Thursday, February 19, 2009

Build Districts

For the last several blog posts, I wrote about the need for a different option to balance the divide between how urban services are funded and how those benefits are distributed. Empty lots and surface parking are given an enormous tax advantage over lots with buildings. As a result, buildings are conserved while land and infrastructure are wasted, contributing to high taxes, high government waste, dying urban areas and urban sprawl. Taxing buildings has been lamented for its negative effects, or deadweight losses, for many years and a number of remedies have been suggested, most notably split rate taxation which is a hybrid of a standard property tax and a full land tax, reducing the penalty on buildings. The problem with this approach and a pure land tax is that those land owners who have bet on low land taxes get slammed at the same time that anyone living, working, or shopping in the affected area receives a much needed break. Those land owners are generally wealthy and influential, and they own the key sites for green redevelopment. Those land owners are key allies for a bright green future.

Build Districts are designed to benefit these land owners in a way that is supportive of healthy cities instead of erosive. They cap property taxes selectively, capping only the building tax burden at two and a half times the land tax burden. So you get the tax benefits of a land tax system without the problems, at least for new construction. I looked at switching existing buildings over also, but the costs are too high in the short term.

A Build District is established as a tax benefit district drawn around an urban neighborhood looking for redevelopment. A high percentage of the available lots will quickly be developed (how quickly is to be determined, there has been no thorough economic modeling yet) to take advantage of the tax break. These new and rehabilitated buildings bring new tax revenues. For maximum effect, all of these revenues should be plowed back into the area in the form of street improvements (buried power lines, better sidewalks, better transit service, street trees, etc.) and services (internet, power, sewer, health care, etc.). Selection of how to spend the money should be done in a public democratic process including the residents and owners of the district and other stakeholders.

The tax cap itself will likely raise land values, as will the street improvements and enhanced services. It is my hope that these rising land values and recycled revenue will create a virtuous cycle promoting a sustainable, quality community. Older buildings can become included as beneficiaries of the district, either by being bought into the tax cap out of revenues from new construction, or in part through rehabilitation and additions. A mature Build District should hopefully be fully developed, with a wealth of amenities, a low cost of living, superior environmental and health performance, and a revenue system nearly identical to what would have resulted from a land tax.

There are some preconditions for a Build District. It ought to work without these plugins, but should be much more effective with them. Basic steps to preserve historic and culturally significant structures should be taken. Zoning should allow development with a walkable, urban character and richness. On-street parking should be managed with prices to ensure an adequate supply of on-street parking while off-street parking requirements for new construction and uses should be waived. 

This is what I have so far. I suspect that this will become a book before too long. I appreciate any questions or comments you may have. I have asked for funding for this work here. Please vote for my idea if you think that it is worth pursuing. Thank you for reading.

The image depicts the theoretical Roanoke Build District, with blue representing existing buildings and green representing potential new construction, most of which is currently off-street surface parking.

Monday, February 16, 2009

Comparing private urban land use and public policy

In comparing the returns from different land uses, the key element appears to be balance. Developers need at least a 30% rate of return in order to acquire financing and build. The public sector requires a 20-30% rate of return in order to overcome the deadweight loss incurred by taxing buildings (24%) and the transaction costs of taxation and public expenditure (which vary). Deadweight loss means loss of economic output from distortions caused by taxation.

1. Historic Rehabilitation. Although the returns are much lower than surface parking, a 40% private return is enough to build. A -20% return for local government makes the historic tax break a win compared with demolition for surface parking or abandonment, though still no path to financial success. Of these four, this is by far the most balanced.

2. Surface Parking. With a private rate of return a whopping 240%, surface parking is a clear winner for investors, while a -50% public rate of return means that much of that profit is a transfer from building owners and renters, and those who work and shop in the area. Despite the public costs, this is by far the most profitable choice given to urban land owners in the study area.

3. Subsidized Development. This offers a similar return to private developers to Historic Rehabilitation at 40%, but at a staggering public cost of -3000% annual return of investment. It is unsurprising that local government is reluctant to pursue this route.

4. For Profit Development. The private return here is the lowest that we examined, offering only 20%. This is below the amount required for financing. The potential return to local government exceeds 1000%, but this revenue is a pipe dream. 

This analysis suggests that a fifth choice is necessary that better balances outcomes between private investment in construction and maintenance on one hand and public investment in services on the other. I call this technique a Build District, and I will lay out this option in the next installment.