multi-century physical lifespan, then the salvage value at the end of 39 years might be $5 million, and the yearly depreciation deduction is $128k. But if the building is designed with reinforced concrete and a glass curtain wall with an intended physical lifespan of only a few decades, then it’s likely the salvage value would be less than the cost of demolition, which doubles the yearly depreciation to $256k. This is a clear example of the economic “benefit” of planned obsolescence, as it encourages designing buildings with a physical life that is as close to 39 years as possible. By building a structure that is disposable at the end of four decades, it’s very possible that the owner would never have to pay taxes on the income that the building generates.
On the other hand, this is an incredibly perilous tightrope to walk. Remember that Miami condo that I mentioned earlier? This year, it turned 40. How many other buildings are just like it, at the end of their calculated financial usefulness and teetering on the edge of catastrophic structural collapse? Perhaps a lot more than you think. With the average age of commercial buildings in the United States climbing to 53 years, it makes one shudder to think about what the future could hold.
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The second element of the tax code that is relevant to this discussion, one that encourages liquidity, is a loophole known as a 1031 exchange. Generally speaking, real estate transactions are discouraged by the simple fact that every time a property is sold, the profit is taxed. If the property is fully or partially depreciated and is sold for a gain (more than the calculated salvage or “book” value), then it is subject to depreciation recapture and capital gains tax. Depreciation recapture is a provision in the tax code that was created to recover taxes on a profitable asset that the taxpayer had previously used to offset taxable income. This recapture is taxed at a higher rate than capital gains and theoretically should discourage maximizing the yearly depreciation amount as outlined previously, since higher yearly depreciation is proportional with a higher depreciation recapture amount owned.
In the example above, the disposable building has twice the yearly write-off compared to the multi-century structure, but the depreciation recapture at the time of sale would be doubled as well. Since this large tax bill is triggered by the sale of a property, conventional thinking would be to hold onto property as long as possible, right? Well, not exactly. This is where the 1031 loophole comes in. As outlined in Section 1031 of the tax code, property owners can defer paying any taxes (depreciation recapture or capital gains) on the sale of a building as long as they use the sale proceeds to acquire another property. While there are some limits to the kind of property or structure they can swap with, they are surprisingly liberal. This loophole promotes liquidity, as there are no limits on the number of times or frequency that a 1031 exchange can be used. The cycle can just keep churning out shoddy structures and replacing them a few decades down the line with more of the same—and with significant financial advantages.
These two factors combine to create a financial system that encourages designing and constructing structures that come and go in less than two generations. The 39 year depreciation schedule disincentives durability and promotes disposability, while the 1031 loophole encourages liquidity by circumnavigating the very provision that was designed to recapture the massive tax write-offs produced by the rapid depreciation schedule in the first place.
Consequently, planned structural obsolescence is reasonable, in fact it’s far more reasonable than building for multi-century lifespans, so long as the reason for building is to create real estate. But if the reason for building is something more tangible, more straightforward than that—if we build structures for a loftier purpose than money—then planned obsolescence is a direct assault. In my next article, “In Defense of Sticking Around,” I will lay out an argument that the 40-year typical building lifespan doesn’t just promote second-rate construction that would make tragedies like Surfside increasingly common, but culminates in devastating social and environmental consequences that are passed down to future generations.
Will McCartney is a Structural Engineer-in-Training at Meyer Borgman Johnson, working primarily on existing buildings. A recent graduate of Benedictine College, he aspires to blur the lines between architecture, engineering, and construction by building long-lasting vernacular structures. Born and raised on a working ranch in west Texas, these days you can find Will in Saint Paul, Minnesota.