Barriers to Fine-Grained Urban Development

Ok, so here’s the long-delayed compliment to these posts on LA density and mid-rise development, regarding the problem of enabling smaller footprint projects and different development models. The size of a development’s footprint was raised by Neal Lamontagne in criticism of mid-rise developments that take up the whole block, but really, it is just as applicable to high-rise development.

I agree that this is an important issue, for many of the same reasons I outlined for supporting mid-rise development in general: it opens the door for a wider variety of people to try their hand at land development. That means more new ideas, more development models, more sensitivity to local market conditions. If you ask me, communities are much more empowered to control their own future when many people in the community are potential developers than when a handful of the most active community members try to control a handful of developers through a handful of city planners.

So why don’t we see more fine-grained development? Let’s explore a few causes. They are somewhat varied, but they mostly come down to the fact that impediments to building have fixed components and variable components, so the larger the project, the greater the number of units upon which to distribute the fixed costs.

High Up-Front Costs

These costs are related to up-front project activities like doing traffic studies. Obviously, there’s an incremental cost too, since larger projects will have more impacts, but all activities have some mobilization cost – an amount that will be incurred no matter how small the actual task.

Here’s a simple analogy. Suppose it costs you $100 to rent a delivery truck for a day, plus $10 in gas for every delivery trip you make, and that you make $20 per delivery. Obviously, you need to make at least 10 trips to break even, and many more trips than that to turn a decent profit. If the fixed costs of $100 were to go down, a delivery business making fewer trips would be feasible. Likewise, high fixed costs for development make smaller projects more difficult, because there are fewer units amongst which to distribute the costs.

Cities have direct control over some fixed costs, through things like permitting requirements and fees. Many cities charge a fee for plan review, often on a basis of how many units or square feet there are in the development. The per unit fee may decline as the number of units increases, because the city also faces fixed costs in doing the reviews. The result is that larger projects are saddled with smaller costs per unit, so they take less of a hit to the bottom line.

Permitting requirements also favor larger projects. Once you are required to do an EIR, for example, you incur some pretty large costs, which encourages you to go for the biggest project possible. In addition, due to the high fixed costs of doing an EIR, it is much more logical to try to permit one large block-sized project than four quarter-block-sized projects. The requirements to do things like EIRs create a market incentive to consolidate properties into the largest possible projects, so that the hassle and cost of going through the permitting process will only be incurred once.

Perhaps the most underappreciated fixed cost that cities have control over is time. Time is money. If you are trying to build a project, all of the time you spend in the permitting phase is time that you are paying architects, paying engineers, paying lawyers, paying planners, paying property taxes, and bringing in no revenue. For large developers, this is a nuisance – the cash flow from other completed projects will keep you going. If you are a small-time developer, who has a harder time getting financing anyway, delays in permitting and legal processes can be a death sentence. Indeed, there is a long tradition in urban planning of simply waiting until recalcitrant actors exhaust their resources and fold.

If cities want to encourage more small-footprint development, they need to do all they can to eliminate these barriers. That means increasing the size and variety of projects that can be built by entitlement. It means processing applications quickly. And it means eliminating many of the pointless studies required of developers.

Zoning

Zoning requirements act in two primary ways: one, they specify how much of the property can be developed through setbacks, height maximums, and floor-to-area (FAR) ratios; two, they may also specify the minimum size of development for a particular use, e.g. a minimum square footage for a one-bedroom apartment. Setbacks and height maximums may be fixed (e.g. setback always 20 feet) or they may have fixed and variable components (e.g. 5% of lot width but no less than 5 feet).

These rules make it more difficult to configure buildings on small sites. Setbacks take up a larger percentage of the site on a smaller property. Minimum square footages might make a site more difficult to use. For example, if the minimum apartment size is 500 SF, and the maximum FAR on the lot is 1350 SF, you couldn’t build three apartments. Maybe the market for three 450 SF apartments is there, but you won’t get to find out.

Now of course, you could ask the zoning board for a variance. The ability to grant variances means that municipalities can have almost limitless power over development – set very restrictive zoning, and arbitrarily grant variances to whoever you feel like giving them to. Variances take time and money, and there’s no guarantee you’ll get one.

Parking Requirements

If you’re laying out a parking lot, you need space for the aisles and the entrance/exit. If you have a multilevel structure, you need space for the ramps. Now, a huge garage might need more than one entrance/exit, and rarely you will see more than one set of ramps up and down between levels. But up to a certain size, one entrance/exit and one set of ramps will do. The larger the size of the parking lot, the smaller the percentage of total space lost to entrances/exits, ramps, and aisle ends.

This means you can accommodate the required parking (and developers rarely build more than the minimum) more efficiently on a larger lot. A block-size development with two entrances/exits and sets of ramps loses less space than six small developments on the same block. For small parcels, it might be geometrically impossible to meet parking requirements, or might require resorting to expensive treatments like robotic car lifts.

The doubtful wisdom of parking minimums has gotten a lot of attention from people with a much bigger platform than me, like Matt Yglesias, so there’s no need to go into detail here. At the very least, cities could eliminate the requirement that parking be provided on site, which would open up the market for efficient use of existing parking capacity and allow for developers of small properties to meet requirements by providing leased spaces elsewhere.

Elevators

Current regulations provide an exemption from elevators for very small buildings: anything two stories or less, and anything with less than 3000 SF per story. Once you hit the threshold of needing an elevator, though, it makes sense to go as big as possible. Again, it makes financial sense to build the whole block so you can distribute the costs of the elevators on more units.

Banks and Insurers

Banks and insurers drive residential construction towards full-block apartment buildings constructed by big-name developers the same way that they drive commercial development towards suburban office parks and malls. It’s a model they have great familiarity with and a ton of data on. Numbers to plug into their spreadsheets; lots of similar deals in the past to make investors feel warm and fuzzy. You want to build a plaza with a Target and a Ralph’s? Done. You want to build a few hundred SFRs? Done. Wanna build a four-story building with half the first floor as retail, no pre-lease, and limited parking? Slow down.

Note that this is one of the reasons that immigrant communities are often forced to self-finance; banks are uncomfortable with development models that those communities want to bring with them, and that prevents good ideas from spreading. For example, many supermarkets in Asia have a food court inside, and you’ll find this model in K-town and other Asian immigrant neighborhoods. It’s a very successful model, yet for the most part, it hasn’t been adopted by the major supermarket chains.

Promoting Fine-Grained Development

Now, some of these things can’t be changed. Cities have limited power to coerce banks into changing lending practices, and city financing schemes like tax subsidies tend to have undesirable side effects. It would be pretty heartless to argue for going back to a time when people with disabilities couldn’t access housing or shopping. But a lot of what worked 100 years ago would work today:

  • Reduced requirements for up-front studies
  • Fast processing of permit applications
  • Liberalization of zoning schemes
  • Elimination of parking minimums
  • Investment through local or regional financial institutions that are more responsive to local conditions

In other words, like many urban development issues, making progress on this issue is simply a matter of getting out of our own way.

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