Systemic bias against small scale development

In recent years, some of the country’s largest mixed-use real estate developments involved disposition of government-owned land directly to developers. For example, Atlantic Yards in Brooklyn and DC’s City Center and Marriott Marquis came about when municipal governments issued requests-for-proposals for underutilized land that they owned.

Last week, Mid­Atlantic Realty Partners and Ellis Development Group closed on a deal to purchase 965 Florida Avenue NW from the District of Columbia. In 2012 the Office of the Deputy Mayor for Planning and Economic Development (DMPED) issued an RFP for this 1.45 acre at the intersection of the Shaw, U Street, and Columbia Heights neighborhoods. The RFP specified that any development on the site include affordable housing. Ultimately two developers submitted proposals. The winning developer purchased the land for just $400,000, at least $5 million less than appraisers estimated the land’s value to be, even after factoring in the affordable housing provision and needed environmental cleanup.

By choosing to allocate very large parcels of land through this process rather than auctioning off small parcels of city-owned land, municipal officials favor large developers not only because smaller developers can’t afford such large parcels, but also because the RFP process favors established developers with political connections. In DC, large development firms provide some of the largest contributions to local campaigns. Not only does the sale of large parcels of public land exclude small developers who have less financial capital, it also reduces the pool of potential buyers to include only those with the political capital needed to navigate the RFP process.

In the case of a private owner selling off a large tract of land, we would expect him to list the property for sale, accepting the best price he could get. If he thought smaller parcels would sell for more, the owner would likely try to subdivide before selling, expanding the pool of potential buyers in the process.

In the case of a government organization selling land, however, the individuals involved face completely different incentives. Public choice theory emphasizes that incentives drive individuals’ behavior, and it provides a lens for understanding the behavior of the parties involved in land disposition deals. In this case, DMPED officials faced competing incentives including advancing policy goals such as affordable housing, gaining favor with important developers, and achieving a fair price for the taxpayer asset.

According to a public choice framework that Richard Wagner and Meg Patrick advance, both government organizations and private firms exist in a complex web; just as public policy affects private sector behavior, businesses affect public officials behavior. Patrick and Wagner explain:

At base, entangled political economy is centered on networks and evolutionary processes of development, where that development is kept in motion by individual efforts to seek gain by putting together deals that often are triadic, meaning that they often feature a winning subset of people gaining at the expense of others in a society.

In a market exchange — what Patrick and Wagner call a dyadic exchange — two parties come to an agreement and make a transaction that both parties anticipate will make them better off. However, in government land disposition, parties who are not directly involved in the deal are still affected by its outcome.

In the case of 965 Florida, the winners are public officials, a small number of residents who get to live in affordable housing, and a favored team of developers. Their gains come at the expense of taxpayers and other developers who may have been able to put together more favorable deals in a market based system but who are unable to compete effectively in the entangled political system. We can’t observe the motivations of the players involved in land disposition deals, but we can observe that public sellers tend to act differently than private sellers.

The current land disposition process is ripe for criticism for privileging favored firms and creating opportunities for officials to use their power for personal benefit. Land disposition also affects the form that cities take. Jane Jacobs spoke out against the “curse of border vacuums” that occur when a large area is dominated by a single land use. While recent land disposition deals often result in mixed-use development, the fact that a single firm develops an entire block or multiple blocks results in a banal pedestrian environment and reduces the visual and economic diversity that Jacobs explained was necessary to engage pedestrians.

Beloved neighborhoods such as U Street give pedestrians an interesting environment because they together include high-end and low-end retail and a variety of architectural styles. This makes the walk from one end of the district to the other feel shorter than it is because of plenty of visual interest along the way. Land disposition deals result in large scale developments designed by a single firm. They will tend to provide space suitable to only economically similar retail and office tenants, reducing the visual and economic diversity that Jacobs identified as key to lively pedestrian environments.