The Economic Truths of Being a Land Baron

It has been a bumpy few weeks in Second Life. Just yesterday the news broke that Rod Humble, the now former CEO of Linden Lab, has departed for greener pastures. In addition to this recent surprise, Second Life residents who make money inside of the virtual world have been weathering the storm of new administrative requirements from the Lab regarding tax documentation.

I have now been in Second Life for almost 8 years, but when I arrived I had no concept of a virtual world economy. When I learned that people were leasing virtual land and actually paying real money for it I was stunned. I thought that was absolutely ridiculous! Why on earth would someone pay money for something that was not real? I saw no reason to spend money on something so silly.

I had no idea how deep the human need is to have a "home", no matter the environment. I was so surprised when the urge to lease virtual land took hold of me. I felt lost without some sort of home that felt like it was mine. It is now 2014 and I have owned a Second Life estate for over 5 years. I lease virtual land to people. I provide the very thing that I once thought was so preposterous.

A few people have been able to make substantial amounts of money, actual US dollars, by selling creations or by leasing virtual land. The big example that always gets hauled out is Ansche Chung and the millions she has made on virtual land. The reality is that the people that make lots of money in Second Life are a tiny, tiny minority of the total residents. Most likely less than 1% of the population.

Most of the folks making "good money" have always done the right thing by declaring that income on their tax documents and paying taxes on it. They would have been insane not to do so, because even though the public at large scoffed and laughed at the concept of "fake" money, we always knew that money was real. I have known since my first year in SL that there would be a point at which the US government was going to step in and execute a tax smackdown to ensure no one was cashing out large amounts of money and not paying taxes on it.

Additionally, whether you know it or not, until these new rules went into effect, the SL economy was a great way to launder money. I never realized that until I became an estate owner and learned how buying and selling Linden dollars worked on a larger scale. While local, state and federal government law enforcement agencies have never exactly been fans of money laundering operations, these illegal endeavors have taken on additional "weight" as a potential method of funding terrorists.

Hello NSA! Hello Patriot Act! Hello IRS! Hello new required tax documentation in Second Life!

In the last month or so, Linden Lab has started contacting people in Second Life who have cashed out large amounts of money. LL informed them that if they did not submit their proper tax documentation to Linden Lab, then the Lab would block their accounts. Blocking an account = the avatar can not log in to SL.

Account blocking is more common than you likely realize. Any time an estate owner misses a tier payment to LL, their account gets blocked. We've seen this happen in the Steamlands, albeit rarely. I'm sure it happens in the wider world of Second Life every time a total flake buys a sim. Linden Lab will unblock the account as soon as the unpaid bill gets paid. In this tax documentation scenario, they are blocking the account until they receive the required documentation. Yes, it's a total pain in the ass, and subject to bureaucratic red tape, but it's "fixable".

Over the last two to three weeks I've heard about a lot of people that I know personally in SL who have been blocked or who have been threatened with being blocked. So far these folks have all been "big fish", people who have cashed substantial amounts of US dollars out of SL. I have no idea what criteria LL is using that = "substantial". I'm sure they have started with high numbers and I am fairly sure they are going to work their way down to lower amounts.

What I have to say next is for the benefit of my Riel Estates residents.

Have no worries about me getting blocked. I am not going anywhere.

How do I know this without a doubt?

Because I don't cash Lindens out of Second Life into actual US dollars. I think in almost eight years of being in Second Life I have cashed out a total of $200 USD, and those cashouts occurred in 2008 and 2009.

Why don't I cash out Linden dollars?

BECAUSE I MAKE NO MONEY ON MY ESTATE.

I want to be very clear about this. I have told you all many times that I do not make money on my estate and that I never have. I wasn't just blowing smoke when I said that. It's the blunt, honest truth. I wasn't saying it to exaggerate.

In the last year my estate barely broke even. Any "extra" Lindens that I have go to one of three places:
  • To the purchase of estate infrastructure objects, like trees, plants, bridges, street lamps, prefab builds etc.
  • To pay for the Radio Riel audio streams.
  • To pay for my gowns, jewelry, furniture etc.
I'm sure many people think I am crazy for working like I do on my estate for no monetary gain, but I am happy to do the work required for 2 sims because I get other benefits from that work.

I have learned a lot of technical information about sims. I have learned a ton about designing sims. I get to have my own space where I can create my artistic vision. I get really cool people (my residents) to hang out with. I get money for Radio Riel. And I get to dress my pixel Barbie to the nines and to never have to worry about paying for it.

I put no money in. I take no money out. The benefits listed above are worth the minimal amount of work required of me from 2 sims. It was different when I owned New Toulouse. That place was an administrative nightmare. Downsizing to 2 sims has been like a permanent vacation from tedious estate work.

While 2 sims have meant less work, it has also meant less money for me in SL. You really have to have 6 or more sims to be able to make any kind of profit.

Now it's time for me to give you all a lesson in the realities of "making money" off of sims in Second Life.

This lesson starts with some history. When I joined Second Life in April of 2006 it cost an initial fee of $1600 US dollars to buy a sim from Linden Lab and an ongoing monthly fee of $195 US dollars. Estate owners figured out the optimal way to carve up the sim into parcels and then figured out the optimal amount that the Second Life land market would bear in terms of the amount of tier they could charge their residents. Whatever was left from the tier paid to them by residents after the estate owner had paid the $195 USD to LL was the profit.

I can't tell you what that amount of profit was because at the time I was not an estate owner. I had no desire to be an estate owner. I now wish I had walked around Caledon, counted the amount of total parcels in each sim, then looked at the amount of weekly tier being charged to residents and figured out the profit. It would have been relatively easy to do, but I had no idea it would eventually affect me. Anyone could do the same thing today with my sims.

That initial sim cost of $1600 USD was very high. It has since dropped to $1000. Back in 2006-2007, the way to cover that $1600 cost was to charge the residents an initial "rental rights" fee. Once again I wish I had saved my original documentation on how much I paid for rental rights when I moved into Caledon. That way I would have an idea of how much of that $1600 was offset by rental rights payments from residents. The rental rights fee still exists when launching a new sim. I charged rental rights for Witchport parcels when I was planning to open it, however the rental rights costs were lower as I was able to buy a sim on the used sim market.

Note: If you ever want to buy a sim. Buy it from the used land market. Don't pay $1000 USD to Linden Lab when you can buy a sim from an existing estate owner at $500 or $250, depending on when the tier is due.

That sim pricing remained in effect until some point in late 2007 or early 2008. I wish I could remember the exact date of the change, but I can't recall it or find it anywhere online. On the date I can not remember, Linden Lab changed the costs on full sims. They changed the initial fee to $1675 USD and the ongoing monthly tier to $295 USD per month.

The only estates in the Steamlands that had/have some sims from that original pricing scheme are Caledon, Winterfell and I think (but I am not sure) Steelhead. They were all around back then. When LL increased the monthly tier by 51% from $195 to $295, they "grandfathered" those prices. This means that if an estate owner had a sim then and still has it now, they are paying the old rate of $195 per month. Obviously any new sims those estates added after the price change are under the "new" pricing and they pay $295 a month for those.

I bought my first sim (Edison Hypatia) in the late Fall of 2008. I have had to pay $295 a month per sim and I have always had to do so.

If an estate owner with a grandfathered sim sells it to someone else, then the sim loses its lower tier. Upon transfer, the cost of that sim goes up to $295.

For example, New Babbage launched in January 2007 during the time that the tier due to Linden Lab was $195 a month. That is what Shaunathan Sprocket paid monthly for all the sims in New Babbage (Full sims). When Shaunathan sold New Babbage to Mosseveno Tenk, the $195 cost per month went bye-bye. Mr. Tenk has always had to pay $295 a month for each New Babbage sim (Full sims).

Now that you understand the different costs for before and after the price change, let's look at how that affects estates. As I said above, estate owners back in the early days of leasing land figured out how much residents were willing to pay for tier in private estates. I am sure they took the costs of mainland tier into consideration and they worked out how much the market could bear in terms of cost. Paying a little bit more for nicer land in a private estate was worth it to many people. However estate owners could not charge too much for that land or else people would refuse to lease it.

What this did was establish a general range for the residents' weekly tier costs. Some estates charged a little more, some charged a little less, but the range was stable because it was being driven by what the market could bear. There was not a lot of wiggle room in that amount unless you were offering something insanely great to your residents and they felt it was worth paying more than the market prices.

Then, along come those of us who bought our sims after the price changes. We have to pay $295 a month to LL....but uh oh...there is already a general range established that residents are willing to pay for their tier. We could have passed on the extra cost on to our residents in order to get the same amount of profit as the grandfathered sims, but then those residents would have told us to take a flying leap and gone to lease in one of the sims that only cost the estate owner $195 a month and that had lower resident tier.

Do you see how anyone who bought a sim after the price increase was screwed from minute one? The sims were costing us $100 more a month, and yet we could not increase our tier to offset that. We were/are in competition with estates that had/have grandfathered sims. They were/are the ones who determine resident tier costs and we have been forced to make our prices match theirs in order to get any residents at all!

The amount of "profit" I make on a sim per month is around $100 USD and that is only if the sim is full 100% of the time. So if I never had any vacancies, abandons or late payments from residents, I have the potential to make $100a month on a sim. Would you do the work an estate requires for $100 per sim per month? Obviously my answer to that question is yes. It's the answer that several Steamlands estate owners would give because their costs and profits match mine.

If you have 6 or more sims at $295 a month each, you have the potential for a somewhat steady profit because the more sims you have the more stability you have in income. Abandons and vacancies harm every estate but they harm smaller estates even more. There is simply less income, period. A few abandons can make a big, bad difference in the financial solvency of a small estate.

Unless you own an estate you would likely be surprised at the number of people who abandon land or who don't pay their tier. I came from Caledon where we all paid our tier conscientiously and where we could not even begin to imagine paying late or not paying at all.

When I bought New Toulouse I had a very harsh awakening. So many people weren't paying tier at all in NT. Part of the reason behind that is because Mama Cree was not able to be in world much before she sold the estate and she was not able to pursue people for tier. A lot of the "residents" there were taking a free ride at her (and the other residents') expense.

I leveled the smackdown in New Toulouse very quickly and I have done so ever since. I have gotten to the point where all of my St John residents are either long-time residents of mine or SL oldbies or both. I *never* deal with unpaid tier now. I deal with people who move on, but they always contact me politely to let me know. I *do* understand that people need to move on. The levels of courteousness and responsibility that I see with my St John residents are not the rule. They are the exception. I know how lucky I am to have the residents that I have.

There are many reasons why people abandon or don't pay tier. Sometimes they are flaky. Sometimes they are inconsiderate. One of the excuses they often use is "Oh she's a rich land baron, making tons of money off these sims, a little bit less won't hurt her."

You now know that that is NOT the case. Abandons hurt estates. Late tier hurts estates. Especially smaller estates. You now know how much money I make off my estate. I broke it all down above. Almost all of the Steamlands estates are in the same boat as I am regarding profit, with the exception of one estate, and that is Caledon.

Desmond Shang, the estate owner of Caledon was recently stuck in some bureaucratic red tape regarding the new tax documentation requirements from Linden Lab. He has been very public and honest about it and the problem was all due to complete and utter stupidity on the part of LL. LL totally messed up his information for the tax documentation and were threatening to block his account. It's especially frustrating because Des has always been totally on the ball regarding his income from Caledon. He has declared it and paid taxes on it from the get-go, so to be threatened with an account block after *years* of doing things the right way simply sucks.

As of today, the snafu has been resolved with Linden Lab and all is well with Caledon. There is one thing, however that came out of all of this that worries me greatly. It makes me worry about my estate. It makes me worry about the other Steamlands estates.

Desmond has always been completely transparent about the amount of money he makes on Caledon. Over the years he has tossed out numbers that are more than substantial and that is a wonderful thing for him. Many people, myself included, respect the business success that he has had with Caledon.

However...

I wrote this blog post because I want *everyone* to know that Caledon is the exception and not the rule. None of the rest of us Steamlands estate owners even come close to that amount of estate-generated income.

It makes me very, very nervous when Caledon's big numbers are put out there because I believe it gives people a false impression on how much money we estate owners make. Those numbers keep the fallacy alive that we are all "rich land barons rolling in money". Why pay tier on time? Why pay tier at all since owning sims brings in so much money?

There will always be flakes. There will always be inconsiderate people. Nothing will ever eradicate them and their penchant to not pay their tier, however I personally believe that if people think we are all bringing in the kind of money that Caledon is bringing in then they feel a little less guilty about not paying their tier. Or they think that we'll be fine if they are a little late.

No. No we won't. And actually that goes for Caledon as well! Any abandons or unpaid tier hurt an estate's bottom line. No matter how big or small that estate is. Larger estates just have the ability to take the hit whereas one blow knocks us little guys right out. And even with larger estates, if they get get hit enough times, it will eventually take them out too.

We estate owners are not all rich land barons.

I personally am making no money on my estate and I never cash out Lindens into US dollars. There just isn't enough to cash out.

Those of us that bought sims after the monthly tier payments to LL went up to $295 a month were screwed on the potential for profit from minute one.

The income that Caledon provides to Desmond Shang is the *exception*. It's a very, very different scenario for the rest of the Steamlands estate owners.

As we are all not bringing in buckets of cash, abandons and late tier hurt us. We can't weather stuff like that like Caledon can. Caledon can't even weather it. It has shrunk and consolidated in order to handle the abandons.

I wrote this post because I want the full truth out there. I do not want to be subjected to negative financial repercussions in my estate because people think I have tons of money based on what they have heard from Desmond Shang about his income from Caledon.

I don't want to see those negative repercussions in Winterfell, Steelhead, New Babbage, Seraph City or Marikesh Mondrago. Seraph and Mondrago are each single sims. My estate St John is 2 sims. It hurts us "little guys" the worst of all.

There you have it. The economic truths of being a Second Life land baron. I truly hope that people find this blog post helpful in understanding what goes on financially behind the scenes.

Thank you to all of the residents of the Second Life Steamlands. We all survive because you are all wonderful, responsible and supportive residents. We would not exist without you.

Comments

Think your time line is slightly off, for what its worth. All the Babbage sims were always at the $295 rate, or Tenk would have got a grandfathered sims on the transfer, so that had to be in effect in Jan 2007. The price rise on transfer didn't go away until well after Tenk bought the estate in Feb 2009.
Gabrielle Riel said…
Whether Shaun was paying $195 or $295, Tenk would have had to pay $295 either way.

I *really* wish I could remember when that price went up.

I found an MSN article about SL real estate that mentions that LL had just raised the rates from $195 to $295....but there is no bloody date on the article!

The article does mention the "just released" Second Life Official Guide book, and that came out in November 2006. So your estimation of the change being in effect by January 2007 is likely on point.
Desmond Shang said…
If I recall it was 15 Nov 06 when the rates formally went up.

It was to be 1 Nov 06, but there was a huge outcry and rumours that the big estates were unfairly tipped off about the rate increase in advance. And I'm pretty sure they were. Why do I think so? Because I heard about it in advance through the 'grapevine' so to speak, and kept my mouth *VERY* shut about it at the time. Didn't take advantage of it though; I well knew that it would be plainly visible if I had, and the social repercussions obvious. Plus, picking up just ten of them would have been well over 10,000 USD out of my pocket. Caledon's 14 regions (at the time) were nowhere capable of generating that kind of money that fast, and I wasn't about to gamble with savings even if I could have got away with it.

That said, inexpensive regions kept pouring onto the grid well into 2007 because in those days, it took weeks to get a region and they were horribly backlogged. Nobody really knows on what date the last estate at 195 rolled out, other than perhaps some ex Linden somewhere.

* * * * *

Gabi, believe it or not the Lindens said (in 2013) that they were doing tax reporting based on Lindex activity; simply 'not cashing out' may not be sufficient to avoid tax reporting issues. But don't take me as an authority on this, send in a ticket to billing and see what they say.

For the record I agree with your logic; if a foreign prince documented that I had a one million dollar credit with him somehow in an email, I'd not see that record as evidence for actual taxable funds (who knows if LL can even back them up and more than the prince). But this isn't tax advisement; I have a very expensive CPA who sorts that sort of thing out for me, and it may be very different for me with a California corp than it is for others.

* * * * *

Very appropriate 'thank you' to the Steamlands people ~ I can only second that. Especially those who did so much for everyone, and never saw a dime for it.

Des
Litta Nightfire said…
Judging from this thread (http://forums-archive.secondlife.com/327/fa/147665/1.html), sim tier changed from $195 to $295 mid-november 2006.
Mari M said…
Found this old article about the price changes.

http://alphavilleherald.com/2006/10/ll_confirms_pri.html

Funny how quickly digital tracks of what received a lot of press at the time just disappear.

And scary too.