I've owed a comment on this for a while.
ROMA, the outfit charged with developing a plan for downtown Austin, has proposed a density bonus ordinance for downtown residential development (available here). Austin's had a temporary density bonus program since 2007. ROMA is proposing to make that program permanent.
All things considered, it is not a particularly onerous proposal. ROMA would allow commercial and hotel developments an automatic bonus if they comply with "gatekeeper" requirements, which mainly means complying with the city's urban design guidelines and submitting a detailed site plan for review and approval. ROMA and its economics consultant concluded that the market for office and hotel space will not support a density bonus program.
The big change is for residential. Residential properties seeking an increase from the district's base zoning must not only comply with the gatekeeper requirements but also must pay a bonus on the extra square footage. Half the bonus must be satisfied by providing on-site affordable housing or an in-lieu fee of $10/sf. The other half must be satisfied by providing a "community benefit," chosen from a menu of public space (fine), music venues (dumb), daycare or senior-care (dumber), or "family-friendly," three-bedroom apartments (dumbest).
The "temporary" density bonus scheme retained CURE zoning, a tool for obtaining additional square footage by providing ad hoc benefits, subject to city approval. Some have criticized that exception as an ad hoc loophole for allowing developers to "get away" with providing merely nominal community benefits.
ROMA claims the new scheme will benefit even developers/property owners by providing certainty. But my understanding is that every increase in entitlements since 2007 has been obtained through the CURE exception. There is already a predictable way to get more entitlements, in other words, but developers and property owners have opted for ad hoc. This hardly supports ROMA's claim. No, the evidence is that the bonuses have bite.
I was befuddled by the initial density bonus plan and I'm befuddled now.
A density bonus is a tax on marginal increases in density. Don't be confused by the rhetoric. It is a tax. The plan raises the cost of that last square foot. The claim that it does not raise the price because no one is entitled to an increase in density is a bit of misdirection. The fact is that the city has an unwritten policy allowing increases in base square footage. A property owner who wants more square footage can reasonably expect to get it for the payment of a nominal amount. And it is expectations that determine property values, not the words written in the code. Raising that cost -- frustrating those expectations -- reduces the incentive to build that last square foot.
The density bonus program is a bad idea because extra space downtown is an unmitigated good. We shouldn't tax economic goods; we should tax economic bads.
More space means room for more people. And more is better, at least for downtown. More people means more demand for downtown businesses, a livelier streetscape, more eyes on the street. We should encourage the clustering of people downtown. Density bonuses shunt people elsewhere.
Density is downtown's reason for being. That's why businesses and residents pay a premium to be there. Agglomerations are valuable. While they sometimes generate negative externalities, they do not downtown. Downtown is not a desirable place despite the crowding together of people; it is a desirable place because of the crowding together of people and businesses. Residents like being close to other people and to downtown establishments. Downtown businesses like being close to other businesses. That's why law firms, advertising agencies, government workers, accounting firms and others cluster downtown despite the cost.
Then there's the fiscal benefit. Every extra square foot of downtown space generates gobs of revenue for the city. Another square foot, valued at $400, generates $10 per year in extra taxes -- twice the proposed density surcharge. And that's an annual payment. If we use the city's cost of money as the discount rate, the present value of that square foot to the city, county and school district is $200 or so. Why risk that for a one-time payment of $5?
That extra square foot imposes no cost on the city. Adding twenty residents to a 200-resident project imposes no extra burden on our schools. Nor on the fire department. Nor on our streets or utilities. By contrast, without the extra space, these twenty residents will need twenty homes in the 'burbs (or displace twenty other central Austin households who will land in the 'burbs), with the new infrastructure necessary to support them.
I've heard the argument that all the new downtown development will require the city to make massive upgrades in downtown infrastructure. That's an argument for another day. But we're concerned here with the impact of a marginal resident. How much will that last resident cost the city in addition to the investments it must make anyway? Anyone who blames that last resident (or ten or hundred) for new infrastructure investments is engaging in hand-waiving, not evidence-based argument.
And then there's the argument that the new condos are making downtown less affordable. What people really mean is that the new condos are not adding to the supply of affordable housing. They are expensive (relative to the city's MFI) but that does not imply that they are raising the cost of the existing stock of affordable housing. I suppose they are reducing the relative share of the existing stock of affordable housing (and there is some older, affordable stuff downtown). But many central Austin neighborhoods have little affordable housing. No one is pushing to require property owners in Pemberton Heights or Tarrytown to pony up money for affordable housing. Many of these property owners have seen a windfall of hundreds of thousands of dollars from the run-up in property values during the last decade. I'm not suggesting that we tax those windfalls, but it makes no sense to saddle downtown properties with the responsibility of providing affordable housing while letting relatively wealthy central Austin homeowners -- the main beneficiaries of central Austin's pricey real estate -- off the hook.
Council is scheduled to consider the density bonus program at its next meeting. The Planning Commission at its last meeting recommended deferring a decision for more study. I suspect that the members who pushed for it are not worried that the plan is too onerous; they want to make it more onerous and need time to generate more public opposition to the plan.
I've heard some Council members are growing skeptical of the plan, for just the reasons laid out here. Here's hoping they do the right thing.