Friday, November 21, 2008

What Types of Urban Development Pay? Part II

This is Part II of a breakdown on recent findings studying Downtown Roanoke, Virginia and the recommendations that resulted.

Last time, we found that surface parking was a good money maker for urban land owners, while development didn't make sense without a government subsidy. Now let's look at how these development choices add up for local government. We compared annual property tax revenues with city spending per acre to find the public return on investment.

1. Surface Parking. This popular downtown land use puts local government in the red, effectively moving money from other uses to land owners, though not as much as other options.

2. Historic Rehabilitation. In urban areas, state and federal income tax credits are not enough for developers to invest. Local tax breaks make the difference, and caused a (re)building boom in the study area. The costs are steep though, with the city's return on investment at -50%, moving tax money to support preservation. 
3. Subsidized Development. When local government holds the entire bag for subsidizing development enough to see results, the costs are staggering. In the case study, land was given for free to a developer. The public return on investment was around -3000%. These projects are few and far between, because they can bankrupt local government.

4. For Profit Development. Of all of the examples identified in this section of the study, this was the only one that produced a favorable rate of return for the city, a handsome 1,240%. No example could be found during the twenty year study period.

Note: These numbers assume an identical development with the same land area (except the surface parking, which lacks a building) and the same 20 year financing.

Next time we'll compare the public and private returns on investment and see if their relationships square with the findings of the study.

Thursday, November 13, 2008

What Types of Urban Development Pay?

I recently completed a research project on what rate of return different types of land development will produce as part of a greater project. I looked at the four main types of development observed in an urban study area over a twenty year span: surface parking, historic rehabilitation, subsidized development, and walkable private for-profit development. My interest in profitability stems from conversations with developers last year who reported that they had to make a 30% return on their investment in order to consider a project.

1. Surface Parking. It's cheap, it's profitable, it's the most common type of development in the study area. The return on investment is well beyond 100%, assuming appreciation in land value over twenty years.

2. Historic Rehabilitation. It's expensive, it gets federal, state, and local tax breaks, and there are many examples in the study area. The return on investment ranges between 30% and 40%. Some of the largest empty historic buildings haven't been restored, but it may only be a matter of time, or a problem related to the scale of the costs.

3. Subsidized Development. It's not as expensive as a rehab project and the financing is much simpler. There's only one catch: the government has to foot a major portion of the bill, if not the whole thing. The return on investment is similar to historic rehab, between 30 and 40%. A handful of these were found.

4. For Profit Development. It's expensive, it gets no handouts of any kind, and the return is only about 20%. No surprise, you don't see a lot of this, and none at an urban scale. The only recent for profit development has been low density and auto-oriented.

Note: These numbers assume an identical development with the same land area (except the surface parking, which lacks a building) and the same 20 year financing.

Next up I'll talk about how these development choices work out for local government.