Density bonuses: Raising density's price

If you are interested in downtown development, pay attention:  There is growing support for adopting a system of "density bonuses" downtown.  The idea has been recommended by the Density Bonus Task Force of the Austin Design Commission, which was created by City Council for the purpose of . . . recommending a system of density bonuses.

The notion is simple.  Every property comes with a base "entitlement" to a particular height or amount of floor space.  Downtown developers routinely ask for additional entitlements so they can build larger, more profitable projects.  These additional entitlements are worth a lot of money to the developer or property owner.  Density-bonus proponents argue that the City can and should ask developers to provide a community benefit in return -- affordable housing, space for the arts or non-profits, transit funding, or the like.

For example, Central Business District zoning imposes a floor-to-area ratio (FAR) of 8-1.  Developer Tom Stacy needed and got a 12-1 FAR limit for his proposed 700-foot tower at 5th and Congress.  Spring, a slender, 400-foot tower under construction at Third and Bowie, needed a waiver of the 120-foot height limit in the Downtown Mixed Use district.  There is no question that the right to build taller -- and thus denser -- projects is valuable.

Over the last couple of years, the City Council has considered requests for extra density case by case.  The price seems to have settled between $200,000 and $250,000 worth of community benefits.  That price wouldn't necessarily have to rise under a density-bonus program; the program could simply standardize the compensation, saving transaction costs for everyone.  But the real point is to extract much, much more for the City -- that is obvious from the Design Commission's report and the suggestions of the various groups that want in on the goodies.  No one believes the City is going to all this trouble just to standardize a $250,000 fee.  (The Chronicle has previewed some of the possibilities.) 

So:  Why not make developers give back something in return for the opportunity to build more profitable projects?  It's "win-win," right?

No.  It more likely is "lose-lose."  I'll elaborate in the next few posts, but here is the argument in a nutshell:

1. Downtown condos already provide massive spillover benefits.  These benefits are consistently undervalued by density-bonus proponents.  The stream of extra tax revenue generated by a single downtown high-rise is worth tens of millions of dollars.  And there are many less tangible benefits.
2. Density bonuses cost real money.  Some seem to think that having to provide a "community benefit" is not a real cost because the owner/developer is not entitled to the additional density in the first place.  This is just rhetoric.  The "community benefit" required for a density bonus is just a price, a surcharge on density.
3. If we raise the price of density, we will have less of it.  Really.  We may have a frenzied condo market today, but the density-bonus program will not apply to the many projects that have been approved.  It will apply only to distant projects facing a saturated market.  Many of these projects will be only marginally feasible and thus very sensitive to any increase in cost.  The loss of just a couple of them will swamp the "community benefits" we receive from all of the projects that do get built.  We will be worse off than if we had never adopted a density-bonus program in the first place.

I also think there is an equitable argument.  Don't laugh.  I know that many downtown property owners have seen a windfall from skyrocketing property values.  It's not necessarily unfair to require them to contribute some of that toward the community's benefit.  But lots of property owners -- thousands of property owners -- have enjoyed huge windfalls over the last few years.  It is unfair to saddle a discrete group of property owners downtown with obligations that ought to be broadly shared.

Next post:  Downtown development's spillover benefits.

Postscript:  Some commenters read me to advocate a free pass for additional density downtown.  That is not what I intended -- the post is entitled "Raising density's price," after all, and I pointed out the real point of the density-bonus proposal is to extract much, much more than the City currently charges.   As I'll show later, some proponents (but not all) see a density-bonus scheme as an opportunity to extract millions more in community benefits.  I'm sorry if I was unclear.

I think the City's job is to maximize the community's welfare.  Charging a price for density may help do that if it does not deter development that will provide massive benefits anyway.  The price could simply be to require a developer to minimize the development's adverse impacts on the community.  It could be that and something more.  A density-bonus scheme that requires millions more in compensation, and that does so according to a rigid schedule of charges, will not maximize anyone's welfare.  The case-by-case approach we use now is working just fine, at least for downtown development.

Comments

[Tim]

Can we instead create a bonus to give them money if they actually create a building that's architecturally interesting?

[AC]

I don't know how you could ever reach a consensus on what's architecturally interesting.

I think there is consensus that some design features are bad. A building that does not engage the street. Exposed parking.

The distaste for exposed parking is purely aesthetic, but it's still a real cost to the public. The developer can fix some of these aesthetic things relatively cheaply. That's
a better use of density bonuses, in my opinion.

[M1EK]

You're about to lose me on this one.

As a political necessity, it's not going to work to say "allow anything and don't charge or ask for anything in return". The most obvious winning argument against the paleoliberal position of "restrict density and mandate affordable housing through rent control" is to say "allow density and then harness it", as in, the market demand is there, why not flow it through some magic turbines rather than spend a lot of time and energy trying to futilely dam up the stream? (Forgive the tortured metaphor; it's very clear inside my head).

Now if you're arguing that the benefits should be modest enough not to drastically disincent future development, I'm right there with you, but you can't argue against the entire premise - you're going to lose the entire war there given the state of the electorate.

[el_longhorn]

Ditto what M1EK says. Don't fight a losing battle, make a good compromise.

There is a shock in Austin right now from the frenzied growth. A lot of the old timers who grew up here are still digesting all the changes. They may come around and let Austin continue to grow into a real city, but let them catch their breath and come to terms with it all. Don't try and cram it down their throats based on abstract policy principles.

On the architectural side, I think aesthetic design review would be OK if it was limited to Congress between the Capitol and Town Lake.

[shilli]

Nice post. My thoughts:
http://austinist.com/2007/10/31/the_density_dil.php

I basically agree that we should be encouraging density instead of taxing it, although I have no problem with extracting concessions from developers if it isn't going to keep the project from going forward.

[AC]

I'm not in this to suggest politically feasible solutions. If I were, I usually wouldn't have anything to say because (1) I'm in a tiny minority on most things and (2) I don't necessarily know what's politically feasible.

I'm not trying to be ideologically rigid. I understand that political compromises have to be made and I can accept them (sometimes). But someone ought to point out the underlying economics so we understand what the real issues are and what the compromises entail. That's all I'm trying to do.

For example, some people seem to think that requiring community benefits is solely a question of fairness and that they are costless for the developer since he doesn't have the right to the entitlements anyway. One of my main points is that community benefits are just a price, no matter what you call them or what the initial entitlements are. Once you recognize that, it's easy to see that raising the price discourages density.

The lower the price, the less disincentive. I understand that. When the market is strong, the price that maximizes the City's benefit is probably greater than zero. This is a nuance that I couldn't capture in my summary. I'll address this and others in more detail later on.

[AC]

Thanks for the link, Shilli. I think case-by-case negotiations are normally too costly, but downtown is a special case, since the transaction costs are so low compared to the expense of the project. I agree with you that the case-by-case approach is better here, certainly better than a "density bonus" matrix. All kinds of groups will work to insert their pet interests into the matrix. And since developers down the line will inevitably ask for relief, it will turn into a potent tool for obstructing development. (Is this a political analysis? ;) )

[M1EK]

The idea that pricing density is automatically bad seems off to me. You've given it a pejorative feeling, even if you didn't mean to - when most of us would like to price lots of things. If some people honestly believe their quality of life is impaired by neighbors building tall or dense, why not establish a price for that? Better than outright banning it - and I do think you're astute enough to know which one of "allow anything" or "go back to the old way" would win politically.

[Mitch]

you do seem to hint at alternatives throughout your post. At least, that's how I read it too.
Anyway, I agree with your final POV in the comments section. It is not the responsibility of the critical public to introduce feasible and smart alternatives to a bad or selfish plan. That duty and honor belongs to the leaders with the most time, responsibility and information to execute. It is their jobs! This is not to say that we shouldn't personally attempt to imagine the best solutions to issues that face our community and dialog about them. I simply think we have just gotten used to the fact that our community and governmental leaders, for whatever reasons, are unable to keep the long-term best interest of our city in mind.