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Sunday, November 21st, 2010

Building Suburbs that Last #5 – Redevelopment Insurance


Photo Credit: Flickr/julianmeade

This is another in a periodic series about building sustainable suburbs properly so-called.

To recap, I consider the suburban decay facing inner ring suburbs across America, especially those of the 60’s and 70’s vintage built on a modern suburban pattern, as one of the key challenges facing urban leaders over the coming decades. I outlined a lot of the case in my review of the book “Retrofitting Suburbia”.

Why is this happening? One big reason cities tend to fall into decline is that they accumulate huge unfunded liabilities, and those liabilities attach to the territory, not the people. This lets one generation of residents rack up huge future bills, then skip town to leave the next generation or those not lucky enough to get out with the bill. It’s the equivalent of being able run up a huge balance on the civic credit card, then pawn the bill off on someone else.

Imagine if you will if your house worked this way. Your mortgage, your credit card debt, etc. all happened to be chargeable not to you, but to whomever was living in your house. If you simply stopped paying and moved elsewhere, you’d be relieved of all those debts. Sounds ridiculous, doesn’t it? But that’s exactly how municipal debt and unfunded liabilities work. It is a huge incentive for politicians and residents to vote for immediate gratification with the bill – infrastructure costs, pensions, redevelopment costs, or what have you – pushed out 25-30 years. Then these people or their children simply move to a greenfield and start the process over again.

I suspect this, perhaps more than any other force, is what drives urban and suburban abandonment in favor of newer towns.

For various reasons I won’t go into here, I don’t think it would be a good idea to have municipal debt follow people. So we have to find ways to prevent people from accruing unfunded debts and off balance sheet liabilities in the first place. My previous installment was about using more robust impact fees to ensure new development pays for the infrastructure it needs on a fully loaded basis. As with that one, my idea here is more of a concept to explore, not at this time a specific policy recommendation that could be implemented.

This one deals with redevelopment costs. Let’s imagine the life cycle of a strip mall. A developer comes in proposing to build a strip center full of big name retailers like Best Buy. The town council salivates over the prospect of a commercial taxpayer. They dicker about cosmetics such as facade materials. Then it is approved and the center built.

The developer goes into this with a certain business case lifespan – say 25 years. That’s a long way off, so for a long time, everything’s great. But eventually the next exit or two down the interstate opens up. And there are even newer malls. Some of those big name retailers move to the new mall. Maybe the owner invests in a refresh, or maybe he just sells it to some downscale operator.

Over time, the tenant mix changes. There are fewer upscale chains and more pawn shops. The mall is considered dowdy. It is old and run down and was cheaply constructed to begin with. And the format of the center is obsolete. The incomes in the area are stagnating or declining as too. And the infrastructure that was new 25-30 years ago is wearing out. Maybe stores close, leaving empty “grayboxes”. Maybe the owner demolishes them to save on taxes while holding onto the weedy remains as a speculator. Or maybe there are still some tenants, and not necessarily bad ones, but not the full range of neighborhood services the town would like to see.

The town as a problem on its hands. Where once it was locked into a virtuous circle as growth led to more growth and more increased taxes and fixed costs spread over more assessed value and income, it is now in a decline cycle. It’s taxes are going up as the tax base erodes and people leave. Many of the remaining residents are older and there is not a new generation waiting in the wings. Suburban decay has arrived.

What is this town to do? Many have fought back with subsidized redevelopment schemes such as new town centers or new urbanist developments or other flavors du jour, but that costs money – money the town doesn’t have. You have to buy out landowners looking for a big payout, you probably have to pay to scrape the site, and you have to give incentives to the new person to come in. It has a major redevelopment liability that has come due. To address it, the town has to borrow from the future, a risky bet that development will pay off enough not just to repay the bonds, but also add to the civic coffers. Some towns aren’t even in good enough condition to do that.

If you think about it, we spend virtually all of our time in the planning process thinking about the upfront side of the development. We charge impact fees to mitigate road needs from new development and such. We go through an extensive review process to make sure there are no adverse impacts on the surroundings. But we spent little time thinking about the back end of the project, of its end of life, and the types of negative externalities that occur there as people can simply abandon homes and malls and go elsewhere.

I suggest we need a lot more thought and more policy tools for managing the end of the life cycle – particularly around acquiring title if necessary and paying to get sites ready for redevelopment. We need to think and plan about the full lifecycle of what we are building up front.

One idea is to require developers to insure against redevelopment costs. That is, landowners and developers should be required to make some financial provision to indemnify municipalities against these types of costs. It could take all sorts of forms such a performance bond or even a credit default swap, but I like to think of it as redevelopment insurance.

Think about it, we don’t let people own and operate cars without liability insurance. Why let them operate strip malls that could fail and leave the town stuck with a bunch of grayboxes while the developer and retailers skip to the next exit down? Imagine if developers had to get insurance to cover any redevelopment costs from a third party in an open, competitive private market. We know the companies writing these policies would be keen to not lose money on them. It would also allow distinctions between good developers and bad ones. And it could encourage provisions such as guaranteed ongoing investment to make sure strip centers and such stay relevant.

The beauty of this is that the development could not be sold until the purchaser could also manage to get such a policy, sort of like title insurance. This would tend to prevent companies from scrapping developments by selling to sleazy operators – and make sure that the original developer could not try to easily wiggle out of his obligations.

This policy would be triggered when certain criteria were met. This is where it gets dicey. How could criteria be specified in advance? And what entitlement might the town have in terms of exercising these rights?

I won’t profess to have the answer. Unlike some of my other suggestions in this series, this one is again more of a thought experiment to show how we need to take more seriously the end and well as the beginning of developments, especially in suburban settings where preferences changes and older formats rapidly become obsolete. This is something I’d like to see academics and policy makers give more thought to know. (I believe some places have already started experimenting with this).

More Reading on the Suburbs

Review: Retrofitting Suburbia
End Property Tax Collection in Arrears

Building Suburbs That Last Series:
#1 – Strategy
#2 – New Urbanism and Parcelization
#3 – The Mother of All Impact Fees
#4 – Supporting Home Based Businesses

10 Comments
Topics: Public Policy, Strategic Planning, Sustainability

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10 Responses to “Building Suburbs that Last #5 – Redevelopment Insurance”

  1. Everett says:

    I’ve been having a similar thought lately, but I don’t have your intellect or planning experience to be able to articulate it with any brevity or tact. I generally agree with you, but think it should be broader in scope. Homeowners can be just as guilty of neglecting property as any business, though up till the recent bubble, it was never on the same scale.

    Another reason why I like this idea, is that your plan also protects against speculators that pick up trashed properties and just sit on them (I see this a lot in Detroit). Sadly, this just prevents rather than stimulates development.

    Great post. I really hope to see this go somewhere.

  2. Alice says:

    Loading more fees on development does not make good redevelopment happen, it just deters anything from happening. I can’t see why a developer should be responsible for what happends 20 years from now; it’s not as though anyone can predict that! If the development thrives, the developer doesn’t get any more money, so why should they pay if the development tanks?
    Cities have plenty of tools to prevent crap development, if they would use them. (The best one is a form-based code.)

    Shifting to a land tax is a better way to deal with those who land-bank trashed properties; the Lincoln Institute has lots on info on how this works.

    It’s not a lack of available tools, it’s political will to use them.

  3. Pat says:

    I like the philosophy behind this. However, it would seem that bankrupcy would protect the developer – as they create independent companies for each project anyway. I would like to see more focus on embracing long term plans, rather than setting them aside whenever asked to do so. We also elect Mayors who appoint boards to make decisions – none of whom are trained to look at what effect their actions have on the next generation or two. It is a crapshoot as to how many of them look beyond the next election.

    I’m interested in this line of thought, even with all that said.

  4. Thanks for the replies. Speculative posts always bring out controversy to be sure.

    The costs associated with redevelopment liabilities are there regardless. The only question is who pays them. Naturally, just as with direct subsidies, jurisdictions compete for business, so these things do have an impact. But they should still be valued as subsidies.

    Pat, my idea is that this is purchased from a third party carrier, just has how construction companies purchase surety bonds. (Or bond issuers pay for ratings or get bond insurance or home buyers get PMI, etc). Part of the nature of the transaction helps protect against bankruptcy.

  5. Pat says:

    Well, in that case – what parameters would suffice to call for a payout on the insurance? Occupancy rate? Total abandonment? Types of businesses occupying the spaces?

    Perhaps this approach can be applied to abatement clawback provisions, as well. It would put the agreement under more scrutiny (as you suggest for developments here) and offer a more solid protection for the public.

  6. Marty says:

    If one could estimate the redevelopment cost that will eventually be imposed on the municipality, just create a special fund for that purpose and add the necessary revenue to the real property tax millage rate.

    That assumes that all types of development have a similar redevelopment cost NPV as a percentage of EAV. If that is demonstrably not the case, allow for an adjustment in the EAV.

    Conceptually, very easy. The hard parts are calculating the future redevelopment cost, which is not well-defined or predictable, and summoning the political will to levy a tax now for a need so ill-defined and far in the future.

    In an area like Chicago with many small jurisdictions, this could be a competitive disadvantage and would probably have to be regionalized.

  7. Dave says:

    “I can’t see why a developer should be responsible for what happends 20 years from now; it’s not as though anyone can predict that!”

    Why not, Alice? If I were to make a decision that potentially could cause/enable the destruction of the community two decades later… why shouldn’t I be instructed to mitigate against that now? Especially given that we have 80+ years of experience in seeing how suburbs decay, it’s pretty predictable now that the new Walmart next store will likely eventually become a decrepit empty big box in a generation (or sooner).

    Why shouldn’t developers have to build buildings that can withstand a human lifetime of wear-and-tear and reuse? It’s what builders did in prior centuries… witness the historic buildings in the US that date back to 1776… or those in the UK that date back to 1276.

    It’s a cop-out to claim that developers cannot build decent structures that are reusable and/or sturdy enough to withstand decades/centuries of use. Just because developers want to throw up things cheaply and quickly doesn’t mean that that practice is ideal or desirable for the people who are left when that structure is collapsing and/or is made “obsolete” by the new format of the newest fad in retailing.

  8. Abe says:

    Planners do spend a lot of time at the upfront side of a development, but there are others that spend time on the back end side of the development. An overall competent team is required to ensure that an area or development retains value and vitality over time.

    For example, the Chamber of Commerce supports the local businesses in the strip center, the Economic Developer assists with tenant replacement and/or recruiting qualified owners to buy the center, Code Enforcement applies penalties with the property is poorly maintained, the Building Inspectors make sure the tenants meet health and safety requirements, and a good property owner works to ensure the continuing value of the development.

    When the team is ineffective, and/or prevailing economic conditions worsen, an area may suffer from disinvestment. When the team is effective, has good leadership and conditions allow, even crummy buildings can be productive and last a very long time.

    It would be difficult for a planner or a developer to anticipate and control for all of the potential challenges and opportunities that might affect the life and form of a particular building over two or more generations. One cannot prevent bad things from happening with just plans and incentives–there has to be follow up as well.

    Perhaps it would be more productive to prepare a set of tools and policies that makes it easier for a building to be reused or redeveloped if it’s intended use is no longer viable. For instance: building codes that are conducive recycling more parts of a building, building and subdivision designs that are adaptable to changing needs, or allowing building designs that permit the owner to dismantle or alter the building with less environmental and financial impact.

  9. [...] Part five in an interesting series of “Building Suburbs That Last” (also check out the previous [...]

  10. [...] mentioning the huge unfunded liabilities that one generation lays in place for the next one to pay. They write: It is a huge incentive for politicians and residents to vote for immediate gratification with the [...]

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