Demolition Bonds
Brian Gongol

One of the significant cultural distinctions between Americans and Europeans is America's relative lack of nostalgia about old buildings. Put simply, Americans don't have a lot of reservations about blowing up an old building and replacing it with something new. The history of building demolition has largely been written on the west coast of the Atlantic.

There's nothing inherently wrong with viewing all construction as temporary; in fact, it's probably a very healthy thing, since it acknowledges that the old should make way for the new whenever the new proves itself more useful to the people using it. This mindset is probably very good for encouraging innovation and progress -- since no American wants to live in 1920s tenements or work in pre-Industrial Era factories.

But there is a downside: Our homes and workplaces don't just deconstruct themselves when they've reached the end of a useful life. Instead, they must be either actively renovated or actively destroyed, lest they simply fall into disrepair and contribute to problems like urban blight.

This problem may have a very simple solution: A requirement (preferably imposed by local authorities) that the financing of all new construction include a demolition bond.

The idea is simple: Suppose a home is constructed with an anticipated useful life of 30 years. The local zoning authority could require that home be bonded for the future value of a complete demolition, discounted for a 30-year period. Upon the end of the 30-year anticipated useful life, the bond could be redeemed at its maturity value to pay for either the demolition of the dwelling or for its useful renovation. The bond discounting would be set according to the anticipated useful life of the construction; thus, for instance, wood-frame buildings would have shorter-term bonds than concrete or steel.

The demolition bond could be applied to commercial and residential property alike. To prevent it from being used simply as a "windfall" at the expiration date, it may be necessary to legally restrict the use of the bond to either demolition or renovation.

Some anticipated consequences, both good and bad:

Controls Urban Blight
It's been an ongoing challenge for urban planners, political leaders, and property owners to check the progress of urban blight. No one likes it, but many of the "solutions" offered are just as unpalatable -- especially the radical application of the Takings Clause as authorized by the Supreme Court's preposterous decision in Kelo vs. New London. Demolition bonds would strike a blow against urban blight without making the same hugely intrusive errors against personal liberty.
Restricts Freedom of Individual Choice
Though demolition bonds would be better for liberty than the radical application of the takings clause that has already been observed, they are not a panacea for free choice. They would impose a restriction on the choices made by building owners. It could be argued that they would fall at about the same level of restrictiveness as mandatory insurance laws for auto owners.
Brings Accounting Values Closer in Line with Economic Values
The cost of demolition or renovation is often hidden on the accounting bottom line. By requiring that a fungible instrument stand in for that otherwise hidden cost, demolition bonds would bridge some of the gap between the accounting value of a structure and the real economic value of that structure, including the opportunity costs imposed by the inevitable long-run decline in the facility's usefulness.
Would Likely Reduce the Average Size of Construction
The construction industry probably wouldn't like the nearly inevitable consequence that investment in demolition bonds would displace some investment available for new construction. Supposing that a demolition bond might cost 5% to 10% of the value of new construction, the new building would likely be 5% to 10% smaller or less valuable when constructed. This would tend to have a short-term constrictive effect on the construction industry, which would directly feel the pain of smaller construction. However, it would benefit the industry in the long run because it would ensure valuable new construction or renovation in the future, rather than the inevitable deterioration of existing facilities. In the immediate term, though, new homeowners and commercial property owners would probably resent the likely reduction in the size and book value of their buildings.
Would Put a Brake on the Housing Bubble
The rise of the "McMansion" has offended many an aesthete and designer. As consumers have rushed to build sometimes absurdly large homes, the arms race for square footage has pushed housing costs to stratospheric heights in some parts of the country. In California, the increasing popularity of the interest-only mortgage is a canary in the coal mine. Demolition bonds would help curb this effect in two ways: First, as noted above, they would tend to displace some of the investment in new construction and thus remove some fuel from the fire. Second, demolition bonds would inherently favor long-term construction; the longer the bond period (based on the expected useful life of the building), the lower the initial cost of the bond.
Could Not Be Applied Retroactively
Demolition bonds wouldn't do any good to solve existing urban blight; they would work only to curb the emergence of future blight. This makes them harder to achieve politically, since they represent a future investment without immediate gain.
Would Reward High-Quality Construction
The use of insulated concrete forms for home construction, according to the industry, costs about 5% to 10% more than the new construction of a similar wood-frame home. Due to concrete's greater durability and capacity to withstand natural disasters, it would likely have a longer useful life than the comparable wood-frame home. The longer useful life would translate to a lower initial present-value cost for the demolition bond, thus at least partially offsetting the higher cost of construction. The same effect would apply to any improvements leading to more durable construction.
Makes Some Useful Capital Illiquid
By tying up the building owner's money in an illiquid long-term investment, the demolition bond could displace more useful investments that the owner could have made elsewhere.
Reduces the Cost Incidence of Present Choices on Future Generations
While the argument may sound like it summons the ghost of Edmund Burke, present generations have an obligation to future generations. If a building is constructed today with the intention that it might only last 30 years, then that choice imposes a fiscal burden on future generations who will then have to demolish that building and re-build. By requiring present-day investment in that future cost, demolition bonds would help offset the unfairness of that imposition.
May Be Difficult to Apply Fairly
Assessments of a building's expected useful life are inherently subjective. Since a direct financial cost is involved, builders would have an incentive to bribe, cheat, or otherwise attempt to influence the authorities responsible for assessing the anticipated useful life of the facility. This could make it difficult to apply the demolition bond requirement in a fair manner.
Could Act as Insurance Against Unforeseen Consequences
When the EPA and state agencies in Iowa mandated new rules and regulations on underground storage tanks for gasoline, many independent gas stations were pushed right out of business. Demolition or renovation bonding could help offset the direct impact of new regulations on commercial facilities and help prevent unfortunate effects that might put small businesses under.