Emanuel’s building proposal misses the mark on Chicago zoning reform

Emanuel’s building proposal misses the mark on Chicago zoning reform

While the mayor is right to say that expanding the downtown development area is a “win-win” for developers and poor communities, expanding downtown without the mayor’s proposed new tax on developers and inflexible size restrictions would be a bigger win for both.

On Feb. 18, Mayor Rahm Emanuel announced a new plan he claims will finance investment in depressed neighborhoods. But his proposal to raise revenue by effectively imposing a tax on new downtown developments will restrict building and is likely to increase the cost of housing for everyone. More importantly, it will perpetuate and extend the influence of laws that not only segregate poor and minority communities but were sometimes explicitly designed for that purpose.

Emanuel’s new tax on developers

The mayor’s plan would effectively impose a tax in excess of $10 million a year to be paid by developers who use the limited available space downtown in the most economically and environmentally efficient way.

Currently, Chicago’s developers are constrained by maximum densities – laws that limit the total size of new buildings. Even in the least restrictive areas around the loop, buildings cannot have a total square footage of more than 16 times the area of the lot they occupy. If a developer wants to build higher, that developer must earn a “density bonus,” which allows a developer to build above the established maximum density in return for adding projects such as outdoor plazas and additional parking, or by either incorporating affordable housing into the project or contributing to an affordable-housing fund.

The mayor’s plan would eliminate most of these density bonuses and instead force developers to contribute to a city fund, effectively taxing developers seeking to make the best use of the land. Modeled after the affordable-housing fund, the mayor wants developers to contribute more than $10 million a year to a new fund controlled by his office that would finance projects in depressed neighborhoods.

Because other bonuses would be eliminated, developers of high-density downtown projects would have little choice but to contribute to the fund or build inefficiently small buildings. This increases the cost of housing and rent in two ways. First, the measure would directly increase rents as building owners pass the cost of the tax on to occupants. Second, the plan would indirectly increase rents by limiting the supply of building space, thereby driving up prices across all area buildings. Importantly, the second effect imposes costs on everyone, even if they do not live in a new building. And even when the restriction is imposed on commercial buildings, it can drive up residential rents as well because more of the limited space downtown is now needed for commercial purposes.

Density restrictions harm the least well-off

The mayor is right that compelling developers to finance projects such as underground parking garages conveys few public benefits. Indeed, when most of the benefits are private (as with parking), developers will include them without government incentives if they make economic sense. Furthermore, research into minimum parking requirements found those requirements increase traffic and urban sprawl. But unlike minimum parking rules, zoning bonuses do convey an economic benefit by allowing developers to make better use of the limited available land downtown.

Ironically, zoning bonuses solve a problem the city itself created. Downtown land is used inefficiently because of maximum densities, and that increases the cost of developments. In many cases these laws were originally introduced with the explicit intention of keeping affordable housing out of wealthier neighborhoods. Research from the state of California shows that when governments restrict building, even when the rules only target high-priced developments, it makes housing less affordable for everyone. And reducing density means increasing urban sprawl, forcing residents to live farther from the city and increasing traffic problems.

By effectively imposing a tax on new development, the mayor’s plan would restrict supply in the downtown area. Developers may find that some projects no longer make economic sense, while in other cases, they may choose to reduce density to avoid the tax. Some of those residents will choose to live outside the city, meaning less tax revenue for an already cash-strapped Chicago. It should be recognized that the mayor also wants to expand the downtown zoning area, which would make more parts of the city available to high-density building projects, thus potentially increasing the amount of money flowing to the new fund. But while this would relax an unnecessary regulation, the benefits would still be limited by the tax.

The fund itself also creates bad incentives. Rather than going toward projects that would bring the greatest benefit to residents of economically depressed neighborhoods, the money may ultimately fund plans favored by special interests. In New York this has created perverse incentives for local government to intentionally reduce maximum densities to force developers to pay higher taxes.

While there is no way of knowing how a similar program would operate here, evidence suggests that, to increase their own influence, Chicago aldermen have imposed zoning rules that are more restrictive than the developments they eventually approve. As developers sometimes prefer to avoid drawn-out negotiations, suboptimal development patterns emerge, such as an abundance of expensive single- family homes in neighborhoods where denser housing makes sense.

Overly restrictive zoning in one of Chicago’s most popular neighborhoods, Lincoln Park, has contributed to the population decline in this area. As incomes rise, residents want more square footage, but maximum-density requirements prevent developers from using land more efficiently. Thus, producing bigger housing units requires more acres of development, and poorer residents are forced out of the most desirable neighborhoods. And in fact, when these requirements were originally introduced, planners were often explicit in their desire to exclude low-income people, and especially black residents.

While today this effect may be an unintended consequence of maximum-density requirements, the impact remains the same. By imposing rules that make it harder for developers to avoid unnecessary requirements, the mayor’s plan would exacerbate the problems of expensive housing and the exclusion of low-income and minority residents from certain areas. And while the mayor is right to say that expanding the downtown development area is a “win-win” for developers and poor communities, expanding downtown without maximum-density restrictions would be a bigger win for both.

Magnifying the impact of maximum-density rules does not help Chicago’s poorest residents. Instead, lawmakers should focus on eliminating artificial barriers to housing affordability. Eliminate the downtown density requirements and permit higher densities across the city, especially near public transport. The city should also eliminate minimum-parking requirements that unnecessarily add to urban sprawl. In addition to the environmental benefits, these policies would make Chicago’s most desirable neighborhoods more accessible to all of its residents instead of just a few.

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