On the Mixing of Incompatible Uses and Incumbency

houses-pollution-nuclear-power-plants-industrial-plants-factory-_557745-47I noticed an interestingly ironic thing today.

The usual argument for the necessity of use-based zoning is that it protects homeowners in residential area from uses that would potentially create negative externalities – ie: smelting factory, garbage dump, or Sriracha factory.

Urban Economics teaches us that such an event happening is highly unlikely in today’s marketplace. (nevermind the fact that nuisance laws should resolve these disputes) The business owner who is looking for a site for a stinky business would be foolish to look in a residential area where land costs are significantly higher.

However, as Aaron Renn pointed out in the comments of my last post on Planned Manufacturing Districts, the inverse of this is happening in many cities as residential uses begin to outbid other uses in industrial areas:

I think part of the rationale in this is that once you allow residential into a manufacturing zone, the new residents will start issuing loud complaints about the byproducts of manufacturing: noise, smells, etc. I know owners of businesses in Chicago who have experienced just that. They’ve been there for decades but now are getting complaints from people who live in residential buildings that didn’t even exist when the manufacturer located there. This puts those businesses under a lot of pressure to leave as officials will almost always side with residents who vote rather than businesses who don’t get to.

It’s clear this is a more relevant defense of use-based zoning than the one we usually hear. Of course, I’d argue that segregating uses through zoning isn’t a just way to resolve these disputes, and my last post discusses some of the detrimental consequences for cities.

It seems ironic, because it inverts the usual argument in-favor of zoning.  Residents are choosing to move near established industrial firms, and PMDs are a tool used to defend incumbent industries from residents.  Despite it’s lack of economic soundness, zoning is typically rationalized through an emotional appeal to defend incumbent residents from dirty industry.

This doesn’t decisively refute use-based-zoning in itself.  In-fact, I’m afraid it may bolster the case, but it does help expose the appeal to emotions used to defend zoning.

Planned Manufacturing Districts: Planning the Life Out of Districts

Chicago’s Goose Island and surrounding Planned Manufacturing Districts

They are called different things in different cities, but they are similar in form and intent among the cities where they are found.  For simplicity’s sake, a Planned Manufacturing District (PMD), as they are called in Chicago, is an area of land, defined by zoning, that prohibits residential development and other specific uses with the intent of fostering manufacturing and blue-collar employment.

Proponent of PMDs purport to be champions of the middle-class or blue-collar workers, but fail to consider the unintended consequences of prohibiting alternative uses on that land.  At best, PMDs have little effect on changing land-use patterns where industrial is already the highest-and-best-use.  At worst, they have the long-run potential to distort the land use market, drive up the costs of housing, and prevent vibrant neighborhoods from emerging.

A Race to The Bottom

Before getting into it further, it is important to examine the economic decisions industrial firms make in comparison to other uses.  Earlier in the industrial revolution, industry was heavily reliant on access to resources.  Manufacturing and related firms were very sensitive to location.  The firms desired locations with easy access to ports, waterways, and later railways to transport raw materials coming in, and products going out.

However, the advent of the Interstate Highway System and ubiquitously socialized transportation network have made logistical costs negligible compared to other costs.  Where firms once competed for locations with access to logistical hubs and outbid other uses for land near waterways in cities, they now seek locations with the cheapest land where they can have a large, single-floor facility under one roof.  This means sizable subsidies must be combined with the artificially cheap land to attract and retain industrial employers on constrained urban sites.

Additionally, today’s economy is has become much more talent-based rather than resource based, and patterns have shifted accordingly.  In contrast to industrial, residential and office uses are still very sensitive to location.  In fact, residential preference for urban locations are increasing.  Likewise, most office and other commercial firms seek to locate where they can best attract talent or customers, or simply put, convenient to residential.  To the dismay of the politicians, blue collar jobs are destined to leave cities to seek cheaper land in less desirable locations.  We should expect industrial firms to prefer exurbs and sites close to negative externalities, such as near highways and airports where noise and air pollution drive out residential uses.  Efforts to stem the tide of these realities will surely incur dead-weight losses.

In a race to the bottom, prohibition of housing and other uses in PMDs drives the value of that land down to the point it can compete on price with the most undesirable suburban locations. That is, until a non-manufacturing use compatible with the wording of PMDs emerges to crowd out industrial.

We are are in an interesting time, and are witnessing the first cases where the long-term consequences of PMDs are beginning to emerge for us to witness.

Google and Chicago’s Fulton Market

Over the past two decades, Chicago’s West Loop has become one of the most desirable neighborhoods in the City.  Developers flocked to the neighborhood to take advantage of the neighborhood’s proximity to Chicago’s Loop, and abundance of underutilized warehouses waiting to be converted to hip lofts.  However, Fulton Market and meatpacking district on the northern part of the West Loop remained immune to the radical transformation.  Neighboring West Town, River West, and West Loop blossomed during the housing boom.  Was Fulton Market less desirable?  Far from it – meaningful redevelopment was forbidden.

As developers began converting West Loop buildings in the 90’s, the Randolph Fulton Market Merchants Association proposed the formation of the Kinzie Street Industrial Corridor.  The Association ultimately triumphed in their lobbying for the district, which formed a PMD to protect them from the encroachment of competing land uses.  They also won a Tax Increment Financing district to fund subsidies, and other programs aimed at enriching incumbent and new businesses in the area.

Then, along comes Google.  According to the wording of the PMD, “High Technology Office” is a permitted use in the Kinzie Street Industrial Corridor.  Google, in search of an office with large floor plates for its Chicago headquarters, chose to move into a former cold storage building in the Fulton Market that is being converted into office.

As a result of Google’s impending arrival, Fulton Market has attracted a flurry of speculative real estate investment as other technology firms, hotels, restaurants, and entertainment venues flock to the area.  Land prices have been driven up to extent that no matter how much the subsidy, Fulton Market is no longer an economically viable location for industry or manufacturing.  We should expect politicians to scramble to fight this over coming years, but extinction of Fulton Market industry is imminent.  Efforts to hamper market-forces, millions of dollars of wasted subsidies, and unnecessarily higher housing costs were sacrificed to achieve nothing of lasting value.

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Vibrancy Thwarted

Possibly the biggest victim of the vast prohibition on uses of land in Planned Manufacturing Districts are the neighborhoods in which they are located.  In her treatise, The Death and Life of Great American Cities, Jane Jacobs discusses the ingredients of what makes urban districts flourish or fail.  Jacobs makes the case that great urban districts typical have a diversity of primary uses, short blocks, diversity of the age of buildings, and sufficient concentration of people.  Districts aimed at preserving and fostering limited uses, such as PMDs, stand in the way of all of these factors necessary for the emergence of vibrant city life.

Most obviously, if residential and other uses are prohibited, a diversity of primary uses and sufficient concentration of people are impossible.  Since the optimal sites for today’s manufacturing and logistics firms are very large, single-story buildings, firms are likely to demolish older multi-story buildings otherwise desired by residential loft-lovers.  They are also prone to spread their facilities over several blocks, sometimes incorporation what was once a street into their property.

Clybourn Corridor, Elston Corridor and Goose Island PMDs

Inspired by Fulton Market’s sudden success, some developers have begun to set their sights on other well located PMDs.  These developers intend to snatch up the preserved land at artificially low prices and entice technology companies to come.  One such developer, South Street Capital intends to do just that in Goose Island, straddled between River North and Lincoln Park to the east, and River West and Wicker Park to the west.  Developers also have also been eyeing the nearby site of the former Finkl Steel Plant.

Ironically, it was Finkl who successfully lobbied for the formation of Chicago’s first PMD, the Clybourn Industrial Corridor.  In the debates leading to the formation of the PMD, light manufacturing firms and developers were opposed to protections.  Light manufacturing wanted to keep the option to sell their land to developers and move to the suburbs.  As reported by the Chicago Reader:

On the other side were a handful of industrial-property owners from the area and their battery of lawyers, who argued that Eisendrath was offering them protection they do not want. Someday they may want to move, they say, because their buildings are too small, old, or obsolete. And they want the right to sell to whomever they choose–builders of shopping malls, condos, town houses, it doesn’t matter–at the highest dollar the market will bear.

“I like doing business in Chicago,” says David Schopp, chairman of U.S. Sample Company, the second-largest manufacturing employer in the area. “But I don’t want to be restricted. I don’t think it’s government’s role to say who I can and cannot sell to.”

Now, it is Finkl who wishes for that option.

The southern part of Fulton Market, as much as zoning hampers it’s potential, should enjoy some vibrancy as adjacent uses spill over into the district. (further, we do expect the city to begin allowing more residential in it’s latest plans for the district)  However, without lifting the PMDs altogether, there is little reason to be optimistic about the Goose Island and Elston Corridor PMDs.  Unfortunately, development of the PMDs in line with current prohibitions will result in a large area devoid of residential uses and other essential ingredients needed to become vibrant districts.  The area currently lacks transit alternatives, so employees will get to work by car or bike, exasperating traffic on roads connecting Lincoln Park to the expressway. We cannot expect the area to be rescued by spillover from nearby residential areas, as the river acts as a border vacuum preventing interconnection and transit access is minimal.  Failure to remove the PMD before further development takes place will condemn the area to eternal dullness.

Chicago’s Goose Island, protected by PMDs

Other PMDs

There are a total of 15 PMDs in Chicago.  The PMDs mentioned above, in addition to the Chicago/Halstead PMD, are the PMDs that have successfully thwarted residential encroachment.  Because of their undesirable locations, the remaining PMDs are impotent at altering land use patterns.  Impotent PMDs only serve as a mechanism for politicians to pay lip service to manufacturing jobs, and window dressing that goes hand-in-hand with subsidies.

I often hear urbanists defend PMDs, repeating the Urban[ism] Legend that we need them to keep manufacturing jobs in the city.  We urbanists can do much to make these districts vibrant if we overcome our nostalgia for urban manufacturing and come to terms with how dangerous PMDs actually are.  Economically speaking, PMDs can only serve the purpose of keeping land prices low enough to compete with undesirable suburban locations for industry. PMDs nonetheless do little to overcome the enormous economic forces repelling industry out from desirable locations in cities.  At worst, PMDs permanently plan the life out of otherwise desirable areas in the long run after serving their purpose temporarily.  At best, PMDs are impotent to drive down land prices in already undesirable places any further than they already are.

At a time when housing affordability is a major issue affecting cities, one way to remove barriers to increased housing supply is to abandon our counter-productive nostalgia for urban manufacturing.  PMDs abolish urban vibrancy, and it’s time for cities to abolish PMDs before it’s too late.

See also:

2005 Study by the University of Wisconsin-Milwaukee on the performance of the Clybourn Corridor PMDs

 

How Affordable Housing Policies Backfire

Affordable housing policies have a long history of hurting the very people they are said to help. Past decades’ practices of building Corbusian public housing that concentrates low-income people in environments that support crime or pursuing “slum clearance” to eliminate housing deemed to be substandard have largely been abandoned by housing affordability advocates for the obvious harm that they cause stated beneficiaries. While rent control remains an important feature of the housing market in New York and San Francisco, even Bill de Blasio’s deputy mayor acknowledges the negative consequences of strong rent control policies. In the U.S. and abroad, politicians and pundits are beginning to vocalize the fact that maintaining and improving housing affordability requires housing supply to increase in response to demand increases.

While support for older housing affordability policies has dissipated, the same isn’t true of inclusionary zoning.  From New York to California, housing affordability advocates tout IZ as a cornerstone of successful  housing policy. IZ has emerged as the affordable housing policy of choice because it has the benefit of supporting socioeconomic diversity, and its costs are opaque and dispersed over many people. However, IZ has several key downsides including these hidden costs and a failure to meaningfully address housing affordability for a significant number of people. Shaila Dewan of the New York Times captures the strangeness of IZ’s popularity:

New York needs more than 300,000 units by 2030. By contrast, inclusionary zoning, a celebrated policy solution that requires developers to set aside units for working and low-income families, has created a measly 2,800 affordable apartments in New York since 2005.

DC’s City Center includes 92 affordable units. Image via Foster and Partners.

Montgomery County, a Maryland suburb of DC,  has perhaps the most well-established IZ policy in the country. After 30 years, the program has produced about 13,000 units. Montgomery County is home to over one million people, 20 percent of whom have a household income of less than $43,000 annually. While this is an extraordinarily high income distribution relative to the rest of the country, this makes the county’s median apartment rental of nearly $2,300 out of reach for many more people than even an aggressive IZ policy can serve.

While Montgomery County’s IZ housing does not reach a large percent of its population, it has provided many more units than other cities’ programs have. Washington, DC’s IZ law was passed in 2006, requiring developers to set aside 8-10% of units as affordable in all new projects with more than 10 units. As of the most recent 2012 report, DC’s IZ program has yet to reach a single beneficiary. The IZ units that have made it to market are sitting empty. This is in part because IZ units, priced to be affordable to those making between 50% and 80% of the Area Median Income, are not the most cost effective choice for many people in this income range, potential beneficiaries of owner-occupied IZ units may not be able to qualify for a mortgage. IZ units tend to be one- or two-bedroom apartments. Low- and moderate-income DC residents may be able to find housing that is much more affordable than what IZ provides by living in a larger apartment with a roommate(s), in a group house, or with family. By attaching these affordable units to new, often luxury buildings, IZ siphons affordable housing resources to the type of housing where it will buy the least.

Evidence on the benefits that mixed-income housing provides for low-income people is mixed, but it’s hard to deny that inclusionary zoning beneficiaries win a lottery. They live in new construction in desirable neighborhoods, housing that would cost several times as much at the market rate. However, IZ’s effects are not limited to beneficiaries, and its costs are not fully borne by developers. Because developers will lose money on the IZ units they build, this cost has to be made up in the market rate units in order for the project to go forward. This adds to construction costs and also incentivizes luxury units that can better absorb the cost of the IZ units relative to more affordable construction. While providing affordable housing to a few lucky low-income people, IZ also makes housing less affordable for everyone who doesn’t receive the benefit by reducing housing supply and skewing the market toward luxury housing that can subsidize the affordable units.

IZ appears free to everyone except developers because it’s not paid for out of city budgets. But ultimately housing consumers share in the cost of IZ units through a hidden tax. By making new construction more expensive, IZ also reduces the rate at which the prices of older or less desirable housing filters down to the point that it becomes affordable to low- and middle-income residents. Putting affordable housing in new construction ensures that it will benefit fewer people than the same amount of resources otherwise could. IZ supporters emphasize the importance of neighborhoods that are socioeconomically diverse but ignore the opportunity cost. Low-income people may be well-served by putting resources toward living in a diverse neighborhood, but this competes against many other places their resources could go, including investing in a business, pursuing education, or prioritizing nutritious food.

As economist Ben Powell explains, IZ can be designed not to have an effect on market-rate housing prices if developers are allowed to voluntarily trade the provision of IZ units for density bonuses. In that case the bonuses must be high enough to offset the cost of the below-cost units. However, as Stephen has pointed out, IZ creates an affordable housing lobby that opposes upzoning without affordability requirements. Eliminating IZ would put all housing affordability advocates on the same team. The same amount of resources currently providing for IZ units could be levied as a transparent tax and transferred to low-income people as cash rather than as luxury housing. This would also allow for resources to be distributed based on need, rather than giving a few households a jackpot.

Culs de sac for safety?

"Evil cul-de-sac" flickr user rleong101

“Evil cul-de-sac” flickr user rleong101

At Cato At Liberty, Randall O’Toole provides a list of recommendations for reversing Rust Belt urban decline in response to a study on the topic from the Lincoln Land Institute. He focuses on policies to improve public service provision and deregulation, but he also makes a surprising recommendation that declining cities should “reduce crime by doing things like changing the gridded city streets that planners love into cul de sacs so that criminals have fewer escape routes.” This recommendation is surprising because it would require significant tax payer resources, a critique O’Toole holds against those from the Lincoln Land Institute. Short of building large barricades, it’s inconceivable how a city with an existing grid of streets would even go about turning its grid into culs de sac without extensive use of eminent domain and other disruptive policies.

O’Toole is correct that the grid owes its origins to authoritarian regimes and that today it’s embraced by city planners in the Smart Growth and New Urbanist schools. But while culs de sac may have originally appeared in organically developed networks of streets, today’s culs de sac promoted by traffic engineers are hardly a free market outcome. As Daniel Nairn has written, the public maintenance of what are essentially shared driveways “smacks of socialism in its most extreme form.”

Some studies have found that culs de sac experience less crime relative to nearby through streets, perhaps in part because they draw less traffic. However, it’s far from clear that a pattern of suburban streets makes a city safer than it would be would be with greater street connectivity. Some studies find that street connectivity correlates with greater social capital. O’Toole’s promotion of social engineering through culs de sac to create a localized drop in crime at the expense of a city’s residents’ social capital is not a clear win. If a pattern of culs de sac streets reduces a city’s social capital, it could increase overall crime rates.

O’Toole also makes a smart land use recommendation, suggesting that struggling Rust Belt cities can reduce regulation to foster development. He writes:

Reduce regulation, including zoning rules, so property owners can engage in urban renewal without government subsidies or top-down planning. Historic preservation ordinances may sound cool, but they are one of the biggest obstructions to private redevelopment.

It makes sense for cities like Detroit to reduce or eliminate their zoning and permitting requirements, allowing as many new businesses as possible to take advantage of the their inexpensive prices. Interestingly, this recommendation for deregulation in the Rust Belt directly contradicts his past writings on deregulatory upzoning in other cities. O’Toole’s native Portland has seen deregulation allowing denser development, and in this case he advocates preserving neighborhood character over allowing the market to drive development styles. I’m glad to see he’s changed his tune to support deregulation.

Ranking State Land Use Regulations

Yesterday, the Mercatus Center released the third edition of Freedom in the 50 States by Will Ruger and Jason Sorens. The authors break down state freedom among regulatory, fiscal, and personal categories. At the study’s website, readers can re-rank the states based on the aspects of freedom that they think are most important, including some variables related to land use and housing. The available variables include local rent control, regulatory takings restrictions, the Wharton Residential Land Use Regulatory Index, and an eminent domain index.

Using only these “Property Rights Protection” variables, Kansas ranks as the freest state, followed by Louisiana, Indiana, Missouri, and South Dakota. Texas, sometimes cited as the state without zoning, comes in at 18th. The least free state is New Jersey, with Maryland at 49th, followed by California, New York, and Hawaii. This result — states with some of the most expensive cities being the most regulated — is unsurprising.

In the places with the freest land use regulations, where a developer would be able to build walkable, mixed-use neighborhoods without going through a burdensome entitlement process, there isn’t demand for dense development. This may be one reason why the Piscataquis Village project, an effort to build a traditional city, is happening in a sparsely populated Maine county because new development of this sort is simply not permitted near any population centers.

As Stephen recently pointed out, public opinion in New York tends to see city policies as wildly pro-development:

In spite of the popular impression of New York as a builder-friendly city that’s constantly exceeding the bounds of rational development, the city’s growth over the past half-century has been anemic, and has not kept pace with the natural growth in population.

This ranking of New York near the bottom of the index demonstrates what urban economists already know — new development is not permitted to be built where rents are highest and it’s most needed in spite of perception of pro-development policies. Does anyone have development experience in some of the freest states? Does this ranking match your perception?

Update: For full disclosure I was a project manager on Freedom in the 50 States.

Irrelevant real estate trends

Earlier this week Wendell Cox wrote a piece at New Geography arguing that projections for increasing demand for multifamily housing relative to single family homes are incorrect. He was criticizing a study by Arthur Nelson that predicts increased demand for multifamily housing relative to single-family housing in California between 2010 and 2035. So far, Cox points out that this hypothesis is not being fulfilled; between 2000 and 2008 slightly over half of newly occupied housing units were single-family homes on conventional lots (larger than 1/8 acre), not indicative of a shift in preferences toward multifamily housing.

Cox emphasizes that his data is based on revealed preferences rather than forecasts or surveys which may indicate a false preference for denser housing. However, he does not acknowledge that these preferences he cites are not revealed in a free market. The mortgage interest tax deduction biases home buyers toward larger homes, the complex entitlement process for dense infill development restricts supply of denser housing, and the the zoning and parking requirements that regulate development all shape revealed consumer decisions.

Both Cox and Nelson seem to base their views of consumer preferences heavily on introspection, assuming that over time more Americans will come to share their preference for suburban or urban living respectively. And they both take the same approach of looking at the real estate trends aggregated across the entire state. This is an interesting question for academics, but not a particularly relevant area for real estate markets. Real estate is local, and state trends are not likely to apply to many cities and neighborhoods. The average home sold in California went for $309,000 at $195 per square foot last month. However this statistic is meaningless for West Hollywood residents where the  average sale price was $378 per square foot. It’s equally meaningless for Bakersfield residents where the per-square-foot price was $87. Only one of these local areas faces a housing affordability problem, which Cox emphasizes is an important concern for land use policy.

Fortunately for consumers, it’s not necessary for academics to accurately forecast changing real estate preferences. They only need for local developers and homebuilders to do so, and the profit incentive leads developers to do just this, unless policy prevents them from doing so. High housing costs indicate supply restrictions that prevent developers from meeting consumer demands. If Bakersfield city planners adopted a binding urban growth boundary, the type of policy Cox decries, we would see the cost of conventional single family homes rise. In most of the places where we see housing affordability problems such as West Hollywood, it’s not Smart Growth policies that are to blame, but rather conventional zoning that prevents increased density from bringing down housing costs.

The most notable exception to this is Portland’s Urban Growth boundary which, in conjunction with density restrictions, keeps house prices in the city at $200 per square foot compared to the state average of $135. This UGB seems to be the driving force behind the work of many anti-density “market suburbanists,” which alone is enough of a reason to oppose this policy. However, in the cities where residents pay the greatest premium for housing, it’s likely that we would see much more multifamily home construction in a freer market.

If zoning restrictions and parking requirements were relaxed in areas of the country where residents currently pay the highest premiums to live, we would in large part see more multifamily construction rather than single family. This is why, despite the cumbersome entitlement process for multifamily buildings in many cities, and the mortgage interest deduction luring consumers to larger owner-occupied homes, over half of last year’s building permits were for multifamily units in some of the country’s most expensive cities like Los Angeles, New York, and Washington, DC.

The Renewed Debate on Inclusionary Zoning

Stephen Smith and I co-wrote this post. In case you haven’t been following Stephen elsewhere, he’s also been writing at The Atlantic Cities and Bloomberg View.

 

This year, some of the first apartments and condos subject to inclusionary zoning laws in DC are hitting the market, stoking debate over development laws that the city adopted in 2007. The inclusionary zoning requirement is currently stalling the city’s West End Library renovation with Ralph Nader leading efforts to include an affordable housing aspect with the library project. Inclusionary zoning advocates often base their support on the desirability of mixed-income neighborhoods, while challengers argue that inclusionary zoning is an inefficient way to deliver housing with unintended consequences.

Heather Schwartz, who studies education and housing policies at the RAND Institute, says that one important feature of this policy tool is that it gives low-income families access to high-income neighborhoods while at the same time limiting the number of low-income residents in a neighborhood. She said, “Since IZ is a place-based strategy that tends to only apply to high-cost housing markets, it can offer access to lower-poverty places than housing vouchers and other forms of subsidized housing have historically done.”

David Alpert, editor-in-chief of Greater Greater Washington, a local urban planning blog, offers another argument in favor of inclusionary zoning, “a policy that builds support for both greater density and affordable housing,” he said in an email. “Much of the opposition to greater density involves a feeling that it is just a ‘giveaway’ to developers who make the profit and impose some collateral burden on a neighborhood, but many people are more supportive of the density if it serves an affordable housing goal.”

While inclusionary zoning proponents may see its ability to introduce just a few low-income residents to a higher income neighborhood as an asset, it does not typically meet an area’s demand for affordable housing. Montgomery County, MD, outside of Washington, DC has one of the nation’s most established inclusionary zoning problems. In over 30 years, inclusionary zoning has created fewer than 13,000 housing units in the county, which area developer AJ Jackson with EYA describes as “a drop in the bucket of housing demand.”

Jackson explains that the requirement to take a loss on some units leads developers to build only higher end housing, where they can make up the losses they take on the affordable units, making the remaining market-rate units still more expensive. Jackson suggests that the only viable solution to the problem of a lack of affordable housing is to increase allowable densities broadly. He points to several neighborhoods in DC and surrounding counties are currently zoned for commercial or light industrial uses, but that profitable residential development could succeed with zoning changes.

However, he points out the political obstacles to this type of development. He said, “For these jurisdictions, office density and jobs are great. But residents take more than they give in tax revenues,” so city officials may oppose residential development for budget purposes. An even greater obstacle may be current residents’ opposition, a well-documented setback to all sorts of DC-area projects from residential to restaurants.

The political incentives that confront politicians when they do decide to embrace more development complicate the density bonus calculus. The pro-density argument for inclusionary zoning is that the bonuses allow developers to build where they otherwise could not, but when an area is being targeted for development anyway, anti-density activists can easily anticipate bonuses when base zoning allowances are being hashed out and factor them in to their maximum tolerated building envelope. If those who oppose development in and of itself have enough clout, the “bonus” that developers can be reduced just a technicality.

For example, during the rezoning process for Manhattan’s West Chelsea neighborhood in 2005, New York City Assemblyman Richard N. Gottfried wrote in a statement that the city should follow the lead of the Hudson Yards rezoning, where the affordable housing programs were made “effectively, if not technically, mandatory,” which he attributed to “the leadership of Councilmember Christine Quinn,” now frontrunner to succeed Bloomberg as mayor.

The city did eventually take steps to increase the amount of affordable housing built by Hudson Yards developers by tweaking the “bonus” formula so that the rezoning yielded more affordable housing without more bulk than the administration’s proposal. Some below-market units were carved out of the proposed development, while others were pushed off-site – the affordable housing “will not generate additional bulk in the neighborhood through an inclusionary bonus,” as Chelsea Now wrote in 2009. The affordable apartments will be built on city-owned plots 15 blocks north, which given their location, were destined for development soon anyway.

And for those who support inclusionary zoning programs because of the extra density they can bring to neighborhoods, Assemblymember Gottfried’s suggestion for West Chelsea should be especially troublesome: “The Commission should look for places to lower the base FAR to allow the area available for affordable housing to increase.

Indeed that seems to be what happened. “Building density in the entire [West Chelsea] district has been reduced from the previous plan,” The Villager wrote the next month, “in order to provide more incentives for developers to apply for higher density under the inclusionary housing program.”

And New York City is not the only place that affordable housing groups have fought as-of-right density in the name of bonus incentive programs. Last year in California, some housing advocates were hostile to legislation, supported by developers and environmentalists, that would have forbidden municipalities in the state from requiring more than one parking space per unit in neighborhoods adjacent to frequent transit corridors.

As Lisa Payne, policy director at the Southern California Association of Nonprofit Housing, told the California Planning & Development Report in regards to their opposition to Assembly Bill 710, “We have 30 years of history with density bonus law, that recognizes the value of trading a planning concession, whether it be height, density, or parking for supplying the mix of incomes in a project. This bill would have removed that tool.” Affordable housing groups withheld their criticism of the 2012 iteration of the parking reform bill, but it has yet to pass.

While inclusionary zoning provides significant benefits to residents who are lucky enough to live in allotted affordable units, it does not provide sufficient housing units to address many cities’ housing affordability challenges, and in some cases can even breed alliances between affordable housing advocates and anti-density constituents. As Jackson explains, permitting more and denser development is the only viable path to this goal.

Selling the Rights to Greater Density

At Next American City, Mark Bergen has an interesting long-form piece on municipal infrastructure financing. He argues that the property owners who benefit from public policies, such as infrastructure investment, should be required to fund these policies. He suggests infrastructure improvements should be paid for with Tax Increment Finance or value capture (PDF). I don’t necessarily agree with his infrastructure funding prescriptions, and may take these up in a future post. What I found even more interesting, though, is his suggestion that developers should pay for zoning changes.

The basis for this proposal comes from the Georgist land tax. Because in urban settings, land’s value largely comes from the amenities surrounding it, landowners do not have the exclusive rights to this value, according to Henry George. The suggestion that developers should pay for the rights to build on the land they own is based, Mark explains, on a policy from São Paulo, called Certificates of Additional Construction Potential (CEPAC). These bonds, representing rights to build, are transferable and are publicly traded. He quotes Gregory K. Ingram of Lincoln Institute of Land Policy:

“They’re essentially selling zoning changes,” explained Ingram. Crucially, the building fees have not eaten away at developers’ profits. By some accounts, the rates of return for real estate in the districts increase.

[…]

The notes, sold by municipalities, are one of the world’s most innovative public financing techniques. Across many sections of São Paulo, if a developer hopes to build or do nearly anything with her property — adjust its uses, expand outward or upward — she must first buy a CEPAC.

On a fairness level, selling zoning changes seems wrong to me. Current zoning policies are an arbitrary starting point, so it doesn’t make sense that developers should have to pay for permission to change a policy that is limiting their rights. Additionally, the overarching objective of value capture, as Mark explains, is to facilitate progress toward Smart Growth objectives. To the extent that these objectives include affordable housing, walkability, and permitting denser development, great progress can be made toward these goals with upzoning alone without significant public investments.

On the residential side, increasing the housing supply is the only feasible path toward large numbers of affordable homes. On the commercial side, walkable neighborhoods cannot be achieved without permitting more mixed-use, dense development. From this angle,  São Paulo’s CEPAC policy would act as a tax on Smart Growth.

From a political perspective, it seems that the CEPAC policy would be subject to abuse. Those who oppose density on the conservative side would lobby for the issuance of few CEPAC bonds. Those on the progressive side who support increased public revenue for their favorite causes may also support the issuance of few bonds, requiring developers to pay high prices for the rights to build.

Despite these problems, though, as Mark points out in Brazil the program has led to increased developers’ profits indicating the program has not had these detrimental effects. I was not familiar with the program before reading Mark’s article, and I don’t know much about how CEPACs have played out politically in Brazil. However, I can imagine that paying for the rights to build would be an improvement for many U.S. developers, even though they act as a tax on density.

Currently, to achieve the zoning changes necessary for increasing density and market-rate affordable housing, developers have to spend significant resources of time and money to go through an uncertain political process. In some cities, as-of-right development is so limited that  the rule of law does not extend to urban development. Given this status quo, CEPAC bonds could benefit developers by removing some of the uncertainty surrounding zoning variances. Rather than spending money on lobbying for property rights they may never achieve, developers could simply buy these rights on the open market. This might also benefit small-business development if buying the needed bonds is cheaper than investing in a lobbying arm.

While I think many market urbanists would prefer to see more housing and walkable development allowed as-of-right, perhaps selling these rights is a second-best solution. Additionally, by compensating taxpayers for the damages to their light and air, CEPAC bonds could reduce the validity of NIMBY arguments. Is anyone more familiar with how the CEPAC program has changed land use rights in Brazil or other ways in which value capture has changed land use policy?