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2013 February 24
by dan bertolet

Cap_Hill-11th-Pine

Someone’s sure going though a lot of trouble to save the lanky brick facade of the 1926 Sunset Electric building at 11th and Pine in Capitol Hill. It’s hard to imagine how the extra floor the developer is allowed to add to the new building in exchange could possibly offset the additional cost of building around all that fragile brickwork.

Either way, this project is a good example of how we tax density to fund public benefits—in this case, preservation of the Pike/Pine neighborhood’s historic character.* On the one hand, City policy dictates that adding density to urban centers like Capitol Hill is a strategy for achieving broad sustainability goals—and that is entirely correct. But on the other, the City tells developers that if they want to put more than a given level density on a site, then they’ll have to pay a toll to fund public benefits.

Apologists for this contradiction point out that if the developer did not save that facade, the reduced construction cost would not translate to lower rents, but would be pocketed as developer profit. Perhaps true, but if developers make a big profit it’s only because they have figured out how to efficiently deliver a product that a lot of people want. In any other field, that success would be admired as ingenuity and smart business.

Furthermore, the reason owners can charge prices that exceed the cost of production is because housing supply is not meeting demand, and building more supply is the only way to relieve that pressure on prices and bring the system back in balance. If there’s a potential for a healthy profit, the free market will do its thing, and eventually the so-called “problem” of developers making too much profit will correct itself as prices come in line with the cost of production. This outcome is a win-win for housing affordability and for the numerous sustainability benefits of density. In contrast, encumbering the production of housing supply—whether through density fees or other regulations, delays, or political wrangling—is a recipe for the lose-lose outcome of higher prices and less density.

As for public benefits, we need to find a way of funding them that doesn’t have the unintended consequence of penalizing new housing development, which is in effect punishing newcomers to the City to the benefit of those who are already here. A more fair approach would be to spread the burden equitably across the entire City, to both new and old properties. Indeed, the most fair approach would place a larger share of the burden on those living in low-density housing (a.k.a. single-family) that does not provide the public benefits of density.

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*One could argue that this kind of “facadomy” doesn’t contribute much in the way of meaningful preservation, but that’s another debate.

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Photo by the author.  This post is part of a series.

14 Responses leave one →
  1. Morgan permalink
    February 24, 2013

    I just walked by that sight last night and like it. I’m sure the developer did the math first.
    Dan, are you suggesting that there should be no regs on building height? Are you suggesting that developers should be allowed to build whatever sized or styled buildings they wish, because the best thing for us and the planet is to let developers build as they wish?

    I wish I had much more time to jump into this post, as well as the high-density debate more generally.

    There is one thing I’m reading in our local social media very often and which I don’t understand–this is all the expressed belief in ‘free’ markets. Not only is there no such thing in the real world, the literature on the subject has widely debunked this approach to market design, decision making, and public policy. There’s a litany of examples where market liberalization created and continues to create extensive problems for ecological, social, and economic sustainability. Why would housing supply be a special case for market liberalization?

    We have so many other viable ways to advocate for density with economics that I’m can’t understand why this approach is so popular, at least among notable voices that catch my ear. I don’t even think it would be super hard to deploy all sort of beautiful economic thinking without touching the notion of ‘free’ market goodness.

    Anyhow, thanks for all your thought and writing on urban design and urban sustainability. I appreciate your work.

  2. February 25, 2013

    Are there any cities where increasing the supply of housing in desirable areas has brought down the cost of housing? Also interesting in the supply and demand category is that we have a bit of a glut of vacant commercial spaces along more than a few of our streets, but the price doesn’t seem to budge.

  3. Jonathan permalink
    February 25, 2013

    Dan, you’re quite mistaken about a very key issue here. Let me see if I can help.

    The location value of a piece of property – that is, the land value – is what economists call a pure economic rent. It is “a price above what is required to put the factor [land] into production.” Because land has no cost of production and its value is not due to anything the owner does, any income from land is by definition 100% economic rent. It also means that these rents can be taxed without effecting production in any way.

    This is what Adam Smith was referring to when he talked about taxing the “unearned increment” of the landlords — a major theme in Wealth of Nations. It is what Joseph Stiglitz is referring to today when he talks about “rent seeking behavior.”

    An up-zone is an instant increase in location value and it has no cost of production, other than the red tape. Whether that value goes to the property owner or is captured entirely by the city, this does not effect the wages paid to the contractor or the return on capital investment involved in the actual development.

    In fact, taking a quick look at the history of this property, it was the previous owner who applied for the land use change before cashing out, as is often the case, a move that netted them almost 4 million dollars in 6 years — it looks like the value of the up-zone was ~3 million.

    If this property had instead been a 4 million dollar liability to the owner over the past 6 years, you can bet construction would have started immediately. This would also remove the enormous subsidy to a small class of property owners, who get millions of dollars for doing nothing.

    This is known as land value taxation or value capture. You should look it up. Here’s a good crash course on the subject:
    http://realestate4ransom.com/

    You’re absolutely right that taxes and fees on buildings, absurd regulations, encumbrances, restrictive zoning, nimbyism, etc, are huge problems for affordable density. I don’t have time to go into to that today. Just bear in mind that land value and building value are apples and oranges.

    • dan bertolet permalink*
      February 26, 2013

      Thanks for the thoughtful comment, Jonathan. Since this post doesn’t even mention land price I’ll assume you’re reacting to my Density Shrugged post.

      http://citytank.org/2012/12/05/density-shrugged/

      The point you make was discussed a bit in the comments of that post, and yes, I think land value taxation is a great idea:

      http://citytank.org/2011/04/15/dont-tax-what-you-want-more-of/

      It seems to me that City policy is mixing apples and oranges, because it applies a tax to the production of buildings with the hope that the tax is transferred into a reduction of land value, thereby reducing the landowner windfall. My guess is that transfer is not always so clean, and can end up increasing the cost of production.

      How about a capital gains tax on land sales?

  4. House Carl permalink
    February 25, 2013

    While I generally appreciate Dan Bertolet’s advocacy, sometimes he goes too far. What is all this about “apologists” and “contradictions”? I sense more than a little nonsense here, and perhaps Dan should realize that in order for neighbors to play nice with increased density they might just want to preserve some of their neighborhood character. It seems to me a more costly project is better than one that gets sunk altogether. Meaningful preservation or no, these kinds of projects definitely bring something to the neighborhood that many of the modernist stinkers simply cannot.

  5. Cap Hill permalink
    February 25, 2013

    I agree with Dan. This brick savings is window dressing for folks that cannot bring themselves to accept that density is good. Though I have strong doubts about our citizen lead design review process at times, I do think we should aspire as a city to create new, memorable buildings, not just perserve the old in pervese ways.

    Where has rent dropped? Seattle…many, many times. I moved back here in 2010 and saw $1000/mont 1BR in downtown. Rent is set by number of units and job growth. Anti-growth people like to fight both density and jobs, thus pushing them out to the suburbs to create CO2 spewing communities.

    GREAT WORK DAN!

    • February 25, 2013

      Sorry to not clarify… absent a recession period, where have the housing prices in desirable areas gone down with an increase in housing supply?

  6. Josh Mahar permalink
    March 1, 2013

    Are you really complaining about one saved facade on Capitol Hill, a neighborhood that has probably seen more development activity per acre in the last few years (and in the coming future) than NEARLY ANYWHERE ELSE IN THE COUNTRY?*

    In many ways I feel like this proves the exact opposite of your argument. Over the past 5+ years, community activists in Capitol Hill have worked very well with developers (in fact, many of the activists and developers are one and the same). The productive give-and-take has resulted in a neighborhood that continues to attract residents and thus development, but still maintains much of its rich character. Does it have 25 story towers? No. Is it the densest place west of Chicago and north of San Francisco and getting denser? Yes.

    Not all of us believe creating a sustainability city is impossible through a slower, more transparent and cooperative approach to city building.

    *I’m basing this on the fact that Seattle had the second most residential units under construction as of February, and Capitol Hill is clearly one of the top ‘hoods for development. http://blogs.seattletimes.com/jontalton/2013/02/19/seattles-downtown-boom/?syndication=rss

    • dan bertolet permalink*
      March 1, 2013

      No Josh, I’m complaining about how the developer had to cover the cost of the saving that facade for public benefit, in order to be allowed to do something that is a public benefit in itself, i.e. adding that extra floor. I have come to believe that it is bad public policy to increase the cost of producing housing by placing the burden of providing public benefits on development. The burden should be shared throughout the City. Admittedly this is a small example, but the same underlying philosophy is what’s behind the drive to overburden development in South Lake Union with “incentive” fees. You don’t tax what you want more of.

      • Josh Mahar permalink
        March 1, 2013

        But it isn’t that black and white. Sure there is a small cost to the developer. But there is also a cost to the property owner, because developers will undoubtedly use incentive zoning to negotiate better land sale prices. Similarly, as you’ve alluded to, rents for commercial and residential units will likely be slightly more. So business owners and residents also pay a cost. And then, since its the “hot” place to be (because of the cool old architecture), parking costs go up (in time and money) and all the low density folks pay a cost to visit from their suburban homes. Everyone pays.

        The point is that we’ve developed this system in which we all pay slightly more in some ways because we believe it leverages us greater overall benefits. Great neighborhoods are public goods (think tragedy of the commons) so an entirely free market just isn’t going to provide the best solution.

    • dan bertolet permalink*
      March 3, 2013

      Josh, based on my understanding of cities and the stress humans are putting on natural resources and ecosystems, my main concern is getting density built as fast and cost effectively as possible. From that perspective, parking fees paid by suburban visitors to cities is trivial matter.

      I have never said that the private market will take care of everything for the common good. I am saying that we need to be smarter about where we apply taxes to fund public benefits. Taxing people for doing the right thing is stupid. For example, as I’ve said before, the taxes for subsidizing affordable housing should be focused on single family home owners, since they are the true freeloaders.

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