Austin Contrarian

Did Simon Properties comply with the Domain incentive agreement?

2008-10-09T18:21:00-05:00

City staff says it did. Here is the presentation (pdf) it made to Council last week.

It struck me that the direct subsidies to the Domain retailers were actually quite paltry. The incentive agreement required Simon to put $1 million into a fund to assist small local businesses locate at the Domain. Simon spent the money assisting five businesses design and construct interior improvements. The incentive agreement did not otherwise require Simon to pass on its subsidies to the retailers.

This raises a point I've been meaning to make for a while. I understand why local businesses get upset when the city spends tax dollars to encourage the development of competing businesses. I'm skeptical, though, that incentive agreements like the Domain agreement benefit specific retailers in the long run. Retailing is a viciously competitive business, which means retailers are very sensitive to the rent they must pay. When a bunch of new retailers flood the market, they lower profits across the board; those lower profits ultimately must be passed back one way or another to the property owners. Simply imagine central Austin adding a dozen large strip malls. The extra supply of retail space would require existing property owners to lower their rents to keep their existing tenants from defecting, and would attract new retailers who couldn't have cut it at the old rents. We would end up with more retailers earning less revenue but paying less rent.

Unless they target subsidies directly to specific retailers, incentive agreements like the Domain agreement merely enlarge the supply of retail space. In this regard, they operate much like the vertical mixed use ordinance which mandates street-level retail regardless of demand. (There are still vacant ground uses in several Guadalupe mixed-use developments.)

I suspect that the people who have the most to fear from retail incentive programs like the Domain's are not the retailers themselves, but the owners of existing retail space.

Ivy League cities

2008-10-09T15:57:33-05:00

Sometimes it's good to play devil's advocate just to keep yourself honest. This is one of those posts.

I've long advocated that rigid land-use controls hurt cities by keeping them too small. This is especially true of "superstar" cities like New York and San Francisco. These cities are so expensive, in part, because they make workers more productive and offer special amenities. Thanks to increasing returns to scale, both productivity and amenities increase with growth*, which makes it important to accommodate new residents. As I've put it before:

New development often has important social benefits that are not captured in the developer's pro formas. A steady supply of new housing keeps homes cheap, or at least keeps home prices from spiraling upward. New development means more room for more people. More people means a larger, deeper market that permits more specialized retail, restaurants, music and arts. More office space means more room for firms and workers to cluster together; these cluster make both firms and workers more productive. A software developer will be more productive in Austin or San Jose than in San Angelo because a lot of learning takes place just by hanging around with other people in the same trade.

Rigid land-use regulations in superstar cities raise housing prices; these high prices sort out low-skilled workers. But even low-skilled residents are more productive when they live in a superstar city. Looser regulations would allow superstar cities to accommodate more low-skilled residents. While an influx of low-skilled residents would lower average productivity, so what? Less-skilled residents would still see higher wages, while higher-skilled residents would enjoy a more diverse and specialized set of amenities and the enhanced productivity provided by a deeper labor pool. Everyone would win (except for incumbent property owners who would see lower rents).

But perhaps there is an argument that the original set of high-skilled workers might lose from looser regulations. Could allowing an influx of lower-skilled workers lower their productivity?

I'm thinking of the difference between a state university and an elite university. I got my undergraduate degree from an SEC school. There were smart people there, but I spent most of my time hobnobbing with people who, frankly, had little interest in academic work. I went to an Ivy League law school, where the situation was reversed — anyone I sat down to talk to had something interesting to say. My education was not limited to the class room; it took place all the time. In fact, I learned more from my classmates than I ever learned in class. (State universities understand this, which is why they create honors colleges to give their best students frequent contact with one another.)

Perhaps the elites in the superstar cities sense it is better to surround themselves with a uniformly high-quality workforce. They want to spend their time with other elites; letting in lots of less-skilled workers would introduce so much static, just as if Harvard were to throw open its doors to anyone with a half-decent high school transcript. In other words, an influx of less-skilled workers might dilute the experience for the high-skilled.

As I said at the beginning, I'm playing devil's advocate. I think this is probably wrong. What matters is being close to other people with the same skill set. A software developer benefits from having a lot of other smart software developers around; a musician benefits from having a lot of other good musicians around. Adding more software developers or musicians who aren't quite as skilled shouldn't dilute this benefit because we city-dwellers largely control whom we interact with. Firms, in fact, segregate themselves by quality all the time. Deepening the labor pool simply can't hurt.

I think the superstar cities are making bad choices. But it's useful to ponder every once and a while whether their residents understand something the rest of us don't.

*Yes, there eventually are limits to increasing returns to scale, principally due to congestion. I don't think cities like San Francisco or New York (or Austin) are anywhere close to these limits, though. But that's a topic for another post.

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Time bandit

2008-10-02T17:43:31-05:00

Benjamin Franks Bradford

Blogging will be light for the next couple of days.

More on the SDS charter amendment and Mueller

2008-10-01T13:44:21-05:00

See this summary (pdf) by city legal staff. The memorandum identifies several Mueller financial incentives threatened by the proposed charter amendment:

Project costs (including infrastructure) partially funded by City sales tax revenue collected from project retail development;

Sales tax committed to repay long term bonds ($12 million to date);

Reinvestment of land sale proceeds into project finance fund;

City must make annual payment for park maintenance;

City must make annual payment for pond maintenance;

City to grant up to $25 million in "account credits" to pay for fiscal postings (subdivision improvement guaranties);

Other incentives include developer use of city owned facilities, city funded storage, environmental clean-up, and future public financing commitment.

And the conclusion:

Subject to potential legal defenses, including constitutional issues, some of the city's commitments under the MDA [master development agreement] seem to meet the charter amendment's definition of a prohibited "Financial Incentive."

While staff suggests the MDA "possibly" can be amended to avoid charter amendment problems, Catellus must agree to any amendment. It's unclear why it would agree, though, unless it receives the compensation it was promised. And since the point of the charter amendment is to prohibit financial incentives in any form, it is unclear, at least to me, how the city could provide Catellus the bargained-for compensation simply by restructuring the financial incentives.

Charting home price volatility

2008-09-30T16:52:28-05:00

See this neat graphic from the New York Times illustrating the volatility of home prices in 20 U.S. cities.

Compare San Diego:

with Dallas:

Some housing markets deserve less blame than others for the disastrous bubble.

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Where should Austin's affordable housing dollars go?

2008-09-30T14:30:58-05:00

A couple of weeks ago, the Statesman reviewed Austin's progress in distributing the 2006 affordable housing bond money. To date, Austin has distributed about $11.8 million of the $55 million we voters approved.

The city is distributing the money to local non-profits. That's a good idea, or at least can be if the city does it right. Competition among non-profits should give us the most affordable housing for the money. (For this to work, of course, the city must turn some of them down.) And turning the non-profits loose should yield some innovative ideas.

I do have a problem with the city's priorities, though. There don't seem to be any. Here are some of the projects the city has approved to date.

Apartments in South Austin for people with disabilities;
Energy-efficient homes in East Austin;
A Habitat for Humanity subdivision in Northeast Austin;
The purchase and renovation of a single home for a 50 year old woman with disabilities;
Efficiency apartments for the homeless
Buying down affordability in a mixed-use project on South Lamar.
A children's shelter.

The city seems to be chasing four or five goals at once: (1) providing transitional housing for the homeless or the near-homeless; (2) promoting home ownership for the low-income; (3) providing disability-accessible housing for the disabled; (4) promoting energy-efficiency in low-income housing; and (5) promoting mixed-income in mixed-use developments.

I don't like this scattershot approach. The city should try to get the best return on its bond money. It may be counter-intuitive, but this means that all the money should go toward the same goal.

In principle, the city is in the same position as a consumer who has $5,000 to apply to her debt. She has a credit card balance at 15% interest, a car loan at 8%, student debt at 6%, and a mortgage at an after-tax rate of 5%. While she may be tempted to spread the money around, she should spend it all on the credit card, where it will earn the highest return.

We need to decide which affordable housing investment gives us the best return. And then we should put all of our money toward that investment until our second option begins to offer a better return.

Which investment gives us the best return? Efficiency apartments for the homeless or near-homeless? Home ownership for the low-income? Affordable housing in upscale, mixed-use projects?

It's not even close, in my opinion: Our priority ought to be transitional housing for the homeless or about-to-be homeless. We do more for individual welfare when we move someone from the street to an apartment than when we move someone from an apartment into a house or an upscale apartment in a mixed-use development. And there are obvious social benefits from getting a homeless man off the street, or keeping a mother and young child out of an emergency shelter. Stable housing allows these people to pull things together, to re-enter the workforce or pursue more education. Finally, the market seems to do a pretty poor job of providing this ultra-cheap housing.

Regardless, we ought to identify our top priority. And then we ought to keep investing in that priority until diminishing returns steer us elsewhere.

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Prescient

2008-09-25T20:31:17-05:00

From the Statesman's City Beat:

“Charity” the pig made an appearance at Austin City Hall this afternoon.

Lounging on hay inside a red cage, the 7-month-old Hampshire pig accompanied about 20 supporters of the Proposition 2 charter amendment that will go before voters in November.

The amendment, spearheaded by a group called Stop Domain Subsidies, would ban tax incentives for projects with retail components. It would also stop the city from making tax rebate payments for any existing projects, such as the Domain.

Brian Rodgers, founder of Stop Domain Subsidies, said the 7-month-old Hampshire pig represented “hog developers feeding at the public trough.”

The group said they gathered outside City Hall because the City Council was considering a $75,000 contract with the Vinson and Elkins law firm. The outside counsel would review the effect the amendment would have on the Mueller airport redevelopment.

City officials and outside legal counsel have warned that the amendment, if passed, could snare Mueller because there are retail components of that 711-acre mixed-use development.

Charity the pig didn’t seem to have much of an opinion on the matter. She mostly laid in the hay and snorted a bit. Munching on a strawberry popsicle appeared to be the highlight of her afternoon.

Cute. But our Council members ought to be impeached, then tarred, and then pelted with rotten, salmonella-contaminated tomatoes if they fail to investigate what SDS might do to Mueller. Or to any of the City's other bond or infrastructure commitments, for that matter.

Prognosticator-of-the-week award to M1ek.

The City's really worried about SDS's impact on Mueller

2008-09-24T16:29:06-05:00

Item #34 on the agenda for tomorrow's Council meeting:

Subject: Authorize negotiation and execution of a legal services agreement with Vinson and Elkins, LLP for legal counsel concerning the effect of Stop Domain Subsidies on the Mueller Development, in an amount not to exceed $75,000; and authorize legal proceedings seeking a declaration concerning the effect of Stop Domain Subsidies (Proposition 2 on November 4, 2008 ballot) on the City's Mueller Development existing and future contracts and bonds.

I'm sure that $75,000 is just the first installment.

Barnes' weighted-density stats

2008-09-23T10:40:14-05:00

Gary Barnes' weighted-density calculations (pdf) for 31 U.S. urbanized areas are below.

Our numbers are very close for some cities. I got a perceived density of 33,000 ppsm for New York; he got 34,000 ppsm. Our numbers weren't so close for some of the others. I got 7,716 ppsm for Boston; he got 10,801.

He used 1990 U.S. Census data while I used 2000 data, which surely accounts for some of the variation. Also, as I noted last time, he used traffic zones rather than census tracts as his base unit. Traffic zones are generally smaller than census tracts, and weighted density rises as the as the geographical area is cut up into smaller units.

Gary Barnes on weighted density

2008-09-22T18:20:03-05:00

Gary Barnes, a professor at the University of Minnesota, wrote a paper back in 2001 that calculated weighted densities for a number of U.S. urbanized areas. Like me, he used the term "perceived density."

He used traffic zones rather than census tracts as his base unit. Traffic zones generally are smaller than census tracts, which causes his weighted densities to be somewhat higher than mine for some cities. (Weighted density rises as the geographical area is cut up into smaller units.)

I wasn't aware of this paper when I wrote my posts. If I had been, I wouldn't have spent all that time largely duplicating his work. But I do want to give the man credit. (And I suspect that since he is a professor paid to do this kind of thing and I'm just a lawyer screwing around in his spare time, his work is more thorough.)

Thanks to the Overhead Wire and that other a.c. for the pointer.