Auctioning the Upzone.

AuthorElmendorf, Christopher S.


This Article proposes a new framework for inducing cities with severely supply-constrained housing markets to allow a lot more high-density housing. Local governments that rezone for larger buildings would (with the approval of a state agency) be permitted to auction, and thus profit from, the newly created buildable space. Winning bidders would acquire tradeable development allowances, which developers would have to acquire and redeem as a condition of project approval. We argue that this framework would expand the supply and density of urban housing through three channels. First, it would enable municipal governments to capture much more of the economic value created by upzoning and regulatory streamlining than they do today, which in turn would create new and better opportunities for local political entrepreneurs to assemble pro-development coalitions. Second, our framework would make local upzoning and regulatory streamlining deals more durable than they are today. This is so because local factions whose policy goals align with the state housing agency's would be able to use auction contracts and state law to entrench their policies, and because the after-auction allowance market would act as a shock absorber, reducing allowance prices as necessary to offset regulatory and other shocks to the cost of development. Third, our framework would help to rectify informational asymmetries that presently hinder state oversight of local land-use plans.

CONTENTS INTRODUCTION I. VALUE CAPTURE, DONE BADLY A. The Transformation of Zoning: From Nuisance Prevention to Tacit Value Capture Table 1. Typology of Value Capture Devices B. "Public Benefit Zoning": Value Capture Becomes Explicit C. A Critique of Contemporary Value Capture II. THE AUCTION MODEL A. A Sketch of the Model B. Why Auctions? C. Why State Approval? 1. Screening Local Regulatory Commitments 2. A Check on Strategic Downzoning 3. Answering Legal Objections to "Zoning for Dollars" 4. Standardizing Vertical Property Rights III. AUCTIONS AND THE POLITICAL ECONOMY OF RESIDENTIAL DENSIFICATION A. Auctions in Local Political Context: Facilitating Sticky Upzoning Deals B. Auctions in Statewide Political Context: Ameliorating Informational Asymmetries IV. OBJECTIONS A. Allowance Owners as an Antidevelopment Interest Group? B. Transaction Costs and the Allowance Endgame C. Upzoning Vetopoints D. Cities with Market Power. E. Do Local Politicians Prefer In-Kind Exactions? F. Would the Auctions Be Unlawful? G. Would the Auctions Be Unjust? CONCLUSION INTRODUCTION

This Article begins with a puzzle. Americans who identify as Democrats tend to have very different land-use preferences than those who identify as Republicans. (1) Many Democrats, given their druthers, would prefer to live in dense, diverse, walkable communities; whereas Republicans generally favor the classic suburban ideal of single-family homes on large lots. (2) These personal preferences line up with larger ideological commitments. Urban lifestyles have smaller carbon footprints, (3) and diverse communities are more conducive to socio-economic mobility. (4) Yet (and here is the puzzle) Democratic policymakers have done very little to repurpose for dense urban development land that was zoned for suburban uses long ago. If one could watch time-lapse films of metropolitan development in "red" and "blue" states, one would notice some differences: more suburban sprawl in the red states; more protected parks and open space in the blue states. But the commonalities would be even more striking: since World War II, there has been virtually no intensification of land use in existing residential neighborhoods. (5)

In the early-twentieth century, it was common for developers in booming cities to tear down existing single-family homes and replace them with small apartment buildings. (6) Yet by the 1940s, this pattern was nowhere to be seen. (7) The spread of zoning evidently put an end to it. (8) In city after city, affluent homeowners prevailed upon municipal officials to zone out "parasitic" apartment buildings from their neighborhoods. (9)

Today, despite skyrocketing demand that has pushed the price of new apartments and condominiums far above the cost of construction in the most economically productive American metropolises, (10) vast swaths of the cityscape remain zoned exclusively for single-family homes. (11) Homeowners strongly resist intensifying land use in their neighborhoods, and they wield outsized influence in local politics by voting and otherwise participating at disproportionally high rates. (12) Because of this, the vision of the thriving city as an engine of socioeconomic mobility is increasingly a thing of the past. (13) In today's high-cost cities, the wage premium paid to low-skilled workers no longer offsets the cost of rent. (14)

The problem of the housing-supply-constrained city has very serious consequences for socioeconomic mobility, the environment, and national economic welfare. (15) Policymakers are starting to pay attention, prodded by a nascent Yes In My Backyard ("YIMBY") movement that is challenging incumbent homeowners' prerogative to keep their neighborhoods just as they have "always" been. (16) The YIMBYs have scored some early victories. After a public reckoning with the racist history of single-family zoning, the Minneapolis City Council voted in 2018 to authorize four-unit dwellings on every lot in the city and to allow taller and denser buildings along transit corridors. (17) The state of Oregon followed suit with a 2019 statute that requires larger cities to allow duplexes or fourplexes on all parcels zoned for residential use. (18) A number of other states have directed local governments to allow so-called "accessory dwelling units" in single-family neighborhoods. (19)

No state, however, has made much headway getting cities to allow substantially larger buildings in previously low-density residential neighborhoods. (20) In California, state senator Scott Wiener made waves in 2018 and 2019 by introducing bills that would require local governments to permit four- to five-story buildings within one-quarter mile of a transit stop, but the legislature's Democratic leadership deemed the idea too incendiary and doused it. (21) Similar bills were also introduced in 2019 in Washington and Oregon, but each failed to receive even a favorable committee vote. (22)

This Article proposes a new tool to induce high-cost cities to accommodate more housing: the state-supervised development-rights auction. Local governments that expand their zoning envelopes pursuant to a state-approved plan would be entitled to auction, and thus profit from, the newly created developable space. We argue that this auction model would bring about greater residential density through three channels. First, it would enable municipal governments to capture much more of the economic value created by upzoning and regulatory streamlining than they do today, which in turn would create new and better opportunities for local political entrepreneurs to assemble pro-development coalitions. By way of illustration, our back-of-the-envelope calculations suggest that auction revenues have the potential to double the size of San Francisco's discretionary general fund. Second, our model would give local political actors whose policy preferences align with the state's a simple tool for entrenching upzoning and permit-streamlining policies. Third, the model would improve state oversight of local land-use regulation by reducing informational asymmetries between the state and local governments. (23)

This Article's proposal builds on the work of economists William Fischel and Robert Nelson, and law professors Rick Hills and David Schleicher. A generation ago, Fischel and Nelson concluded that local governments should have more or less unfettered discretion to sell rezoning for cash. (24) More recently, Hills and Schleicher have argued that so-called "transferable development rights" programs can be used to redistribute among landowners upzoning's economic gains, shifting value toward more politically popular landowners and thereby generating public support for otherwise tough-to-sell rezonings. (25)

The common thread running through these scholars' work is the notion that if local governments could capture or strategically redistribute more of upzoning's economic gains, they would allow more efficient upzoning to occur. This Article starts with the same idea, while contributing a new mode of value-capture (auctions), and a couple of new layers to the argument: one about asymmetric entrenchment of land-use policies; the other about informational barriers to effective state superintendence of local regulation.

Part I sets the stage by explaining the cumbersome methods local governments now use to extract value from new residential development. These methods either destroy or fail to collect a good part of the value that upzoning ought to create. Part II introduces the proposal. It explains the logic of value capture through auctions (relative to present-day alternatives), as well as our rationale for conditioning the local right to auction development allowances on a state agency's approval of the plan. Part III discusses the likely effects of our proposal on the local political economy of land-use regulation, and on the monitoring capacity of state agencies charged with overseeing local plans. Part IV responds to objections. The final Part concludes. (26)


    1. The Transformation of Zoning: From Nuisance Prevention to Tacit Value Capture

      The original theory of zoning presupposed that land uses should be separated so that noisome industrial and commercial activities would not interfere with peaceable residential living. Zoning was envisioned as a clear-cut, ex-ante substitute for the unpredictable common law of nuisance. (27) Projects conforming to objective requirements--use, height...

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