Some revenue-strapped local governments and smart growth advocates are finding common ground on the subject of how new development can be more fiscally productive for the city or county budget. Planners are being advised to pay more attention to the revenue per acre (property tax primarily) of a property rather than its total revenue generated, because that signals a project that produces more revenue for every acre of land consumed. Studies from places as diverse as Asheville, North Carolina; Sarasota County, FL; and nine towns in four western states show mixed-use, higher density development in compact, walkable places like downtowns dramatically outperforming typical suburban development types like malls, big box stores and single-family housing.
What planner or budget director wouldn’t want more of the stuff on the right hand side of this chart? (Click on it to read the labels.) As a wake-up call to communities about the fiscal value of their downtowns, this sort of research and analysis is invaluable. It has similar value as additional support for developing new walkable, mixed-use places with higher densities than might be typical for a suburban locale. The financial crisis, recession and debates about government spending and debt have put financial issues to the forefront in public discussions, so being able to marshal such data to make the case for smart growth (or whatever you want to call it) is a good thing.
But as a planner with an undergraduate degree in economics who has spent much of his career dealing with the financial and real estate aspects of planning, I have a few observations about the substance and implications of this sort of analysis. Now that it is gaining national attention and being proposed as a tool for evaluating proposed development projects, the revenue-per-acre concept deserves some critical review.
Thoughts on the Theory
First off, some thoughts about the basic math and economics involved. If the focus is on revenue per acre, then obviously the more building space you construct on a parcel the more property taxes that parcel will generate. That means taller buildings and denser development. But there are natural limits to how tall and how dense you can build, and where you can build in such fashion. Just as trees don’t grow upwards forever, buildings can only go so high and downtowns can only expand so far according to a variety of factors determined by the local context. Tall buildings cost more to build, and thus must command higher prices in the market to be economically feasible. Downtowns, major employment centers, and other locations where people and businesses really want to be are going to be more valuable places to build, and thus able to support more-intense development and a greater range of uses (see Central Place Theory). Development that is farther out from these places uses more land and spreads out more for a reason: the land is cheap enough to do so. This is why a Target store on the Near North Side of Chicago can have three stories when the typical suburban store will only have one, and the one-story store has a big parking lot while the three-story store has a three-story attached parking garage. The density, intensity, and construction type reflects the land value and market demand.
So revenue per acre is a useful observation, but only up to a point. There are places where higher revenue per acre can be achieved, and those are the places we should protect, reinforce, and potentially expand using appropriate planning policies, and guide development toward using economic development tools. And there are places that are not as valuable, which host less-intense development and provide particular characteristics that are demanded in the market. Single-family neighborhoods are a good example of such places, as are the retail centers that serve those neighborhoods. These places may not produce as much revenue as a five-story mixed-use building on a per-acre basis, but they can produce as much revenue as the market will bear and are valuable components of a community’s tax base.
Turning the Diagnosis into a Prescription
The fiscal problem of suburban sprawl, as outlined in compelling fashion by the folks at Strong Towns, is that we have spent several decades building primarily lower-valued places, neglecting our existing higher-valued places, and not building enough new higher-valued places. And the infrastructure required to serve these lower-valued places is expensive enough that we are not getting enough return on our public investment. A community that consists mainly of single-family homes and strip shopping centers may not have enough revenue coming in to cover its capital costs when the time comes to replace its roads and utility infrastructure – and some towns are starting to have trouble already.
Looking at revenue per acre has helped us to diagnose the fiscal problem with our growth patterns, but we need to be cautious and thoughtful in how we turn that diagnosis into a prescription for better fiscal health. A deliberate policy to maximize the value of new development risks pricing out people who can’t afford it, because more-valuable property translates into higher home prices and commercial lease rates. A well-intentioned revenue strategy risks becoming a new form of the fiscal zoning policies that some communities have used to keep out low- and moderate-cost housing, rental apartments, and other uses deemed fiscally undesirable.
Planning for Fiscal Health
This is a new area of planning that is still developing its theoretical foundation and analytical tools, so it will be interesting to watch it evolve. The fact that we are having this discussion at all is a good sign of progress. My initial thinking is that broad-based, rigorous, and integrated planning that incorporates these fiscal and economic issues will be the best way to go. Calculating the public ROI of individual projects and reviewing them on that basis seems too close to fiscal zoning, and ignores the cross-subsidization between places in a community and the value that they create collectively. In a healthy community, downtown supports the outlying neighborhoods and vice versa – it’s not every property for itself. I’m more inclined to the approach laid out in this white paper that uses property value as an indicator for measuring neighborhood quality of life, and then directs financial resources to neighborhoods on a competitive basis. That way you are prioritizing your capital projects and other spending where it is most needed and most effective to improve the quality of life, which increases property values and ultimately revenue generation. Rather than prioritizing expensive development projects, let’s build better places where every property becomes more valuable.
–Dave Stamm, Cities That Work Blog