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Liberalizing cities | From the bottom up

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Clear case of the damages inherent in policy uncertainty

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Current policy evolution in Los Gatos, CA demonstrates the power that urban planners have to alter property rights.  The Silicon Valley municipality is currently debating whether or not to upzone a parcel where a developer would like to build 550,000 square feet of office space, replacing 250,000 square feet of an older office park.

The lots, located near the Netflix headquarters, are thought to be the potential site for the company’s needed expansion. However, the Bay Area is already home to ample vacant office space, so the developer would like the alternative option of building multifamily housing in the location. In response to this request for a change in zoning that would allow either use, the planning commission chairwoman said she was “blindsided” by the owner seeking permission for options to use the land in various ways.

In today’s world of master plans that dictate acceptable uses for each parcel of a city’s land, asking for the freedom to build different types of buildings, rather than approaching a commission with a plan in place for a specific zoning change, may seem out of line. In reality the owner is simply seeking permission to put his land to its most efficient use given future uncertainties. Entrepreneurs profit by seeing through these uncertainties to put resources to their most profitable uses, but in the market for land, policies limit their ability to do so.

In curent conditions, in which developers are not building much new office space unless it is pre-leased, the planning commission has the power to determine the land’s expected value by requiring the owner to commit to a plan before moving forward with redevelopment. This is a classic Coasean case of the care that policy makers must take in assigning property rights. Russ Roberts and Richard Epstein did a podcast that clearly discusses the importance of property rights in the market for land here.

The Los Gatos case is an interesting one in which city planning staff has been working with the owner to create scenarios for both office and multifamily developments, but the commission is reluctant to permit such flexibility. At this time, the planning commission has asked for more time to consider the proposal and for further information from the property owners.  Millions of dollars are at stake here, not just for the developer and the owner, but also for the county that currently receives $18 million in tax revenues yearly from Netflix, so it will be interesting to follow the future of this development.

Comments

  1. No way the commission allows housing, proposition 13 incentives make it a VERY, VERY unwise choice for the city (largely because of pressure from the related but not connected school districts). Because of prop 13, every city needs to be a jobs exporter to have any chance at all of funding itself (and allowing the local school district to fund itself) without giving up substantial power to the state. Cities that have already given up most of that power to the state don’t have much of a problem with building new housing (see San Jose for a local example), but any city that is currently a jobs exporter and funds itself (and has an equivalent local school district funding itself) would be absolutely insane to allow any housing in areas that can potentially be commercial. They’re better off having the land undeveloped and facing the potential “consequences” of not meeting their housing quota required before 2014.

    This is largely the reason why nearly every smaller city in Silicon Valley is a jobs exporter, and why formerly residential enclaves like Marin County switched almost entirely to trying to build commercial in the 80’s and 90’s and now have significant office space as well. Marin was able to build up their commercial base before the prop 13 limitations gutted their tax base enough to require being funded primarily from Sacramento collected funds.

    From a market-oriented and libertarian-leaning perspective, this is much more of a case of horrendous tax policy centralizing power at the state level than it is anything about land use.

  2.  I was going to comment,

    I thought that euclidean planning generally set a maximum use.  If I thought planning was a good idea I could see why you would limit heavy commercial/industrial construction in an already residential neighborhood, negative externalities on current voters.  Why would you ever want to limit residential construction in an already built up commercial/industrial neighborhood? The only people who would move there must want to live in that type of neighborhood.

    Is Willis’ observation correct? Do we see this particular type of planning nonsense only in California? Because of prop 13?

  3. I don’t think we see it only in California, it’s just worse in California because of the prop 13 (and other subsequently passed propositions) incentive structure.

  4.  I especially chuckled at this quote from the assistant school superintendent:

    “There is real interest in people finding affordable housing so their kids can come to school here,” Paulides said.

    Those darn people!

  5. What possible rational reason would a planner have for limiting residential construction in an already built up commercial/industrial neighborhood, outside of California’s whacked out tax scheme?

  6. I just meant that a lot of other places have whacked out tax schemes that accomplish some of the distortion of prop 13, it’s just that California’s is the most whacked out.

    If you’re looking for reasons aside from tax schemes though, “traffic” seems to be a common one used by planners in my other home in the Seattle area.

  7. That’s a very interesting subject. Since public schooling is typically paid
    through property taxes, municipalities have the incentive to limit the
    number of less wealthy new children coming into the area. At the same time,
    they encourage property uses that either generate property taxes without
    burdening the schools or are families wealthy enough to pay more property
    tax than the burden of their children. This is the real obstacle to
    affordable housing that inclusionary zoning tries to combat…

    It’s a topic that deserves an entire books on the subject, but I had a post
    that touched on this subject, featuring a quote from Rothbard on the effects
    of land taxes on living patterns.

    http://www.marketurbanism.com/2009/05/04/public-educations-role-in-sprawl-and-exclusion/

  8. What exactly happens because of prop 13. Do jurisdictions not get to keep funding from residential, or do they get to charge a higher rate for commercial/industrial?

    Do many jurisdictions charge higher property taxes on commercial/industrial as opposed to residential?

  9. I agree that the main commission is unlikely to approve the change because of the NIMBYism that typically follows multifamily housing. In this case, however, refusing to allow the option of housing could also make it too risky for the land owner to go forward with the new office park proposal. Sort of a Prisoner’s Dilemma for the planning commission, if you are just looking at the potential school funding outcomes.

  10. Think of Proposition 13 as rent control for property taxes.

    It was passed in the late 1970s in the twilight of the Pat Brown era of major public works. Since a great deal of government expansion (schools, colleges, libraries, parks) was paid through property taxes, these became super expensive. People stood to lose their homes as the bills came due.

    Proposition 13 capped property taxes at the level when it was enacted. For people who stayed in their homes, this was a tremendous windfall. Proposition 13 limited increases to a small percentage of the tax bill, much like how rent stablization laws limit rent hikes. The tax rate would rise to the current assessed level if property changed hands, so not everyone is still paying 1970s levels. However, once anyone bought a property, the increases would be limited but rated to year of transaction.

    Note, though, that if property owners passed an assessment bond after Prop. 13, they would pay in property taxes any additional indebtedness. It’s not a fixed amount from the transaction date, as many areas continued to fund things like schools, parks and open space preserves.

  11. The rational reason is that homeowners vote, and they’d vote down anything that would debase their property values.

    The southern Peninsula areas are notorious for their anti-growth policies. On the surface, it’s a desire to curb sprawl and prevent San Mateo and Santa Clarita counties to become like L.A. County and carpet every square inch of flat land in development and then grade the hills when the flat land runs out. (If you look at an aerial map of the Peninsula, you’d see that the development footprint is generally confined to a relatively small plain near US-101. Much of the counties are open space or even agriculture.)

    In practice, it turned the homeowners into a landed gentry. The anti-growth policies have pushed housing prices to ludicrously high levels, and the sprawl that was kept out of the Peninsula manifested itself in the San Joaquin Valley and Solano County (which is north of Oakland and between San Francisco and Sacramento), both poorer areas that are hungry for growth. The Bay Area’s commute shed expanded from the triad of San Francisco, San Jose and Oakland and now includes Sacramento, Stockton and Modesto.

    They don’t want to make housing more affordable, and despite a strong liberal Democratic voting record, these residents believe density will turn them into “the next” San Francisco (considered a slur outside of the city) or Oakland or Richmond (density with racial overtones).

  12. Because Prop 13 capped property taxes at very low levels, local governments generate revenue for schools from sales taxes. That’s why they prefer commercial to residential development.

  13. So, in short, the municipalities wish to maximize tax income while minimizing outlays, right?

    Therefore being a strictly commercial municipality requiring no schools, parks, libraries &c is a Good Thing?

    Cui bono?

    Municipal managers.

    QED

  14. Current policy evolution in Los Gatos, CA demonstrates the power that urban planners have to alter property rights.

    Nobody is altering anyone’s property rights. The developer is making a bet one way or the other. None of his rights have been altered, modified, infringed upon, taken away.

    Best,

    D

  15. That’s why they prefer commercial to residential development. 

    Residential is also a drag on services and costs more to manage than the taxes it takes in (COCS 101). But I agree that CA cities want retail wall-to-wall, so they can get enough revenue to try and keep up.

    Best,

    D

  16.  Just need to point out that you clearly know nothing of the area and its development since 1950 or so.  What you describe mostly reflects early 20th century patterns in the South Bay, right down to “the development footprint is generally confined to a relatively small plain near US-101”.

  17. It may represent some positive “rent control” effect for residential, but prop 13’s real effect is in industrial and commercial property.  Especially in the Bay Area, many companies own large amounts of (what is now) extremely valuable property, but pay property taxes on a tiny portion of its actual market value.  The money has to come from somewhere, so taxes are effectively increased  elsewhere.  Within a few years of prop 13’s passage, California created a massive system of “fees” and similar revenues to shore up the new deficit.  Who knows how much expensive bureaucracy now maintains all that junk?

  18. Clearly, if he’s allowed to build something that he currently is not allowed to build, his property rights will have been altered. That seems fairly obvious.

  19. It’s also common for cities to have employee head taxes and/or gross receipts taxes, to compliment sales taxes.

    Either way, anything that keeps revenues high and students low is a good thing for the school districts, especially those like the one in Los Gatos that still have full autonomy from state-level funding/control.

  20. That feeds into things like this. All long-time property owners have absurdly low carrying costs on their property (since almost all commercial properties have a pre-1978 tax base, because they’re owned by shell corporations and sold that way rather than by the property itself, the property tax due each year is usually sub 0.1% of the actual 2011 value of the property), and often will just use them as a store of value, rather than bothering to rent them out or pursue the highest level of currently allowed use. That leads to situations where it is worth it to hold out for a massive rezone, which almost immediately makes the parcel 3, 4, 5, 10 times more valuable than it was prior.

    That’s a large part of the reason that you see fairly large amounts of seemingly vacant commercial and residential property all over the older areas of prime, coastal California – amounts that seem crazy for such expensive and in-demand areas.

  21. His property rights are not altered. He still has the right to build. You are confusing his ability to build with his ability to build A or B. That is: make profit A or profit B. Take risk A or risk B.

    This is, of course, not changing his property rights.

    Best,

    D

  22. What you can build is a property right – when we’re talking property rights, we’re not simply referring to the ability to build something. I’m not even arguing that it’s a good thing or a bad thing, but clearly the right to build A or the right to build B are different rights. Otherwise, you’re basically saying that if the government told him that he can only build a seventeen story ferris wheel on his property, his property rights haven’t been changed, because he can still build something.
     
    Anything that affects what can be done with a property is affecting the property rights of the owner, for better or for worse.

  23. Otherwise, you’re basically saying that if the government told him that
    he can only build a seventeen story ferris wheel on his property, his
    property rights haven’t been changed, because he can still build
    something.

    You are of course doing the ad absurdum slightly, but the Supreme Court in Penn Central and several subsequent rulings has already ruled on your perceived problem, and has already decided that what I wrote is in fact both reality and in our laws with respect to property rights.

    That is: there is no interference with the primary expectation of being able to build nor the expectation of a reasonable return. There is, in our laws, no additional layer of “property rights” that allows a property owner to upzone into the heavens to make more profit on a parcel by rezoning. You can wish for it to be true, and libertarian discussion boards can harrumph in outrage at this issue, but the harrumphing has no basis in reality or law.

    Thank you for your reply.

    Best,

    D

  24. Otherwise, you’re basically saying that if the government told him that
    he can only build a seventeen story ferris wheel on his property, his
    property rights haven’t been changed, because he can still build
    something.

    You are of course doing the ad absurdum slightly, but the Supreme Court in Penn Central and several subsequent rulings has already ruled on your perceived problem, and has already decided that what I wrote is in fact both reality and in our laws with respect to property rights.

    That is: there is no interference with the primary expectation of being able to build nor the expectation of a reasonable return. There is, in our laws, no additional layer of “property rights” that allows a property owner to upzone into the heavens to make more profit on a parcel by rezoning. You can wish for it to be true, and libertarian discussion boards can harrumph in outrage at this issue, but the harrumphing has no basis in reality or law.

    Thank you for your reply.

    Best,

    D

  25. I agree. And the open space was purchased on the open market for the amenity good. There is zero basis for complaint about open space being off limits for development.

    Best,

    D

  26. You keep making the argument that I’m arguing for something that I’m not, and it’s very clear by the supreme court case that you referenced. I never argued that an owner in the US legally has the rights to do anything and everything with the property. However, when in an academic discussion, any zoning or other mandate on how a property must/can be used is by its very definition a restriction on property rights. That doesn’t mean that it’s illegal or undesirable for those restrictions to be in place, however, to claim that a zoning change is not a change in property rights is absolutely absurd. If the owner is granted the change that he desires, his property will be several times more valuable should he choose to sell, solely because of the change in property rights (you can call them “development entitlements” if that wording suits you better).

  27. The biggest amenity of all that open space accrue to property owners, who benefit from an artificial scarcity of land.

    I suppose it all worked out since Solano County and the San Joaquin Valley were willing to take the sprawl off the Bay Area’s hands.

  28. The biggest amenity of all that open space accrue to property owners, who benefit from an artificial scarcity of land.

    I suppose it all worked out since Solano County and the San Joaquin Valley were willing to take the sprawl off the Bay Area’s hands.

  29. Property rights aren’t what you wish they were, they are what they are.

    If you want to change the system to fit what you wish it was, change it. Koch tried that at the national level then when that failed, he tried at the state level. And that failed too.

    A change in zoning doesn’t change property rights, it changes the risk and reward.

    Best,

    D

  30. who benefit from an artificial scarcity of land.

    First, a good chunk of that open space is not economically buildable due to slope and seismic.

    Second. More importantly – and something the typical homeowner is more aware of than an obscure ideology’s frame – is that every agent derives a hedonic benefit from nearby natural amenities. All agents derive a psychological benefit from nearby nature. Only new and potential property owners are at a disamenity when they wish to consume the housing good. Even fewer make decisions based on a narrow ideological frame, and only in Gullyvornia where Prop 13 caps tax. In states that aren’t similarly kneecapped, agents still want the open space even though they don’t benefit monetarily (as their taxes go up, and it keeps out undesirables due to increased property value).

    That is: fear and loathing of taxation and creation of artificial scarcity by market transactions motivates only a tiny minority.

    And lastly, it is their community, and I’ll wager the community doesn’tt really care that outsiders pretend outrage over their open space.

    Best,

    D

  31. Ok then. The planners have the power to manipulate exactly which set of risks and rewards are allowed to be pursued by the property owner. Since property owners base all decisions on how to use their property on the risks and rewards available, the planners have the power to determine exactly what happens with the property. Seems like a distinction without a difference, but if that’s what floats your boat, more power to you.

  32. You can wish what you want. Planners don’t willy-nilly change zoning just because they had too much coffee that day.

    Property rights are granted by society. Society changes zoning, either by citizens or developers pressuring politicians or by the public approving proposed changes from planning staff. That is how changes are made. If you choose to believe that this is unlimited power over property owners, good for you.

    But I appreciate you trying another tack. Not surprising, but appreciated nonetheless. As I stated upthread, the author of this piece was wrong when they incorrectly asserted that planners have lots of power over property rights. And commenters on this board were incorrect to believe the author’s assertion.

    Sadly, all too typical amongst a small, isolated minority.

    Best,

    D

  33. Semantics are fun, aren’t they?

    No one is asserting that planners go willy-nilly changing zoning laws, the post, and comments made to the post, were all discussing the effects of these changes and the reasons for why the planners (and citizens of the municipality) would consider or not consider the changes. I don’t ever blame planners, especially in California, for things like this. It’s entirely caused by the initiative/proposition system and the crazy incentives that have been put in place through that system. Planners do have very littler power, I’ll grant you that.

  34. I clearly know nothing about the development area, you say, but don’t say what I got wrong?

    Development south of San Francisco follows the pattern of growth expanding outward from US-101, or its precursor, El Camino Real.

    The city of San Jose itself was established in the 1770s, and it had seen the establishment of what’s now Santa Clara University and San Jose State University in the 1850s. San Jose had also served as California’s state capital for a brief period. The area had long been primed to grow.

    The county also was abundant in rich farmland, and over time, as the area became wealthier, that land was more valuable for housing and business development than agriculture. The former agricultural land became today’s suburbs.

    What about Santa Cruz, Stockton and Modesto then? These prove that development didn’t confine itself to the plain. Well, they became part of the Bay Area commute shed almost by accident. They’re not suburbs per se, as those areas were free-standing cities that were settled independent of the South Bay. That was only a late-stage effect due to sky-high housing costs pricing out newcomers, or a pull from residents of those areas seeking economic opportunities not available closer to home. If housing costs were lower, the extreme commutes would not be worth it.

  35. That’s the basic game every California city must play regardless of its size. And remember that California is rather promiscuous in allowing of local control of cities and service districts (Los Angeles County has four dozen different transit systems serving almost 90 cities!)

    All cities must have functions that lure in sales tax revenues from nonresidents in order to be viable. Even if residents were educated to keep their spending within the city limits, they’d consume more in services than they’d spend, as you said.

    Cities don’t actually want wall-to-wall retail. They want retail near a freeway off-ramp or on the edge of the city limits, the places where they can rope in nonresidents. A good example of sales tax farming is the Los Angeles suburb of Commerce.

    It’s a predominantly Latino working- and middle-class suburb of mostly industrial land use but a small population of 13,000. Also, houses tend to pass down the generations, so there really isn’t a lot of movement in or out this city. What does this tiny city do?

    It collects taxes from industrial uses, but it keeps those relatively low compared with other industrial cities in the San Gabriel Valley and Southeast L.A. County to stay competitive. So, it needs even more money. Commerce has a card club casino, and it redeveloped a former tire factory next to I-5 into the Citadel, a heavily trafficked outlet mall. If that wasn’t enough, Commerce further diversifies its revenue portfolio with a shopping center on Whittier Boulevard called Commerce Center. It’s a strip mall anchored by a market, a Target AND a Kmart, but its location puts it on the border with unincorporated East Los Angeles and Montebello. Those two communities have to only go as far as across the street to take tax money out of their own cities.

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