Monday, August 21, 2017

Stephen R. Miller on Contemporary Issues in Teaching Land Use: Question 3:  Teaching the Economics of Land Use Regulation and Ethics

While updating the recently released ninth edition to the casebook Land Use and Sustainable Development Law, the four co-authors engaged in numerous spirited discussions about teaching land use. We wanted to open this discussion to others to get their comments and thoughts as we continue to rethink the teaching of this important subject. Each month on this blog, we will introduce a new topic relevant to teaching land use. The topics will loosely follow our casebook chapters, and we are now up to Chapter 2. We'll explore each topic through four blog posts, one from each of us. We hope you find the discussion enriching, and encourage you to contribute to the conversation in the comments section below or off-line.  -- John NolonPatricia SalkinStephen Miller, & Jonathan Rosenbloom.]

Contemporary Issues in Teaching Land Use

Question 3:  Teaching the Economics of Land Use Regulation and Ethics

by Stephen R. Miller

There is so much to say about economics and land use—and much of it beyond the traditional tropes of law and economics analysis—that it can be hard to know how to introduce the subject without going down the rabbit’s hole.  The casebook provides a rich hypothetical for investigating these concerns.  I believe there are three important lens through which students must begin to see the economic consequences of land use decisions and I focus on these.

The project sponsor.  In considering the project sponsor, I try to get students to see two important economic issues.  First, the project sponsor typically engages in development to make money.  This is not always the case; many nonprofits build buildings and their purpose is to have a location that suits their mission.  But most development in the U.S. occurs to either develop property, or otherwise enhance its value. That ability to create value is both limited, and often enhanced, by traditional land use regulation.  Further, sometimes project sponsors impose additional private land use controls, through CC&Rs, to enhance value.  So, while land use controls might initially be seen as limiting value (and they may do so in a broader economic sense), for many project sponsors, sometimes land use controls—public or private—can also increase value.  Second, I think it is important for students to be begin to think about how project finance effects the economics of projects.  Real estate development is among the most money-intensive industries there are, and that means that project sponsors are often constrained in what they can do not just by regulations, but also the requirements of their creditors, many of whom demand significant potential profits—upwards of 20% or more is common—in order to lend.  That puts another type of pressure on the developer that is often hidden from sight.  The system only works if there is profit; while that can be lucrative for the project sponsor, it is also a limitation on what the project sponsor can build that is not just about the sponsor’s individual financial situation.  Project finance often has as much to say about what a project turns out to be as land use controls.  To that end, I encourage students to learn something about project finance if they are interested in representing developers.
The neighbors.  Much of the property rights debate right now is awkwardly circumscribed by a contrived focus on just the project sponsor.  It is as if no one else exists in the world in many of these arguments.  But, of course, the people that live around the project sponsor also have property rights of their own, and beyond rights, they have economic interests.  Real estate is often the largest single investment of any family; leases are often the largest single commitment of any company, especially for non-manufacturing companies.  As a result, a failure to think about the economic effects of a project on neighbors is really a bizarre framing that belies how most land use fights play out.  Indeed, the reason so many land use battles become battles is just how much people have at stake economically.  
The local government.  I find that most of my students have not had considerable exposure as to how land use development affects the finances of local governments.  The issues involved here are too numerous to be fully expounded in one class, but they can be introduced early.  Notably, a reminder that local governments are uniquely land-based jurisdictions in an era when we live across jurisdictions from where we work, and we purchase from retailers that are states away through the Internet.  Local governments need to balance budgets, and that means they must, to some extent, engage in the “fiscalization of land use.”  Those that don’t pay attention to the economic impacts of land use decisions will almost certainly face financial constraint that could be enduring for decades to come.  But how much should local governments explicitly make choices about land use to maximize the public fisc?  If we know that apartment buildings tend to bring families with children, and those children need schools, is it okay for a city to simply say that it cannot afford apartments because it cannot afford the schools?  What if the local government is in a state that has severely limited the ability to raise money through property taxes and has constitutional limitations on bonds?  What about police, ambulances, and fire?  And if those local governments are circumscribed in their ability to raise funds, is it ethical for them to require HOAs and private land use controls that make individual developments economically liable for improving private roads, placing sidewalks, and replacing the water sewer when it breaks?  
By introducing these three lens through which to think about economics, students can then begin to add on additional knowledge and perspectives as they go.  Indeed, as Chapters 3 and 4 will show, economics has even changed the fundamental character of how zoning is done and brought about strange legal beasts like “floating zones,” “planned unit developments,” and “development agreements."
Finally, I also try to get students to think about whether economics fully explains the way land use works today.  Of course, the answer is "not entirely."  We prioritize all kinds of non-economic interests through public and private land use controls that matter to us.  Aesthetics, a good place to raise a family, the strange alliance between land use and educating children, historic preservation, the preservation of sensitive environments:  these are just a few.  For all of the importance of economics in land use, how important is maximizing value to how we live and think about the city we want?  These issues will play out over the course of the semester, and introducing them early gives a rich framework to the rest of the course.

The  ninth edition of Land Use and Sustainable Development Law, is now available for the 2017-18 academic year.  Feel free to contact any of the co-authors if you would like to discuss the book--or just teaching land use law in general.

Land Use Book Image

Previous posts in the Contemporary Issues in Teaching Land Use series

Question 1: Teaching the Crossroads Where Nuisance & Zoning Meet [Rosenbloom | Nolon | Salkin | Miller]

Question 2:  Teaching the 1916 NYC Zoning Ordinance and the Standard State Zoning Enabling Act [Rosenbloom | Nolon | Salkin | Miller]

Question 3:  Teaching the Economics of Land Use Regulation and Ethics [ Salkin | Nolon | Miller | Rosenbloom ]

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And just to throw in something else: most discussion of zoning assumes that "property values" are sacrosanct and should be continually increasing. But a homeowner's "property value" is a renter's rent or a new buyer's home price, which means that ever-rising property values means ever-rising levels of homelessness, and ever-rising levels of people escaping high-cost regions to move to low-cost regions, thus taking an ax to national economic growth.

Posted by: Michael Lewyn | Aug 21, 2017 8:08:17 AM

These are good points! Residential affordability, in general, could also make a nice way to introduce the topic of economics in land use at this particular time.

Posted by: Stephen R. Miller | Aug 22, 2017 11:34:31 AM