Detroit has experienced population decline of nearly two-thirds since 1950 and continues to have a massive vacant residential lot problem. The AEI Housing Center estimates that Detroit has 134,000 vacant lots, with 36% of its residential lots vacant. Demand exists in the metro, construction exists nearby, and often just across the city limit, but new construction in Detroit doesn’t generally pencil out.

Detroit’s combined tax rate on primary residences is generally much higher than nearby neighbors. Higher annual property taxes are capitalized into lower home prices—suppressing appraised values relative to construction costs—so builders/developers are unable to build and sell a new home at a profit. The result is an appraisal gap: when sale prices and appraisals fall short of construction costs, new homes do not get built.

A well-designed tax abatement program can eliminate the appraisal gap, thereby incentivizing private infill development on vacant lots, especially by smaller builders. The Net Present Value of the abatement gets capitalized into the sale price, and the appraiser makes a positive value adjustment to comps that lack abatements. The buyer/borrower is still able to quality as the lower monthly taxes roughly offset the high principal and interest payment. Detroit’s Neighborhood Enterprise Zone (NEZ-NC) program shows that tax abatement is necessary—yet not sufficient—and market principles still apply.

The lesson extends beyond Detroit. In struggling cities with thriving suburbs, a properly designed property tax abatement, by-right zoning, short and simple land use rules, faster permitting, and lower costs can help pull demand inward. Make it feasible and builders will build.