Skip to content

Density Shrugged

2012 December 5
by dan bertolet

In progressive cities like Seattle, pointing out that it would be a good idea to make our urban areas more compact, walkable, and better served by transit is about as controversial as saying that we should turn out the lights when we leave the room. And it’s no secret that density is the essential enabling ingredient, the secret sauce for resource-efficient, economically competitive cities.

So why then, do we still seem to be so attached to the notion of taxing increased density? Because that is exactly what we are doing when we require developers to pay for public benefits such as affordable housing or farmland preservation if they want to build above a given height or capacity limit. Known as incentive zoning, it’s the standard formula in pretty much every U.S. city that’s experiencing growth. The trouble is, when we place a toll on the production of density, we are making the fundamental mistake of taxing the very thing we want.

Most everyone is on board with giving tax breaks to pursuits deemed vital—renewable energy, for example—in order to accelerate adoption. In the case of high density development, however, our inclination tends to be just the opposite, even though we know that densifying cities is just as critical as developing renewable energy if we hope to achieve meaningful, long-term reductions in energy use and climate-changing emissions. Can you imagine the ruckus that would ensue if a politician proposed giving tax breaks to developers if they build taller?

It’s a given among most urban planning policy wonks that if a municipality enacts a zoning change that enables higher density and therefore higher value development, then the public has a RIGHT to appropriate some of that value. Yet most of these same wonks also understand the critical role of urban density and are in favor of upzones to allow more of it. Do you notice the contradiction, reader? Attaching an extra fee to density encumbers its production, an outcome completely at odds with the well-justified reasons for upzoning in the first place. The end result is we get less of what we want, and what we do get is more expensive.

The time has come for us to get past the lingering anti-urban biases that prevent us from fully acting on the reality that the big city is not the enemy of the planet, but actually its best friend; the reality that density is a pivotal solution to a looming, time-critical planetary catastrophe that necessitates doing everything we can to create more of it quickly and efficiently.

And one significant step we can take is to stop expecting the skinny guys to go on a diet. The people who live in dense urban cores instead of sprawling suburbs are already contributing to the public good, because simply by living where they live, their environmental footprint is greatly reduced. We shouldn’t be applying density tolls that effectively tax that lifestyle choice and make it more expensive.

If we’re looking for a particular group that ought to bear a greater share of the tax burden for broadly shared public benefits like affordable housing, the rational choice would be those who live in low density—that is, put the fat guys on the diet.  Because single-family homes in a city like Seattle take up so much prime land, they play a major role in jacking up housing prices across the board. Low-density land use also contributes to increased development pressure on the ex-urban fringe, simply because it uses up more land closer in. Rural preservation programs such as Transferable Development Rights ought to be imposing their fees on low-density property owners, not on dense development that inherently ameliorates the root cause of rural land consumption.

None of this is to say we don’t have an obligation to publicly fund important public benefits like affordable housing and open space. We just need to be careful that the funding choices we make do not compromise our broader sustainability goals. No, finding new sources of funds definitely will not be easy. Ultimately, mobilizing the necessary support for such restructuring is going to take a big shift in the cultural mindset that still sees city building as some sort of necessary evil, and by extension, development as an easy target for extraction.

The new mindset we need would celebrate the crazy-rapid pace of apartment development that’s now happening in Seattle’s Capitol Hill and Ballard neighborhoods as an accomplishment with as much (or more?) long-term sustainability significance as say, a new large-scale wind turbine farm. The mindset we need would recognize the unmatched sustainable development opportunity in South Lake Union—the envy of cities nationwide—and would strive to remove delays and encumbrances rather than create them (territorial views of the Space Needle, for example, would land at the bottom of the priority list).

And yes, the mindset we need would, in fact, support tax incentives for higher density development.

>>>

Dan Bertolet once wrote a blog called hugeasscity.

Photo of the 650-unit Via6 apartments—one of the highest density housing developments ever built in Seattle—by the author.

 

 

 

 

28 Responses leave one →
  1. biliruben permalink
    December 5, 2012

    While I agree with the majority of your sentiment, the fact remains that:

    1) Building denser increases profits for the developers
    2) Increasing density increases negative externalities, such as a greater need for transit, road, ped and bike infrastructure, decreasing light and views, and an impact on sewer, storm water, electrical grid capacity, schools, medical needs, and fire and police.

    Given 1), we shouldn’t let the developers completely off the hook in taking at least some responsibility for pitching in to help with 2).

    • dan bertolet permalink*
      December 5, 2012

      #1: Depends on the real estate market. In places with weak real estate markets developers often build below zoning capacity (or don’t build at all) because building more density is not profitable. This can be the case in places where we would like to see development, such as the SE Seattle station areas or downtown Tacoma.

      In medium markets, incentive zoning could tip the scales toward lower density development. In very strong, high value real estate markets perhaps a case can be made, but even then you are still encumbering a positive outcome.

      Furthermore, if building more density is profitable that’s a good thing, because then the private market will build more of it, increasing supply and putting downward pressure on price.

      #2: The net externality of dense development is positive. Pretty much all those needs you list would also apply to low density development, but they would be more costly to provide.

  2. Chris permalink
    December 5, 2012

    This is fascinating topic, Dan. I think you are correct for the most part, except for one critical point: A well-crafted value capture mechanism extracts value that would otherwise have accrued to the land owner, keeping the incentives for redevelopment otherwise in tact. Granted, this is hard to do is most cases for a number of reasons. But take, for example, a parking lot zoned for a 10 story building that is rezoned for a 20 story building, and assume sufficient demand from users to fill space at a market-competitive rate. The value of the building is given by the market rental rate for space, the cost of the building is driven by market forces plus the cost of the “incentive” fee, and the cost of the capital is driven by market forces. So long as marginal value of each bonus foot is greater than the marginal cost of each bonus foot (construction cost + incentive fee), the full 20 stories will be utilized. So long as this is true, each additional dollar of incentive fee does not affect the development outcome, and instead affects only the “windfall” land value that otherwise would have accrued to the landowner by virtue of the rezone.

  3. Matt the Engineer permalink
    December 5, 2012

    If you’re looking for an alternate funding source for low income housing, etc. that is currently funded by development, how about a carbon tax? The legislature just opened up a crack in the 18th ammendment wide enough to drive a carbon tax through, including a tax on gasoline.

  4. Kate Martin permalink
    December 6, 2012

    Thanks, Dan. I think that preserving the aesthetic of “single family housing” without rewarding the sprawl is perhaps a nuanced version of your take. Density doesn’t need to be only in apartments in station areas. Raising a family is much easier (and usually healthier) in a SF zone. Pushing back on the “small house” movement and defining it as square foot per person and people per 5000 sf lot, would go along way.

    I rebuilt my one story rambler on 5000 sf to 3 stories and the maximum 35′ at the roof ridge. We now have 8 people living in 3,000 sf on that 5000 sf lot. In reality we could have a backyard cottage and 2 more people. That would be 10 people on 5000 sf and the “look” of single family would still be there. No bigger lot coverage needed. I still have trees and green and a garden (and 2 parking spaces). Seattle doesn’t look at that idea. Ever.

    On a block with 20 houses, we could have 20 people or 200 people. We know which one is more sustainable, but we buckle every time SF pressure arrives. I don’t know if there’s another city with the stock of SF zoning we have. But meanwhile, it’s totally legal to have 10 people on this lot of mine. How about incentivizing that instead of punishing it? If people want to be alone on 5,000 sf, then a price probably should be associated with that. I hope that doesn’t sound righteous.

    Even the utility rates favor the 40% of the 300,000 Seattle households that are single occupant many of whom are single occupant households alone in one house on a 5000 sf lot. I pay a dime for most of our electricity and singles pay a nickel. Why is density in this way (and families) punished? Same could be said for the SWG bill. I’m subsidizing single occupant households.

    I think that incentive zoning could go along way toward providing the fabric we need to make complete neighborhoods with healthy habitat for humans. Stand alone reservations of low-income housing (or anything marginalized like that) aren’t working that well, so I wonder about the SLU plan. The sky is not really the limit for buildings in my opinion. It’s a matter of how the children are fairing with what we’re building. If the children are doing alright with what we’re building, then we’re doing fine. If they’re not, we should adjust our priorities because it can’t be all about the adults and still be a sustainable city for the future. I do not believe that the kids in Seattle are currently alright.

    • Wes permalink
      December 14, 2012

      I’m going to have to disagree that raising your kids in an sf zone is better. This is an American bias. My wife and everyone else from her city are raised in 10-40 story condo buildings. There is nothing wrong with kids from her city. Actually growing up in a neighborhood with a density greater than 95,000 people per square mile kept her and most of the kids out of trouble. There was always something for them to do, besides sitting at the park and smoking pot. After arriving in America and seeing the suburbs and sfh zones, she thought “how can they raise their kids like this? They’re so far from everything!”. All of her friends felt the same way, they viewed suburbia and the highways as wasted space. Now after being here a few years, she realizes that it’s because American (especially West Coast) cities offer very little for children. The urban districts have almost no play grounds, and there are wide boulevards where people in huge cars insist on driving 45 m.p.h. And honking at people that are just walking around their own neighborhood. I would love to raise my children in a neighborhood with a density greater than 50,000 people per square mile with parks, quiet streets and good transit. Unfortunately this is very rare in America because of people that insist sf is better for raising children, and fight zoning changes that would allow urban family living. Unless this changes my wife and I are seriously considering taking our kids to Vancouver, London, Tokyo, shanghai or seoul.

  5. Monster permalink
    December 8, 2012

    i can think of a certain blogger on this site who lives in a SFH home in the central district who should give up his consumptive lifestyle and move into a more dense neighborhood. there is no differance if you live in a sfh on beacon hill issaquah highlands. its still living in poorly used spaced.

  6. Dr. Density permalink
    December 8, 2012

    Dan, you are right on. It’s absurd that we overburden and tax transit rich, complete and walkable urban development for being the right solution.
    Once again, City Tank honors the “Triumph of the City”!

  7. Alex permalink
    December 8, 2012

    Dan, I think that you are conflating marginal and lump sum charges that have really different effects on behavior. You are also not differentiating between fees applied in an upzone and fees applied just to build to the existing density limits.

    When land is upzoned and there is demand for development beyond the original zoning limits, new value is created. If a whole lot of land is upzoned and/or if the price elasticity of the rents is very high then most of that value will be passed on to the renters (or condo buyers) in the form of lower prices. However, when less land is upzoned and/or the price elasticity of the rents is low, the owner of the land keeps most of the new value. This is what usually happens in the US these days because the demand for dense, urban, complete neighborhoods is much higher than the supply and the amount that we upzone for is usually relatively small. I would argue that this is true for South Lake Union.

    The City then has the opportunity to extract that new value (that it created through the upzone) from the property owner. What usually happens is that the City imposes a marginal fee on each additional square foot that is actually built above the old zoning (what is currently proposed for SLU). If there are diminishing returns to additional height, at some point the fee will prevent the construction of additional square footage that would have otherwise been built (though often there are new height limits that kick in before this happens making this point moot). This is what you are worried about. A marginal fee affects the marginal decisions about how much to build. However, the other option is that the City extracts a lump sum up front fee related not to each additional square foot that is built, but instead related to the increased value of the land regardless of whether the property owner takes advantage of the added development capacity (this is what Vulcan is currently saying it would prefer to do by giving a block of land to the City up front). In this case, the fee is imposed on the property owner and the value is extracted by the City, but there is now nothing discouraging the property owner from building as much as they would without a fee. This fee has no effect on decision making at the margins.

    If the City just lets the property owner keep the added value, it sets up a system of rent seeking where politically connected property owners purchase land with restrictive zoning for a low price knowing that in exchange for political contributions they can dramatically raise the value of the land through an upzone. There is an argument to be made that this is what you would want because it creates powerful advocates for upzoning land in a City that needs those advocates. However, the incentive is for these property owners to only want their land to be upzoned. The more that other land is upzoned along with their land, the more prices fall and the more the added value goes to the renters not the property owner. This incentive system discourages a more comprehensive solution to the city’s real estate supply constraints. More importantly, a rent seeking system like this usually leads to more general corruption of the local political system.

    For all these reasons I think you should support an up front, lump sum fee when property is upzoned.

    • December 10, 2012

      Alex,

      You make some fine points here, but I think you’ve missed the fundamental point of Dan’s post. Why should we, in your term, “extract value” when value is created by upzones. While it is true that value is created, there is also inherent risk. If the developer over shoots the target and has lots of vacant space, can the developer “extract value” from the City’s coffers because they stupidly gave him too much capacity?

      Secondly, density, all by itself is a good thing. More people living in a smaller space is simply better –more efficient– that sprawl. When a developer creates additional housing units she is creating a public benefit by increasing supply.

      True, that developer will make a profit at developing the land converting the potential value into cash. But that’s called capitalism. I don’t work for free, and developers don’t either.

      As to your point about corruption, I can’t take it very seriously. The truth is that developer already do work the system to get additional capacity and neighbors often fight it. Saying that allowing more development capacity will lead to corruption is like saying that by allowing public comment on new development will somehow lead to NIMBYs bribing Councilmembers NOT to allow upzones.

      Finally, you suggest a lump sum to be paid for the value generated. Aside from the fact that determining what that sum might be would be a a guess and politicized, developers ALREADY pay a lump sum: it’s called public process and development fees.

      The longer we try to suppress developer profits to prevent them from “laughing all the way to bank” we’re simply preventing new housing, attenuating supply which drives up prices and keeps them high, and, in the end, transferring wealth to the people who got here first at the expense of future residents of the city.

      Seattle progressives need to learn to use the eraser side of their pencil now and again, instead of always writing more rules. Sometimes no intervention, fewer rules and fees, is an intervention in and of itself. Let it be!

      • Josh Mahar permalink
        December 12, 2012

        I think Alex’s point is that, when done correctly, these taxes aren’t preventing any additional development but just capturing windfall profits and using them to benefit the public rather than a single property owner.

        Its a great point. Assuming no tax, a developer then makes a heap of additional money (even though they would have built the project anyway) and they use that money in some other project, which in many cases could be a SFH housing development, strip mall, etc. out in the exurbs (all they look at in choosing a project is risk and return).

        When that money is captured by the city and used specifically to improve amenities and transit in the neighborhood, it makes other properties more attractive for development, thus encouraging more dense development.

        To Dan’s point about putting the burden on low-density builders for rather than high density builders: we often do this as well. Much of the new surbuban development around Issaquah has funded the preservation, management, and restoration of the Issaquah Alps.

        I’m not sure some kind of TDR fee for wanting to building at a lower density than allowed in Seattle would generate much revenue (I don’t think this is ever a problem). But one solution I think is pretty simple is changing the property tax from a tax on the improvements on the land, to a simple tax on the value of the land. This is exactly what Alex is talking about in using a lump sum rather than a marginal value tax and it would provide much bigger incentives for building on parking lots and other under-used lots in the downtown core.

    • dan bertolet permalink*
      December 16, 2012

      Thanks for the thoughtful critiques Alex and Josh. A few comments:

      Alex you correctly point out that when rent elasticity is low created value won’t translate to decreased rent, and that the reason elasticity is low is because demand is outstripping supply. But one reason demand is outstripping supply is because the cost of producing housing is too high relative to the return on the investment. And when we extract value from land, in the end it will drive up the cost of producing housing–there is no free lunch!–thereby contributing the root problem.

      I also think you have to look at this as a system. For an isolated project it may be true that extracting new value may lead to public benefits with no increase in rents. However, for the reasons I gave above, this will lead to a perpetuation of the root systemic problem, which is that extracting value distorts the market and drives up the cost of producing the outcome we want. To reach a balance for the system in which supply catches up with demand and rents become elastic, we will have to suck it up and stop worrying about windfalls for a few property owners.

      Regarding those windfalls, it also seems to me that it’s a bit arbitrary to single them out for a special tax. The government constantly enacts all kinds of regulations that alter the value of property and businesses in both directions. When land was downzoned outside urban growth boundaries, the government had no obligation to compensate land owners for the value they lost.

      Josh, if a developer can make “a heap of additional money,” as you put it, that means that housing development becomes a more attractive financial pursuit, which means the market will do it’s thing and more of it will be produced, which is exactly what we want. That increased supply puts downward pressure on prices and eventually the problem of takes care of itself — the “problem” being some people’s concern that developers are getting away with making too much money.

      Also Josh, I agree about land value taxation, and am all for it:
      http://citytank.org/2011/04/15/dont-tax-what-you-want-more-of/

  8. Morgan permalink
    December 11, 2012

    Whether or not to subsidize density is an interesting proposition that I’d love to see deeper writing on.
    I’m not sure I like the idea of local government getting into the real estate business. Government is good at some things; efficiency and profit are not among them–and shouldn’t be.

Trackbacks and Pingbacks

  1. Burgess on South Lake Union - Seattle Transit Blog
  2. Risky Business: Sharing the Wealth Means Sharing the Risks | Seattle's Land Use Code
  3. ‘Tis All in Pieces: The Confusing Cost-Price-Ideology Housing Debate | Seattle's Land Use Code
  4. Merits and Aesthetics in the Density Argument - Seattle Transit Blog
  5. TANKSHOTS (6) | citytank
  6. Don’t Overburden Development In The South Lake Union Rezone | citytank
  7. Backwards: Seattle’s Land Use Code | citytank
  8. Conlin is Right On the Money - Seattle Transit Blog
  9. McGinn Recommends Rejection of West Seattle Project
  10. We Should All Be On Supply’s Side | citytank
  11. The Road To San Francisco Is Paved With Housing Supply Suppression | citytank
  12. Welcome To The Affordable Housing Policy Twilight Zone | citytank
  13. The Mixed Messages and Misplaced Burden of Taxes on New Development | citytank
  14. Getting Real About The Costs And Benefits Of Affordable Housing | citytank
  15. Workforce Housing in Seattle: Myth vs. Reality | citytank

Leave a Reply

Note: You can use basic XHTML in your comments. Your email address will never be published.

Subscribe to this comment feed via RSS