Risky Business: Sharing the Wealth Means Sharing the Risks


Pay to play: Why should the City get access to private profit when they won’t take any risks?

Proposals for incentive and inclusionary zoning in South Lake Union seems like Seattle City government playing politics with the balance sheets of private businesses. Upzones create private value, the argument goes, so the City should share some of that value and use it for affordable housing. More profit is possible with additional building, but what about the risks? Profit is a reward for successfully taking risk. Is the City willing to share the risks too? If it wants to tap into the profit stream created by new development, the City should put up some cash like other investors rather than fining developers for success.

Don’t get me wrong; I love taxes! Taxes pay for public goods, redistribute wealth, and create disincentives for stuff we shouldn’t be doing, like sprawl (this last point is a central point of Dan Bertolet’s latest post). Taxes are one thing, but when the City tries to create public benefit from private investment without taking any of the risk, it’s not fair. If the City wants to “extract value” from private development at South Lake Union then they should put some money into projects being proposed there.

Instead of having City Council staff standing on the sidelines speculating about just how much money is going to be made from increases in development capacity being sought by developers in South Lake Union, how about getting in the game by buying a share of the projects. I can’t think of a better way to get more control over what happens with the upzones than if the City itself was an owner or shareholder.

As an investor the City would have to take on some risk. If there is too much housing built with additional zoning, then the City would lose it’s shirt along with other private investors — but the price for units would be cheap. But if demand for new housing stays high, the City would make it’s money back. And guess what, it could contribute its share of profits to reducing rents in the project. It’s a win-win!

The City has lots of power when it comes to land use, but trying to squash private profits from private investment to make political points doesn’t make sense. It also doesn’t make sense to tax something that’s good for the public, like additional housing. If the City really wants to influence housing price they should allow as much housing construction as private investors think would be profitable, then let those investors make a profit.

Imagine if the “incentive zoning” concept was applied to other businesses in the city. Since the City gives out a business permit should it share in the profits of a restauranteur, in addition to other taxes and fees, and require an affordable menu? Should a pet shop have to create a certain number of affordable pets for children? How about affordable hot dogs? If the City wanted to accomplish these things they’d regulate them or create a tax or fee structure, but they wouldn’t game the profits of local businesses. Housing is different and more important, but is 80 percent of Area Median Income (AMI) really the income band in the city that needs help with housing costs?

One last point that I made in a comment on Bertolet’s post at Citytank:

The longer we try to suppress developer profits to prevent them from “laughing all the way to bank” we’re simply preventing new housing, attenuating supply which drives up prices and keeps them high, and, in the end, transferring wealth to the people who got here first at the expense of future residents of the city.

The real value extraction — and social injustice — is making things more expensive for families who want to live with us by keeping housing supply low and fining developers for trying to build more of it. Increasing costs of housing and limiting how much gets built siphons money out of the pockets of newcomers into the pockets of homeowners already here by increasing the value of existing homes and developable land. That doesn’t seem fair either, does it?

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1 Response to Risky Business: Sharing the Wealth Means Sharing the Risks

  1. MarkSJohnson says:

    The City has made a few small investments in South Lake Union (Mercer, the park, the streetcar), and plans to invest a few millions more on infrastruture, transit, and other improvements that the market will not provide. The reason Seattle took that risk was that there is an opportunity to create a new kind of downtown neighborhood, with a intensity and mix of uses unlike anywhere else in the city. The office core has virtually no residents, and the retail core has few. Belltown has lots of housing, restaurants, and bars, but not so many jobs. South Lake Union would be all commercial if there were no land use regulations, but the opportunity is there to make something unique, where housing and jobs are concentrated on the same blocks. To get that to happen, the City is contemplating raising height limits. The argument here seems to be that the right to build to the sky already belonged to these propoerty owners and the City is squashing their initiative by placing conditions on building taller buildings. To the contrary, the public built the infrastucture that makes the density of these towers feasible. Try building a highrise without a wastewater treatment, or storm sewers, or a park nearby, or adequate roads, or transit.
    It is only fair that the public at large have a say in who should benefit from all those risky public investments (the ones the market generally finds have too little return), and if that includes benefitting working people who do not make six figure incomes, or more, well, that seems fair, too.

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