Beyond matter of right: incentivizing preferred types of development

Building approvals are tied to a term, "matter of right," which is based on the zoning classification of the land.  If the project meets the basic requirements (such as a 2-3 story house in an area zoned for 2 to 3 story houses), it doesn't trigger extra-normal review and it can be approved administratively.

A few years ago I wrote a piece ("Land-Use Regulation and Fiscal Sustainability (in Montgomery County, Maryland)") in response to something written by economist and local suburban transit advocate Ben Ross ("Land-Use Regulation and Fiscal Sustainability") where he makes the point that our building regulation paradigm is wrong-footed in that it optimizes approvals of sub-optimal projects and makes it much harder to develop what would be the preferred type of building.

Walmart on Georgia Avenue NW in Washington, DC.  Under construction on November 25th, 2013.

This comes up in areas where the desire for certain types of development, especially multiple story vertical mixed use buildings, is ahead of the market's willingness to finance such development in those places.

Revitalizing areas are the classic example of places where you need "good development" but it is very hard to get it, especially at the earliest  stages when it can have extranormally positive impact.

The 5900 block of Georgia Avenue NW, where we now have a Walmart as a single use building covering close to 4-acres, is a good example of a location that would serve the city much better had it been developed as a multi-story mixed use building with apartments, but that wasn't easy to accomplish at the time that Walmart went to the property owners with an offer.

The Rise development in Vancouver.  Photographer unknown.

The developer wasn't really interested in pursuing anything difficult, so they were happy to take Walmart's offer.

A query on a list I'm on made me think about this again.

Here I am arguing that sometimes, the underutilization of property isn't derived from zoning restrictions but from financing and development practices that are out-of-step with urban market opportunities.

Streamlined approvals aren't much of an incentive.  One incentive especially bandied about by the New Urbanists in association with what are called Smart Codes, would be to make it easier to approve more difficult, but preferred projects, like mixed use development, and harder to approve single use projects in those places.

But streamlined approvals don't save a developer all that much money, and aren't enough to spur the investment of additional millions of dollars that otherwise isn't justified by a financial analysis of the proposal for a bigger, more complicated project.

How about a set of tax incentives and abatements that phase out over time?   In order to build something ahead of the market, a developer needs financing and/or other inducements (free land, etc.).

Perhaps something that would work would be a graduated structure of tax incentives and abatements that would work off over time.

Some cities do a form of this.  Philadelphia encourages construction of housing, especially the conversion of underused office and factory buildings but also new construction, and offers a tax abatement for the first 10 years that the building is used for residential purposes.  Baltimore has a similar kind of program ("Downtown developers in line for the new city tax break," Baltimore Brew).

Offer the best package of tax incentives for the locations and projects that do the most to spur change and additional private investment.  Instead of offering tax incentives on a first-come, first-served basis, without much in the way of criteria or focus, the best set of incentives should be targeted to those locations--anchor projects-- that are determined to have the most potential for spurring additional private investment because of they example of "quality" that they provide, which without the incentives, would not occur for many years, given the current investment climate and perceptions of the submarket.

On the H Street corridor, the redevelopment of the Children's Museum block is the kind of anchor project I mean.

This project didn't receive tax incentives but instead was awarded zoning bonuses, which allowed the construction of taller buildings.

At the time doing a project on the H Street corridor like that--converting a building to condominiums and constructing two high-quality apartment buildings on the block--was unprecedented.

The only similar buildings that had been constructed in the area were subsidized senior housing, which were great for the residents but had limited revitalization benefit to the rest of the corridor.

This project and the entry of that particular firm (Abdo Development) into the H Street real estate submarket repositioned how the H Street neighborhood was perceived by other developers, and in turn spurred the entry of other high quality developers and innovative projects (delayed of course, by the 2008 real estate crash).

One definite impact was immediate, on the next block east.  Whereas BP had proposed a 50,000 s.f. gas station, after many years of opposition and the evident change in the market, instead we now have a multiunit apartment building called 360 H Street (pictured above) with a grocery store on the ground floor.  Talk about a difference to the neighborhood, urban revitalization, and the local economy!

Another example is 501 H Street NE (pictured at right) which is a simple one-story building that was constructed in the 1970s in the place of buildings lost during the 1968 riots.  It's going to be demolished and built in its place will be a stunning (by comparison) building with retail and condominiums.

Only give tax abatements to quality projects.  Similarly, tax incentives should be directed to projects that are special rather than to projects that are ordinary and/or sub-optimal.  In DC, this isn't the way it works.

It's abetted by the fact that there isn't a single point of entry for tax abatement requests.  Instead such requests are channeled through the approval process by individual Councilmembers, as initiated by developer requests.  While there is a review process, it's inadequate.  The process is definitely unsystematic, which is probably intentional, as this makes tax incentive financing harder to track in toto.

Looking south at the intersection of Georgia and New Hampshire Avenues NW, Washington, DC.

A perfect example of this in DC is at the southwest corner of Georgia and New Hampshire Avenues NW, which would have been perfect for a multi-story mixed use building, but instead is a one-story building leased to CVS.

Immediately north and across New Hampshire Avenue lies a relatively new seven story apartment building, which like the Abdo Children's Museum project on H Street, has sparked new and positive development within a few blocks of the site.

The CVS building is owned by a real estate investment trust that specializes in drug stores and received tax incentives from DC for its construction.

You can argue that because this project was an early example of new (chain) retail in that submarket that it was deserving of tax breaks.  Or you can say a higher bar should have been set because of the under-utilization of the site, especially because it is located at one of the most prominent intersections on the corridor.

I would argue that tax incentives should have been provided only if the building would have been multi-story vertical mixed use.

Having a single integrated tax abatement request and approval process would make this more possible and likely instead of the chaotic unfocused system that currently exists.

Tax crappy projects and buildings more highly, to capture the unrealized opportunity represented by minimal development.  Another problem with getting "better projects" is how the financing and ownership regime works for chain retail.

Rendering for a new building at 501 H Street NE, Washington, DC.

Real estate investment trusts are financing and ownership vehicles that develop and/or own and manage properties in multiple locations.  Most of these companies prefer simple investments.

Simple investments do not mean multiple story vertical mixed use, they mean a single use project, something like a fast food restaurant or a pharmacy, etc., on a site that is capable of being developed more intensely.

The above-mentioned CVS store at the southwest corner of Georgia and New Hampshire Avenues NW illustrates this point as well.  As mentioned, the building is owned by a REIT that specializes in drug stores.  Across the street is a seven story apartment building, built above the Metrorail station.

Perhaps one way to get a better building is to set up the tax regime so that better buildings are taxed lower and projects that contribute less are taxed higher.  This idea is a derivation of property tax proposals by Henry George, which focused more on the value of land and less on the value of the building, to encourage positive development.

-- Assessing the Theory and Practice of Land Value Taxation, Lincoln Institute of Land Policy

The economic justification, especially in DC which also collects 100% of the "state" income tax, is that mixed use development generates more total revenue to the city than single use projects.  See the past blog entry "Further thoughts on rethinking comprehensive plan theory in terms of city planning and public finance ."

Note that taxing property on the opportunity value is done all the time with land that can be developed as something else, such as farmland being taxed as if it can be housing ("Bill to lower taxes on agricultural land stalls," Kearney Hub).

While I don't usually recommend it, sometimes raising property taxes is done to "run people off their land."  For example, once the area now called Union Market went into play, the city re-appraised much of the property in the district in terms of its opportunity value and taxes tripled.  I would argue that was a punitive measure designed to displace the then tenants, who were mostly small businesses owned by immigrants.

Rather than being capricious or punitive, instead, I propose this be done systematically to encourage better development in the places where you are working to achieve it.  Definitely two examples of where to do this would be the single use Walmart at the 5900 block of Georgia Avenue NW as well as the CVS at New Hampshire and Georgia Avenues.

Note that Matt Yglesias has a piece in Slate, "Land Value Tax Won't Fix San Francisco," that isn't directly related to this argument.  He attributes the loss in development capacity to zoning restrictions and suggests that's where attention should be brought.