Build More by Compensating Current Residents
Published:
Current residents bear the costs of new development. Those costs take many forms – crowded schools, congested freeways, crime, ugly high-rises, spillover parking on residential streets – but they all decrease property values. Accordingly, homeowners and landlords are often vocal opponents of new development, and seek to impose burdensome or prohibitive costs on developers through zoning regulations.
In an ideal world, anyone wanting to move to a city could compensate the current residents for the congestion costs that they would impose. In practice, transaction costs make this arrangement impossible, but there are other schemes that accomplish the same goal. For instance, developers might provide cash payments to all residents living within a certain radius of any new construction, or the developer might pay an “impact fee” to the local government that would be spent on various public goods, such as schools, parks, or libraries.
The Cicero Institute makes the case for this latter scheme in their proposal “Align incentives for neighborhoods to build”. They want to channel existing impact fees, which currently flow to the broader city government, to San Francisco’s local neighborhoods instead:
If each of San Francisco’s 36 neighborhoods had a political organization, similar to the currently weak “Community Boards” in New York, or the Advisory Neighborhood Commissions in Washington D.C., or merely a citizens’ body under the control of the local district supervisor, which could help distribute those fees, the gains to a neighborhood from growth could be vast.
By concentrating the benefits among those who bear the costs, the scheme could encourage residents to become stakeholders in new construction.1
The Cicero Institute notes that previous attempts by the state of California to encourage new residential development have failed or backfired. The list of such attempts is almost comically long. In 1977, California passed the “Permit Streamlining Act”, detailing strict time limits for local governments to deny a permit application. In response, local governments started to reject projects nearing the time limit, requesting that the developer re-submit their application to give them more time for review. Other acts sought to expedite the approval process for housing that met existing zoning requirements or which contained a certain percentage of “affordable housing”, but these too have proven largely ineffective.
Given this history of failure, the Cicero Institute’s proposal deserves careful scrutiny. There is a risk that it adds yet another layer of bureaucracy and discretionary review to an already convoluted process.
The fundamental problem with the Institute’s plan is that all current residents are not identically harmed by new construction. A new condominium across the street is much more costly than one on the opposite side of the neighborhood. The Institute’s plan acknowledges this issue, allocating “25% of the funds to neighbors and landholders within a quarter mile of the project, who tend to be the most concerned about development.”2 While this goes some way towards targeting the benefits, it leaves a number of questions unanswered. For instance, more funding for local schools may be desirable for landlords and homeowners, but childless renters will see little benefit, and indeed may have their rents increased. Conversely, a direct tax abatement for residents would be of little use to an absentee landlord worried about losing her tenants to a proposed apartment building.
In addition, developers already offer some compensation to neighborhoods. The Institute notes that developers may “offer to fund certain parks or infrastructure improvements, or to provide money directly to local neighborhood groups, in exchange for political support.” It is not obvious that a neighborhood council would be able to purchase community support for a project more effectively than the developer. Indeed, the fact that such payments are relatively infrequent suggests that purchasing political support may be quite costly.
Notes:
It is worth nothing that localizing the benefits of new construction is not a novel idea: Donald Shoup proposes a similar plan in his monumental The High Cost of Free Parking. To ensure that residents can find street parking, cities currently require commercial businesses to provide a minimum number of off-street parking spaces for tourists and shoppers. Shoup notes that this requirement is effectively a subsidy to drivers at the expense of walkers, bikers, and those taking public transit, and he suggests that charging a market price for street parking – while returning the revenues to a local “parking benefit district” – would allocate parking more efficiently and encourage neighborhoods to relax minimum parking requirements. ↩
If neighbors and landholders in a bordering neighborhood are excluded from these funds, neighborhoods might approve relatively more projects along their borders. Getting the “right” neighborhood size may be crucial to the plan’s success. ↩