Almost no day goes by without news that the city of San Diego has approved yet another new plan that substantially increase densities and/or heights in many parts of the city. That should make us happy. We are very much in favor of increasing densities in appropriate locations. But every time we hear of a plan being approved, we cringe. Why?
For two reasons: First, because the new plans will open the door to huge density increases without any assurance that public facilities will keep up with development so that the “quality of life” in these neighborhoods will not get worse as the community grows. For example, this is what the recently adopted plan for Kearny Mesa tells us about implementation: “Public improvements described in this Community Plan vary in their scope. Some can be provided as private development occurs. Others require significant capital funding from city, state, regional, and federal agencies and funding mechanisms, such as impact fees for development.” That’s all.
Please note the vagueness. And please note that “significant” funding is needed from all levels of government that are, at this economic juncture, practically bankrupt. The zoning changes that markedly increase development density will take place automatically, but funding for public facilities, such as schools, parks, and libraries, is left to an uncertain future.
The second reason we cringe has to do with a lost opportunity – an opportunity for what is called land value recapture – that could bring additional public facilities and/or affordable housing to the city’s communities. Land value recapture is based on the observation that plan approvals – a public action – considerably increase the value of land by increasing what can be built (e.g., higher-density housing). It stands to reason that some of the increased land value should be recaptured by the public in the form of community benefits in the affected neighborhoods.
Land prices have increased very fast in the recent past, making housing much more costly. In his new book, “A New Model for Housing Finance,” local economist Murtaza Baxamusa points out that between 2012-2017 land prices doubled in California, because of land-use changes and other reasons, contributing significantly “to the doubling of housing values.”
Who benefits is the landowner. To be clear: The value of the land has increased as a result of the City Council’s approval of the plans, not because of any landowner activities. That is why John Stuart Mill, the classical economist, referred to such increases in land value as “unearned increments.” He contrasted, with disdain, the productive industrialist and the idle landowner, whose land increases in value regardless of any input he or she might make. Similarly, we could contrast the landowner and the developer, who in producing homes provides a much-needed societal good.
How does land value recapture work? When a developer considers buying land for a prospective development, the price of the land is negotiated with the landowner. If additional community benefits are required to take advantage of the additional densities – thus increasing development costs – the developer will have to bargain with the landowner for a lower price. The landowner will continue to come out ahead, but not as much as without land value recapture.
For example, Keyser Marston Associates, in a report assessing the impact of increasing inclusionary housing requirements in the city of San Diego, found that in other cities they generated reductions in “land value as high as minus 30%.”
So there you have it: If land value recapture were implemented, some of the land value increases resulting from public action (e.g., plan changes allowing increased density) would be returned to the public in the form of additional fees or amenities paid for by the developer. Land value recapture should be based on economic analyses, first to assess the increases in land values resulting from the increased densities and, second, on the basis of the results from the first analysis, to establish the feasible amount of additional fees (for parkland for example) or affordable housing, to be required (based on the various density increases allowed on each parcel in the plan area).
With so many plans already approved, the city of San Diego has missed many golden opportunities. But there will still be community plan updates and specific plans in the future. For example, the University community plan that is being updated right now is considering large density increases, especially in employment-generating land uses. Mayor Todd Gloria and the new City Council should seize the tool of land value recapture to help maintain the quality of life in San Diego’s communities as they densify and infill.
Nico Calavita is professor emeritus in the graduate program in city planning at SDSU. He is an expert on land value recapture and author of “Value Capture” and co-author of “Public Benefit Zoning.” Brian J. Curry is past executive managing director and national practice leader of the Residential Development Group at Cushman Wakefield, a global commercial real estate company.