Chicago’s Bonds Turn To Junk–As Could Be Expected

1. The article I wrote this week for Forbes makes the connection between post-WWII urban renewal, and today’s tax increment financing. I realize that the two redevelopment policies aren’t identical, most notably not in scale. Urban renewal was a nationwide policy during an era of extreme central planning; TIF is funded at local and state level to bring redevelopment to targeted sites. But during its four-decade rise, TIF has reflected urban renewal’s flaws, perpetuating waste, cronyism, and property confiscation.

2. Another article I liked was by City Journal contributing editor Aaron Renn, called “Libertarians of Convenience.” It is about how urban progressives resist government regulations for their preferred activities, while calling for more regulations overall. It seems that the group hasn’t connected certain dots: while advocating for government growth outright, they become shocked when said governments impose regulations upon them that are pointless and arbitrary, not grasping that this is often the natural course of bureaucracy.

What explains these contradictions? A charitable explanation is that urban progressives—typically on the younger side—are just beginning to experience how excessive regulations can suffocate life in the city…But it’s hard to avoid thinking, too, that some of the inconsistency reflects elite biases. The things that liberal-minded city residents like and want to do—eat from hip food trucks, smoke dope, and other “bourgeois bohemian” pursuits—should be left as free as possible, consequences be damned…Those that they consider déclassé—Big Gulps, Marlboro Lights, McDonalds—should be restricted or even shut down. It’s regulation for thee but not for me.

What the urban Left doesn’t recognize is that the regulatory mind-set is nearly impossible to turn on or off, depending on what you like or don’t like. Many of the bans and rules that progressives impose on cities not only make life difficult for muffler shops, hardware stores, plumbing firms, bodegas, and other unglamorous operations; they also harm the enterprises that they love.

3. But perhaps the most noteworthy urban news story was one that many have anticipated: Chicago’s bonds reached junk level. On Tuesday, Moody’s downgraded city bonds backed by property, sales and fuel tax revenue from Baa2 to Ba1, or just below investment grade.

The move came in direct response to an Illinois Supreme Court decision which found that the state constitution prevents the legislature from restructuring pension obligations for government employees. This could prevent the necessary reforms to the very debt that first caused the city’s ratings to drop so low. The state of Illinois has an estimated $167 billion in unfunded retiree pension and health care obligations. Various government entities within Chicago and Cook County, meanwhile, have an estimated debt of $87 billion, and two-thirds of this is for unfunded employee liabilities. Taxpaying Chicago households will eventually be on the hook to cover much of both. Yet, as the court decision showed, officials at multiple levels of government have proven unwilling to reform these burdens, so beholden are they to public employee unions. The problem forced Moody’s to downgrade Chicago’s bonds in 2014, and now again.

But I would argue that outside forces informed Moody’s decision also. Earlier this year, I wrote in the American Interest about the legal dubiousness of the bankruptcies in Detroit and Stockton. These cities, too, had run up massive debts because of unfunded pension liabilities, and filed for bankruptcy to shed them. But rather than following traditional bankruptcy proceedings by paying back their creditors, they made almost full guarantees to their retired employees, while giving some bondholders mere cents on the dollar (or in the case of Stockton, less than one penny). These cases represented a reversal of the normal order in which creditors are paid in bankruptcy. They were driven in both cities by a populist impulse to protect unionized government workers and give large financial firms the finger. But for the article, I interviewed a half-dozen financial and legal experts who thought the deals could set a bad precedent. If indebted cities can just file for bankruptcy and then use it to shirk payments to financial firms, the mere threat of future ones doing so could increase borrowing costs. Chicago has long seemed next in line to file for bankruptcy, and its liberal politics mirror that of Detroit and Stockton. So perhaps by lowering the city’s bond rating, Moody’s is taking necessary precautions.


Why Money for Schools Means No Permits For Housing

Housing has a lot going against it in the California. But amidst all the legal, political, and regulatory roadblocks, there’s one law that sneaks by largely unnoticed: Prop 98.

Prop 98 guarantees a minimum level of state spending on education each year. Sacramento pools most city, county, and special district property taxes into special education funds to meet this commitment. The localities only get to keep a small part of the property tax revenues for their own general budgets.

This system creates a disincentive for cities to permit housing. New housing brings in new residents who need city services. But it doesn’t bring in a commensurate increase in property taxes since most of that revenue gets scooped up by Sacramento.

Commercial development, though, brings in taxes a city gets to keep. Sales and hotel taxes are significant revenue streams. And they don’t cause the kinds of strain on city services that new residential does.

Reforming Prop 98 might be low hanging fruit. Changing the formula to appropriate a broader stream of city revenues might help ease the bias against housing. And it might even be possible to amend the law without having to fight the California Teachers Association. As long as there’s no net decrease in education funding, of course.


For those not acquainted with California politics, the California Teacher’s Association (CTA) is the most potent lobby in Sacramento. If the CTA doesn’t like a bill, it doesn’t become a law.


It’s tough to say exactly how much new housing Prop 98 actually prevents. Different cities get to keep different amounts of their property taxes, so the disincentive differs case to case. And there are plenty of other things like CEQA and Prop 13 which put a drag on new construction as well. But where CEQA and Prop 13 make it easier for residents who are already NIMBYs to gum up the works, Prop 98 is a reason in itself for a city to avoid residential development. So while we can’t do much to change the aesthetic preferences of our neighbors, we can do something to change the law. And if tweaking one law makes cities see new housing as a financial boon instead of a burden, it might be worth the effort.


The Right to the City

This post draws heavily from Tom W. Bell’s “Want to Own a City?”  and would not have been possible without his prior writing and research

The “Right to the City” is an old marxist slogan that’s as catchy as it is ill-defined. Neither the phrase’s originator Henri Lefebvre, nor David Harvey, a more recent proponent, seem to have articulated the idea in any meaningful way. Even the Right to the City Alliance stops short of explaining what the right actually is. When it comes up, it’s typically alongside a claim that something is being stolen or taken away from long-standing communities, as if neighborhoods were sovereign territory suffering from an invasion. For practical purposes, no one has any right to reside in any place beyond their ability to pay. But if the desire is for a way in which communities could actually own the places they call home, perhaps the Right to the City should be a property right.

San Francisco. Ground zero for the debate over who gets to live where and why.

San Francisco. Ground zero for the debate over who gets to live where and why.

Public Ownership through Private Property

What’s the difference between a private company and a municipal corporation? You can own the former but not the latter. Investors have clearly delineated property rights in their corporations. Residents have no equivalent ownership rights in their cities. But what if living in a city meant owning a piece of it as a legal entity as well?

Imagine that a city issued shares to its residents. Shares would vest over time and long-time residents would have more equity than new arrivals. Now assume that this city took in all of its revenue through land value taxation and that land revenues were used to pay dividends to the city’s resident-shareholders. Instead of facing displacement, incumbent residents would benefit from rising demand to live in their city.

Shares might also be used to weight the voting system. More shares could mean extra say in electing representatives, city-wide ballot measures, neighborhood level participatory budgeting, or perhaps even corrective democracy. Again, the point would be to formally privilege long-time residents over newcomers in deciding how the city is run.

All of this should be taken as more of a thought experiment than a policy proposal. For one, policy reform would go a long way in solving the problem of displacement without having to favor incumbency. There are also plenty of blanks to fill in when thinking about how a shareholder system would work. And, of course, there’s a lot that could go wrong. The devil’s in the details and given the wrong details the devil might look like hyper-nativist parochialism. But, given the right arrangement, privileging tenure through ownership could tie together the fortunes of residents with the fortunes of their city as a whole. It could encourage long-time residents to welcome newcomers with open arms. And it could offer political and economic enfranchisement beyond what the status quo is able to provide.

Why the Left and the Right Should Join Forces against Eminent Domain

The destruction of inner cities at the hands of bureaucrats wielding eminent domain has been well documented by urban theorists from Jane Jacobs to Richard Epstein. As Ilya Somin points out, eminent domain has played an important role in destroying property in Detroit, contributing to its population losses. Dating back to the implementation of Title 1 of the Housing Act of 1949, urban policymakers began using federal funds for slum clearance. Unsurprisingly, destruction of housing units correlated with the population decline in Detroit and other cities.

While one would think that the horrors of slum clearance under Title 1 have been adequately demonstrated to prevent planners from pursuing neighborhood destruction as an economic growth strategy, cities across the country continue using eminent domain to clear “blighted” neighborhoods. Last year Denver declared an area of its Five Points neighborhood, including 246 homes, blighted, meaning that now developers interested in building in the area can request the city to use eminent domain to grant them the properties that they want. While the Atlantic Yards project received extensive press coverage, policymakers often employ eminent domain more quietly on behalf of stadium builders, benefiting sports fans at a dear cost to neighborhood residents and business owners. Like urban renewal projects dating back to the 1950s, Forest City Ratner has failed to deliver the promised housing that was part of the Atlantic Yards agreement when the city agreed to condemn the neighborhood.

Perhaps Robert Caro provides the most poignant description of the horrors of eminent domain in The Power Broker, explaining the losses of neighborhood cohesion when the tool is used to demolish private housing to be replaced by public housing or in some cases vacant lots  when promised public works are not delivered. One would think that the well-documented failures of urban renewal would lead policymakers to be very cautious when employing eminent domain for corporatism, or “public benefit.” However, even in the Kelo case in which the Supreme Court established that cities can legally use eminent domain in an attempt to provide public benefit through economic development, the Pfizer project for which homes were condemned fell through. Not only did New London policymakers fail to incite economic development by demolishing houses, they shrunk their tax base and created the blight of vacant lots where there was no blight before.

Today, policymakers in California are leading the charge to use eminent domain in a creative new way: using its power to confiscate underwater mortgages from banks, write them down to current market values, and refinance homeowners’ loans with more favorable terms. While the policy has yet to be implemented, unintended consequences are easy to foresee. Once city policymakers employ this policy, mortgage bankers will be much more reticent to make loans to people there, ultimately limiting the city’s housing supply. Furthermore, this policy will be yet another example of policymakers attempting to raise homeownership rates when its unclear that homeownership is beneficial, especially for those who can’t afford it comfortably. The policy will doubtless have other unintended consequences yet unknown. Eminent domain often results in the opposite of what policymakers say it will; slum clearance creates slums and giving individuals’ property to corporations to create jobs ultimately results in decreased economic growth. In this case, using eminent domain to increase affordability for homeowners will likely lead to lower homeownership rates and more expensive housing in cities that employ this strategy.

Polls demonstrate that a large majority of people oppose eminent domain for economic development. Despite this stated support, all but a handful of states permit eminent domain based on the subjective and easily manipulated designation of “blight.” Despite eminent domain’s long history of being used for racist ends and ongoing use to eliminate low-cost housing, eminent domain fails to spark the widespread liberal outrage it deserves. The liberal bastion of The New York Times editorial page not only stayed silent when its business side used eminent domain to clear away existing businesses for its new headquarters, Matt Welch of Reason points out it was one of few neighborhoods across the country to throw its support behind the Kelo decision. The corporatism inherent in using eminent domain for economic development is an area where those on the left and free marketeers should be able to find plenty of common ground to support state-level reforms. Unlike many areas where public choice incentives make policy reform unlikely, eminent domain has not only concentrated benefits, but also concentrated harms. In turn, this makes it an area of land use policy where reform should be possible.

Q&A with David Schleicher

I recently spoke with George Mason University Law Professor David Schleicher about his research on land use law and economics. Here is our conversation including links to some of his academic articles that have earned a lot of attention in the land use blogosphere.

Emily: What are some the costs of land use restrictions? Talk about agglomeration economies and how these relate to development restrictions.

David: This is a huge area of research that spans back to Alfred Marshall looking at why cities exist in the first place. It comes up with explanations for why people are willing to pay increased rents to live downtown. These include lower transportation costs for goods, which was a major driver of urbanization for much of American history. Today this is a small driver of urbanization because the costs of internal shipping have fallen so dramatically. Now an important advantage of urbanization is market size. You can see this in all different markets. Restaurant rows are a great example of this. When you go to one of these rows where there are a lot of restaurants and bars, you have insurance that if one place you go is bad, you know you have other options nearby. The last category of agglomeration benefits is learning, or information spillovers. We see this in cluster economies like Silicon Valley where people at different firms learn from each other. As Marshall explained, “The mysteries of the trade become no mysteries, but are as it were in the air.” Wage growth is faster in urban areas than in rural areas, and this comes from this learning process. In the aggregate, if you keep people out of dense cities, you will decrease national productivity.

Emily: In your paper City Unplanning, you propose a tool called Tax Increment Local Transfers (TILTs) that would compensate property owners for allowing more development in their neighborhoods. How would these work?

David: The idea of TILTs is that new development increases the city’s property tax base. By multiplying the increase in the base by the tax rate, we get what is known as the tax increment. If we give some of this increment to neighbors of a project automatically, they may oppose projects less. It’s effectively an institutionalized bribe, but it would have some really neat effects. Currently we use Community Benefit Agreements, in which the developer bribes — “bribes” is so negative sounding — neighborhood opposition. But, CBA’s increase the cost of development. They act as a tax on development, so they are not as effective at lowering real estate costs. TILTs get money from a growing property tax base instead, so they have the neat effect of reducing the incentives to complain about new developments. So if you know you’re going to get paid through a TILT, your incentive to hold up the project goes down whereas with CBAs you have an incentive to make yourself a fierce opponent to development in the hopes of attaining a larger community benefit. Secondly, it has an information component. If residents know that they will receive monetary benefit from a development but they still oppose it, this provides the planning office with the information that residents would rather not have the building than have the cash.

It’s an idea to help overcome NIMBYist opposition to development in their neighborhoods and to help address the problem that we see very little housing and office growth in our largest cities. One source of this low rate of development comes from aldermanic privilege. The idea of this is that because most cities don’t have competitive political parties, we see that every councilman gets to decide on land use issues in his own district. The effect of this inside big cities is to turn a city like New York into something that politically looks like a lot of suburbs. All of the things that we’ve talked about with suburbs  using political influence to prevent new development in their town can happen inside a city legislature. The TILTs proposal is designed to make it attractive for individual councilmen who are going to control land use decisions in their districts to allow development. It’s acknowledging that the only way we might get more development is to pay off NIMBYs.

Emily: Transferable development rights share some similarities with TILTs in that both create incentives to build support for development. Do you see potential for TDRs?

David: I think of these as more similar to zoning budgets, another policy idea I’ve written about. Basically these are an announcement by cities that they want to allow more building, but they’re unsure of where they want to put it. TDRs are basically a market mechanism for setting the amount of building that the city wants to allow. They’re also traditionally a method of building coalitions, because they get preservationists in favor of new development near landmarked buildings because it’s going to channel cash to them. So the theaters of the 42nd Street theaters were able to sell their TDRs to nearby developers, and then the theater community got in favor of the redevelopment of Times Square. I think it’s a relatively attractive idea, and its a procedural solution like the ones I propose. Whether you could imagine it happening at the citywide level has never been done, but I think they’re very attractive.

Emily: I have previously considered a role for states in setting limits for how much municipalities can restrict land use because it seems that homeowner interest groups would not be as organized at the state level. What are your thoughts on that?

David: You have a problem here that the interest of the state is not necessarily maximizing land value. And of course states do get involved in land use. For example, Massachusetts’ anti-snob law created a work-around for local zoning. But in general, states don’t get involved because people get really angry when they do. I’m not opposed to states getting more involved in land use — I think I would probably be in favor of it — but there are problems. You can tell stories about how states get around land use inefficiencies because they are a higher level of government. People make the same types of arguments for regional governments. One of the problems with this is that states can end up behaving with the same aldermanic privilege that we see in cities, where legislators are allowed to make decisions for their districts. In states where there is not a lot of partisan competition, we see that legislators have a lot more power over bills that affect only their districts. So state land use policies might work better in states like Ohio or Michigan where there is more partisan competition, but in somewhere like Wyoming less so. You can imagine it going either direction.

Emily: What’s your opinion on the relationship between Smart Growth advocates and market urbanists?

David: The conflict between market urbanists and Smart Growth advocates is real, but it can be overstated. Their critiques of current zoning are roughly similar. They both think that we’ve separated land uses too much and that we’ve limited density too much. The modern regime governing land use is bad for the environment and its bad for economic productivity because it splits things up too much and it reduces entry to our richest cities. The answers that market urbanists and Smart Growth people give for how to fix this are different. So Smart Growth activists generally have a vision of what a city should look like. They’re prescriptive. Market urbanists are more demand driven. They say we have no idea what the optimal city should look like, we just think that unless there is a clear case of negative externalities, development shouldn’t be restricted. So the question of whether Smart Growth types and market urbanists are allies or enemies is an interesting one.  For the most part they are allies against the baseline position of modern American policy. That said, there are situations in which we disagree.  So take the never ending debate over the Height Act. Some, though not all prescriptive urbanists like the height limit because they have an idea of what a city should look like, and maybe a mid-rise city like Washington fits that pretty closely, whereas market urbanists think that’s ridiculous. If people want to build taller buildings on K Street, we can’t really see any reason why they shouldn’t. But in a lot of other arguments they agree.

Emily: Do you think that institutions like DC’s Advisory Neighborhood Commissions play a role in limiting development?

David: ANCs are effectively a mechanism through which neighborhoods are able to mobilize and organize opposition to projects. Their decisions are usually not fully binding, but they are able to make recommendations, and they usually win. They are designed to be a step in the process where the opinions of the neighbors can be heard. They are conceived of in opposition to Robert Moses-style trampling of neighborhoods, but their effect is by-intent to give neighborhood opposition to development more sway. And the way they do it is both by formally including them in the process and by providing a mechanism by which they can overcome the ordinary Olsonian limits on collective action. You have a hearing where everyone in the neighborhood gets together, and this allows them to coordinate opposition.

Emily: Some land use writers have focused on the importance of writing about the losses of zoning to educate people and changing public opinion. Do you think this is an important strategy along with advocating for procedural changes?

David: This is an area where the lawyers and the journalists approach the problem from a different method. I think it’s very well and good to educate people about the costs of excessive land use controls. The very use of the word NIMBY or BANANA is an effort to educate people and shame people for their preferences to stop development in their neighborhoods. To the extent this is effective I think that’s great. However, I think that opposition to building is rooted in something that you can’t talk people out of. People have made investment decisions to buy their homes and then have lots of incentives to stop building in their area. Procedural solutions are more likely to be fruitful, whether they’re mine or someone else’s, in changing the manner in which policymakers make decisions. These are differences in emphasis only. I think that educating people about the costs of zoning is great, but because people put so many of their assets into homes, I don’t think that telling people their decisions are economically unattractive is going to be very efficacious in changing their mind.

Emily: When upzoning is considered for broad areas rather than individual parcels, it seems that there could be a lobby among some homeowners who support upzoning for the chance to sell their home for redevelopment. Do you see less opposition to upzoning when the change applies to a larger area?

David: Absolutely. A project that I’m currently working on is that city’s master plans produce less-restrictive results than amendment-by-amendment zoning changes because you’re able to get deals across neighborhoods. So if you’re upzoning all of Washington you would have neighborhoods saying we’ll take a tower here if you’ll take a tower there, and you perhaps get something closer to expressing the city’s preferences. Whereas if you do this project-by-project, there is no reason to believe that if you allow a tower in your neighborhood that the next time the next neighborhood will be willing to take one. So you see cities where this happens. For example Philadelphia’s rezoning was consciously an effort to overcome the slow limitation on building and density created by amendment after amendment of downzoning.

Why do condos even exist?

It sounds like a dumb question – they exist because people like the security of owning a home combined with the services and lower costs that apartments offer, duh! But upon further reflection, condominium-style tenure can be a bit problematic.

240_Central_Park_South_2012-09-30_15-18-22The main problem, as I see it, is that a building that’s been carved up into condo units can almost never be redeveloped. So much so that preservationists have been known to cheer on developers doing condo and co-op conversions of historic properties:

Indeed, sometimes preservation advocates look to condo developers as white knights. Since the Bialystoker Center for Nursing and Rehabilitation on East Broadway closed last year, Laurie Tobias Cohen, the executive director of the Lower East Side Jewish Conservancy, has been “extremely eager” for a developer to buy the historic building and convert it to co-ops or condos. The closing of the nursing home was a great loss, she said; the goal now is to prevent the demolition, or further deterioration, of the building. “What we don’t want,” she said, “is to lose any more of the built historic fabric.”

This is no doubt an elegant solution to the problem of unprotected historic buildings, but what about the less-than-stunning condos and co-ops that have been built in the US – and pretty much every where else in the world! – since the end of World War II?

Why are condo buildings impossible to redevelop? Simple: gravity! You can’t keep your apartment on the 17th floor while someone demolishes their 5th floor unit. In Canada, Australia, New Zealand, and Singapore, they call condos “strata” apartments, which reflects what they really are: floors of apartments layered inseparably atop each other. To redevelop a condo or co-op building, you have to buy every single unit, after which you can dissolve the condo structure and own the property in fee simple (i.e., ownership over both the land and the structures on it – the way you own a detached or attached single-family home, or a landlord owns a building). And buying up every single unit in anything but the smallest of buildings is next to impossible.

So in theory, carving a building into condos should diminish its property value. All buildings are depreciating assets (long-run historic potential is too far into the future to matter), but when you own property in fee simple you can replace the buildings on it, ideally with bigger, more valuable ones (although not always “bigger” ones…more on that later). This option basically doesn’t exist for condos and co-ops (which for the purposes of this discussion are the same). One would think that dividing a building into separately-controlled residential condos would be so damaging to property values that nobody would ever do it, and yet, at least in the United States, it happens quite often.

The federal enabling legislation for the condominium form of ownership didn’t actually exist until 1970, when it was enacted for the benefit of Puerto Rico, and not, I believe, because of pressure from mainland developers. There had always been co-ops, at least in New York City (like the Dakota), and I’m not sure if these prewar co-op buildings were ever redeveloped (anybody know?), but they were only for the very wealthy and were much rarer during New York’s unregulated prewar growth period than they are today.

But condos didn’t become popular on the mainland for another 10 years after the 1970 enabling act (remember, the federal legislation was not passed in response to demand by mainland developers), so the oldest condos in American cities aren’t more than about 30 years old. But these are beginning to age – aesthetically, functionally, and density-wise – and I think in the not-so-distant future we are going to begin to feel negative repercussions from buildings that basically can’t be torn down without violating someone’s property rights. (I’ll also discuss later how Singapore does exactly that to get around the problem of a nearly 90 percent home ownership rate in a city-state chock full of multifamily buildings and a culture that has no love for second-hand apartments.)

I should also add that the inflexibility that comes with dispersed ownership in condos and co-ops can be problematic even before redevelopment. I once spoke to someone at a firm that did energy retrofits for prewar buildings in New York who said that even when the return on investment is obvious, it’s sometimes very difficult to get co-op and condo boards to approve the upgrades. But apartment landlords, he said, are much more economically rational, and are therefore willing to invest money when they see the savings. That seems borne out in this NYT article about a highly polluting heating oil used in New York that the city is trying to convince apartment buildings to phase out. It doesn’t mention rentals vs. co-ops/condos specifically, but all the drama in the article revolves around trying to convince co-op boards – not landlords – that it’s in their financial interest to do the retrofit. (I don’t think those sorts of oil furnaces were still around by the ’80s when condos became popular.)

So, back to the original question: why the hell do condos exist?

Though most of the (very smart!) real estate professionals I’ve talked to about it had never thought about it, I’ve read a few theories, and have a few of my own, which I’ll list, but I encourage readers – especially those with knowledge of foreign property markets where incentives and outcomes differ – to chime in. (I’m interested especially in East Asia, where the value placed on new housing is much higher than in long-built out American and European cities.)

So, without further ado, a few possible reasons why condos and co-ops exist…

Tax subsidies. Henry Hansmann at Yale Law wrote a paper in 1991 arguing that condos and co-ops exist mostly for their tax advantages, and that absent these, there would be far fewer. I emailed Henry recently asking if he still believes this, and he was nice enough to respond that he did, but that he hadn’t really kept up on the issue since 1991. But the paper is pretty persuasive, with the caveat (as always) that the math is beyond me. Here’re the first two paragraphs of the paper, which is available as a free PDF:

Twenty-five years ago, cooperative apartment buildings were uncommon in the United States, and condominiums were virtually nonexistent. Since then, however, both forms, and particularly condominiums, have spread rapidly through the real estate market. This article explores the factors responsible for this development. In the process, it also assesses the relative transactional efficiency of consumer ownership and investor ownership in multiunit housing.

I argue that two factors appear principally responsible for the recent spread of cooperatives and condominiums. First is the large tax subsidy to owner-occupied housing that has existed since the Second World War and that has been particularly large during the past two decades. Second is innovation in the forms available for organizing ownership in multiunit dwellings. A variety of considerations suggest that the first of these factors has been more important than the second and that, in the absence of the tax subsidy, cooperatives and condominiums would occupy a much smaller share of the housing market than they do at present. In support of this analysis, this article offers the first sophisticated calculations of the magnitude of the pure tax subsidy to owner-occupied housing, as opposed to rental housing, and of the changes in that subsidy over the past fifty years.

In support of his tax theory he mentions the relative paucity of commercial condos, where ownership is not privileged in the tax code over renting. In fact, I recently worked with a New York City developer who bought and carved an aging postwar skyscraper across from the United Nations into condominiums to market (very successfully, it turned out) to foreign countries for their permanent missions to the UN, specifically because they don’t have to pay property taxes by virtue of their sovereign status, while their landlords do.

Rent regulation. In certain cases it appears obvious that condos and co-ops were created because rental profits were artificially capped through rent controls. This was definitely the case with the massive wave of co-ops that appeared in the ’80s in New York City. Landlords realized they couldn’t make much money renting the units at regulated prices, so they sold them to tenants at unregulated ones. Because the current tenant was the only person they could sell to, the tenant had an unusual among of pricing power (especially in the ’80s, before prices started skyrocketing and, at least I assume, raised the possibility of luxury decontrol so that landlords gained the upper hand), and therefore many got “insider deals” – that is, they bought their apartments as co-ops for less than market value.

I once read – but cannot confirm – that rent controls in prewar Europe had a similar effect on tenure choice in new construction. Rents were regulated but sales prices were not, so many builders (and maybe landlords with already-built buildings?) decided to simply sell the units outright as co-ops or condos (can’t remember which) at prices that were unregulated. Then again, in Europe there is (and was) also the aforementioned issue of restrictive land use regulation, which was introduced earlier than in the US (where the really restrictive stuff didn’t start till the 1960s), so it may have been a factor in encouraging condos/co-ops. (Someone who actually knows what they’re talking about regarding Europe, rent regs, and housing tenure – please validate me and/or set me straight!

Restrictive land use regulation. This is one that I thought of on my own, although I don’t think it’s as solid as the tax subsidies and rent regulation explanations. Redevelopment can only happen if the government lets it happen, and though zoning doesn’t (usually) forbid you from razing and rebuilding, it does often prevent building a bigger structure. Some will eventually redevelop their property even if they can’t raise the square footage, but they’re much less likely to do so. And if your right to redevelop is curtailed anyway by land use regulations (even more so if it’s got historic preservation protection), then you’ll have less compunction about giving it up entirely by carving your property into condos.

Time value of money. Economists dating back to the School of Salamanca have taught that a dollar today is worth more than a dollar tomorrow, and that a dollar in a million years is practically worthless. Redevelopment is by definition far into the future from the time that the developer is making the choice between rentals and condos. The “option to redevelop,” as one developer I spoke to called it, may simply be too far into the future to matter, and especially to overcome the benefits of owning your own home without having to maintain the grounds and, at least in cases where the units are stacked on top of each other (i.e., in an apartment building), without having to pay for your own plot of land.

* * *

While the problem of impossible-to-redevelop condos is most acute in apartment buildings, where you physically cannot redevelop one unit without disturbing the rest, it has also hindered non-stacked condo units. Lydia DePillis (peace be upon her) recently noted an example in DC’s ritzy Logan Circle neighborhood of non-stacked condos, usually found in more suburban locations, that were originally built as affordable housing, but now can’t be redeveloped because the owners can’t all agree to sell. Which is a reminder that condos’ lack of redevelopment potential is not only a problem for a city’s overall affordability and fabric (and aesthetics, in many cases!), but it also really sucks for condo owners who’d like to cash out but can’t because of their intransigent next-door neighbor.

Now onto the case of Singapore. Singapore has highly encouraged homeownership as a means of social engineering (despite its free market bonafides, Singaporean housing policy is highly interventionist), and has been very successful at it: at 87 percent, its homeownership rate is trumped only by former communist countries that simply deeded people’s state-owned apartments to them after the fall of the wall (which I’m sure is going to become a huge problem once Eastern Europeans become wealthy enough to want to redevelop their infamous housing blocks).

But Singapore is also an incredibly dense city-state where the vast majority lives in multifamily buildings, so “homeownership” means owning your own strata unit (their term for a condo, also used in Australia, New Zealand, and Canada). And like all strata and condo buildings, the owners will almost never reach an agreement to sell, so they cannot be redeveloped by conventional means. Combine that with the ugliness of the buildings and the fact that Singaporeans, like all East Asians, place a high value on new homes, and you can begin to see the problem. (Worthwhile to note that en bloc sales were not allowed until a few decades after the homeownership policy took off, and it wasn’t private investors who built the unredevelopable strata towers in the first place – it was the government.)

So to solve it they instituted something called en bloc sales in 1994. The basic idea is that if a certain percentage of a designated building’s residents choose to sell their units (it used to be 90 percent, now it’s 80), then the developer wins the option to buy all the units (including apartments belonging to the “minority owners,” or those who did not approve the sale), which he can exercise at whatever price the supermajority agreed to.

The policy started with buildings that were built by the state-owned Housing Development Board, which is responsible for the vast majority of housing in the city-state, but I was told by Dr. Alice Christudason, an associate professor in the Department of Real Estate at the National University of Singapore, that private developments became subject to en bloc sales with less-than-unanimous consent in 1999 under the “Land Titles (Strata) Act,” which “supersedes any contracts made,” which of course didn’t contain any provision allowing for non-unanimous en bloc sales. (Not sure if newly-built private strata buildings contain any en bloc provisions?)

En bloc sales are very controversial, though (there’s even a TV show about them), and I can’t imagine a non-authoritarian country like the US or Japan tolerating that sort of routine violation of property rights quite the way Singapore does it.

It’s also worth noting that in some ways, a lack of redevelopability can be a positive externality. The ugliness of a 30-year-old condo building next door is mitigated by the fact that it won’t be replaced with a larger one that will take more of your light and air. And if the building is attractive – like the New York City co-ops of the turn of the last century, or possibly 1980s condo towers in the year 2100 (who knows, it could happen!) – then it’s not such a bad thing that it can’t be torn down. A lot of people much smarter than me don’t seem too concerned about the issue: I talked to NYC real estate guru Jonathan Miller about this a few months ago, and his thought on it was that it just contributes to a skyline that reflects all the layers of New York’s history.

But I do think that at some point it’ll become problematic, at least in East Asia. Thirty years from now, for example, is a 90 percent-urbanized China really going to want today’s unattractive, shoddily-built, auto-oriented condo towers marring the skyline and taking up precious land? Authoritarian China may adopt Singapore’s en bloc method of redevelopment, but what about democratic countries like Japan and South Korea that have more respect for property rights? (I’ve been told Japan didn’t have the condominium form of ownership until the early ’70s, but that means the older buildings are starting to become ripe for redevelopment.) Eventually I suppose everything will become attractive in an historic way, but what about the intervening years? (Or am I overestimating the number of condos in East Asia, and they’re actually a relatively rare form of housing tenure in multifamily buildings?)

Update: Here’s an article from March that @graemebone on Twitter sent me about Vancouver strata buildings facing this exact issue, with ballooning maintenance costs being the trigger. British Columbia passed its “Strata Titles Act” in 1966, so they’re facing these issues a few years before we will in the US. Some interesting bits about how they’re just now starting to deal with it:

“There is an implied provision in the Act, which is that if you have more than 10 units in a project, there will be one jerk,” says lawyer Patrick Williams, one of the city’s premier condo-law experts. “One jerk can bring down the whole house of cards, hold everyone to ransom.” Gioventu, from the owners association, is also less than reassuring: “If you live in a 64-unit building, think of those other 63 people you have to sell with as being like your in-laws.”

Until now, those dysfunctional relationships have been tested over familiar stresses: leaks, maintenance reserves, noise, pets, prostitution, grow-ops. Williams knows of just two cases in B.C. where judges have issued decisions on impasses between owners who want to stay and those who want to demolish and sell the land. (In both cases—one a three-owner condo in Kitsilano, the other a larger project in Burnaby—the judges ruled in favour of the owners who wanted to demolish over those willing to keep pouring money into maintenance.)

Even getting to those decisions hasn’t been easy. “The Strata Property Act here is really in its infancy,” explains Williams. Buyers don’t realize how fuzzy the law is when it comes time to shut it all down. It also sets the bar high for how much agreement is needed: 100 percent. Condo owners who can’t get that in their buildings have to go to court—as the Cypress Gardeners have done—to try to get a judge to order a sale. As if that weren’t enough, there’s another hurdle: the institutions that hold the mortgages may not go along with the deal.

And here’s some interesting research on en bloc sales in Singapore, in the same article:

In search of other jurisdictions where condo dismantling is further along, UBC professor Tsur Somerville and a group of colleagues looked to Singapore. “This is where we’re all headed,” says Somerville. They looked at the sales of 285 condo buildings after 1994 (when the government introduced regulations allowing developers looking for low-density properties to tear down and rebuild at higher densities). Their study found that the more units in a complex, the less likely the owners would agree (and the less likely a sale would happen). They found that another factor blocking sales was the difference between the smallest and largest units in a building: where units were similar in size (and, consequently, price), sales were more likely. Buildings that were owned mostly or entirely by investors reached sales agreements more easily. And sales became more likely when Singapore changed its law, reducing the owner consensus needed from 100 percent down to 80 or 90.

All this makes me wonder: why do condos/strata exist in Canada? Were they given tax subsidies similar to those in the US?

An Early Defense of Zoning

At Discovering Urbanism, Daniel Nairn offers an interesting summary of Edward Murray Bassett’s 1922 defense of zoning (available as a free e-book). Bassett faced opponents who were against a new type of land use regulation, many arguing that zoning was unconstitutional. In retrospect, some of his arguments defending zoning are comical. He asserts that zoning would never go so far as to direct aesthetics because the courts would protect us from the overreach. It would be interesting to hear what he’d have to say about a planning commission meeting today. Nairn’s entire analysis is interesting, but I was particularly intrigued by Bassett’s assertion that zoning fosters cooperation. As Nairn summarizes:

Cooperation yields overall larger return on investment for all property owners. This was Bassett’s primary concern, one that he underscored with a number of prisoners’ dilemma scenarios. For example, “In some of the larger cities a landowner in the business district is almost compelled to put up a skyscraper because if he put up a low building, his next neighbor would put up a higher one that would take advantage of his light and air.” He asserted that skyscrapers were probably not a sound investment in their own right, but they were built anyway in a virtual arms race for public goods of light, air, privacy, and scenery. Zoning was the truce that made everyone better off.

I’m not sure that I follow Bassett’s logic here. If light and air are only available on floors that are higher than the floors of the neighboring buildings, then only the top few floors of any building would typically have this asset. It’s almost as if he’s talking about a race to the highest roof deck here. Aside from the problems with how he makes this argument, it is worth a look to determine whether or not zoning takes a positive step toward cooperation in the land market. Whether or not an institution fosters cooperation is a key factor in determining its success or failure. With cooperation, trade becomes a positive sum game rather than a negative sum game. For example, property rights is an institution that clearly fosters cooperation; when they are not well-defined, as in black markets, trade is often accompanied with violence.

Restrictions on land use, whether they come from public sources (zoning, height limits) or private sources (deed restrictions, HOAs) face trade offs between providing clear expectations of future development and permitting flexibility as land’s highest-value use evolves over time. On the far end, deed restrictions make it difficult to impossible to change land use restrictions, while HOAs and BIDs can often change restrictions with super majority votes from their members. Of course HOA rules often veer toward the draconian, but they are easier to overturn than other types of regulations. HOAs and BIDs also lack the stability of government entities. Since they are not likely to be around as long as cities, the time horizon of their rules may be indeterminate in some cases.

According to Bassett, zoning represents the best of both worlds, a compromise between permanent deed restrictions and rules that can be overturned too easily. On the one hand, it allows a landowner not to worry about his neighbor “taking advantage of his light and air” by prohibiting buildings taller than what zoning permits. Bassett writes from the perspective of developers and suggests that building skyscrapers is much like an arms race. He asserts that because elevators take up square footage that cannot be leased, skyscrapers are less profitable than lower buildings. He suggests that the only reason for building skyscrapers is to prevent the next door building from casting a shadow on a wasted setback. Of course it is the case now, as then, that when developers build tall buildings is because they think the net present value is greater than that of a shorter building. Only the exceedingly rare developer who doesn’t want to make money would pick a building design for the purpose of not allowing his neighbor to take advantage of light.

Many people have made the argument that tall buildings produce externalities, but he doesn’t quite identify these externalities correctly; they do not fall on the developer who wants to prevent his neighbor from taking free light and air, but rather on the owners of shorter buildings and their tenants. Bassett’s argument is instead more reminiscent of the fallacious Marxist argument that competition among firms hurts welfare. So, in my estimation, he does not make a strong argument that zoning produces cooperation by preventing a race to the bottom, or top, as the case may be. Collusion among building owners to restrict building supply may be a form of cooperation, but it’s not the type that benefits society.

As Nairn summarizes, Bassett also support zoning because:

Zoning stabilizes building and property values, by signaling to investors what they can expect from a certain district. Markets work when people know what they are buying, and zoning creates some assurance that the product will not change fundamentally. This reason is why housing developers were among the most ardent supporters of zoning in the early stages.

For much of the history of Euclidean zoning, this may have been its most important quality. Once cities introduced comprehensive plans, it was clear what types of buildings could be built on each land parcel, providing rule of law in the land market so that buyers and sellers both knew land’s potential uses, and all buyers and sellers were equal before the law.

Today, one of the biggest problems with zoning is that this rule of law has been eroded in some major cities. Rather than introducing broad changes, such as widespread upzoning, to meet cities’ evolving needs, planners in cities such as New York and DC have taken the approach of relying on variances and Planned Unit Developments as well as requiring projects to achieve neighborhood approval. Going into the approval process, developers often don’t know whether their plan will be approved or denied, and this makes buying and selling properties highly speculative. These tools permit flexibility in land use, but at the great expense of losing the rule of law that is key to allowing market participants to form expectations for the future. Without the rule of law, planning approval processes that don’t rely on  as-of-right development are the worst of all worlds; they limit potential opportunities for trade while introducing uncertainty into the market.

Street art: violation of property rights or positive emergent order?

Among Egypt’s pro-democracy protesters, graffiti has played an important role in the communication, providing a
platform for free speech under military rule. The Associated Press reports:

Graffiti has turned into perhaps the most fertile artistic expression of Egypt’s uprising, shifting rapidly to keep up with events. Faces of protesters killed or arrested in crackdowns are common subjects — and as soon as a new one falls, his face is ubiquitous nearly the next day.

The face of Khaled Said, a young man whose beating death at the hands of police officers in 2010 helped fuel the anti-Mubarak uprising, even appeared briefly on the walls of the Interior Ministry, the daunting security headquarters that few would dare even approach in the past.

Other pieces mock members of the Supreme Council of the Armed Forces, the council of generals that is now in power, or figures from Mubarak’s regime.

While this artistic movement in the Arab Spring puts the importance of freedom of expression in sharp relief, we of course more typically see graffiti and street art in freer societies where the act is often seen not as political uprising but as mindless vandalism. As a big believer in the power of property rights, I feel like I should be against street art as clear violations of building owners’ rights. However, it’s hard to argue that illegal street art doesn’t add something valuable to cities both visually and culturally, in times of peace as well as times of civil uprising.

It would be nice to suggest that a signalling mechanism could show artists on which buildings their work is permissible, but, not knowing much about the culture of street art or graffiti, I imagine that decriminalizing this art form would destroy it. What do you all think of unsanctioned street art? Does it make a difference if the building is industrial, retail, office, or residential?

Does it make a difference if it’s high brow street art like this?

(Who wouldn’t want a Banksy original on their wall?)

As opposed to more chaotic graffiti like this?

What do you all think is the appropriate response to graffiti from law enforcement and communities?

P.S. On the subject of city streets, thank you to Charlie Gardner and Flickr user hazer2006 for adding some great photos to the Market Urbanism Flickr Group.