Location Matters

Last call for happy hour at the American Dream. Now who’s picking up the tab?

Not only is the need for more housing critical, but the fiscal impacts of where, how and the mix of what is built will reverberate through a municipal budget for decades.

Last call for happy hour at the American Dream. Now who’s picking up the tab?

Two men looking at an old building facade

Courtesy of Incremental Development Alliance

One thing is certain. It won’t be cheap. The party started nearly a century ago and nobody wants to leave.

The introduction of federally backed mortgages in the 1930s, the return of GIs from WW II in the 1940s and the construction of the federal highway system in the 1950s created a new housing paradigm — affordable homeownership through suburban expansion.

And the country couldn’t get enough.

But this form of growth is highly leveraged. The cost to build and maintain the added infrastructure and public services required by one round relies heavily on the economic growth generated by the next round. And so on. And so on.

Author and planner Chuck Marohn calls it “The Growth Ponzi Scheme” and believes we won’t change our ways until it ends like all Ponzi schemes — badly. “We’re going to try every alternative we can before we give up on this,” he said.

Marohn sees signs that the scheme already may be running on fumes. After bailing out banks during the housing crash, the government is buying up mortgages, forgiving loans and piling on debt. Plus, a massive infrastructure package is in the works that includes billions for deferred repairs and maintenance.

“These are all late-stage tactics that you use to keep what is a nonviable financial approach going,” said Marohn, founder of Strong Towns, which advocates for sustainable approaches to growth and development.

At the moment there are extenuating circumstances. COVID has left the government with no choice but to “prop everything up and hope that it unwinds after we’re gone,” Marohn said.

Yet that still leaves cities, counties and townships with a problem: how to manage the reverberating costs of past development patterns while making better fiscal decisions about the future.

“The fiscal impacts of our choices have really been becoming apparent for at least the last 10 years,” said Glenn Kellogg, interim director of the Incremental Development Alliance (IDA). “The best thing we can do is to stop making the same mistake.”

The IDA helps municipalities take matters into their own hands to break the cycle of unsustainable growth. The IDA’s tag line: “No one is coming to do this for you.”

Conventional developers typically prefer to work with large sites, which are usually more plentiful in the open spaces on a community’s edge. Incremental development involves small projects on neglected property within the existing built environment where roads and utilities are already present.

Three story brick building with balconies

Photo courtesy of Smart Growth America

Incremental development relies on the one-two punch of removing regulatory barriers such as restrictive zoning and encouraging a grassroots approach to development — housing and commercial — that does not depend on attracting conventional developers who require the economies of scale associated with large sites.

“We’re suggesting a different strategy. We teach people how to be developers in their own neighborhood,” Kellogg said.

More cities than not are dotted with empty or derelict buildings in need of repair or replacement, but no one is likely to see them as a good bet unless they live in the neighborhood and stand to benefit from what happens down the street.

The IDA offers workshops, boot camps and speaking engagements that prepare people to become citizen real estate developers and show cities how to support them as they strengthen their neighborhood one lot at a time.

Meeting with several people sitting at a round table

Photo courtesy of Smart Growth America

Although each project is small, together they offer an opportunity for cities to grow in a fiscally sound way by making more efficient use of their greatest resource.

“Their biggest asset is the land that they have and the value of that land,” Kellogg said. “When you look at the assets of a municipality, typically most of their revenue is coming from real estate taxes.”

But not all land is equal in that regard. The most valuable land in terms of generating taxes is usually within the existing built environment near the municipal center versus the less dense spaces near the edge. Not only does land in the center generally yield more taxes per square foot, it costs less to provide municipal services there because the infrastructure already exists and doesn’t need to be extended outward to reach new development.

That’s the beauty of incremental development. By making neglected properties productive again, it helps communities fill gaps in the existing built environment and maximize the return on infrastructure that is already in place.

“Part of what you end up paying for as a municipality is really the linear foot of the infrastructure that you have to provide — roads, sewage lines, utilities and emergency services,” Kellogg explained. “Being able to squeeze more out of every linear foot you’re having to service is obviously going to be more efficient.”

That’s always been true, but it was not part of the equation that drove most post-war development. “We’re only now at a point where people are coming around to realize the fiscal implications of development patterns,” Kellogg said.

The IDA has helped cities from Albuquerque to Atlanta introduce their citizens to its grassroots development strategy. South Bend, Ind., enlisted the IDA to help residents of declining neighborhoods take advantage of zoning updates and revive their neighborhood, lot by lot.

Homes in South Bend neighborhood, IN

Photo courtesy of the City of South Bend, IN

South Bend is famous for being the home of the University of Notre Dame, but in most respects is no different than many other Rust Belt Cities wounded by the loss of suburbanization were a “perfect storm for hollowing out” some of South Bend’s older neighborhoods, said Tim Corcoran, the city’s director of planning.

Historically cities used annexation to fuel growth, but people are realizing that continued annexation on the edge no longer makes financial sense, Corcoran said. Plus, state law now limits the power of Indiana cities to grow in that manner.

“Your only real avenue for growth is infill in the places that have been left behind,” he said.

But infill is easier said than done. Modern zoning codes impose restrictions that didn’t exist when older neighborhoods were originally developed. And financing can be difficult to secure because construction costs can exceed appraised value in declining neighborhoods.

But appraised value doesn’t account for the deep roots of many longtime residents who are not ready to give up on their neighborhood. “We have a lot of people who still live there that want to heal their neighborhood,” Corcoran said.

The answer is to put two-and-two-together and empower residents to drive infill development on their own.

Even if conventional developers thought infill was feasible, an ingrained bias toward suburban development patterns might not produce the kind of projects residents want and could make it a less affordable place to live. “It’s going to take people within those neighborhoods to make the changes they want to see,” Corcoran said.

South Bend is proceeding under the premise that a journey of 1,000 miles begins with a single step. “There’s a real power in doing things in small pieces,” Corcoran said.

The city started the ball rolling six years ago by making small changes to the zoning ordinance in places where the old regs were obviously outdated. Then the city improved the design and readability of the ordinance to make it easier to understand. Along the way, parking requirements were reduced, accessory dwelling units allowed and the whole package was given a stress test.

The stress test was based on an analysis of the depth, width and other characteristics of lots throughout South Bend and showed the city whether the zoning changes would support the desired development. “We wanted to make sure there were no hidden rules and regs that could hold somebody back,” Corcoran said.

The slow-but-steady journey culminated in 2020 when the city council approved a new zoning ordinance. Now the focus is on putting it into action. To jump start the process, South Bend is creating shovel-ready building plans that comply with all city regs and include specs and costs. “All you have to do is check that the zone is right for your building type and off you go,” Corcoran said.

The final step: working with the IDA to give people the skills and knowledge to rebuild their neighborhood and help the city grow through infill development that doesn’t require new infrastructure.

“The roads are already there, the pipes are already in the ground, so maximizing the utilization of infrastructure in neighborhoods that have seen a lot disinvestment over the last 50 years is really important,” Corcoran said. “Every city should be thinking about that.”

Joe Minicozzi of Urban3 Design is an authority on the subject. He specializes in using tax data to help municipalities visualize the relationship between their land-use policies and their finances. Minicozzi points out that in many cases, the disinvestment goes back a lot farther than 50 years.

Redlining — the formerly sanctioned policy of denying mortgages to borrowers in minority neighborhoods — began in the mid-1930s and its legacy lives on in many cities where those neighborhoods became mired in a long, steady decline. An analysis of one such neighborhood in Kansas City revealed that the city lost $30 million in taxes over a span of 80 years due to vacated property.

“And that’s just one neighborhood. Imagine what was [lost] citywide,” Minicozzi said. Compounding the fiscal damage from redlining is the fact that the city still needs to support the infrastructure in those neighborhoods. Minicozzi urges cities to seize the opportunity these neighborhoods present to make their infrastructure pay for itself.

A variation on that theme plays out in Lafayette, La., where Minicozzi analyzed the relative costs and revenues associated with various neighborhoods. He found that a historically segregated inner-city neighborhood actually outperformed the outlying suburbs.

Although affluent, the suburbs are net negative in terms of cash flow — largely because of their sprawling nature, but also because they are located in a flood plain and require an expensive storm water system. Although very poor, the inner-city neighborhood is net positive because it is more densely developed and requires less infrastructure per house.

“It’s not rocket science,” Minicozzi said.

But making more efficient use of existing infrastructure is not the only thing municipalities should be thinking about on the road to fiscal sustainability. They also should be maximizing the productivity of their taxable land. And that requires a different mindset when making land-use decisions.

“You have to understand where your most valuable land is,” said Kim Pontius, CEO of Aspire North, a REALTOR ® association based in the northern Michigan municipality of Traverse City, the largest city in the region.

Six years ago, the association obtained a grant from the NATIONAL ASSOCIATION OF REALTORS® to explore that very question. Uneasy about Traverse City’s fiscal future, they teamed up with the city and neighboring Garfield Township to hire Minicozzi.

The glaring issue in Traverse City is the ratio of taxable to nontaxable land. Less than half of the land in the city is taxable. The rest — an airport, community college, schools, parks, open space, etc. — is exempt.

“We have way too much land that is taken out of productivity” in terms of directly generating tax revenue, Pontius said.

Increasing Traverse City’s amount of taxable land by reducing the amount of exempt land is not a viable option. Instead, said Pontius, the city needs to squeeze the most out of its existing taxable land in order to generate the revenue needed to sustain itself in the long run. Otherwise, city residents will face higher and higher taxes and growth will come in the form of sprawl.

Minicozzi’s study revealed where the greatest opportunity exists: the city’s downtown core. While only 47 percent of the overall land in the city is taxable, 77 percent of the land in the downtown is taxable.

Not every city is stuck with an overall shortage of taxable land, but, most municipalities — including Traverse City — find that their most valuable land in terms of tax production per acre is in their downtown cores and secondary activity centers. This is where growth delivers the biggest bang for the buck — but only if those areas are allowed to grow.

A construction area in Traverse City, MI, near 5-story apartment buildings

Photo courtesy of Incremental Development Alliance

“You are sealing your own fate if you say you want to leave things the way they are,” Pontius said. “The conclusion of the study .... was that unless we could agree to build something higher than what the zoning limits allowed, we were dooming ourselves to a future of ever-increasing taxes to foot the infrastructure.”

Unfortunately, for those who favored greater density in the downtown core, the city commission made it harder, not easier, to grow vertically. Under pressure from activists, the commission required that any buildings exceeding the existing cap of 65 feet must be approved by voters through a citywide referendum rather than through the old process of seeking a variance from the commission.

“Something’s got to give,” Pontius lamented, “and if you don’t like sprawl, your mind has to start working in three-dimensions and not two.”

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A free, semi-annual magazine published by NAR, On Common Ground presents a wide range of views on smart growth issues, with the goal of encouraging dialog among REALTORS®, elected officials, and other interested citizens.

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