Land-Use Regulation and Fiscal Sustainability (in Montgomery County, Maryland)

Ben Ross, an economist and President of Action Committee for Transit, the Montgomery County, Maryland advocacy group which pushes a pro-transit agenda including the Purple Line light rail and a light rail system in northern Montgomery County, has published a piece on the economic and political impacts of the land use regulation system in the county.

--Land-Use Regulation and Fiscal Sustainability

He writes:

I've just finished writing something that tries to address fundamental issues about the relationship between democratic governance and land-use regulation. I start from an institutional economics perspective which I think gets you insights that you don't get by just using microeconomics (which tells you what's wrong, but can't explain why these wrong things keep happening).

I'm not going to nitpick differences of interpretation between he and I as I already sent those comments to him. Instead, I want to focus on his recommendations:

The needed simplification has two central elements. First comes an end to the system of fictional zones overlaid with “alternate” methods of development that are in practice mandatory. The Planning Board and its staff must be freed of their unsustainable burden of work. Property should be zoned so that the development that is expected proceeds “of right.” Second, and closely linked to the first, the resources now dispersed into negotiated amenities[*] must be captured through taxation. This will allow fairer and more democratic allocation and will directly contribute to relieving the county's long-term fiscal problem. More broadly, such reforms will improve the county's business climate by lessening the delay and uncertainty which are a greater deterrent to economic growth than the absolute level of taxation.

[*] Only negotiated amenities are at issue here. Developers should comply with general rules, such as affordable housing requirements, and supply infrastructure that is inherent to a project, such as internal streets and sidewalks, stormwater control, etc.

Recommendation one is really key--that only projects meeting all of the goals and objectives of a master or area plan should be treated as matter of right. Matter of right development zoning tends to focus on minimums, not the best result. So why should we favor projects with minimal benefits with the easiest path to approval?

It's so simple that I can't believe I never came to this conclusion myself. For example, the problem with revitalization of traditional commercial districts is that most developers aren't interested in developing the sites to the maximum capacity and opportunity, because often, to reap the full benefits has a longer pay back period than how the financial system is set up to deal with the development of real estate projects.

For example, projects like Bethesda Row in Bethesda, Maryland are amazing, but the longer payback period of this and similar projects elsewhere sent the development company off the cliff financially during the last downturn (early part of this decade) and the company had to restructure (see "FEDERAL REALTY’S PRUDENT STRATEGIES SERVE IT WELL IN A TOUGH PERIOD" from Retail Traffic Magazine).

-- business description document of Bethesda Row by Federal Realty Investment Trust

The Smart Code, a design oriented method of land use regulation that is somewhat different from the traditional zoning process, which focuses on height, mass, and bulk, but not design, and not context, is pushed by new urbanists as a way to achieve better development outcomes, but for the most part it focuses on incentivizing making better choices, it doesn't require making better choices.

Only when there are massive benefits for "doing the right thing" such as how Arlington County allows massive density increases in the Wilson Boulevard corridor by following a special approval procedure, do you get much closer to optimal choices.

DC has little in the way of substantive ability to provide massive density increases to developers, because most plots of developable/redevelopable land are small, and the height restriction and relatively low scale nature of commercial zoning in the city (I am not knocking this, merely pointing out the obvious) makes substantive density bonuses pretty small in comparison to the cost of property and the cost of development.

With regard to the second recommendation, of monetizing and capturing the added development bonus through taxation rather than a negotiated community benefits process, I am of two minds of this. It depends on how the money would be used.

The advantage of a community benefits (proffer) process is that it directs resources to needs that have been identified but not filled (see the blog entry "Community Benefits Agreements"). For the most part, these needs are of a long term investment nature, rather than something that is funded out of a jurisdiction's annual operating budget.

Arlington shows that you can utilize amenities approval processes, especially wrt transportation demand management, in ways that meet a variety of community objectives satisfactorily, without having the process be hijacked by hyper-local demands.

The key is to have master plans/sector plans that set the framework for priorities, goals, and objectives, and a process by which the satisfaction of the P/G/O are achieved through the negotiation process. The master framework makes a big difference. It's something we lack in DC. I don't know about Montgomery County.

The problem with directing all the money to taxation is that it is just as likely to get pissed away (think higher salaries for government employees, police officers using training classes as a subterfuge to buy cheap guns, etc.) as it is to be invested in capital improvements.

I guess I would be okay with capturing the development gains from land use regulation (zoning) through taxation if all the monies were to be directed to capital investment in transportation, public facilities of various sorts, and other capital improvements, rather than seen as one time gains for the operating budget.

The biggest problem in local government is a failure to invest in the long term and to acknowledge that development bonuses are worth money, but also come at a cost, but at the same time, recognizing that the right kind of development can in fact improve communities as well--Bethesda Row being a key example of completely changing the nature of Bethesda as a successful and urban destination within an automobile-centric place.

wrt Arlington, I don't know how it works exactly. I think it's not so much that the County is small (unlike Montgomery County which is 20 times bigger), but that they have robust systems/procedures in place, and that the systems focus on generating the right outcomes. (E.g., read the master transportation plan and see how each element derives from the plan goals, and how each element is internally consistent and consistent with the overall goals.)

In DC, I argue that the reason that the procedures for community benefits are weakly defined is to minimize the amount of money paid out by developers--a pro-Growth Machine policy. The Comp Plan is "precatory" -- a bunch of shoulds, and without specific laws and requirements, it's just feel good language. Although it reads well, without the back up of actual requirements, things don't improve all that much except when the market dictates that it do so (as the value of land significantly increases, developers tend to do the right thing more).

We don't have sector plans in DC like they do in Arlington or Montgomery Counties. We do have small area plans but they aren't full blown community plans. And therefore we don't have a process for coming up with consensus priorities at the neighborhood/ward level. (We do have area elements in the comp plan but they are general, nothing like a sector plan.)