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Changing Zoning Laws: At What Cost?

by Carter Coleman

Whether you were for or against the Prometheus project, it’s worthwhile to consider the impact of zoning changes on city revenue.

When should the city stick to its zoning guns? What are we giving away, if anything, when we grant zoning favors? The Prometheus project provided an interesting case study.

The developer claimed that they needed a significant change in zoning laws for a viable apartment complex, and that dropping even one apartment from the total would make the project infeasible.

What if the city told developers they had to obey our zoning laws, and let the property owners pick from the best of the proposals within zoning?

A few of us wondered about that question. We looked at property tax revenue from the proposed apartment building versus building homes within current zoning (as the adjacent 4.5-acre parcel will be).

Apartments versus Homes

It turns out that apartment buildings generate significantly less property tax revenue than do homes or condos. Why is this? It’s because homes and condos change hands at an incremental and much higher rate than apartment buildings.
We calculate that homes built at current zoning would generate $240 million more in property tax over the term of the lease (or a net present value of $33 million). The city gets 16% of this.

The difference between the proposed apartment building and the land developed within zoning is $236 million ($31 million NPV).

Here’s the calculations:

https://spreadsheets.google.com/ccc?key=0AtGiz-w_WBhWdHVjU0UyR0VQbU9Fb21TcVRBR1paa3c&hl=en

A Bird in Hand

Neighbors raised interesting questions about our analysis. One was what I’ll call “A bird in hand is worth two in a bush.” Basically, neighbors argued that the property owners might not follow their economic interest and develop within zoning laws if we didn’t grant them this favor.

However, by following this logic, it would mean that Council would need to approve every project requiring zoning changes out of this fear.

Public Benefit Projects

At the very least, if the value of the zoning favor is known, it could be used to negotiate with the developer on what’s called a “public benefit project.”
Public benefit projects are a common part of horse trading with developers, and can be projects such as parks, parking garages, or amenities to mitigate negative impacts of the development.

Impact to Schools

Although city planning doesn’t include schools in their planning equation, Council decisions do impact school revenues. Why is this? Simply because 43% of property tax goes towards schools. When the City forgoes revenue, so do schools.

43% of property taxes go to schools.

Bottom Line

Somewhat surprisingly, the city does not do this kind of analysis for zoning changes. However, given the amount of revenue the city is forgoing for this one project, it seems reasonable for Council to ask Planning to incorporate financial analysis into decision making as an additional data point. It’s not that difficult. Not to do so we think is fiscally irresponsible.

We thank city Planning and Management who reviewed the model, our logic, and assumptions and supplied valuable input.

A link to the model and more explanation can be found in this article on OMVNA.org.

Carter Coleman has an MBA in Finance and Accounting from Purdue, and a degree in Economics from the University of Illinois, Chicago. He has worked as a financial analyst for companies including IBM and Siemens. Carter is also the Treasurer of the OMVNA, but his views do not reflect the views of the Neighborhood Association.

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