Zoning for Dollars

From day one, zoning has been about money. When it debuted in the United States in the early 1900s, the concept of banning noxious industrial and other uses from residential areas was fundamentally about enhancing property values, and thereby the local tax base.

"When industry got trucks and could go anywhere, they were invading residential areas," said William A. Fischel, professor of economics at Dartmouth College and author of 2015's 'Zoning Rules!' "When they brought down the value of houses the real estate tax value went down. That was one of the reasons towns across the country adopted zoning."

Today, however, a growing cadre of experts makes a compelling case that zoning, as it is typically practiced these days, threatens to rob current and future generations of prosperity. And more and more localities are pursuing the fiscal and economic benefits of an approach to zoning and development that looks more like that of 100 years ago.

In the early days of zoning, relatively few Americans had cars, so development codes usually allowed shops and other daily commercial uses to remain close to residential areas. But by the prosperous period of rapid suburbanization following World War II, cars were becoming ubiquitous. In the burgeoning suburbs, zoning evolved toward a radical separation of uses — houses from apartments from shops from offices from industry — that could only function if most people could drive from one to the other and park their cars at each stop. In a bid to enhance the value of single-family homes, over time, jurisdictions began to mandate minimum sizes for lots and houses and restrict apartments to separate zones. As central cities lost out to the suburban exodus, meanwhile, many adopted suburban-style zoning with separated uses and plenty of parking.

The resulting development pattern is a fiscal time bomb, said Christopher Zimmerman, vice president for economic development at Smart Growth America (SGA). First, the spread-out nature of it means longer water and sewer pipes, more roads and other infrastructure. And while some — but certainly not all — of the installation costs may be paid by developers, the long-term maintenance and replacement fall squarely on local taxpayers. "Very few places do the up-front accounting for that life cycle," Zimmerman said. Smart Growth America conducted an analysis of 17 studies that compare different development scenarios and found that walkable, mixed-use development costs onethird less for upfront infrastructure and saves an average of 10 percent on ongoing delivery of services.

Not only does it cost more to serve and maintain spreadout areas, the tax revenue from low-density development typically fails to cover those costs, and commercial property too often loses value over time. Urban-style development generates 10 times more tax revenue per acre than conventional suburban development, according to the SGA study.

Harvesting more tax dollars per acre

"A city is a defined area with only so many acres. You should look at that land like a farmer looks at production, and think about the tax yield per acre," said Joe Minicozzi, principal of Urban3, LLC, a consulting firm that creates fiscal models for cities. He cites as an example from his home base of Asheville, N.C., a Walmart on 34 acres that generates about $6,500 an acre in property taxes, compared to an old downtown department store that has been redeveloped as condos and retail, which yields more than $600,000 an acre. "A Walmart [executive] told me, 'We want buildings to depreciate quickly, 15 to 20 years max.' It is the commitment to a place of the lifespan of a cat." Even considering sales tax, the downtown yield is several times more per acre. But under conventional zoning in most places, downtown-style multistory, mixed-use development is off limits. "Zoning makes all these rules," he said, "and the result is the low-yield Walmart is legal and the high-yield denser, traditional downtown stuff is not." His advice to local jurisdictions: "Wipe the big box zoning off the books. And make the stuff that's more potent for you a lot easier to do."

"What is the market demanding?" asked Zimmerman. "More urban places and smaller dwelling units, though we continue to build large units that don't sell. We see in every metro area people willing to pay a premium for walkable development and proximity to transit. But we have all these regulations that mitigate against that." Zimmerman, who served 18 years on the county board in Arlington, Va., noted that the walkable nodes developed around Metro rail stations there have been so popular that, though they represent 10 percent of county land, they are "producing more than 50 percent of the revenue."

Scaling up the economic payoff

"At every scale there is an economic benefit to zoning that allows denser development," said Peter Katz, a former city planning director and a key figure in the new urbanism movement. At the municipal level it can not only save on infrastructure costs and yield more per-acre revenue, as noted above, but walkable town centers are economic attractors today in a way that office parks and the like are not. The regional economy also benefits "when people spend more on a house and less on cars," he said. "House-related spending circulates multiple times when they are furnished, sold, or have work done, and they appreciate so that greater household wealth is accumulated. Cars merely depreciate, and they abuse the road infrastructure." At the household scale, zoning giveth and taketh away from household finances: while predictable land use and development helps maintain property value, conventional zoning depletes household wealth when the resulting development pattern mandates long drives and maintaining multiple vehicles.

One of the first metro regions to perform a comparative analysis of growth scenarios based on fiscal outcomes was California's Sacramento Area Council of Governments (SACOG). In the early 2000s, SACOG's blueprint scenario planning estimated that the Sacramento region's taxpayers would save at least $16 billion on infrastructure costs by focusing most new growth at higher densities in existing communities. "Sacramento's six counties are traditionally sprawling areas, and the surrounding areas are pretty conservative," said Kate Meis, executive director of the Sacramento-based Local Government Commission. "It was the economic argument that moved the region."

At the municipal scale, Fresno, Calif., is taking a new approach to zoning driven by economic and fiscal concerns. A city of about 520,000 located 190 miles east of San Francisco once derided as a "poster child of suburban sprawl," Fresno in 2016 overhauled the suburban-style development codes to steer development downtown, with the goal of making it easier and cheaper to do projects in the area where the city wants them. In addition to introducing a "form-based code" that illustrates the kinds of projects that can gain immediate approval, the city completed environmental impact reviews to establish where and how development can proceed, Meis said. "If a proposed project checks off all the boxes specified in one of their zoning codes, it can be approved over the counter, with no need for additional review."

Some suburban locales are getting into the act of zoning and development reform, too. In anticipation of the potential arrival of a commuter rail station, in 2004, the Austin suburb of Leander, Texas, partnered with the regional transit agency, Capital Metro, to study the possible impact of transit-oriented development (TOD). In a comparative analysis of an urban design vs. current development patterns they found that an overlay of walkable urban zoning would create double the tax base at buildout, $2 billion versus $1 billion. The city then created a partnership with the major landowners to develop a code and master plan to entitle 2,300 acres for development to accommodate 30,000 people. Though slowed by the onset of the Great Recession soon after, the Leander TOD has attracted Austin Community College's San Gabriel campus and St. David's Emergency Center, with plans for a hospital. Last year the city approved $15 million in tax increment financing (TIF) to help pay for infrastructure for Northline, a 115-acre town center for the TOD zone. The funds will be repaid by the added increment of new tax dollars from the development. "The city was persuaded because by 2031 the TIF will be paid off and the tax yield will be huge," Minicozzi noted.

Zoning as Fate

Absent a rail investment to drive the conversation, officials in the suburban town of Fate, Texas, — about 30 miles east of Dallas — nonetheless have begun to take a hard look at whether the low-slung, far-flung style of development their codes would call for is fiscally prudent. A town of 12,000 in 2017, Fate was adding 1,000 residents a year and city administrators began to wonder if growth would cover the life-cycle costs of all the new infrastructure. In researching the topic, Fate City Manager Michael Kovacs discovered a number of pertinent discussions on the website for Strong Towns, whose founder, Charles Marohn, writes and speaks frequently on the topic. Kovacs pulled together a series of videos that he shared with elected officials.

The city began to adopt a new approach to zoning, planned unit development and capital budgeting that sought to increase tax revenue and prepare for long-term maintenance and replacement of roads, water and sewer and other infrastructure. Administrators developed a key tool, described in a 2017 webinar: Calculating the expected annual tax revenue for various densities of development and then looking at the number of years it would take to earn enough from those properties to replace associated infrastructure. In one analysis, downtown mixed-use retail with apartments above and townhouses produced enough revenue to replace the infrastructure in 9.5 years. For an existing local subdivision, the figure was 32.4 years. "They do an analysis of fiscal return for every development now," said Daniel Herriges, an urban planner who is content manager for Strong Towns. "It's not a rigid criterion for approval, but it is made public and becomes the basis of a conversation."

Fischel, author of "Zoning Rules!," notes the success of a Fresno or of Sarasota, Florida's Rosemary District in harnessing economic development through changes to zoning and other codes and processes, but adds a cautionary note. "Zoning is one of those necessary but not sufficient tools," he said. "Zoning is a kind of fence — you can put up a fence and say one thing can come in and others not. You can't necessarily make things happen. You can keep the goats from the sheep, but you can't make the livestock show up."

And for every successful city that is expanding opportunity with updated zoning, others are catering to existing homeowners opposed to density by using zoning as a barrier that keeps newcomers away. When zoning squelches new housing in proximity to jobs, Fischel said, it contributes to suburban sprawl, retards the ability of workers to move to jobs-rich regions, fosters wealth inequality and ultimately suppresses the American economy.

In Fischel's view, every city that has not done so recently, should consider updating their zoning codes, which typically still look a lot like they did in the middle of the last century. "If you want to build a good, modern city you can't use a code that is 40 years old and is different from the city we want to build," he said.

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