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Bonusing downtown housing: an evaluation of goals and means Miller, Robert M. 1982

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BONUSING DOWNTOWN HOUSING: AN EVALUATION OF GOALS AND MEANS by ROBERT M. MILLER B. A. ( Honours ), U n i v e r s i t y Of Calgary ( Calgary ), 1975 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS i n THE FACULTY OF GRADUATE STUDIES School Of Community And Regional Planning We accept t h i s t h e s i s as conforming to the r e q u i r e d standard THE UNIVERSITY OF BRITISH COLUMBIA September 1982 © Robert M. M i l l e r , 1982 In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t of the requirements f o r an advanced degree at the U n i v e r s i t y of B r i t i s h Columbia, I agree that the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and study. I f u r t h e r agree.that p e r m i s s i o n f o r e x t e n s i v e copying of t h i s t h e s i s f o r s c h o l a r l y purposes may be granted by the Head of my Department or by h i s or her r e p r e s e n t a t i v e s . I t i s understood that copying or p u b l i c a t i o n of t h i s t h e s i s f o r f i n a n c i a l gain s h a l l not be allowed without my w r i t t e n p e r m i s s i o n . Department of School Of Community And Regional P l a n n i n g The U n i v e r s i t y of B r i t i s h Columbia 2075 Wesbrook Place Vancouver, Canada V 6 T 1W5 Date: September 2 7 , 1982 i i A b s t r a c t The purpose of t h i s t h e s i s i s to examine the p o t e n t i a l e f f e c t i v e n e s s of a r e l a t i v e l y new zoning i n n o v a t i o n -r e s i d e n t i a l d e n s i t y bonuses. The i n v e s t i g a t i o n examines the extent to which such bonuses are l i k e l y to s t i m u l a t e the development of housing in the downtown areas of l a r g e North American c i t i e s . As a p r e r e q u i s i t e to the e v a l u a t i o n of d e n s i t y bonuses, the u n d e r l y i n g g o a l , that i s , the d e s i r a b i l i t y of more housing i n the downtown, i s f i r s t c o n s i d e r e d . The l i k e l y e f f e c t i v e n e s s of a bonus system i s then evaluated i n l i g h t of the p u b l i c goals to be r e a l i z e d and the expected impact of bonuses on downtown r e a l e s t a t e markets. Chapter One prov i d e s an i n t r o d u c t i o n to the problem area noting t h a t , d e s p i t e the apparent advantages of bonus systems, there i s cause to doubt t h e i r e f f e c t i v e n e s s . Three o b j e c t i v e s are e s t a b l i s h e d f o r the t h e s i s : f i r s t l y , to re-examine the arguments f o r downtown housing; secondly, to evaluate the p o t e n t i a l e f f e c t i v e n e s s of bonus systems, and; t h i r d l y , to d i s c u s s other mechanisms which might complement or r e p l a c e bonus systems. Parameters governing the i n v e s t i g a t i o n ' s scope and l i m i t a t i o n s are d i s c u s s e d . Chapter Two pr e s e n t s , as an example, a b r i e f d e s c r i p t i o n of the bonus system used i n downtown Vancouver. The u n d e r l y i n g g o a l s , and the a n a l y s i s undertaken in d e f i n i n g the bonuses themselves, are d i s c u s s e d . The r e s u l t s of i n t e r v i e w s with a number of l o c a l developers are summarized, drawing a t t e n t i o n to the strengths.and shortcomings of the system i n p r a c t i c e and suggesting i n c o n s i s t e n c i e s i n i t s most b a s i c assumptions and premises. An h i s t o r i c a l p e r s p e c t i v e on the e v o l u t i o n of the downtown core i s presented i n Chapter Three. A t t e n t i o n i s drawn to the i m p l i c a t i o n s of s u s t a i n e d employment growth on the area's c h a r a c t e r and r e s i d e n t i a l f u n c t i o n . The p u b l i c goals and p o l i c i e s which emerged i n response to changing c o n d i t i o n s i n the area are examined, and the u n d e r l y i n g arguments suppo r t i n g the housing goal are c r i t i c a l l y reviewed. I t i s concluded that the arguments are l a r g e l y i n t u i t i v e , emotional and value based, supported by a very l i m i t e d base of e m p i r i c a l evidence and a n a l y s i s . Chapter Four examines the e v o l u t i o n and c o n s t r u c t i o n of " d e n s i t y bonuses " as a mechanism f o r land use c o n t r o l . T h e i r expected e f f e c t i v e n e s s i s then evaluated - in l i g h t of land v a l u a t i o n and r e a l e s t a t e investment theory. I t i s argued that the methods f o r c a l c u l a t i n g bonuses are o v e r l y - s i m p l i s t i c , that bonuses are u n l i k e l y to be s u s t a i n e d over time and t h a t , i n any case, they are most l i k e l y to be captured by o r i g i n a l landowners, p r o v i d i n g l i t t l e or no i n c e n t i v e f o r subsequent landowners. I t i s concluded that these shortcomings s e r i o u s l y undermine the expected u s e f u l n e s s of bonus systems i n s t i m u l a t i n g the p r o v i s i o n of r e s i d e n t i a l development in the downtown. In Chapter F i v e , the goals f o r downtown are re-examined. i v A l t e r n a t i v e s to the p r o v i s i o n of housing as a " s o l u t i o n " to the downtown's " problems " are put forward. A l t e r n a t i v e means of p r o v i d i n g housing are i d e n t i f i e d . Chapter Six o u t l i n e s a s e r i e s of q u e s t i o n s and i s s u e s r e l a t e d to the t o p i c which c o u l d provide d i r e c t i o n s f o r f u r t h e r r e s e a r c h . In the c o n c l u d i n g chapter the i m p l i c a t i o n s of the f i n d i n g s are d i s c u s s e d . I t i s suggested that the arguments f o r housing in the downtown should be .re-considered w i t h i n a s t r a t e g i c c o n t e x t , that i s , in terms of the r o l e of housing as a l e g i t i m a t e downtown f u n c t i o n rather than as a bandaid s o l u t i o n used to r e p a i r the negative consequences of employment growth i n the area. I t i s suggested, f u r t h e r , that the e x p e c t a t i o n that " bonuses " f o r housing might p r o v i d e a p o s i t i v e economic inducement f o r developers over time i s l a r g e l y an i l l u s i o n , and one which should not be promoted without more c o n v i n c i n g arguments f i r s t being e s t a b l i s h e d . F i n a l l y , the need f o r a r i g o r o u s examination and e v a l u a t i o n of such techniques, before and subsequent to t h e i r a p p l i c a t i o n , i s emphasized. V Table of Contents A b s t r a c t i i L i s t of F i g u r e s i i i Acknowledgement v i i I . INTRODUCTION 1 A. OBJECTIVES 4 B. PARAMETERS OF THE ANALYSIS 4 I I . DOWNTOWN VANCOUVER - AN EXAMPLE OF BONUSES IN PRACTICE 8 I I I . IS DOWNTOWN HOUSING DESIRABLE? 20 A. AN HISTORICAL PERSPECTIVE 21 B. DOWNTOWN HOUSING - UNDERLYING GOALS 35 1. GOAL#1 - EFFICIENCY 36 2. GOAL#2 - A " LIVABLE " DOWNTOWN 37 3. GOAL#3 - BROADENING LIFESTYLE OPTIONS 38 4. GOAL#4 - SUPPORTING DOWNTOWN ACTIVITIES 39 5. GOAL#5 - STABILITY IN THE LONG RUN 40 C. HOUSING AS A " SOLUTION " ? 40 IV. BONUSES - IN THEORY AND PRACTICE 50 A. ORIGINATION 51 B. DEFINITION AND STRUCTURE 55 C. CALCULATING BONUS AMOUNTS 59 D. LAND VALUE DETERMINATION AND DENSITY BONUSES ....63 1. ADDITIONAL PERMITTED DENSITIES 67 a. Development 68 b. D i s p o s i t i o n 71 2. COMMERCIAL/RESIDENTIAL DENSITY BONUSES 73 a. Development 73 b. D i s p o s i t i o n 79 E. PROBLEMS AND SHORTCOMINGS 81 1. CAN THE BONUS BE ACCURATELY CALCULATED? 81 2. CAN THE INCENTIVE REMAIN OVER TIME? 85 3. FOR WHOM IS THE BONUS AN INCENTIVE? .....87 4. DO ALL LANDOWNERS RECEIVE AN INCENTIVE? .....89 F. SUMMARY OF CRITICISMS 90 V. BEYOND THE BONUS 91 A. HOUSING AS A "MEANS" 93 B. HOUSING AS AN "END" IN ITSELF 95 VI. DIRECTIONS FOR FURTHER RESEARCH 98 VI I . CONCLUSIONS AND IMPLICATIONS 1 0 1 BIBLIOGRAPHY 106 vi L i s t of Figures Figure 1: Downtown Vancouver - Re s i d e n t i a l Bonus Provisions. Figure 2 : Downtown Vancouver - Mixed-use Projects Using Residential Bonus Provisions, February, 1 9 8 2 . Acknowledgement I am g r a t e f u l f o r the p e r c e p t i v e and s u p p o r t i v e comments of my p r i n c i p a l a d v i s o r s , Jay Wollenberg, Jonathan Mark and C r a i g D a v i s . T h e i r i n s i g h t s and enthusiasm have made the p r o j e c t c h a l l e n g i n g , i n s t r u c t i v e and e n j o y a b l e . I am e s p e c i a l l y t h a n k f u l f o r S h e i l a ' s patience and encouragement d u r i n g these past two years, f o r the t h e s i s was as much her endeavour as i t was mine. 1 I. INTRODUCTION For s e v e r a l decades urban p o l i c y makers have sought to encourage the development of housing w i t h i n and c l o s e to the downtown areas of l a r g e c i t i e s . R e s i d e n t i a l uses, compared to other land uses, have d e c l i n e d i n most Canadian and American downtowns with the r e s u l t i n g imbalance of employees to r e s i d e n t s r a i s i n g a number of qu e s t i o n s about the f u t u r e r o l e of downtown. E f f o r t s to r e - i n t r o d u c e housing have been d i f f i c u l t f o r both p r i v a t e and p u b l i c s e c t o r s a l i k e . In the 1960's, the technique of " bonus " zoning appeared, o f f e r i n g r e a l e s t a t e developers a d d i t i o n a l b u i l d i n g d e n s i t y i n exchange for the p r o v i s i o n of a v a r i e t y of p u b l i c a m e n i t i e s . In the 1970's, bonuses were used to s t i m u l a t e the c o n s t r u c t i o n of d w e l l i n g u n i t s w i t h i n the c e n t r a l business d i s t r i c t s of s e v e r a l l a r g e c i t i e s . R e s i d e n t i a l d e n s i t y bonuses, and the mixed-use p r o j e c t s which they c r e a t e d , were promoted as a zoning i n n o v a t i o n which would a c t u a l l y reward the marketplace f o r p r o v i d i n g housing downtown. Bonusing, as a land use c o n t r o l mechanism, was a p a r t i c u l a r l y unorthodox form of p u b l i c i n t e r v e n t i o n as i t represented a very p r o - a c t i v e attempt by p o l i c y makers to manipulate the economic v i a b i l i t y of p r i v a t e p r o j e c t s i n an e f f o r t to achieve p u b l i c purposes. I t i s evident from the dearth of l i t e r a t u r e a d d r e s s i n g e i t h e r the theory, a p p l i c a t i o n or e f f e c t i v e n e s s of d e n s i t y bonuses that there have been few " c r i t i c a l reviews of e i t h e r the concept or i t s a p p l i c a t i o n . ( That i s not to suggest that 2 s p e c i f i c ; bonus schemes have not been examined in exhaustive d e t a i l by i n d i v i d u a l developers e v a l u a t i n g the p o t e n t i a l of p a r t i c u l a r s i t e s . ) S u p e r f i c i a l l y , at l e a s t , one can observe that where r e s i d e n t i a l bonus schemes have been implemented, some amount of housing may have been b u i l t . One might i n f e r from t h i s t h a t bonuses do work and, t h e r e f o r e , that p u b l i c o b j e c t i v e s are r e a l i z e d - but there i s cause f o r doubt. At a p r a c t i o n e r s ' workshop in Vancouver 1 i n October, 1981 , l o c a l d evelopers, i n v e s t o r s , planners and a r c h i t e c t s met to d i s c u s s the e f f e c t i v e n e s s of the r e s i d e n t i a l bonus system used in downtown Vancouver. Throughout the workshop two q u e s t i o n s emerged r e p e a t e d l y as the c e n t r a l concerns of those using the bonus system: • what should the p u b l i c goals be with respect to the downtown and what c o n t r i b u t i o n might new housing i n the area make towards a c h i e v i n g those goals? • i f , indeed, the arguments for i n c r e a s i n g downtown housing are d e f e n s i b l e , how e f f e c t i v e can a bonus system be in s t i m u l a t i n g r e s i d e n t i a l development? The suggestion was put forward by s e v e r a l p a r t i c i p a n t s that the bonus system was an i l l u s i o n - that i n p r a c t i c e i t simply d i d not e x i s t . Where developers were, in theory at l e a s t , to be o f f e r e d an economic inducement f o r the p r o v i s i o n of d w e l l i n g 1Mixed-use Workshop ( Proceedings forthcoming ) h e l d i n Vancouver on October 1, 1981, and sponsored by the Canadian Housing Design C o u n c i l . 3 u n i t s i n mixed-use p r o j e c t s , i n f a c t they had u s u a l l y p a i d d e a r l y f o r that o p p o r t u n i t y and, i f anything, the bonus was more an economic burden than i t was an i n c e n t i v e . From the p r i v a t e s e c t o r ' s p e r s p e c t i v e , i t was argued, the bonus system was not working as the planners had expected i t t o . S i m i l a r p e r c e p t i o n s of the bonus system s u r f a c e d d u r i n g subsequent i n t e r v i e w s with l o c a l developers p r e s e n t l y engaged i n mixed-use p r o j e c t s i n Vancouver's downtown bonus areas. Doubts have been r a i s e d on behalf of the " p u b l i c i n t e r e s t " i n bonusing more g e n e r a l l y , most notedly i n W i l l i a m Whyte's 2 unreserved c r i t i c i s m of New York C i t y ' s bonus system. While Whyte was not r e f e r r i n g to r e s i d e n t i a l bonuses s p e c i f i c a l l y , h i s a c c u s a t i o n that the i n c r e a s e d b u i l d i n g bulk generated by bonused f l o o r s p a c e may generate more p u b l i c c o s t s than b e n e f i t s , stands in d i r e c t o p p o s i t i o n to the p r e v a i l i n g l i t e r a t u r e which, g e n e r a l l y , suggests that bonuses provide a " something for nothing " s o l u t i o n . The suggestion that bonusing o f f e r s a r e l a t i v e l y c o s t l e s s mechanism for improving downtowns, Whyte argues, i s f a l l a c i o u s , and the extent to which i t o f f e r s developers an i n c e n t i v e i s , at the very l e a s t , h i g h l y q u e s t i o n a b l e . 2 Whyte, 1981 . 4 A. OBJECTIVES The purpose of t h i s t h e s i s i s to look beneath the assumed d e s i r a b i l i t y of downtown housing and assumed u s e f u l n e s s of the bonusing technique. The t h e s i s w i l l re-examine the purpose, workings and p o t e n t i a l e f f e c t i v e n e s s of the r e s i d e n t i a l d e n s i t y bonuses used to encourage the p r o v i s i o n of d w e l l i n g u n i t s w i t h i n the predominantly commercial areas of l a r g e downtowns. The f o l l o w i n g o b j e c t i v e s have been e s t a b l i s h e d f o r the t h e s i s : • to t r a c e and c r i t i c a l l y review the goal of i n c r e a s e d housing i n the downtown; • to c r i t i c a l l y review the assumptions, workings and l i m i t a t i o n s of r e s i d e n t i a l bonuses so as to determine the c o n d i t i o n s under which they might be e f f e c t i v e in s t i m u l a t i n g the development of housing in the downtown; and, • i f the goal of i n c r e a s e d housing i s found to be d e f e n s i b l e , other p u b l i c a c t i o n s which might complement or r e p l a c e the d e n s i t y bonus mechanism w i l l be b r i e f l y examined. B. PARAMETERS OF THE ANALYSIS The development and a p p l i c a t i o n , of r e s i d e n t i a l d e n s i t y bonuses in North American downtowns has occured only s i n c e the 1960's and has n e i t h e r amassed an e x t e n s i v e body of l i t e r a t u r e nor a broad base of well-documented experience upon which to draw. While there do e x i s t a small number of a r t i c l e s which 5 d i s c u s s t h i s new " i n n o v a t i o n " i n land use c o n t r o l , and by-laws from those c i t i e s which have implemented bonuses, i t has not been p o s s i b l e to f i n d any r e p o r t s which evaluate the a c t u a l e f f e c t i v e n e s s of downtown r e s i d e n t i a l bonuses a f t e r they have been in p l a c e f o r some p e r i o d of time. As such, the i n v e s t i g a t i o n has been l i m i t e d to an examination of i n f o r m a t i o n gleaned from v a r i o u s sources, most of which f a l l short of " hands on " experience. Nonetheless, these,, coupled with i n t e r v i e w s with developers a c t i v e l y i n v o l v e d i n bonused p r o j e c t s , have provided a s u f f i c i e n t l y i n f o r m a t i v e and i n s i g h t f u l b a s i s upon which to undertake the a n a l y s i s . The p r i n c i p a l sources of i n f o r m a t i o n have i n c l u d e d : • p l a n n i n g l i t e r a t u r e r e l e v a n t to the planning of downtowns and a l t e r n a t i v e land use c o n t r o l mechan i sms; • l i t e r a t u r e d e a l i n g with the theory of land v a l u a t i o n and investment a n a l y s i s ; . • economic f e a s i b i l i t y s t u d i e s undertaken f o r s e v e r a l m u n i c i p a l i t i e s in the course of t h e i r developing bonus systems; • downtown plann i n g documents for approximately f i f t e e n l a r g e c i t i e s in Canada and the U n i t e d S t a t e s ; • w r i t t e n summaries from s e v e r a l workshops d e a l i n g with downtown r e s i d e n t i a l bonuses in Vancouver; and • i n t e r v i e w s with developers who have been, or who are a c t i v e l y i n v o l v e d i n bonused, mixed-use 6 p r o j e c t s in downtown Vancouver. A second major parameter of the t h e s i s i s r e l a t e d to the emphasis p l a c e d on the economic aspects of bonus systems, with l e s s a t t e n t i o n being given to the s o c i a l / e n v i r o n m e n t a l consequences of the p r o j e c t s which may r e s u l t . The reason f o r t h i s imbalance i s that bonus systems need not n e c e s s a r i l y imply a p a r t i c u l a r form, environment or type of tenant, although they o f t e n do. The s t r u c t u r e of a bonus system - f o r example, whether expensive or s u b s i d i z e d u n i t s are bonused, the o p p o r t u n i t y to t r a n s f e r d e n s i t y to other s i t e s , the method by which d e n s i t y i s c a l c u l a t e d - can be designed e i t h e r to c r e a t e a p r e s c r i b e d r e s u l t or to permit maximum f l e x i b i l i t y in p r o j e c t d e s i g n . What the r e s u l t i n g housing and p o p u l a t i o n c h a r a c t e r i s t i c s w i l l be, while of obvious concern to p o l i c y makers, become second-order q u e s t i o n s i n comparison to the u n d e r l y i n g q u e s t i o n of whether the bonus i s l i k e l y to r e s u l t i n any housing at a l l . The focus of the t h e s i s i s c l e a r l y on the l a t t e r q u e s t i o n . F i n a l l y , the notion of " downtown housing " need not be l i m i t e d to the p r o v i s i o n of d w e l l i n g u n i t s w i t h i n the downtown's 3 commercial areas. Adjacent r e s i d e n t i a l d i s t r i c t s , f o r example, the West End, F a l s e Creek and the s i t e of B.C. 3The " downtown ", i n conceptual terms, i n c l u d e s the c o m m e r c i a l / r e t a i l centre and the predominantly n o n - r e s i d e n t i a l t r a n s i t i o n areas which t y p i c a l l y surround i t , commonly r e f e r r e d to as the " core " and " frame ", r e s p e c t i v e l y . In p a r t i c u l a r s i t u a t i o n s , a b u t t i n g r e s i d e n t i a l d i s t r i c t s may a l s o be i n c l u d e d . 7 P l a c e , ( a l l of which abut Vancouver's downtown ) may play a key r o l e i n terms of a c h i e v i n g p u b l i c goals f o r the downtown. However, as d e n s i t y bonuses have t y p i c a l l y been a p p l i e d w i t h i n commercial areas, such areas w i l l p r o v i d e the focus f o r the examination. The importance of adjacent r e s i d e n t i a l d i s t r i c t s w i l l be c o n s i d e r e d where t h e i r impact on the downtown may be of s i g n i f i c a n c e . As an i n t r o d u c t i o n to the mechanics of bonusing, and the c o m p l i c a t i o n s which surround i t s a p p l i c a t i o n , a b r i e f case study of Vancouver's system w i l l be presented. The two most c r i t i c a l q u e s t i o n s w i l l then be explored i n the subsequent c h a p t e r s : • should housing be encouraged i n the downtown? • i f i n c r e a s e d housing i n the downtown i s d e s i r a b l e , are r e s i d e n t i a l d e n s i t y bonuses l i k e l y to be e f f e c t i v e ? F i n a l l y , other p u b l i c a c t i o n s which might complement or r e p l a c e the bonusing mechanism w i l l be d i s c u s s e d and c o n c l u s i o n s drawn from the a n a l y s e s . 8 I I . DOWNTOWN VANCOUVER -.AN EXAMPLE OF BONUSES IN PRACTICE In 1975, the C i t y of Vancouver implemented a d e n s i t y bonus system to encourage the p r o v i s i o n of r e s i d e n t i a l developments i n c e r t a i n d i s t r i c t s w i t h i n the downtown." A p r e l i m i n a r y statement of g o als f o r the area had been prepared i n 1974, 5 with the f o l l o w i n g p r o p osals r e l a t e d s p e c i f i c a l l y to housing i n the area: • to improve the human environment downtown by encouraging a mixture of a c t i v i t i e s , i n c l u d i n g housing, to provide v a r i e t y and d i v e r s i t y over a 24 - hour day, to reduce the problems of access to work caused by d a i l y commuting and to enhance the e f f e c t i v e n e s s of mutually supporting a c t i v i t i e s and s e r v i c e s ; and • to encourage f u r t h e r growth in a p p r o p r i a t e downtown a c t i v i t i e s by encouraging new housing, i n v a r i e d l o c a t i o n s and f o r v a r i e d income groups. 6 The bonus r a t i o s were proposed i n 1974, and subsequently t e s t e d by a c o n s u l t a n t engaged by the C i t y to examine the l i k e l y impact of the proposed d e n s i t y p r o v i s i o n s on development. The f e a s i b i l i t y study, conducted by Western Realesearch C o r p o r a t i o n ' C i t y of Vancouver, Zoning and Development By-law, 3575, 414. 5 C i t y of Vancouver, 1974. 6 When the development g u i d e l i n e s were approved by C o u n c i l i n 1975, the r e f e r e n c e to " v a r i e d income groups " was not s t a t e d e x p l i c i t l y . 9 L t d . , 7 examined the v i a b i l i t y of development p r o j e c t s in s i x l o c a t i o n s , ' assuming d i f f e r e n t d e n s i t y r a t i o s i n each. Development on each s i t e was analysed to determine the " developer's p r o f i t ", 8 i n i t i a l l y assuming that there would be no f i n a n c i n g used and, subsequently, assuming that a 75% loan/value mortgage would be obtained f o r the commercial component. Estimates of r e q u i r e d developer's p r o f i t l e v e l s were used as benchmarks a g a i n s t which p r o j e c t e d r e t u r n s ( to both c a p i t a l and e q u i t y p o s i t i o n s ) c o u l d be evaluated. For each of the s i x s i t e s examined, p r o t o t y p i c a l p r o j e c t s were eva l u a t e d assuming f i r s t the e x i s t i n g zoning, then the proposed d e n s i t y r a t i o s ( which always i m p l i e d reduct ions i n p e r m i s s i b l e commercial d e n s i t y ) and, f i n a l l y , an assortment of d e n s i t y r a t i o s i n which a d d i t i o n a l r e s i d e n t i a l d e n s i t i e s were added to the e x i s t i n g commercial zoning. Without exception, whether f o r s t r a i g h t o f f i c e development, o f f i c e / r e t a i l or o f f i c e / r e t a i l / r e s i d e n t i a l p r o t o t y p e s , development of the s i t e s was found to be uneconomical given e x i s t i n g market c o n d i t i o n s . " G e n e r a l l y speaking i t would appear as though the proposed zoning r e g u l a t i o n s w i l l not encourage the flow of p r i v a t e c a p i t a l i n t o mixed c o m m e r c i a l / r e s i d e n t i a l developments w i t h i n the study area. In e f f e c t , the proposed zoning r e g u l a t i o n s cause a " downzoning e f f e c t " which g e n e r a l l y decreases the p r o f i t p o t e n t i a l on many developable s i t e s i n the study a r e a . 9 " 7 Western Realesearch C o r p o r a t i o n L t d . , 1975. 8Developer's p r o f i t was d e f i n e d as the d i f f e r e n c e between the c a p i t a l i z e d value of the proposed development upon completion and i t s c a p i t a l c o s t . 9 Western Realesearch C o r p o r a t i o n L t d . , 1975. 10 The f a c t o r s which were f e l t to c o n t r i b u t e to the general l e v e l of low r e t u r n s i n c l u d e d the impact of a previous downzoning of commercial d e n s i t i e s in September, 1973, r i s i n g c o n s t r u c t i o n c o s t s , low demand, r i s i n g land c o s t s and the shortage and high cost of mortgage f u n d s . 1 0 Rental u n i t s , i n p a r t i c u l a r , were argued to be uneconomical as a r e s u l t of p r o v i n c i a l rent c o n t r o l s , the r e l a t i o n s h i p of c o n s t r u c t i o n , land and f i n a n c i n g c o s t s and the f e d e r a l income tax laws r e l a t e d to apartment c o n s t r u c t i o n - a l l of which were beyond the d i r e c t i n f l u e n c e of the C i t y of Vancouver. The a n a l y s t s i n d i c a t e d that even with i n c r e a s e s of 3 F.S.R. 1 1 above the proposed d e n s i t i e s , development v i a b i l i t y would not be s u b s t a n t i a l l y improved. Very soon a f t e r the report was completed .the C i t y of Vancouver engaged a second group of c o n s u l t a n t s 1 2 to re-assess the probable market response to the mixed-use zoning p r o p o s a l s . The c o n s u l t a n t s reviewed the methodology and f i n d i n g s of the Western Realesearch study, met with l o c a l d e v e l o p e r s , a r c h i t e c t s and landowners and prepared recommendations with respect t o : • p o s s i b l e amendments to the zoning p r o p o s a l s ; 1 0 Western Realesearch C o r p o r a t i o n L t d . , 1975, 3. 1 1 T h e amount of f l o o r s p a c e ( or s i z e of b u i l d i n g ) which i s p e r m i t t e d on a given s i t e i s r e g u l a t e d by the s i t e ' s F.S.R. ( F l o o r Space R a t i o ) . The F.S.R. i s simply a r a t i o of permitted f l o o r s p a c e to a v a i l a b l e s i t e area - an F.S.R. of 3 would permit 3 square feet of f l o o r s p a c e f o r each square foot of s i t e area. For example, a 300' X 120' development s i t e would have a s i t e area of 36,000 square f e e t . An F.S.R. of 3 would permit the c o n s t r u c t i o n of 108,000 square f e e t of f l o o r s p a c e . If each f l o o r of the b u i l d i n g had 10,800 square f e e t the r e s u l t i n g b u i l d i n g would be 10 s t o r i e s h i g h . 1 2 Baxter et a l , 1975. 11 • other measures which the C i t y might take to encourage downtown housing; and • a framework f o r a n a l y s i n g the impact on investment of a l t e r n a t i v e zoning p r o p o s a l s . 1 3 They argued that the use of s p e c i f i c " r u l e s of thumb " to estimate average c o s t s and revenues was o v e r l y r e s t r i c t i v e and not an accurate d e s c r i p t i o n of the range of values which a c t u a l l y e x i s t i n the marketplace. To i l l u s t r a t e t h i s , the a n a l y s t s a l t e r e d the i n i t i a l assumptions by: • d e c r e a s i n g land values by 8%; • d e c r e a s i n g the c a p i t a l i z a t i o n r a t e by 5.5%; • reducing the parking requirement ( c o s t s ) ent i r e l y ; ® i n c r e a s i n g net r e t a i l rents by 20%; ® reducing b u i l d i n g c o s t s by 11%; and • reducing i n t e r e s t r a t e s by 12.5%. They then analysed the impact of each m o d i f i c a t i o n ( cummulatively ) for one of the p r o t o t y p i c a l s i t e s . T h e i r c o n c l u s i o n was not e n t i r e l y unexpected - although each change, by i t s e l f , i s r e l a t i v e l y s m a l l , i f a l l of the changes f o l l o w the same d i r e c t i o n ( i . e . reduce c o s t s and i n c r e a s e revenues ) t h e i r cummulative impact on p r o j e c t economics may be s i g n i f i c a n t . 1 " They argued the need f o r d e t a i l e d s e n s i t i v i t y a n a l y s i s so as to more r e a l i s t i c a l l y assess expected r e t u r n s at 1 3 Baxter et a l , 1975. 1 tt Baxter et a l , 1975, 11. 12 s p e c i f i c l o c a t i o n s and.under v a r i o u s market c o n d i t i o n s . The r e s o l u t i o n of f i n a l d e n s i t y r a t i o s occured i n 1975, and the Zoning and Development By-law was amended a c c o r d i n g l y . R e s i d e n t i a l development was to be permitted throughout the downtown ( by s u b s t i t u t i n g r e s i d e n t i a l f o r permitted commercial space ) and encouraged in s p e c i f i c areas through the use of d e n s i t y bonuses ( Fi g u r e 1 ). In areas A, B and C ( o f f i c e core ), f o r example, the r e s i d e n t i a l uses c o u l d be s u b s t i t u t e d fo r commercial uses up to a maximum of 3 F.S.R. The permitted commercial d e n s i t i e s i n these areas are 9, 7 and 5 F.S.R., r e s p e c t i v e l y . By c o n t r a s t , in areas D and E, r e s i d e n t i a l uses are allowed i n a d d i t i o n to the per m i t t e d commercial d e n s i t i e s , y i e l d i n g p r o j e c t s which are l a r g e r where housing i s i n c l u d e d . Area D, f o r example, permits 3 F.S.R. commercial and 2 F.S.R. r e s i d e n t i a l ( r e f e r r e d to as 3 + 2 ) although, through the s u b s t i t u t i o n of r e s i d e n t i a l . for commercial space a p r o j e c t c o u l d c o n c e i v a b l y accommodate only 2 F.S.R. commercial and 3 F.S.R. r e s i d e n t i a l ( 2 + 3 ). F i n a l l y , areas F, G and H have base commercial d e n s i t i e s ( 5, 4 and 2 F.S.R., r e s p e c t i v e l y ) and allow an a d d i t i o n a l square foot of commercial f l o o r s p a c e f o r each foot of r e s i d e n t i a l f l o o r s p a c e c o n s t r u c t e d , to p r e s c r i b e d maximums ( 5 + 1 + 1 , 4 + 1 + 1 and 2 + 2 + 2 r e s p e c t i v e l y ). From the bonus system's i n c e p t i o n i n 1975, u n t i l 1980 ( approximately ), the bonuses drew very l i t t l e response from the market. F i v e mixed-use p r o j e c t s were developed i n the bonus areas ( F i g u r e 2 ) and none i n the most c e n t r a l o f f i c e core F i g u r e 1: Downtown Vancouver - R e s i d e n t i a l Bonus P r o v i s i Subject to conformi ty with the guidelines an,-1 r l ^ , , c » T K I the m a x i m u m density for any permitted G I H In the area denoted by the letter ' A ' use shall be f loor space ratio 9.00. In the area denoted by the letter ' B ' , the m a x i m u m density for any permitted use shall be f loor space ratio 7.00. In the area denoted by the letter ' C , the m a x i m u m density for any pern i t ted use shall be f loor space ratio 5.00. In the area denoted by the letter ' D ' , the m a x i m u m density for any non-residen-tial use shall be f loor space rat io 3 .00; however , an addit ional f loor space ratio of 2.00 may be permit ted for residential use. In the area denoted by the letter ' E ' , the m a x i m u m density for any non-residen-tial use shall be f l oo r space rat io 1.00; however, an addit ional f loor space ratio of 2.00 may be permit ted for residential use. In the area denoted by the letter 'F', the m a x i m u m density for any non-residen-tial use shall be f l oo r space rat io 5 .00; however, for every square foot o f residen-tial f loor area, an addi t ional square foot o f non-residential f loor area shall be permitted up to a max imum addi t ional f loor space ratio of 1.00 for residential use and a max imum addi t ional f loor space rat io o f 1.00 for non-residential use. 'n the area denoted by the letter 'G', the m a x i m u m density for any non-residen-tial use shall be f loor space ratio 4.00; however, for every square foot of residen-tial f loor area, an addit ional square foot o f non-residential f loor area shall be permitted up to a max imum addi t ional f loor space rat io of 1.00 for residential use and a max imum addi t ional f loor space rat io o f 1.00 for non-residential use. In the area denoted by the letter 'H', the max imum density for any non-residen-tial use shall be f loor space rat io 2.00; however, for every square foot of residen-tial f loor area, an addi t ional square foot of non-residential f loor area shall be permitted up to a max imum addit ional f loor space rat io of 2.00 for residential use and a max imum addi t ional f loor space rat io o f 2 .00 for non-residential use. Hotels shall be considered to be a commercia l use. Within the Down town Distr ict , residential f loor area may be substituted for com-mercial f loor area, provided however that in no case shall the density (Floor Space Ratio) of residential use exceed 3. U l Source: C i t y of Vancouver, Zoning and Development By-law 3575. 1975, p.415. F i g u r e 2: Downtown Vancouver - Mixed-use P r o j e c t s Using R e s i d e n t i a l Bonus P r o v i s i o n s , February, 1982. 15 where r e s i d e n t i a l uses were p e r m i t t e d through s u b s t i t u t i o n , but were not bonused. Three of the f i v e p r o j e c t s , ( p r o j e c t s numbered 1, 2 and 3 ) were r e l a t i v e l y l a r g e , p r o v i d i n g 166, 72 and 454 u n i t s r e s p e c t i v e l y , and each took the form of a separate r e s i d e n t i a l s t r u c t u r e s h a r i n g a common s i t e with an o f f i c e b u i l d i n g . The remaining two p r o j e c t s ( 4 and 5 ) , i n c o r p o r a t e d the placement of a few u n i t s ( 8 and 6-units, r e s p e c t i v e l y ) atop o f f i c e b u i l d i n g s . In 1979 and 1980, market c o n d i t i o n s in downtown Vancouver began to change s i g n i f i c a n t l y . 1 5 The demand f o r o f f i c e space, which had been s l u g g i s h s i n c e the mid-1970's, began to r i s e , with o f f i c e space shortages a n t i c i p a t e d for 1981-1982. At the same time, r e s i d e n t i a l p r i c e s throughout the c i t y were r i s i n g s t e a d i l y . With the apparent success of the nearby F a l s e Creek development ( in marketing some expensive m u l t i - r e s i d e n t i a l u n i t s i n a c e n t r a l c i t y l o c a t i o n ) , there evolved the ex p e c t a t i o n that perhaps there d i d e x i s t a small group of consumers who might choose to l i v e downtown. While r e s i d e n t i a l p r o j e c t s may not have been v i a b l e i n and of themselves, favourable e x p e c t a t i o n s , coupled with the r i s i n g demand f o r o f f i c e space, may have made the r i s k i n v o l v e d i n marketing u n i t s in mixed-use developments s u f f i c i e n t l y t o l e r a b l e to undertake c o n s t r u c t i o n . A f l u r r y of development a p p l i c a t i o n s appeared in 1980 and 1981. 1 6 By February, 1982, there were 6 mixed-use 1 5 Real E s t a t e Board of Greater Vancouver, 1976 - 1981. 1 6 C i t y of Vancouver, January, 1982, 11. 16 p r o j e c t s under c o n s t r u c t i o n , another 11 p r o j e c t s with o u t s t a n d i n g development approvals and no l e s s than 9 p r o j e c t s being proposed w i t h i n the study a r e a . Interviews h e l d with s e v e r a l developers i n v o l v e d i n c u r r e n t p r o j e c t s / p r o p o s a l s uncovered a number of shared a t t i t u d e s and experiences which begin to i l l u s t r a t e both the a p p l i c a t i o n of, and r e l a t e d problems with the bonus system used in Vancouver. • I t was f e l t that the downtown core has l i t t l e c o m p e t i t i v e advantage i n terms of marketable amenities when compared to r e s i d e n t i a l areas around the downtown ( e.g. F a i r v i e w Slopes, F a l s e Creek, B.C. Place ). For a s i m i l a r or lower p r i c e , p r o s p e c t i v e customers c o u l d r e c e i v e more amenity with l e s s noise in a predominantly r e s i d e n t i a l area. Despite the advantages of access to work, shops, r e s t a u r a n t s and c u l t u r a l a c t i v i t i e s the area's image and environment make i t very d i f f i c u l t to market d w e l l i n g u n i t s . • It was g e n e r a l l y f e l t t h a t " bonused " d e n s i t y i s normally purchased as though i t were commercial space: that i s , a 4 +1 + 1 F.S.R. s i t e would be exchanged on the market at a p r i c e based on a development p o t e n t i a l of 6 F.S.R. of commercial. As such, developers who purchase land normally pay a high p r i c e f o r the r e s i d e n t i a l p o t e n t i a l , a p r i c e which demands that a high rent or s a l e s p r i c e f o r the u n i t s be r e a l i z e d . Those i n t e r v i e w e d f e l t that 17 the bonus o f f e r e d l i t t l e , i f any, i n c e n t i v e to subsequent developers/landowners. As the demand f o r o f f i c e space decreases, mixed-use s i t e s with a r e s i d e n t i a l " bonus " become l e s s d e s i r a b l e , as the r e s i d e n t i a l component can r e s u l t i n i n e f f i c i e n c i e s and e x t r a c o s t s and c o m p l i c a t i o n s which cannot be c a r r i e d by r e n t s from the commercial space. At any point in time, there may be a v a r i e t y of developer " types " i n v o l v e d i n mixed-use p r o j e c t s - some p r e f e r to develop and hold the p r o j e c t f o r a long time while others p r e f e r to r e t a i n ownership of the o f f i c e component but s e l l the d w e l l i n g u n i t s immediately, and s t i l l others who p r e f e r to simply c o n s t r u c t the p r o j e c t and s e l l i t as soon as p o s s i b l e . D i f f e r i n g o b j e c t i v e s on the part of developers are r e f l e c t e d i n the kinds of f e a s i b i l i t y a n a l y s i s which they undertake and t h e i r p e r c e p t i o n s and t o l e r a n c e f o r r i s k . P r o j e c t v i a b i l i t y i s , to a l a r g e extent, a f u n c t i o n of the s i t e ' s l o c a t i o n r e l a t i v e to the e x i s t i n g d i s t r i b u t i o n of a c t i v i t i e s , p a r t i c u l a r l y with respect to the o f f i c e component. R e s i d e n t i a l v i a b i l i t y i s extremely d i f f i c u l t to p r e d i c t as the sub-markets f o r v a r i o u s t y p e s / c o s t s of u n i t s i s po o r l y d e f i n e d . Most of the d w e l l i n g u n i t s p r e s e n t l y under c o n s t r u c t i o n were, as of February, 18 1982, to be marketed as luxury condominiums, although there i s a great deal of u n c e r t a i n t y as to the s i z e of the sub-market groups which might c o n s i d e r purchasing them. I t was f e l t that those developers with p r o j e c t s c u r r e n t l y under c o n s t r u c t i o n were having a great d e a l of d i f f i c u l t y in i d e n t i f y i n g p o t e n t i a l buyers and a c t u a l l y s e l l i n g the u n i t s . • Some of the developers i n t e r v i e w e d f e l t that they would c o n s i d e r b u i l d i n g a mixed-use p r o j e c t again i f assured of i t s economic v i a b i l i t y at the o u t s e t . The developers interviewed were unanimous in t h e i r view that the bonus system d i d not normally provide the i n c e n t i v e which i t may have been intended t o . S e v e r a l s p e c i f i c r e s e r v a t i o n s were r a i s e d with r e s p e c t to the p o t e n t i a l e f f e c t i v e n e s s of the bonus system: » i t i s i n e f f i c i e n t to provide a small number of d w e l l i n g u n i t s on top of an o f f i c e b u i l d i n g ; e housing w i l l only be b u i l t i f e f f e c t i v e demand e x i s t s - bonuses and zoning cannot c r e a t e demand; • the economic i n c e n t i v e i m p l i e d by the bonus system does not seem to e x i s t i n p r a c t i c e ; • the b u i l d i n g ' s a e s t h e t i c q u a l i t i e s may not be as good i n a mixed-use p r o j e c t ; • i t i s not e n t i r e l y c l e a r what the C i t y hopes to achieve with respect to the area's " r e s i d e n t i a l component ": are small numbers of l a r g e , expensive 19 u n i t s perched atop o f f i c e b u i l d i n g s r e a l l y l i k e l y to r e s u l t i n an improved downtown? When the market f o r downtown housing i s strong, why should a r e s i d e n t i a l d e n s i t y l i m i t of 3 F.S.R. be maintained when i t may a c t u a l l y r e s t r i c t the amount of housing which c o u l d be b u i l t ? These comments regarding the workings of Vancouver's downtown bonus system and the kind of r e s i d e n t i a l component which i t can c r e a t e echo the q u e s t i o n s r a i s e d by developers i n 1 9 7 5 1 7 and which were again r e - s t a t e d at the mixed-use workshop in October, 1981. The f o l l o w i n g chapters examine these q u e s t i o n s in t u r n , beginning with the arguments for and a g a i n s t i n c r e a s e d housing in the downtown. 1 7 Baxter et a l , 1975 20 I I I . IS DOWNTOWN HOUSING DESIRABLE? H i s t o r i c a l l y , c i t y c e n t r e s have served as a focus f o r business, c u l t u r a l a c t i v i t i e s and community l i f e . The area's c h a r a c t e r r e f l e c t s the constant e v o l u t i o n of a c t i v i t i e s and forms which emerge in response to changes in the demand for and a l l o c a t i o n of a c t i v i t i e s throughout the urban area. •In the p a s t , the i n t e n s i t y of downtown a c t i v i t i e s and p h y s i c a l form of the area ( b u i l d i n g s , s t r e e t width and layout ) were, in p a r t , a f u n c t i o n of technology: how high a b u i l d i n g c o u l d be b u i l t , how f a r one c o u l d reasonably commute to work given e x i s t i n g modes of t r a n s p o r t . T e c h n o l o g i c a l i n n o v a t i o n s a p p l i e d in the e a r l y -1900's, coupled with economic growth and changes in the a f f l u e n c e and p r e f e r e n c e s of consumers appear to have been the u n d e r l y i n g f o r c e s which have, over the past f i v e or s i x decades, s u b s t a n t i a l l y c o n t r i b u t e d to a s p e c i a l i z a t i o n of the downtown's f u n c t i o n . 1 8 S p e c i a l i z a t i o n and s u s t a i n e d growth, i n t u r n , have c o n t r i b u t e d to the demise of the surrounding r e s i d e n t i a l areas. Downtowns have not evolved by a c c i d e n t - they have, i n s t e a d , been shaped and re-shaped by the constant i n t e r p l a y of p u b l i c p o l i c y and the marketplace - sometimes moving in tandem sometimes in o p p o s i t i o n . What the downtown i s today, and H e i l b r u n , 1974, 19-56. 21 the r o l e i t ought to play i n the f u t u r e , p a r t i c u l a r l y with respect to the p r o v i s i o n of housing, can only be c o n s i d e r e d w i t h i n the context of the complex r e l a t i o n s h i p between p u b l i c goals and the marketplace. A t t e n t i o n must be drawn to the t r a d e - o f f of goals which may occur when one c h o i c e or " r o l e " for downtown i s promoted over another, as occurs f o r example, with the d e s i r e to permit u n c o n s t r a i n e d o f f i c e development while a l s o hoping to e s t a b l i s h a r e s i d e n t i a l base in the area. The purpose of t h i s chapter i s f i r s t l y , to b r i e f l y t r a c e the recent e v o l u t i o n of l a r g e North American downtowns, f o c u s i n g on the changes which have occured with respect to the areas' r e s i d e n t p o p u l a t i o n and housing stock. Secondly, the c u r r e n t goals which have been adopted with r e s p e c t to downtown housing w i l l be i d e n t i f i e d and t h e i r r a t i o n a l e examined. F i n a l l y , the case f o r more housing in the downtown w i l l be debated to make e x p l i c i t the v a lues, assumptions and p o s s i b l e consequences of a l t e r n a t i v e g o a l s . A. AN HISTORICAL PERSPECTIVE The f o l l o w i n g d i s c u s s i o n i s intended to provide the reader with a general d e s c r i p t i o n of the trends and e v o l u t i o n of p u b l i c goals which l e d to c u r r e n t e f f o r t s to introduce housing i n t o the downtown. I t i s , admittedly, an o v e r - s i m p l i f i c a t i o n of the complex f o r c e s and c o n d i t i o n s which have shaped Canadian and American downtowns ( and p u b l i c a t t i t u d e s towards them ) s i n c e the e a r l y 1900's. The sequence of changes a f f e c t i n g downtowns has not always occurred i n the l i n e a r f a s h i o n presented here, 22 nor has the timing of changes or major i n f l u e n c e s ( e.g. the F e d e r a l Urban Renewal Programs ) c o i n c i d e d i n Canada and the Un i t e d S t a t e s . F u r t h e r , very l a r g e c i t i e s ( New York and San F r a n c i s c o , f o r example ) can have at l e a s t a ten to twenty year l e a d on sma l l e r c i t i e s ( Toronto, Ca l g a r y , Vancouver ) i n terms of the problems being experienced and the s o l u t i o n s developed.Further, Canadian downtowns have not experienced n e a r l y the same degree of s o c i a l unrest and d e c l i n i n g investment as have t h e i r U.S. c o u n t e r p a r t s , nor were t h e i r changes always a f f e c t e d by s i m i l a r l e g i s l a t i v e c o n s t r a i n t s or p u b l i c funding programs. Despite these d i f f e r e n c e s , the c e n t r a l problems c o n f r o n t i n g the downtowns of l a r g e c i t i e s , and the p u b l i c goals adopted f o r them i n the 1970's, share many s i m i l a r i t i e s on e i t h e r s i d e of the border. A number of t e c h n o l o g i c a l i n n o v a t i o n s i n the e a r l y 1900's allowed land to be used more i n t e n s i v e l y than ever b e f o r e . 1 9 Advancements in b u i l d i n g c o n s t r u c t i o n techniques and l i f t i n g mechanisms enabled the development of h i g h r i s e b u i l d i n g s and the e f f i c i e n t v e r t i c a l movement of people and goods. The p r o v i s i o n of p u b l i c t r a n s i t systems and the use of the p r i v a t e automobile allowed the downtown labour f o r c e to commute gr e a t e r d i s t a n c e s . But while the a b i l i t y to use land more i n t e n s i v e l y was a necessary c o n d i t i o n f o r change i t was not, by i t s e l f , s u f f i c i e n t to b r i n g about the major changes o c c u r i n g i n downtowns durin g the 1940's and 1950's. I t was only when t h i s technology was 1 9 H e i l b r u n , 1974, 32; Cook, 1980, 6. 23 combined with a market demand f o r i n t e n s e , c e n t r a l l y l o c a t e d o f f i c e space that the most dramatic changes to the downtown's form, environment and f u n c t i o n began to occur. The p e r i o d of r a p i d economic expansion which began i n the l a t e 1940's f o l l o w i n g W.W.II c r e a t e d the employment growth and, hence, the market demand f o r o f f i c e f l o o r s p a c e which dominated the downtown's growth f o r the next three decades. The i n c r e a s i n g importance of the t e r t i a r y and quaternary s e c t o r s w i t h i n the i n d u s t r i a l base, combined with a growing economy, r e s u l t e d i n a s u s t a i n e d demand for downtown o f f i c e s p a c e . 2 0 The growth i n employment, with the m a j o r i t y of employees commuting by car or t r a n s i t , had a number of consequences f o r downtowns g e n e r a l l y . A " t y p i c a l " downtown in the l a t e 1940's and 1.950's might have r e f l e c t e d the f o l l o w i n g kinds of changes t a k i n g p l a c e the development of o f f i c e employment and commercial f l o o r s p a c e would t y p i c a l l y be the dominant growth f a c t o r , causing land values in the core to r i s e to such a l e v e l as to o u t b i d other land uses ( i n d u s t r i a l , warehousing, r e s i d e n t i a l ); the demand f o r c e n t r a l c i t y accommodation was f a l l i n g as the a f f l u e n t middle and upper c l a s s e s moved to the mushrooming s u b u r b s . 2 1 The housing stock which remained w i t h i n and beside downtown was 2 0 Weimer, 1960, 17; Ginzberg, 1979, 48-53; Yeates, 1975, 172. 2 1 H i r s c h , 1973, 70. 24 poorly. maintained,commanding r e l a t i v e l y low rents and t y p i c a l l y occupied by lower income households. Many d w e l l i n g u n i t s were demolished, p r o v i d i n g new s i t e s for commercial development or s u r f a c e park ing; • the reduced demand f o r downtown housing from f a m i l i e s with children,,- coupled with growing housing demand by downtown workers, l e d to changes in both the area's housing stock and demographic mix; • as f a m i l i e s moved to the suburbs, so too d i d the growth i n r e t a i l a c t i v i t y , c a p t u r i n g the comparative advantages of c l o s e r p r o x i m i t y to households, ample f r e e parking and weather c o n t r o l l e d shopping e n v i r o n m e n t s . 2 2 The r e t a i l o u t l e t s which chose to remain or to l o c a t e downtown became i n c r e a s i n g l y s p e c i a l i z e d ; • surrounding the downtown, inner c i t y property val u e s were depressed, i f not d e c l i n i n g , in the face of low i n v e s t m e n t . 2 3 The impact of f a l l i n g investment on American c i t i e s , because of t h e i r high c o n c e n t r a t i o n s of low income households, was p a r t i c u l a r l y severe. What were once c o n s i d e r e d to be s t a b l e neighbourhoods were beginning to be viewed as " slums-" and " ghettos ", i n f e s t e d with 2 2 Cook, 1980, 6; Weimer, 1960, 2 3 H e i l b r u n , 1974, 364; H i r s c h , 14; Weaver, 1977. 1973, 410. 25 r e s i d e n t i a l " b l i g h t •". In some American downtowns, the owners of low-cost r e n t a l apartments abandoned t h e i r p r o p e r t i e s o u t r i g h t . 2 " The a f f l u e n c e and p o p u l a t i o n growth of the 1940's and 1950's had drawn r e s i d e n t s and r e t a i l a c t i v i t y away from the downtown, while the growth of o f f i c e f l o o r s p a c e had c o n t r i b u t e d to the development of a h i g h l y s p e c i a l i z e d a c t i v i t y base. P u b l i c p o l i c y r e i n f o r c e d these movements by encouraging the c o n c e n t r a t i o n of downtown employment and p e r m i t t i n g , i f not a c t i v e l y promoting, the removal of the area's housing stock. O v e r a l l , there appeared to be two strong sentiments about the downtown which were widely shared by planners and p o l i t i c i a n s a l i k e : » that commercial growth was a source of s t r e n g t h f o r both the downtown and the c i t y g e n e r a l l y , and should be encouraged and accommodated at a l l c o s t s ; and • that " b l i g h t e d " areas were u n d e s i r a b l e , and should be redeveloped i n a major way. The c i t y was d e s c r i b e d as being the " body ", and the downtown the " heart " - a heart which had to be b i g , strong and pumping for the body to s u r v i v e . 2 5 Strength was b e l i e v e d to l i e i n commerce and employment, not i n a combination of business and housing. Downtown Toronto, f o r example, was d e s c r i b e d i n 2 " H e i l b r u n , 1974, 259. 2 5 Cox, 1962, 109; San F r a n c i s c o , 1966, 13. 26 the f o l l o w i n g terms: "The g r e a t , v i t a l hub of Toronto, and i t s r e g i o n . In the i n t e r e s t s of everyone, i t i s imperative that i t expand and f l o u r i s h , becoming a g r e a t e r , f i n e r , more e f f i c i e n t , b e a u t i f u l and e x c i t i n g c i t y c e n t r e . Development must be channeled to i t , where business can be conducted most e f f e c t i v e l y , and should not be allowed to draw i t s v i t a l i t y to other s i t e s . 2 6 " There was no end i n s i g h t f o r the s u s t a i n e d growth of employment; the symbol of progress and p r o s p e r i t y . Large t r a c t s of land were zoned fo r dense commercial development, e s p e c i a l l y in the most c e n t r a l p a r t s of the downtown. Widespread c o n c e r n 2 7 arose over the presence of b l i g h t e d areas which e i t h e r l a c k e d re-investment i n t e r e s t or which r e f l e c t e d what were thought to be u n d e s i r a b l e s o c i a l c o n d i t i o n s - poverty and sub-standard housing c o n d i t i o n s . These were an uncomfortable embarrassment in an atmosphere of growth and p r o s p e r i t y , and were thought to u n n e c e s s a r i l y l i m i t the more e x c i t i n g r o l e which the downtown co u l d assume: "Some symptoms of t h i s r e s t r i c t i n g i n f l u e n c e ( the i n a b i l i t y of the CBD to adapt to changing needs ) are worn-out c e n t r a l c i t y areas, drabness, u n s i g h t l i n e s s , shabbiness, inadequate parking and congested s t r e e t s ; i n other words, b l i g h t . 2 8 " I t was f e l t that something was needed to counter the d e t e r i o r a t i n g p h y s i c a l c o n d i t i o n s and u n d e r u t i l i z e d areas w i t h i n 2 6 C i t y of Toronto, 1967, 45. 27 weaver, 1979, 57. 2 8 Cox, 1962, 1 10. 27 and surrounding the downtown. Reductions i n market demand f o r housing downtown, in combination with the a n t i c i p a t i o n of the core's p e r i p h e r a l expansion and the need fo r s u r f a c e p a r k i n g , had s u b s t a n t i a l l y reduced the amount and q u a l i t y of the housing which had p r e v i o u s l y surrounded the commercial c o r e . Yet i t had happened very q u i c k l y , and at such a s c a l e that the marketplace c o u l d not immediately redevelop a l l of the b l i g h t e d areas f o r other uses. The o l d housing stock was d i s a p p e a r i n g , but what would be i t s successor? The marketplace shared l i t t l e i n t e r e s t in r e d e v e l o p i n g b l i g h t e d areas - o f f i c e users p r e f e r r e d to be c o n c e n t r a t e d i n e s t a b l i s h e d o f f i c e areas while warehousing and i n d u s t r i a l uses were b e t t e r accommodated o u t s i d e of the downtown. There was l i t t l e e f f e c t i v e demand for downtown housing. Real and p e r c e i v e d s o c i a l unrest ( r a c i a l t e n s i o n , robbery, v i o l e n c e ) in b l i g h t e d areas had made r e s i d e n t i a l development f o r higher income households too r i s k y , 2 9 and land c o s t s in the commercial core i t s e l f were p r o h i b i t i v e l y high f o r r e s i d e n t i a l uses. The p u b l i c sectors, in both Canada and the United S t a t e s responded to the s i t u a t i o n with the c r e a t i o n of " urban renewal " programs, attempting to " improve " the c e n t r a l c i t y ' s b l i g h t e d areas by s t i m u l a t i n g p r i v a t e re-investment and p r o v i d i n g a l t e r n a t i v e housing f o r e x i s t i n g low-income r e s i d e n t s . 3 0 Throughout the 1950's and e a r l y 1960's urban 2 9 Weimer, 1960, 21. 3 0 Carver, 1975, 139. 28 renewal schemes were put i n t o a c t i o n i n most major Canadian and American c i t i e s , making use of f e d e r a l f i n a n c i a l support f o r the p r e p a r a t i o n of renewal p l a n s , land assemblies and development p r o j e c t s . The p u b l i c powers of condemnation ( e x p r o p r i a t i o n ) were l i b e r a l l y used to undertake major land assemblies i n b l i g h t e d areas and the land was then s o l d or l e a s e d at below-cost to s t i m u l a t e p r i v a t e development i n t e r e s t . P u b l i c agencies o f t e n became p r i n c i p a l tenants i n an e f f o r t to f u r t h e r reduce developers' r i s k s . P u b l i c housing p r o j e c t s were c o n s t r u c t e d and were c h a r a c t e r i s t i c l y very dense so as to both reduce land c o s t s / u n i t and s a t i s f y the high demand f o r s u b s i d i z e d housing. In the U n i t e d S t a t e s , approximately 36 urban renewal p r o j e c t s had been completed by 1960, another 65 were scheduled f o r completion in 1960 and 1961, and an estimated 700 p r o j e c t s were in the p l a n n i n g s t a g e s . 3 1 In Canada, the adoption of urban renewal f o l l o w e d the U.S. program by s e v e r a l years, with the f e d e r a l government beginning i t s p a r t i c i p a t i o n through the f i n a n c i n g of l o c a l urban renewal s t u d i e s . In 1964, t h i s involvement was expanded to allow f e d e r a l c o n t r i b u t i o n s to be made towards the p r e p a r a t i o n of urban renewal schemes and the implementation of c i v i c improvement programs. By 1969, when the program was e f f e c t i v e l y h a l t e d i n Canada, the f e d e r a l government had f i n a n c i a l l y supported 198 urban renewal s t u d i e s , which r e s u l t e d in 135 3 1 Weimer, 1960, 19. 3 2 Government of Canada, 1969, 6. 29 schemes and 48 s p e c i f i c p r o j e c t s . 3 2 As Carver suggests, the grander i n t e n t ofurban renewal had r e a l l y been to b u i l d upon the remaining a t t r i b u t e s of run-down areas without e r a s i n g e v e r y t h i n g that p r e s e n t l y e x i s t e d . 3 3 However, the program soon became noted f o r i t s f i r s t stage ( assembly and s i t e c l e a r a n c e ) and, with inadequate f i n a n c i a l support f o r the c o n s e r v a t i o n of that which was to be r e t a i n e d , the program took on a p e j o r a t i v e meaning. Urban renewal, as a mechanism f o r " improving " downtowns and p r o v i d i n g low-cost housing, came under attack from a l l s i d e s for a v a r i e t y of r e a s o n s : 3 " • i t was argued to be i n s e n s i t i v e to the presence of neighbourhoods, i n d i v i d u a l s and p h y s i c a l a t t r i b u t e s of the renewal area - i t was a " b u l l d o z e r " approach which r e p l a c e d r a t h e r than regenerated; • i t was too c o s t l y i n terms of the p u b l i c s u b s i d i e s i nvolved; ® too o f t e n i t f a i l e d to s t i m u l a t e independent p r i v a t e investment in the b l i g h t e d areas; • the housing p r o j e c t s which were developed were too b i g and too dense - becoming h i g h r i s e " ghettos "; • i t a r t i f i c i a l l y i ncreased/supported land values 3 3 Carver, 1975, 136. 3"Weimer, 1960, 19; Jacobs, 1961; Carver, • 1975, 122; Adamson, 1968; Dennis and F i s h , 1972; Z e i t l i n , 1972; H e i l b r u n , 1974, 274. 30 which c o u l d not be supported by the market i n the program's absence; • the program la c k e d o b j e c t i v e standards by which the me r i t s of urban renewal c o u l d be judged, r e s u l t i n g i n i t s s u c c e s s f u l n e s s being d i f f i c u l t to measure; • i t might have been b e t t e r administered at the l o c a l or r e g i o n a l l e v e l i n order to be more f l e x i b l e and responsive to l o c a l c o n d i t i o n s ; • i t may have been an u n n e c e s s a r i l y massive form of p u b l i c i n t e r v e n t i o n to s t i m u l a t e re-investment. Other, l e s s complex mechanisms may have been e q u a l l y e f f e c t i v e i n encouraging the p r i v a t e s e c t o r to undertake i t s own land assemblies, e.g. tax r e l i e f f o r those owners who pool t h e i r p r o p e r t i e s or d i r e c t land s u b s i d i e s to development companies. In Canada, the d i s m a n t l i n g of the Urban Renewal Program i n 1969 marked the end of any comprehensive e f f o r t on the part of the f e d e r a l government to r e v i t a l i z e downtown a r e a s . 3 5 By the end of the 1960's, Canadian c i t i e s were l e f t with d e t a i l e d urban renewal plans and, i n v a r y i n g amounts, a supply of assembled, developable land, but with l i t t l e hope f o r f e d e r a l f i n a n c i a l support. Many c i t i e s had designated d i s t r i c t s around the 3 5McLemore, et a l ( 1975 ) , note that i n Canada, the Urban Renewal Program was subsequently replaced'by the Neighbourhood Improvement Program ( N.I.P.) and R e s i d e n t i a l R e h a b i l i t a t i o n A s s i s t a n c e Program ( R.R.A.P.), n e i t h e r of which had d i r e c t a p p l i c a t i o n to the downtown core area. 31 downtown as high d e n s i t y r e s i d e n t i a l areas but had no e f f e c t i v e way of s t i m u l a t i n g r e s i d e n t i a l development, 3 6 short of d i r e c t f i n a n c i a l p a r t i c i p a t i o n . By the l a t e 1960's, communities were beginning to r e -examine t h e i r goals and p o l i c i e s f o r the downtown. The plans of the e a r l y 1950' and 1960's had encouraged and s e r v i c e d continued o f f i c e expansion, the consequences of which were now becoming i n c r e a s i n g l y apparent: • the r a p i d growth i n o f f i c e employment and f l o o r s p a c e r e q u i r e d the expansion of t r a n s p o r t a t i o n systems, amenities and p u b l i c f a c i l i t i e s and had c o n t r i b u t e d to a general d e t e r i o r a t i o n of environmental q u a l i t y ( l o s s of d i r e c t s u n l i g h t , c r e a t i o n of wind t u n n e l s , l o s s of h i s t o r i c b u i l d i n g s , e t c . ) ; 3 7 « the r e s i d e n t i a l p o p u l a t i o n had e i t h e r s t a b i l i z e d at very low l e v e l s or was c o n t i n u i n g to d e c l i n e . T h i s ; i t was argued, c o n t r i b u t e d towards the downtown becoming " dead " in the evenings and on weekends, to the u n d e r u t i l i z a t i o n of p u b l i c and p r i v a t e i n f r a s t r u c t u r e and to a need for the continued p r o v i s i o n of commuter s e r v i c e s ; 3 8 • the make-up of the downtown housing stock was c o n t i n u i n g to change - ground-oriented, l a r g e u n i t s 3 6 For example, see C i t y of Toronto, 1975, A-48. 3 7 F r e i l i c h , 1981, 5; Cook, 1980, 6. 3 8 C i t y of Toronto, 1975, A-17; Weaver, 1979, 63. 32 were being demolished and apartment buildings ( which had provided r e l a t i v e l y inexpensive suites ) were redeveloped, largely the result of pressures to provide development si t e s and parking l o t s to service the growth in o f f i c e development. " White painting " was emerging in the inner c i t y , r esulting in the renovation of existing single-family structures in r e s i d e n t i a l areas surrounding the commercial core and further reducing the supply of low cost housing. Luxury condominiums and large apartment buildings were beginning to appear along the edges of the downtown and, to a limited extent, in mixed commercial/residential projects. Questions were being raised by s o c i a l commentators, planners and c i t i z e n s a l i k e - what happens to the residents forced to relocate? Who could afford to l i v e in the expensive units being b u i l t ? Would there be any place for moderate income o f f i c e workers to live? What contribution should the downtown make towards meeting the need for additional housing in the c i t y generally? • the downtown was s t i l l struggling to maintain i t s declining r e t a i l base, which threatened a further reduction in the area's v i t a l i t y and drawing power. 3 9 3 9 Weaver, 1979, .66; Wilkin, 1979, 2 3 . 33 • a v o c a l and v i s i b l e r e a c t i o n a g a i n s t r a p i d change was beginning to s u r f a c e among those d i r e c t l y a f f e c t e d by freeways, urban renewal and p r i v a t e redevelopment. P u b l i c awareness of the c o s t s of growth was beginning to r i s e amid changing s o c i a l v alues r e l a t e d to the q u a l i t y of l i f e , energy c o n s e r v a t i o n , the h i s t o r i c a l p a t t e r n of redevelopment, f i s c a l c o n s t r a i n t s , and so on.' 0 In some c i t i e s , i n t e r i m development c o n t r o l by-laws were enacted to t e m p o r a r i l y l i m i t the c o n s t r u c t i o n of l a r g e o f f i c e b u i l d i n g s while c i t i e s r e -formulated plans f o r the downtown." 1 The a t t i t u d e s of growth and r e - b u i l d i n g p r e v a l e n t in the 1950's and 1960's were, themselves, breeding the search for an a l t e r n a t i v e philosophy towards s o c i a l and m a t e r i a l c o n d i t i o n s . The d e s i r e to make the downtown more than simply a place of economic pr o d u c t i o n - that . i t become a place of enjoyment, a c t i v i t y and d i v e r s i t y - gave support to the arguments f o r downtown housing. The emphasis given the r o l e of housing i n the downtown's recovery took on a z e a l which r e f l e c t e d a s t r i k i n g -back a g a i n s t the entrenched pro-growth a t t i t u d e s of e a r l i e r decades, and the kind of downtown which they had c r e a t e d . "° Goodman, 1971; R e i c h t , 1970. " 1 F o r example, i n Toronto, see the O f f i c i a l Plan Amendment ( By- law 347-73 ) and the Holding By-law ( By-law 348-73 ) and i n Vancouver, see L i n d e l l , 1982, 49. 34 The plans f o r downtown which emerged in. the 1970's were fundamentally d i f f e r e n t from t h e i r 1960's pr e d e c e s s o r s . When they r e f e r r e d to the need f o r a " hea l t h y " downtown, i t was now in terms of a more balanced mix of commercial and r e s i d e n t i a l a c t i v i t i e s , an improved p h y s i c a l environment and a stronger r o l e f o r downtown i n terms of meeting the s o c i a l goals of the community, p a r t i c u l a r l y with respect to housing. The plans attempted to c r e a t e a b e t t e r f i t between the growth of downtown a c t i v i t i e s and i t s i n f r a s t r u c t u r e - t r e a t i n g p u b l i c f a c i l i t i e s as both supports and c o n s t r a i n t s on the growth of downtown.employment. A gr e a t e r emphasis was p l a c e d on mass t r a n s i t as the p r i n c i p a l mode of t r a n s p o r t f o r work-related t r i p s . In a number of c i t i e s , the r a t i o n a l i z a t i o n of growth, p u b l i c s e r v i c e s and environmental q u a l i t y r e s u l t e d in a down-zoning of commercial development p o t e n t i a l from the generous d e n s i t i e s which had been granted i n the 1950's.* 2 At the me t r o p o l i t a n l e v e l , e f f o r t s were launched to d e c e n t r a l i z e a gre a t e r p r o p o r t i o n of f u t u r e o f f i c e growth from the downtown to r e g i o n a l c e n t r e s . Within t h i s context of changing c o n d i t i o n s and g o a l s , the case for i n c r e a s e d housing w i t h i n the downtown was r e - s u r f a c i n g , and the u n d e r l y i n g i n t e n t s becoming more broadly based. * 2 F o r "example, see Vancouver ( Western Realesearch C o r p o r a t i o n L t d . , 1975, 3 ) and Toronto ( C i t y of Toronto, 1975a, 98 ). 35 B. DOWNTOWN HOUSING - UNDERLYING GOALS A strong commitment to i n c r e a s i n g the amount and mix of downtown housing i s emphasized i n the recent plans of v i r t u a l l y a l l of the major c i t i e s examined." 3 P o l i c i e s i d e n t i f y the need to p r o t e c t v i a b l e r e s i d e n t i a l neighbourhoods around downtown, to c r e a t e r e s i d e n t i a l p r e c i n c t s w i t h i n downtown and to encourage the p r o v i s i o n of accommodation throughout downtown as a s i n g l e use or as a component of mixed-use p r o j e c t s . The degree of emphasis p l a c e d on r e s i d e n t i a l development v a r i e s from plan to p l a n , as does the comprehensiveness of the housing goals and p o l i c i e s adopted. Planners have argued that the r a t i o n a l e f o r i n c r e a s i n g the downtown's r e s i d e n t i a l p o p u l a t i o n i s based on a number of p r o p o s i t i o n s ( which re-appear c o n s i s t e n t l y throughout pl a n n i n g documents ) . The reasons given for e n l a r g i n g the r e s i d e n t i a l base are sometimes inter-woven with goals r e l a t e d to what the housing should be l i k e ( a f f o r d a b i 1 i t y , t a r g e t groups, p h y s i c a l or environmental aspects of the b u i l d i n g s , e t c.) although, g e n e r a l l y , very s p e c i f i c o b j e c t i v e s about the kind of r e s i d e n t i a l mix and environment to be c r e a t e d through the bonus are l e s s e v i d e n t . We w i l l c o n s i d e r f i r s t a s y n t h e s i s of the r a t i o n a l e which has been advanced i n downtown plann i n g documents for promoting r e s i d e n t i a l development, i d e n t i f y i n g the goals to " 3 F o r examples, see San F r a n c i s c o , 1981, H-7; Denver, 1981, i i i ; C a l g a r y , 1978, 64; San Diego, 1979, 38; Ottawa, 1979, 25; P h i l a d e l p h i a , 1976, 10; S e a t t l e , 1981a, 3; A t l a n t a , 1976, 26; M i n n e a p o l i s , 1979, 18; B u f f a l o , 1971, 46; P o r t l a n d , 1978,1; Vancouver, 1974, 56-; Edmonton, 1981; or Toronto, 1975. 36 be achieved,, the c o n t r i b u t i o n which housing i s argued to make towards a c h i e v i n g those goals and the assumptions/values which underly each argument. The r a t i o n a l e w i l l then be d i s c u s s e d i n terms of the v a l i d i t y of assumptions and a l t e r n a t i v e v a l u e s / s o l u t i o n s which might a l s o be c o n s i d e r e d i n d e f i n i n g goals and choosing among a l t e r n a t i v e means. 1. G0AL#1 - EFFICIENCY I t i s a w e l l accepted view that l o c a l governments should be r e s p o n s i b l e managers of p u b l i c resources, promoting the f u l l e s t u t i l i z a t i o n of e x i s t i n g c a p i t a l investments as w e l l as the c o s t / e f f e c t i v e n e s s of planned expenditures while, more g e n e r a l l y , being cognizant of the p r i v a t e c o s t s r e s u l t i n g from p u b l i c a c t i o n s . The u n d e r u t i l i z a t i o n of p u b l i c investments in the downtown i s f r e q u e n t l y c i t e d as an i n e f f i c i e n c y , as i s the c o n s t r u c t i o n of r o a d / t r a n s i t improvements to s e r v i c e commuters while lar g e t r a c t s of downtown land remain v i r t u a l l y vacant ( e.g. urban renewal areas, railway rights-of-way,- ob s o l e t e w a r e h o u s e / i n d u s t r i a l areas ). The i n t r o d u c t i o n of housing, i t has been argued, c o u l d reduce these i n e f f i c i e n c i e s in s e v e r a l ways: • reducing p u b l i c and p r i v a t e commuting c o s t s by having more workers w i t h i n walking d i s t a n c e of downtown jobs; and • by i n t e n s i f y i n g land uses on u n d e r u t i l i z e d s i t e s , more f u l l y u t i l i z i n g e x i s t i n g i n f r a s t r u c t u r e and 37 generating g r e a t e r tax revenues from b l i g h t e d areas. 2. GOAL#2 - A " LIVABLE " DOWNTOWN There i s c l e a r l y the p e r c e p t i o n r e f l e c t e d i n p l a n n i n g documents that the downtown i s " dead " ,s u n i n v i t i n g and i n h o s p i t a b l e . There are, as w e l l , arguments and sentiments that the area should not be l i f e l e s s - r a t h e r , that i t should be robust and e n t i c i n g , a mixing of s o c i a l , c u l t u r a l and shopping a c t i v i t y and a r e f l e c t i o n of the c i t y ' s energy and d i v e r s i t y every evening, every weekend. I t has been widely argued that a c i t y needs a focus or centre of a c t i v i t y , and that that focus should be the downtown - a f t e r a l l , has that not been i t s h i s t o r i c r o l e ? and i s a focus s t i l l not needed? and i s the downtown not i n a c e n t r a l l o c a t i o n ? and are there not a l r e a d y a c t i v i t i e s and f a c i l i t i e s to b u i l d upon? A g r e a t e r downtown r e s i d e n t i a l p o p u l a t i o n i s b e l i e v e d to make two important c o n t r i b u t i o n s to t h i s intended r e v i v a l of a c t i v i t y and atmosphere: • i n c r e a s i n g the number of downtown users, thereby p r o v i d i n g a broader b a s i s of market support f o r a great e r mix of a c t i v i t i e s extending beyond the working hours; and • by p r o v i d i n g the c a s u a l , informal s u r v i e l l a n c e of p u b l i c areas ( sidewalks, parks ) which might allow other users to f e e l s a f e r and more r e l a x e d ( and 38 thereby drawing more users .to the area ). 3. GOAL#3 - BROADENING LIFESTYLE OPTIONS In r e c o g n i z i n g a v a r i e t y of consumer p r e f e r e n c e s f o r l i v i n g arrangements and l i f e s t y l e o p tions ( and the p o s s i b i l i t y that some households might p r e f e r a downtown l o c a t i o n ) i t has been argued that housing should be p e r m i t t e d throughout the downtown. F u r t h e r , i t i s sometimes argued that the option to l i v e downtown should not be l i m i t e d ( as the market would do ) only to those consumers having e f f e c t i v e demand. I t i s sometimes argued that a l l households should have the o p p o r t u n i t y to choose among a range of a l t e r n a t i v e housing forms and l o c a t i o n s and that the a v a i l a b i l i t y of a f f o r d a b l e u n i t s f o r the downtown labour f o r c e may be i n the best i n t e r e s t s of downtown businesses anyway ( which w i l l be d i s c u s s e d l a t e r ). I t i s sometimes f e l t that the area's e x i s t i n g r e s i d e n t s have value as having c r e a t e d a r e c o g n i z a b l e neighbourhood, that t h e i r r e s i d e n c y should be p r o t e c t e d and that they c o u l d p r o v i d e the foundations f o r a new downtown community. P e r m i t t i n g the development of market u n i t s throughout the core would only provide a p a r t i a l step towards a c h i e v i n g t h i s goal - i n c e n t i v e s and/or requirements have a l s o been j u s t i f i e d on the b a s i s that a f f o r d a b l e u n i t s should be p r o v i d e d . 39 4. G0AL#4 - SUPPORTING DOWNTOWN ACTIVITIES It i s widely accepted that downtowns should continue to expand t h e i r employment o p p o r t u n i t i e s and l e v e l of r e t a i l s a l e s . For e x i s t i n g businesses to expand and f o r new firms to l o c a t e downtown there must e x i s t an a v a i l a b l e labour supply w i t h i n an easy commuting d i s t a n c e . For r e t a i l o u t l e t s to t h r i v e and expand, there must be s u f f i c i e n t consumer demand. The c r e a t i o n of a s u b s t a n t i a l r e s i d e n t i a l p o p u l a t i o n w i t h i n the downtown, i t i s argued, c o u l d have two favourable consequences: • by accommodating more households ( many of which might be employees ) , the downtown may remain c o m p e t i t i v e with the expansion of businesses elsewhere in the c i t y i n terms of r e l a t i v e p r o x i m i t y to the labour f o r c e ; and • more consumers w i t h i n walking d i s t a n c e of downtown r e t a i l a c t i v i t y w i l l undoubtedly lend market support to e x i s t i n g businesses and generate a wider v a r i e t y of r e t a i l / entertainment a c t i v i t i e s . I t has a l s o been argued that more r e s i d e n t s may r e s u l t i n a gre a t e r v a r i e t y ( and improved q u a l i t y ) of p u b l i c s e r v i c e s and amenities being provided throughout the downtown - b e n e f i t s which c o u l d be enjoyed by a l l downtown users. 40 5. GOAL#5 - STABILITY IN THE LONG RUN The downtown has. become i n c r e a s i n g l y s p e c i a l i z e d i n both i t s form ( c l o s e l y spaced o f f i c e towers ) and f u n c t i o n ( o f f i c e -o r i e n t e d employment ). I t has been argued that a hi g h degree of s p e c i a l i z a t i o n i n c r e a s e s the area's v u l n e r a b i l i t y should there be sudden or major s h i f t s i n the economy, or should there emerge a more advantageous l o c a t i o n ( o u t s i d e of downtown ) f o r such a c t i v i t i e s . The l o c a t i n g of employment o u t s i d e of downtown may occur spontaneously, w i t h i n the marketplace, or be encouraged/enforced through employment d e c e n t r a l i z a t i o n p o l i c i e s . The i n t e g r a t i o n of a s u b s t a n t i a l r e s i d e n t i a l base, i t has been argued, might ensure continued a c t i v i t y and tax generating a b i l i t y f o r the area should business a c t i v i t y d e c l i n e . As r e s i d e n t i a l b u i l d i n g s would t y p i c a l l y be developed at s u b s t a n t i a l l y lower d e n s i t i e s than i n t e n s i v e o f f i c e b u i l d i n g s ( and l i k e l y spaced f u r t h e r apart ) , the p h y s i c a l c h a r a c t e r of an area with housing might a l s o prove to be more adaptable than one without. C. HOUSING AS A " SOLUTION " ? It i s c l e a r from the arguments advancing the p r o v i s i o n of downtown housing that we are d e a l i n g with both f a c t u a l and normative p r o p o s i t i o n s . The f a c t u a l p r o p o s i t i o n s - that net savings of p u b l i c resources w i l l r e s u l t , or that more r e s i d e n t s w i l l support a broader base of r e t a i l a c t i v i t i e s - may be, to some extent, measurable through e m p i r i c a l i n v e s t i g a t i o n . The 41 normative p r o p o s i t i o n s - that low-income households should have the o p p o r t u n i t y to l i v e downtown, or that e x i s t i n g neighbourhoods should be p r o t e c t e d / r e i n f o r c e d - are not capable of being t e s t e d , but may only be debated and r e c o n s i d e r e d i n l i g h t of d i f f e r e n t v a l u e s , circumstances and i n t e r e s t s . Between the extremes of f a c t and value l i e s a l e s s c h a r t e d ( but no l e s s important ) area of debate d e a l i n g with the r e l a t i o n s h i p between users and t h e i r environment - f o r example, at what point does b u i l d i n g s i z e , the a v a i l a b i l i t y of d i r e c t s u n l i g h t or the frequency of s o c i a l encounters on a sidewalk begin to a d v e r s e l y a f f e c t the user's p e r c e p t i o n of s e c u r i t y and h i s l e v e l of p h y s i c a l comfort? The a p p r o p r i a t e n e s s of housing in the downtown i s c l e a r l y as much a value-based judgement as i t i s a " t e c h n i c a l " p r e s c r i p t i o n . While there i s no shortage of good i n t e n t i o n s about the d e s i r a b i l i t y of housing in commercial areas one i s hard pressed to f i n d i n many downtown planning documents any r i g o r o u s or q u a l i t a t i v e a n a l y s i s (. or r e f e r e n c e to such a n a l y s i s ) of whether the net s o c i a l b e n e f i t s to be gained are expected to exceed t h e i r c o s t s - although i t i s c o n s i s t e n t l y assumed that they w i l l . There are s e v e r a l aspects of t h i s assumption which deserve c l o s e r s c r u t i n y ; I t would be m i s l e a d i n g to suggest that bonused housing i s without p u b l i c c o s t , f o r there may be incremental c o s t s r e l a t e d to s e r v i c i n g the r e s i d e n t p o p u l a t i o n and environmental c o s t s generated by the a d d i t i o n a l b u i l d i n g bulk ( the r e d u c t i o n of 42 s u n l i g h t and views, e t c . ) . O f f - s e t t i n g these c o s t s may be marginal r e d u c t i o n s i n commuting c o s t s and perhaps the b e n e f i t s of a more l i v e l y , safe environment. What i s not c l e a r i s the extent to which r e s i d e n t s w i t h i n the downtown w i l l i n c rease p e d e s t r i a n volumes, p u b l i c f a c i l i t y use and l e v e l s of evening/weekend a c t i v i t y - w i l l t h e i r c o n t r i b u t i o n be enough to o f f - s e t p o s s i b l e p u b l i c c o s t s ? Most of the downtown plans reviewed assume that the p u b l i c b e n e f i t s w i l l l i k e l y exceed the c o s t s - and perhaps they do - but there appears to be l i t t l e i n d i c a t i o n that d e t a i l e d e m p i r i c a l a n a l y s i s has been undertaken to support t h i s p o s i t i o n . T h i s i s not to suggest that g r e a t e r r e s i d e n t i a l d e n s i t i e s adjacent to the downtown w i l l not l i k e l y c o n t r i b u t e to i t s v i t a l i t y . What i s unclear i s whether the marginal c o n t r i b u t i o n to v i t a l i t y and e f f i c i e n c y of r e s i d e n t s w i t h i n the downtown i s l i k e l y to exceed the p u b l i c c o s t s which may be c r e a t e d - i s a l i m i t e d amount of housing worth the p u b l i c e f f o r t and c o s t s which may be r e q u i r e d to o b t a i n i t ? R e c o n s i d e r i n g the argument that u n d e r u t i l i z e d areas should be redeveloped we f i n d two u n d e r l y i n g q u e s t i o n s - must they be redeveloped in the short run and, i f so, i s housing the best use for those areas? U n d e r u t i l i z e d areas are not c r e a t e d by chance, but r a t h e r r e f l e c t a changing p a t t e r n of consumer pre f e r e n c e s ""The e x p e c t a t i o n that environmental c o s t s may r e s u l t from i n c r e a s e d d e n s i t y or bulk i s , i n f a c t , p a r t of the r a t i o n a l e f o r e s t a b l i s h i n g bulk c o n t r o l s on downtown commercial b u i l d i n g s . There i s l i t t l e b a s i s f o r arguing that many of the c o s t s r e s u l t i n g from bulk w i l l be any l e s s adverse where the b u i l d i n g i s occupied by r e s i d e n t s , as opposed to b u s i n e s s e s . 43 and purchasing power. Housing i s l a c k i n g in these areas because the consumers of housing s e r v i c e s have not demonstrated a s u f f i c i e n t l y strong e f f e c t i v e demand in the marketplace f o r housing i n these l o c a t i o n s . Where demand might e x i s t , i t may be the case that i t i s unable to compete with other p o t e n t i a l users for the space, p r i n c i p a l l y being downtown businesses and land i n v e s t o r s . I t c o u l d be argued that b l i g h t e d areas s i g n a l the gradual t r a n s i t i o n i n an area's " h i g h e s t and best use " which, in the long run, w i l l r e s u l t i n the area's redevelopment i n response to market demand. But i s the community w i l l i n g to wait for the long run - f o r the market to slowly take i t s course or i s i n t e r v e n t i o n d e s i r a b l e to hasten the t r a n s i t i o n or change i t s d i r e c t i o n ? It i s not u n l i k e l y that d i f f e r e n t communities may have d i f f e r e n t t o l e r a n c e s f o r the presence of u n d e r u t i l i z e d areas - there i s probably no simple, g e n e r a l l y a p p l i c a b l e answer for a l l communities or f o r a l l b l i g h t e d areas with respect to the d e s i r e d t iming of t h e i r redevelopment. Even i f a community chooses to s t i m u l a t e redevelopment, i t c o u l d be argued that other types of uses ( e.g. i n s t i t u t i o n a l , o f f i c e j might a l s o r e s u l t i n a f u l l e r u t i l i z a t i o n of e x i s t i n g i n f r a s t r u c t u r e , supported by a g r e a t e r d e n s i f i c a t i o n of e x i s t i n g neighbourhoods around the downtown ( but s t i l l w i t h i n walking d i s t a n c e ). The community might then debate the extent to which surrounding neighbourhoods should accommodate redevelopment and attempt to measure the d i f f e r e n c e s i n net p u b l i c c o s t s a s s o c i a t e d with each a l t e r n a t i v e . 44 While the d e s i r e to rejuvenate the downtown's a c t i v i t y base i s a widely shared g o a l , i n c r e a s i n g the r e s i d e n t p o p u l a t i o n i s e s s e n t i a l l y a demand-side s o l u t i o n - by adding r e s i d e n t s , i t has been argued, aggregate purchasing power i s i n c r e a s e d and a gre a t e r v a r i e t y of a c t i v i t i e s supported. But there may be a su p p l y - s i d e s o l u t i o n as w e l l . I t might be argued t h a t , i f there is- to be p u b l i c i n t e r v e n t i o n , i t c o u l d be more e f f e c t i v e i f d i r e c t e d towards c r e a t i n g " people generators " ( shopping areas, stadiums, e t c . ) which would a t t r a c t users from a c r o s s the urban a r e a . T h i s , in t u r n , might improve the downtown's image and amenity, thereby i n d i r e c t l y s t i m u l a t i n g a stronger demand f o r housing in the area. Obviously, the philosophy of " p r o v i d e housing, and a c t i v i t i e s may f o l l o w " i s q u i t e d i f f e r e n t from " provide more a c t i v i t i e s , and housing w i l l f o l l o w ". If a community were only i n t e r e s t e d i n st r e n g t h e n i n g the downtown's a c t i v i t y base, they might adopt the l a t t e r approach, a c c e p t i n g the gradual p r o v i s i o n of market housing as being d e s i r a b l e , although not a necessary p r e r e q u i s i t e to ge n e r a t i n g more a c t i v i t y . The r a t i o n a l e f o r housing, however, extends beyond simply the support of i n t e r e s t i n g a c t i v i t i e s f o r non-residents ( employees, shoppers, v i s i t o r s ) and i s given purpose in and of i t s e l f by v i r t u e of the e q u i t y ( v a r i e t y of housing c h o i c e s ) and s t a b i l i t y ( mixed land u s e s / a c t i v i t i e s ) arguments. The e q u i t y or " l i f e s t y l e " argument r e s t s on the premise that the marketplace should not be the s o l e o r c h e s t r a t o r of the s p a t i a l a l l o c a t i o n of housing f o r v a r i o u s income or l i f e s t y l e groups. 45 Beyond what one c o u l d a f f o r d i n the housing market l i e s the c o n v i c t i o n that low income households should not be p r i c e d out of an area of the c i t y which might be w e l l - s u i t e d to t h e i r needs. I t has been argued that there should be equal access to housing o p p o r t u n i t i e s f o r a v a r i e t y of household types. The i d e a l of " equal access ", however, i s tempered by economic r e a l i t i e s - p u b l i c agencies may face budget c o n s t r a i n t s which place severe l i m i t s on the p r o v i s i o n of s u b s i d i z e d u n i t s i n r e l a t i v e l y c o s t l y l o c a t i o n s . In terms of p u b l i c e f f i c i e n c y , i t may be more d e s i r a b l e to accommodate s u b s i d i z e d households i n l o c a t i o n s o u t s i d e of the downtown and then s u b s i d i z e t h e i r commuting c o s t s . " 5 One might a l s o q u e s t i o n the extent to which c e r t a i n kinds of s u b s i d i z e d households accommodated in the downtown core are r e a l l y l i k e l y to s a t i s f y o b j e c t i v e s f o r the area. Some households ( e.g. low income ) may o f f e r l i t t l e market support for r e t a i l a c t i v i t i e s . F a m i l i e s with c h i l d r e n may f i n d the area to be- unsafe and/or l a c k i n g the support s e r v i c e s / a m e n i t i e s which they r e q u i r e . S t i l l o thers ( e.g. the e l d e r l y and unemployables ) may make l i t t l e c o n t r i b u t i o n to reduced commuting c o s t s or to a more a c c e s s i b l e labour p o o l . The r i g h t to " equal access " to the downtown as a r e s i d e n t i a l l o c a t i o n must be c o n s i d e r e d in l i g h t of the c o s t s of s u p p o r t i n g that r i g h t , the c o n t r i b u t i o n which d i f f e r e n t kinds of households might make towards a c h i e v i n g the goals f o r the area and , " 5 T h e r e appears to be l i t t l e i n d i c a t i o n that d e t a i l e d e m p i r i c a l a n a l y s i s has been undertaken to t e s t the comparative c o s t s / b e n e f i t s of these two a l t e r n a t i v e s . 46 f i n a l l y , the s u i t a b i l i t y of the l o c a t i o n r e l a t i v e to the needs of d i f f e r e n t types of households. In the f i n a l a n a l y s i s , i t i s probably not p o s s i b l e to argue a d e f e n s i b l e , g e n e r a l l y a p p l i c a b l e " yes " or " no " answer to the q u e s t i o n of whether housing should be encouraged throughout the downtown. The a n a l y s i s r e q u i r e d f o r e v a l u a t i n g i t s d e s i r a b i l i t y i n a s p e c i f i c s i t u a t i o n ( e.g. l o c a t i o n , economy, po i n t i n time ) would demand a thorough i n v e s t i g a t i o n of the magnitude, timing and i n c i d e n c e of both b e n e f i t s and c o s t s of each of the " housing " and " non-housing " a l t e r n a t i v e s . These would then need to be e v a l u a t e d i n l i g h t of the mix of goals and i n t e r e s t s which may e x i s t w i t h i n the community. Because of the pervasiveness and- complexity of p o t e n t i a l economic, s o c i a l and environmental impacts, such a n a l y s i s would c l e a r l y be d i f f i c u l t . As d i s c u s s e d e a r l i e r , p u b l i c and p r i v a t e b e n e f i t s / c o s t s may be l a r g e l y non-economic ( e q u i t y , s o c i a l and environmental c o n s i d e r a t i o n s ) l e a d i n g to problems with respect to t h e i r i d e n t i f i c a t i o n , measurement and comparison. Monetary impacts, while capable of e m p i r i c a l p r e c i s i o n , may be e q u a l l y d i f f i c u l t to estimate as one must d e a l with marginal c o s t s , i n d i r e c t impacts, p u b l i c and p r i v a t e impacts and u n c e r t a i n t y . The o p p o r t u n i t y c o s t s of not having housing may be p a r t i c u l a r l y d i f f i c u l t to reach agreement on c o n s i d e r i n g the d i s p a r a t e goals ( in terms of what the downtown ought to be l i k e ) which may e x i s t among i n t e r e s t groups. Some may c o n s i d e r the o p p o r t u n i t y c o s t s to be r e f l e c t e d in a more l i m i t e d set of c h o i c e s f o r 47 c i t i z e n s ( in terms of p l a c e s to l i v e and i n t e r e s t i n g p l a c e s to v i s i t ), i n reduced user s a t i s f a c t i o n ( p s y c h o l o g i c a l d i s c o m f o r t ) i n being downtown, or i n a d d i t i o n a l commuting c o s t s to be i n c u r r e d . Others may d i s p u t e or place l i t t l e value on such c o n s i d e r a t i o n s . In reviewing the r e l e v a n t l i t e r a t u r e and p l a n n i n g documents, i t has been d i f f i c u l t to f i n d very much t e c h n i c a l a n a l y s i s i n d i c a t i n g that any p a r t i c u l a r kind or t h r e s h o l d amount of housing must be present in the downtown for the goals i d e n t i f i e d e a r l i e r to be r e a l i z e d . One normally f i n d s only the argument that more housing of any kind would be p r e f e r r a b l e to l e s s . In any case, t e c h n i c a l a n a l y s i s c o u l d only measure and compare the magnitude/incidence of b e n e f i t s and c o s t s - the importance which i s a s s o c i a t e d with each c o u l d be expected to vary * among i n t e r e s t groups w i t h i n the community. As the expected impacts were c o n s i d e r e d and debated, a p o l i t i c a l d e c i s i o n would emerge, drawing on the r e s u l t s of t e c h n i c a l a n a l y s i s but r e f l e c t i n g more the t r a d e - o f f of i n t e r e s t s and goals made by p u b l i c p o l i c y makers. Whether a downtown becomes " b e t t e r " or " worse •" remains a judgement to be made by the c i t y and the area's users, r e l a t i v e to t h e i r e x p e c t a t i o n s of what downtown should or should not be. The area, and the process by which i t i s shaped, w i l l not l i k e l y s a t i s f y a l l of the goals of d i v e r g e n t i n t e r e s t s . One i s l e f t with the impression that the i n t r o d u c t i o n of housing i n t o the downtown as a means of a c h i e v i n g the v a r i e t y of 48 g o a l s d i s c u s s e d e a r l i e r has been based on a combination of l i m i t e d t e c h n i c a l arguments, good i n t e n t i o n s and i n t u i t i o n . The goals f o r downtown, and the extent to which housing might c o n t r i b u t e to t h e i r r e a l i z a t i o n , are not p r o p o s i t i o n s which should be r e a d i l y accepted. Many of the arguments which underly t h e i r c r e d i b i l i t y appear to be untested. As w e l l , i t has been d i f f i c u l t t o - f i n d examples of a r i g o r o u s examination of a l t e r n a t i v e s to e i t h e r the f u t u r e r o l e of downtown or to the d i r e c t i n f u s i o n of housing i n t o the area as a s o l u t i o n to the downtown's " problems ". In a l l of the c i t i e s examined, the s o l u t i o n was the same - the downtown should continue to accommodate the growth of employment while, at the same time, encourage the p r o v i s i o n of housing to m i t i g a t e many of the u n d e s i r a b l e c o n d i t i o n s which such growth generates. F u r t h e r , there was l i t t l e i n d i c a t i o n that any i n v e s t i g a t i o n s had been undertaken to evaluate the impact of housing b u i l t through bonus systems on the v i t a l i t y , e f f i c i e n c y or q u a l i t a t i v e aspects of downtown. While one may argue the extent to which housing i s or i s not a p r e r e q u i s i t e for the downtown's improvement, the f a c t that a l l of the m u n i c i p a l i t i e s examined regard i n c r e a s e d housing as an o p p o r t u n i t y to improve the area cannot be denied. Recognizing t h i s commitment, but being w e l l aware of the l i m i t a t i o n s of the arguments which underly i t , we now t u r n our a t t e n t i o n to the second q u e s t i o n - i s the d e n s i t y bonusing technique l i k e l y to be an e f f e c t i v e mechanism f o r s t i m u l a t i n g the market to provide new d w e l l i n g u n i t s - of any type or 49 amount? The f o l l o w i n g chapter addresses t h i s q u e s t i o n 50 I V . B O N U S E S - I N T H E O R Y A N D P R A C T I C E For a bonus system to be s u c c e s s f u l i t must provide a s u f f i c i e n t economic i n c e n t i v e to induce development. There are s e v e r a l parameters by which i t s p o t e n t i a l e f f e c t i v e n e s s can be guaged: • can d e n s i t y bonuses pr o v i d e an economic i n c e n t i v e and, i f so, f o r whom? • can the amount of bonus ( a d d i t i o n a l square footage ) and i n c e n t i v e ( premium beyond earned r e t u r n s ) r e q u i r e d to s t i m u l a t e r e s i d e n t i a l development be a c c u r a t e l y determined? e can the i n c e n t i v e generated by a bonus be s u s t a i n e d over time? These q u e s t i o n s provide a b a s i s f o r the examination of the p o t e n t i a l e f f e c t i v e n e s s of r e s i d e n t i a l d e n s i t y bonuses which f o l l o w s . The i n v e s t i g a t i o n w i l l begin with a b r i e f h i s t o r i c a l review of the e v o l u t i o n of d e n s i t y bonuses as a method of land use c o n t r o l , followed by a d e s c r i p t i o n of the mechanism i t s e l f and the manner in which bonuses have been c a l c u l a t e d i n the p a s t . The n o t i o n of r e s i d e n t i a l d e n s i t y bonuses w i l l then be examined w i t h i n the context of that body of theory which attempts to d e s c r i b e the processes by which land values and land uses are determined. The expected i n t e g r a t i o n of bonuses w i t h i n the marketplace w i l l be c o n s i d e r e d i n l i g h t of that theory. 51 F i n a l l y , a number of c r i t i c i s m s w i l l be put forward.in response^ to the q u e s t i o n s r a i s e d above - c r i t i c i s m s which, i t w i l l be argued, s e r i o u s l y c h a l l e n g e the p r o p o s i t i o n that r e s i d e n t i a l d e n s i t y bonuses are l i k e l y to be an e f f e c t i v e land use c o n t r o l mechanism. A. ORIGINATION The general concept of " i n c e n t i v e " or " bonus " zoning i s c r e d i t e d " 6 with beginning i n New York C i t y " 7 in 1961 as a r e a c t i o n to the i n a b i l i t y of the t r a d i t i o n a l land use zoning system to achieve newly emerging p u b l i c g o a l s . The land use c o n t r o l s then i n use were not ensuring that the d e s i r e d amenities were provided through redevelopment. Land in the downtown core was f i r s t down-zoned and a system of " bonuses " c r e a t e d which allowed developers to earn the p r e v i o u s l y p e r m i t t e d d e n s i t i e s by p r o v i d i n g p e d e s t r i a n amenities ( housing was not bonused ) . " 8 Barnett suggests that the " bonus " was provided i n p a r t i a l compensation f o r the down-zoning which o c c u r r e d . " 9 Benson argues that a down-zoning d i d not occur i n " 6Rose, 1976, 62; Whyte, 1981, 24; Barnett, 1974, 40; Witherspoon, 1977, 18; Cook, 1980, 87-98. Both Cook, 1980, 115; and Weaver, 1979, 58;, however, i n d i c a t e t h a t bonuses had a c t u a l l y been i n c o r p o r a t e d i n t o Chicago's 1957 downtown zoning ordinance. A bonus system was a l s o proposed f o r Vancouver in 1961, see C i t y of Vancouver, 1961, 16. " 7 Zoning R e s o l u t i o n of the C i t y of New York, 11-122(1961). " 8 Whyte, 1981, 24; Barnett, 1974, 40. For an example of the system's s t r u c t u r e see Cook, 1980, 87. " 9 B a r n e t t , 1974, 40. 52 any r e a l sense s i n c e the newly a c h i e v a b l e d e n s i t i e s were the same as those p r e v i o u s l y p e r m i t t e d . 5 0 Whyte suggests that the bonus may have been a mechanism f o r promoting the s u b s t i t u t i o n of new re q u i r e m e n t s / r u l e s i n p l a c e of the o l d development r e g u l a t i o n s which were p r e v i o u s l y i n e f f e c t . 5 1 The use of d e n s i t y bonuses to o b t a i n p u b l i c amenities was a p p l i e d i n the downtown areas of a number of c i t i e s d u r i n g the 1960's and 1970's. The technique was b e l i e v e d to b e n e f i t both the p u b l i c environment ( through the p r o v i s i o n of amenities ) 5 2 and p r i v a t e development i n t e r e s t s ( through higher a c h i e v a b l e d e n s i t i e s ) . 5 3 R e s i d e n t i a l d e n s i t y bonuses ( manditory and o p t i o n a l ) were int r o d u c e d i n suburban areas i n the e a r l y 1970's in an attempt to provide below-market housing in otherwise middle and upper income communities. 5" As the d e s i r e to encourage housing in the downtown gained momentum through the 1960's and 1970's, attempts were made to use the " bonus " to e n t i c e o f f i c e developers to i n c o r p o r a t e housing i n t o t h e i r 5 0 Benson, 1970, 897. 5 1 Whyte, 1981. 5 2 T h e kinds of p u b l i c " amenities " which are commonly gained through d e n s i t y bonuses i n c l u d e , among o t h e r s , p l a z a s , connections to p u b l i c t r a n s i t f a c i l i t i e s , arcades, a d d i t i o n a l b u i l d i n g setbacks ( a l l o w i n g s u n l i g h t p e n e t r a t i o n ), t h e a t r e s , e l e v a t e d walkways f o r p e d e s t r i a n s and s o c i a l / r e c r e a t i o n a l f a c i l i t i e s . See, f o r example, Cook, 1980, 109. 5 3 Cook, 1980, 23; Weaver, 1979, 59. 5 " Erber and P r i o r , 1974. 5 5 F o r example, see C i t y of Toronto, 1980, 39; Washington,D.C.., ( Zogby, 1979, 2 ) ; Anchorage ( Cook, 1980, 110 ) ; C i t y of Vancouver, 1975; C i t y of Calgary, 1973, 127; Witherspoon, 1977, 18. 53 p r o j e c t s . 5 5 The r e s i d e n t i a l bonus was expected to overcome many of the problems which had h i s t o r i c a l l y h i n d e r e d both p r i v a t e and p u b l i c e f f o r t s to p r o v i d e downtown housing. I n v e s t o r s had been r e l u c t a n t to b u i l d housing downtown ( except perhaps a l i m i t e d supply of luxury condominiums ) f o r s e v e r a l r e a s o n s : 5 6 • land c o s t s / u n i t were t y p i c a l l y too high; • o f f i c e c o n s t r u c t i o n ( or the l i k e l i h o o d of f u t u r e re-zonings to permit o f f i c e development ) was g e n e r a l l y more p r o f i t a b l e ; • downtown may have lacked a c o m p e t i t i v e l e v e l of r e s i d e n t i a l amenity r e l a t i v e to other l o c a t i o n s i n the market; • there may not have been evidence of a c l e a r l y d e f i n e d or s u f f i c i e n t l y l a r g e market demand for downtown housing; and/or • mixed-use p r o j e c t s were s t i l l r e l a t i v e l y u n f a m i l i a r , not s u f f i c i e n t l y t e s t e d in the market and argued to be too c o s t l y , r i s k y and complicated. For t h e i r p a r t , p u b l i c agencies had c o n s t r u c t e d a l i m i t e d number of p r o j e c t s using s u b s i d i e s from s e n i o r l e v e l s of government, but the p o s s i b i l i t i e s of major a d d i t i o n s to the downtown stock were l i m i t e d b e c a u s e : 5 7 Weimer, 1960, 21; Cook, 1980, 1976. Cook, 1980, 26; Kendig, 1980, 1980, 2. 8; Weaver, 1979, 65; Petersen, 339; Clayton Research A s s o c i a t e s , 54 • f e d e r a l and p r o v i n c i a l / s t a t e subsidy programs o f f e r e d l i m i t e d r e s o u r c e s ; • land c o s t s may have been too high f o r government s u b s i d i z e d programs ( per u n i t cost maximums ) ; • p u b l i c agencies d i d not want to c r e a t e a p e r c e p t i o n that f u t u r e downtown r e s i d e n t s would r e f l e c t a d i s p r o p o r t i o n a t e share of low income, e l d e r l y households. The Urban Renewal Programs had been v i c i o u s l y c r i t i c i z e d and brought to a h a l t , and governments may have f e l t that a second major program co u l d be p o o r l y r e c e i v e d . Even i f s u c c e s s f u l , more s u b s i d i z e d housing might have discouraged p r i v a t e investment. From the market's p e r s p e c t i v e , the " bonus " provided an u n o f f e n s i v e i n t e r v e n t i o n - a market-oriented s o l u t i o n to the p r o v i s i o n of housing downtown. 5 8 The bonus appeared e s p e c i a l l y reasonable and a t t r a c t i v e in l i g h t of the emerging trend back to mixed-use b u i l d i n g s - developers were to be given a choice 8One i n d i c a t i o n of the bonus system's apparent acceptance in the marketplace i s that i t has yet to be c h a l l e n g e d i n the c o u r t s , which may suggest that i t i s e i t h e r w e l l r e c e i v e d , i n c o n s e q u e n t i a l to development or d i f f i c u l t to c h a l l e n g e . For a d i s c u s s i o n of the l e g a l aspects of bonuses see Benson, 1970; and Meshenberg, 1976, 43. 55 between s i n g l e and mixed-use b u i l d i n g s , 5 9 and rewarded i f they opted f o r the l a t t e r . For the p u b l i c s e c t o r , the technique appeared to o f f e r an inexpensive, uncomplicated, l o w - r i s k stimulus f o r c o n s t r u c t i o n - a " something f o r nothing " s o l u t i o n . 6 0 B. DEFINITION AND STRUCTURE The term " bonus " has been used l i b e r a l l y throughout the l i t e r a t u r e d e s c r i b i n g " i n c e n t i v e zoning " f o r r e s i d e n t i a l uses. A general d e f i n i t i o n has been o f f e r e d by Meshenberg 6 1 which, i n the simplest of terms, i s " the o p p o r t u n i t y ( f o r developers ) to earn more money ". I t i s necessary, however, to make the d e f i n i t i o n more s p e c i f i c so as to d i f f e r e n t i a t e between the a d d i t i o n a l b u i l d i n g d e n s i t y c r e a t e d and the economic i n c e n t i v e which may or may not occur as a r e s u l t . A bonus i s used i n t h i s t h e s i s to mean an a d d i t i o n to permitted b u i l d i n g d e n s i t i e s , and nothing more. The r e s i d e n t i a l d e n s i t y bonus i s e s s e n t i a l l y the g r a n t i n g of a d d i t i o n a l b u i l d i n g d e n s i t y , beyond that which would 5 9 W h i l e zoning and i n c e n t i v e s for l a r g e - s c a l e mixed-use p r o j e c t s i n the downtown d i d not achieve wide support u n t i l the 1960's, landmark p r o j e c t s had been b u i l t i n the 1950's, i n c l u d i n g Penn Centre in P h i l a d e l p h i a (1953), Midtown Plaza in Rochester (1956) and Charles Centre in Baltimore (1957). In 1975, Witherspoon estimated that approximately 100 l a r g e - s c a l e mixed-use p r o j e c t s had been c o n s t r u c t e d throughout ' the U.S. For d i s c u s s i o n s of s p e c i f i c p r o j e c t s and the emergence of mixed-use g e n e r a l l y , see Witherspoon, 1977; C i t y of Toronto, 1975; Brownell, 1974; Cook, 1980, 8; and Weaver, 1979, 63. 6 0 Wilborn, 1973; Weaver, 1977, 59; Cook, 1980, 23. 6 1 Meshenberg, 1976, 45. 56 otherwise be permit t e d , f o r the " p r o v i s i o n of h o u s i n g . " 6 2 The a d d i t i o n a l d e n s i t y may accommodate e i t h e r commercial or r e s i d e n t i a l f l o o r s p a c e , or some combination of both. An i n c e n t i v e w i l l r e f e r to the landowner's a b i l i t y to capture " unearned r e t u r n s " 6 3 ( as a r e s u l t of the bonus having been granted ) through the development and/or d i s p o s i t i o n of h i s pr o p e r t y . I t should not immediately be assumed that because there i s a bonus, there i s n e c e s s a r i l y an economic i n c e n t i v e c r e a t e d . An example of the bonus system now i n o p e r a t i o n in Toronto may he l p to f u r t h e r i l l u s t r a t e the general s t r u c t u r e of d e n s i t y bonuses. In the F i n a n c i a l D i s t r i c t of downtown Toronto, a developer may c o n s t r u c t a mixed-use p r o j e c t c o n t a i n i n g a maximum of 8 F.A.R. f o r commercial uses and 4 F.A.R. ( or 750 u n i t s per hectare ) f o r r e s i d e n t i a l uses. Developers may be per m i t t e d a gre a t e r r e s i d e n t i a l d e n s i t y ( 1,000 u n i t s per hectare ) where the occupancy of the u n i t s i s to be r e g u l a t e d so as to accommodate only the handicapped or e l d e r l y . 6 " C i t y C o u n c i l may a l s o permit r e s i d e n t i a l d e n s i t i e s to inc r e a s e by 25% where the owner agrees to provide the a d d i t i o n a l housing f o r the purposes 6 2 " P r o v i s i o n of housing " may take s e v e r a l forms, i n c l u d i n g the c o n s t r u c t i o n of u n i t s o n - s i t e , a c a s h - i n - l i e u payment/unit to a p u b l i c agency, or an agreement to provide housing on an a l t e r n a t i v e s i t e or at some l a t e r p o i n t in time. 6 3 R e t u r n s are earned in many ways - as payment f o r the use of c a p i t a l , as a reward f o r e x p e r t i s e or t a l e n t , and as compensation f o r assuming r i s k . Whether or not r e t u r n s are " unearned " depends upon the i n i t i a l e x p e c t a t i o n s of the i n v e s t o r - how much d i d he expect to r e c e i v e i n payment f o r h i s c a p i t a l , e x p e r t i s e and the assumption of r i s k . 6 " C i t y of Toronto, 1980, 46. 57 of the a s s i s t e d ( government s u b s i d i z e d ) housing program. 6 5 In p r a c t i c e , the c o n d i t i o n s and amount of bonuses may be e x p l i c i t and implemented on an a s - o f - r i g h t b a s i s , or they may be introduced w i t h i n the context of general p o l i c y i n t e n t s and n e g o t i a t e d on a p r o j e c t by p r o j e c t b a s i s . 6 6 They may be general i n nature - a l l o w i n g u n p r e s c r i b e d numbers of u n i t s of any household type, or they may be t a r g e t e d at p r o v i d i n g housing f o r very s p e c i f i c p o p u l a t i o n groups ( e.g. low income, e l d e r l y ). In some c i t i e s , choosing to use the bonus may permit developers to enter a f a s t e r , s t r e a m - l i n e d approval process and gain exemptions from other by-law requirements ( e.g. b u i l d i n g h e i g h t s , setbacks ) . 6 7 Conversely, i n l i g h t of the bonus being provided developers may be r e q u i r e d to submit t h e i r p r oposal to a more d e t a i l e d review process. Bonuses have been o f f e r e d with two purposes i n mind: • as an intended i n c e n t i v e f o r developers to provide housing; and/or • as compensation f o r a r e d u c t i o n i n p e r m i s s i b l e commercial d e n s i t y where a down-zoning has o c c u r r e d , or where a requirement to provide housing w i t h i n new p r o j e c t s has been introduced. Throughout the l i t e r a t u r e the d e n s i t y bonus i s argued to provide an economic i n c e n t i v e to developers by p e r m i t t i n g 6 5 C i t y of Toronto, 1980, 41. 6 6 Cook, 1980, 23; Witherspoon, 1977, 18. 6 7 Cook, 1980, 78; Witherspoon, 1977, 18. 58 g r e a t e r r e s i d e n t i a l and/or commercial d e n s i t i e s than p r e v i o u s l y a c h i e v a b l e i n r e t u r n f o r the p r o v i s i o n of v a r i o u s f e a t u r e s ( p l a z a s , housing, e t c . ) . 6 8 For the l a t t e r type of " bonus " to be e f f e c t i v e , proponents argue that the permitted d e n s i t y must be lower than that which c o u l d be s u s t a i n e d by the market but not so low as to be s u b j e c t to c h a l l e n g e in the c o u r t s f o r i t s unreasonableness. There i s a p e r c e p t i o n among proponents that an e x t r a o r d i n a r y gain may be r e a l i z e d because: • the r e t u r n s from p r o v i d i n g the f e a t u r e exceed i t s c o s t ; and/or • the t o t a l p r o j e c t w i l l be l a r g e r with the bonused d e n s i t y , and that w i l l generate a g r e a t e r amount ( in absolute terms ) of p r o f i t ; and/or » the a d d i t i o n a l d e n s i t y does not have a land c o s t a s s o c i a t e d with i t and t h e r e f o r e the r e t u r n s need only cover c o n s t r u c t i o n / f i n a n c i n g c o s t s . C o n c e p t u a l l y , one would expect the r e t u r n s from p r o v i d i n g any bonusable f e a t u r e to cover the c o s t s of i t s p r o v i s i o n and generate an e x t r a r e t u r n which p r o v i d e s an i n c e n t i v e f o r d e v e l o p e r s . The " i n c e n t i v e " depends upon the extent to which the c o s t s and r e t u r n s from the f e a t u r e are s u f f i c i e n t l y d i f f e r e n t , with the d i f f e r e n c e more than compensating for the e f f o r t and r i s k a s s o c i a t e d with p r o v i d i n g the f e a t u r e . 8Meshenberg, 1976, 45; Kendig, 1980, 339; Dewees, 1975, 46; Kleven, 1974, 1480; Erber and P r i o r , 1974, 14; Clayton Research A s s o c i a t e s , 1980, 30; K l e i n and Sears, 1974, 267. 59 C. CALCULATING BONUS AMOUNTS It was noted e a r l i e r that the no t i o n of r e s i d e n t i a l d e n s i t y bonuses grew out of the c r e a t i o n and apparent success of amenity bonuses g e n e r a l l y . As such, i t i s h e l p f u l to f i r s t review the manner i n which general amenity bonuses have been c a l c u l a t e d before examining the methods used i n c o n s t r u c t i n g and e v a l u a t i n g r e s i d e n t i a l bonuses. The l i m i t a t i o n s of the methods used w i l l then be c r i t i c a l l y reviewed. In determining the amount of bonus to be given f o r a p u b l i c amenity ( e.g. p l a z a s , t h e a t r e s , arcades ) the a c t u a l c o s t s of producing the amenity are f i r s t estimated, u s u a l l y on a square foot b a s i s , with the annual cost of a m o r t i z i n g that expenditure then c a l c u l a t e d . The a n a l y s t then c a l c u l a t e s the amount of a d d i t i o n a l net l e a s a b l e square footage r e q u i r e d to generate an annual net cash flow s u f f i c i e n t to cover the amortization/maintenance c o s t s o f the amenity. A judgement i s then made as to the amount of a d d i t i o n a l bonused f l o o r s p a c e r e q u i r e d to generate the a d d i t i o n a l revenue which p r o v i d e s the i n c e n t i v e f o r developers to pro v i d e the amenity. Ruth and Krubhkov provide an example of the p r o c e d u r e . 6 9 However, as a bonusable f e a t u r e , housing i s s i g n i f i c a n t l y d i f f e r e n t from the other f e a t u r e s which are normally bonused. It d i f f e r s i n s e v e r a l r e s p e c t s : • p u b l i c amenity c o s t s , r e l a t i v e to t o t a l p r o j e c t 6 9 Ruth and Krubkhov, 1966. 60 v a l u e , impose r e l a t i v e l y minor c o s t s and b u i l d i n g a l t e r a t i o n s , e s p e c i a l l y when i n c o r p o r a t e d i n t o b u i l d i n g designs at an e a r l y stage. As such, amenity c o s t s can be i n c o r p o r a t e d i n t o t o t a l c o n s t r u c t i o n c o s t s without having a major impact on the p r o j e c t ' s v i a b i l i t y . The housing component, because of i t s sheer b u i l d i n g bulk, can represent a major c o s t and p h y s i c a l component of a p r o j e c t ; the p r o v i s i o n of p u b l i c amenities i s r e l a t i v e l y uncomplicated, t y p i c a l l y r e q u i r i n g only the m o d i f i c a t i o n of b u i l d i n g design or s i t e l a y o u t , whereas the i n c o r p o r a t i o n of housing i n t r o d u c e s a number of c o m p l i c a t i o n s with respect to the s e p a r a t i o n of t i t l e , a d d i t i o n a l f i n a n c i n g and the d i v i s i o n of management and o p e r a t i n g expenses;, p u b l i c amenities are not normally revenue-g e n e r a t i n g and so the developer need not be concerned about marketing the amenity to consumers. Housing l i e s at the opposite extreme, with developers g i v i n g c o n s i d e r a b l e a t t e n t i o n to the competitiveness of t h e i r dwellin'g u n i t s . The p r o f i t a b i l i t y of housing, u n l i k e p u b l i c amenities, r e s t s l a r g e l y on i t s a b i l i t y to generate a p r o j e c t e d stream of revenues; bonuses given to c r e a t e p u b l i c amenities may not be expected to cover a p o r t i o n of land c o s t s . There i s some c o n f u s i o n , on the other hand, as to whether 61 the r e t u r n from the bonused housing component should cover a p r o - r a t e d share of land c o s t s and provide a r e t u r n to the land investment. Because of these d i f f e r e n c e s one cannot apply a simple " c o n s t r u c t i o n cost plus i n c e n t i v e " approach in determining the a p p r o p r i a t e amount of r e s i d e n t i a l d e n s i t y bonus to o f f e r d e v e l o p e r s . One ought to a l s o c o n s i d e r the a d d i t i o n a l c o m p l i c a t i o n s and c o s t s of housing, the extent to which commercial uses can s u b s i d i z e r e s i d e n t i a l c o s t s , the expected markets for the u n i t s and the extent to which the r e s i d e n t i a l f l o o r s p a c e should be expected to o f f s e t land c o s t s . A l l of these f a c t o r s might be expected to a f f e c t the amount of e f f o r t r e q u i r e d and r i s k i n c u r r e d by the developer, and t h e r e f o r e the l e v e l of r e t u r n s r e q u i r e d . The l e v e l of a n a l y s i s r e q u i r e d to evaluate r e s i d e n t i a l bonuses and i n c e n t i v e s appears to be more complicated than that r e q u i r e d f o r general p u b l i c a m e n i t i e s . A number of c i t i e s have engaged economic c o n s u l t i n g firms to evaluate the f i n a n c i a l v i a b i l i t y of t h e i r bonus p r o p o s a l s . The method of a n a l y s i s i n each of the three s t u d i e s examined 7 0 m i r r o r e d the kind of p r e l i m i n a r y p r o j e c t assessment which developers undertake when 7 0 T h e three s t u d i e s examined i n c l u d e d K l e i n and Sears ( Toronto ) ;Western Realesearch C o r p o r a t i o n L t d . ( Vancouver ) ; C l a y t o n Research A s s o c i a t e s L i m i t e d ( Edmonton ). For a d d i t i o n a l examples, see a l s o Wright, Mansell and A s s o c i a t e s , 1978; Peat Marwick and P a r t n e r s , 1973; Urbanics, 1978; and Baxter, 1975, 139. 62 f i r s t c o n s i d e r i n g a new p r o j e c t . The analyses i n v o l v e d an e s t i m a t i o n of the p r o j e c t s ' c r e a t i o n c o s t s ( development, c o n s t r u c t i o n and land c o s t s ) and p r o j e c t e d net o p e r a t i n g revenues f o r the f i r s t f u l l year of o p e r a t i o n . The measures of p r o f i t a b i l i t y normally i n c l u d e d one or both of the f o l l o w i n g two r a t i o s : • Return on Investment ( R.O.I. ) , which i s net o p e r a t i n g income ( f i r s t year ) d i v i d e d by the c r e a t i o n c o s t ; • E q u i t y Y i e l d Rate ( Re ) , which i s the f i r s t year's net cash flow ( a f t e r debt s e r v i c e ) d i v i d e d by the i n v e s t o r ' s i n i t i a l e q u i t y c o n t r i b u t i o n . A n a l y s t s sometimes i n c l u d e d an examination of the " Break-even Revenue " ( the gross revenue r e q u i r e d to y i e l d a given R.O.I. or Re ) and/or a " Developer's P r o f i t " r a t i o ( the c a p i t a l i z e d value of the f i r s t year's net o p e r a t i n g income, l e s s the c r e a t i o n c o s t , a l l d i v i d e d by the c r e a t i o n cost ). Without e x c e p t i o n , the r e p o r t s reviewed c o n s i d e r e d only the f i r s t year's p r o j e c t e d o p e r a t i n g flows and undertook the a n a l y s i s on a before-tax b a s i s . Land values were assumed to r e f l e c t c u r r e n t market p r i c e s and a share of land c o s t s was normally apportioned to the bonused d e n s i t y . S e n s i t i v i t y a n a l y s i s was u s u a l l y undertaken to examine the extent to which r e t u r n s v a r i e d i n response to changing land v a l u e s , r e n t s , i n t e r e s t r a t e s and other key f a c t o r s . On the b a s i s of the a n a l y s i s and l o c a l market conditions-, the a n a l y s t .then made a reasoned judgement as to the amount of bonused d e n s i t y r e q u i r e d to induce developers 63 to provide the housing component. ( The i m p l i c a t i o n s and l i m i t a t i o n s of the methodology a p p l i e d i n the s t u d i e s w i l l be examined in a subsequent s e c t i o n of the t h e s i s . ) The reader should be c a u t i o n e d that the f i n d i n g s and c o n c l u s i o n s a r i s i n g from a r e a - s p e c i f i c a n a l y s i s are not t r a n s f e r r a b l e to other markets or c i t i e s , as r e a l e s t a t e markets are, i n g e n e r a l , l o c a l i n nature. The values of the v a r i a b l e s e n t e r i n g the a n a l y s i s are o f t e n very s p e c i f i c to a p a r t i c u l a r downtown area ( land values, p e r m i t t e d or bonused d e n s i t i e s , demand/supply c o n d i t i o n s f o r o f f i c e and r e s i d e n t i a l uses, developer/community e x p e c t a t i o n s ) or to a p a r t i c u l a r p o i n t i n time ( i n t e r e s t r a t e s , mortgage a v a i l a b i l i t y , c a p i t a l i z a t i o n r a t e s , tax p r o v i s i o n s ). As such, while the methods of a n a l y s i s may be roughly s i m i l a r i n each case, the r e l a t i v e values of the input v a r i a b l e s w i l l undoubtedly vary with l o c a t i o n and timing and can be expected to l e a d to very d i f f e r e n t r e s u l t s under d i f f e r e n t market c o n d i t i o n s . D. LAND VALUE DETERMINATION AND DENSITY BONUSES It i s not the i n t e n t of t h i s s e c t i o n to provide a d e t a i l e d examination of the f u l l body of l i t e r a t u r e a ddressing the process by which land values are determined. Rather, only the g e n e r a l p r o p o s i t i o n s which are most r e l e v a n t to t h i s 7 1 For a c o n c i s e , c h r o n o l o g i c a l summary of much of the r e l e v e n t l i t e r a t u r e , see Mondor, 1978. 64 i n v e s t i g a t i o n w i l l be d i s c u s s e d . 7 1 The employment base i n most downtowns has continued to expand as businesses choose to l o c a t e in c l o s e p r o x i m i t y to each other and i n a c e n t r a l l o c a t i o n r e l a t i v e to the urban labour f o r c e . 7 2 As a c t i v i t i e s compete f o r the most c e n t r a l l y l o c a t e d land r e l a t i v e to the e x i s t i n g p a t t e r n of land uses, land values r i s e and the marketplace s e l f - s e l e c t s the most v i a b l e uses for a given l o c a t i o n and t i m e . 7 3 Those a c t i v i t i e s which can o f f e r the h i g h e s t p r i c e f o r land may be expected to dominate the c o m p e t i t i o n . 7 4 As d i s c u s s e d e a r l i e r , most types of housing in downtown areas have been unable to compete with commercial uses, r e s u l t i n g i n a r e d u c t i o n i n the amount of housing which has e x i s t e d downtown and making i t i n c r e a s i n g l y d i f f i c u l t to introduce new housing i n t o the area. In t h e o r e t i c a l terms, the value of land i s equal to the present value of the f u t u r e stream of net income which can be generated through i t s use and d i s p o s i t i o n . 7 5 The value of land i s e s t a b l i s h e d through the i n t e r a c t i o n of w i l l i n g buyers and s e l l e r s n e g o t i a t i n g a p r i c e which i s , in the f i n a l a n a l y s i s , deemed to be a c c e p t a b l e by both p a r t i e s . I n v e s t o r s are I s a r d , 1956; H e i l b r u n , 1974, 16; H i r s c h , 1973, 273. Shenkle, 1978,.121; H e i l b r u n , 1974, 116. For a conceptual d i s c u s s i o n of the s p a t i a l d i s t r i b u t i o n of urban land uses, see H e i l b r u n , 1974, 118-120. 5 H e i l b r u n , 1974; Nolan, 1978, 6. I t i s worth n o t i n g that " value " to p a r t i c u l a r i n v e s t o r s may a l s o be a f u n c t i o n of t h e i r p o r t f o l i o s and investment o b j e c t i v e s , l e a d i n g them to p l a c e a higher value on the p r o p e r t y than suggested by the present value of i t s f u t u r e net income. 65 concerned with the net growth in t h e i r w e a l t h 7 6 generated by the use and eventual d i s p o s i t i o n of the land and i t s improvements. They o f f e r a p r i c e which, in c o n s i d e r a t i o n of f u t u r e cash flows expected to be generated by the p r o p e r t y , g i v e s them a r e t u r n which they judge to be reasonable compensation f o r the use of t h e i r r e s o urces, the expected impact of i n f l a t i o n and a premium for the r i s k s to be i n c u r r e d . 7 7 The p r o j e c t e d change in t h e i r net wealth depends upon t h e i r e s t i m a t i o n of consumer demand, a v a i l a b l e f i n a n c i n g , the nature of t h e i r investment p o r t f o l i o , tax impacts, the ownership form and a l t e r n a t i v e investment c h o i c e s . Since each buyer may have d i f f e r e n t o b j e c t i v e s , e x p e c t a t i o n s of f u t u r e cash flows and t o l e r a n c e s f o r i n c u r r i n g r i s k , i t i s reasonable to expect that each buyer w i l l value the property d i f f e r e n t l y . 7 8 S e l l e r s , on the other hand, have an asking p r i c e determined by the p r i c e of comparable property a v a i l a b l e f o r purchase, by t h e i r judgement as to what c o u l d be b u i l t on the s i t e , by e x p e c t a t i o n s of p o s s i b l e changes in zoning, and so on. One e f f e c t of p u b l i c land use c o n t r o l s i s to l i m i t p e r m i s s i b l e uses and d e n s i t i e s . Where p u b l i c p o l i c y i s u n c e r t a i n or changing, or where land uses and market c o n d i t i o n s are changing s i g n i f i c a n t l y , a spectrum of f u t u r e e x p e c t a t i o n s and, hence, asking and b i d d i n g p r i c e s may c h a r a c t e r i z e the land market. As market c o n d i t i o n s change, so too w i l l the p r o p e r t y ' s 7 6 Greer, 1979, 7. 7 7 B i s h and Nourse, 1975, 80-81; Greer, 1979, 11. 7 8 See, f o r example, Clayton Research A s s o c i a t e s , 1980, 34. 66 value in the m a r k e t p l a c e . 7 9 In a c o m p e t i t i v e market, the exchange p r i c e should r e f l e c t the p r i c e which c o u l d be absorbed by the " h i g h e s t and best use " f o r that p r o p e r t y : 8 0 " . . . t h a t use, from among reasonably probable and l e g a l ' a l t e r n a t i v e uses, found to be p h y s i c a l l y p o s s i b l e , a p p r o p r i a t e l y supported, and which r e s u l t s i n the highest land v a l u e . 8 1 " In a c o m p e t i t i v e market, buyers would be expected to b i d up the p r i c e to that l e v e l which permits the minimal a c c e p t a b l e r e t u r n to the new owner, 8 2 thereby b i d d i n g away excess or abnormal p r o f i t s . Recognizing the d i f f e r e n t c h a r a c t e r i s t i c s of competing buyers i t has been argued t h a t , i n p e r f e c t l y c o m p e t i t i v e markets, market p r i c e s may be set by c l a s s e s of d i v e r s i f i e d i n v e s t o r s t a k i n g advantage of v a r i o u s tax p r o v i s i o n s and d i f f e r e n t i a l tax r a t e s . 8 3 It has . been argued too, that land values are a r e s i d u a l -that value which remains a f t e r a l l f a c t o r payments have been made. 8* In a c o m p e t i t i v e market, land p r i c e s r i s e to capture any " value " beyond that which e x i s t s at the most co m p e t i t i v e 9 Hamilton, 1970, 54-55; Nolan, 1974, 20; W i l k i n , 1979, 120. 0 Nolan, 1974, 1 8 ; H e i l b r u n , 1974, 121; Bish and Nourse, 1975, 84. 1 Boyce, 1975, 107. 2 W i c k s e l l , 1935; Clayton Research A s s o c i a t e s , 1980, 25. 3 For a d i s c u s s i o n of d i v e r s i f i c a t i o n , see Gau, 1978. " M a r s h a l l , 1890; Barlowe, 1958, 238; M i l l s , 1969; K e i p e r , 1961; H e i l b r u n , 1974, 114; Wendt, 1974, 154. 67 l e v e l . Any unearned r e t u r n s enjoyed by "middlemen " i n the land development process should, i n the long run, be m i t i g a t e d by r i s i n g land p r i c e s . The i n t e r a c t i o n of d e n s i t y bonuses and land value adjustments i s c r i t i c a l . In theory, at l e a s t , one might expect any p o s i t i v e economic b e n e f i t a s s o c i a t e d with the bonus to be e v e n t u a l l y , i f not immediately, c a p i t a l i z e d i n t o the value of the land. The l i k e l i h o o d of t h i s o c c u r r i n g , and the i m p l i c a t i o n s f o r the maintenance of an economic i n c e n t i v e are matters worthy of more c a r e f u l examination. We w i l l c o n s i d e r , f i r s t l y , the kind of " bonus " c r e a t e d when r e s i d e n t i a l development p o t e n t i a l ( d e n s i t y ) i s added to the e x i s t i n g zoning on a pro p e r t y ( be i t commercial or r e s i d e n t i a l ). Secondly, we w i l l examine the s i t u a t i o n in which r e s i d e n t i a l and commercial d e n s i t y i s added to the e x i s t i n g zoning, but f o r which d w e l l i n g u n i t s must be b u i l t in order to u t i l i z e the bonused commercial d e n s i t y . 1. A d d i t i o n a l Permitted D e n s i t i e s If we c o n s i d e r f i r s t the type of bonus c r e a t e d when c i t i e s simply " add on " r e s i d e n t i a l d e n s i t y to the d e n s i t i e s p r e v i o u s l y permitted, we would f i n d o r i g i n a l landowners faced with two op t i o n s - to e i t h e r develop or s e l l the p r o p e r t y . It can be a n t i c i p a t e d that the owner w i l l normally s e l e c t the o p t i o n which y i e l d s the g r e a t e s t net present value ( a d j u s t e d for r i s k ). 68 a. Development If the landowner decides to develop the property he w i l l c o n s i d e r the o p t i o n s of e i t h e r using the bonused d e n s i t y or i g n o r i n g i t . T h i s d e c i s i o n w i l l be based on the p e c u l i a r i t i e s of the landowner, the market c o n d i t i o n s f o r d i f f e r e n t uses and h i s w i l l i n g n e s s to develop a mixed-use p r o j e c t . Should he opt to b u i l d the housing component, he must make a d e c i s i o n as to whether to enter h i s land's value i n t o the economic a n a l y s i s at i t s accrued c o s t to him or at i t s replacement c o s t ( market value ) . T h i s d e c i s i o n i s c r i t i c a l . 8 5 The land's accrued cost to the o r i g i n a l owner would i n c l u d e i t s o r i g i n a l purchase p r i c e plus any net o p e r a t i n g l o s s e s which were i n c u r r e d during the h o l d i n g p e r i o d , brought forward to t h e i r present v a l u e . ( The landowner might a l s o i n c l u d e the o p p o r t u n i t y cost of h i s c a p i t a l during the h o l d i n g p e r i o d . ) The land's replacement cost r e f e r s to the amount ( per square foot ) which the landowner would have to pay f o r comparable property at c u r r e n t market r a t e s , that i s , i t s c u r r e n t value i n the marketplace. If the o r i g i n a l landowner values the land at i t s r e a l cost 5 There remains some debate as to whether land should be valued at i t s accrued or replacement c o s t . A n a l y s t s such as Dewees ( 1975, 48 ) and Peat Marwick and Partners ( 1973, 111-8 ) have emphasized the accrued cost approach. However, the v a l u a t i o n of land c o s t s i n the f e a s i b i l i t y s t u d i e s reviewed were based on surveys of c u r r e n t land values throughout the downtown ( i . e . c u r r e n t replacement cost or " market value ") . Land c o s t s were u s u a l l y a p p l i e d to the p r o j e c t as a whole. However, in one f e a s i b i l i t y study at l e a s t ( C l a y t o n , 1980 ), land c o s t s were apportioned between commercial and r e s i d e n t i a l development p o t e n t i a l on a pro rated share of b u i l d a b l e square footage. 69 to him, the housing component would be apportioned a zero land c o s t s i n c e h i s o r i g i n a l purchase p r i c e ( pre-bonus ) would not l i k e l y have i n c o r p o r a t e d the value of the r e s i d e n t i a l d e n s i t y . 8 6 The landowner would s e l l the d w e l l i n g u n i t s f o r whatever the market c o u l d bear and may r e a l i z e abnormal r e t u r n s depending on the l e v e l of demand for the u n i t s . If demand i s high, the bonus would have c o n t r i b u t e d to h i s r e t u r n by p e r m i t t i n g r e s i d e n t i a l development. I f demand i s low, the owner may s t i l l earn normal r e t u r n s but be unable to r e a l i z e abnormally high r e t u r n s . Since r e s i d e n t i a l uses are not r e q u i r e d he r e t a i n s the op t i o n to b u i l d or not to b u i l d and would be u n l i k e l y to b u i l d unless assured of earning at l e a s t h i s minimal r e q u i r e d r e t u r n . Suppose, however, that the landowner's o b j e c t i v e s i n c l u d e d f u r t h e r development in the bonus area i n the f u t u r e . The owner c o n s i d e r s h i s need to purchase other development s i t e s r e a l i z i n g t h a t , i f other landowners are aware of the bonused d e n s i t y ' s economic value, he w i l l be charged a premium fo r the bonused d e n s i t y . The s i z e of the r e s i d e n t i a l premium w i l l be determined through n e g o t i a t i o n . To maintain h i s p a r t i c i p a t i o n i n the market, the r e t u r n s generated from t h i s f i r s t p r o j e c t must provide s u f f i c i e n t funds to buy new land for f u t u r e development. As such, the o r i g i n a l landowner i s l i k e l y to value h i s 6See, f o r example, C l a y t o n , 1980, 27. However, i f the land had been purchased s h o r t l y before the c r e a t i o n of bonuses, but while e x p e c t a t i o n s of p o t e n t i a l bonuses p r e v a i l e d , there i s every l i k e l i h o o d that recent purchasers may have p a i d a premium fo r t h e i r s i t e s i n a n t i c i p a t i o n of the bonus being i n t r o d u c e d . 70 r e s i d e n t i a l development p o t e n t i a l at an amount which r e f l e c t s i t s replacement cost . T h i s w i l l e s t a b l i s h a land c o s t / d w e l l i n g u n i t which i s g r e a t e r than zero and w i l l i n c r e a s e the minimum acce p t a b l e s a l e s / r e n t p r i c e s f o r the u n i t s . Is there now an " i n c e n t i v e " to b u i l d housing? The answer depends on whether one looks at the s i t u a t i o n r e l a t i v e to the landowner's past or f u t u r e p o s i t i o n in the market. Looking to the past, i t i s l i k e l y that the o r i g i n a l owner has r e c e i v e d an i n f i n i t e r e t u r n to h i s i n i t i a l r e s i d e n t i a l land investment ( which was zero, where no s p e c u l a t i v e premium was p a i d ) i f the s a l e / r e n t a l of the u n i t s generates any r e t u r n to land at a l l - and that might be a generous i n c e n t i v e indeed. Looking forward, however, we would expect that the landowner has only secured h i s f u t u r e p a r t i c i p a t i o n i n the market - he may have r e a l i z e d an unearned r e t u r n but those proceeds w i l l l i k e l y be r e q u i r e d to f i n a n c e h i s next land purchase, which w i l l be that much more c o s t l y as a r e s u l t of the r e s i d e n t i a l development p o t e n t i a l . C l e a r l y , the landowner would r e a l i z e g r e a t e r r e t u r n s i f he apportioned a zero land cost to the r e s i d e n t i a l d e n s i t y , but he might not generate s u f f i c i e n t funds to stay a c t i v e in the market. If one of h i s o b j e c t i v e s i s to develop other p r o j e c t s i n the f u t u r e , he has l i t t l e o p t i o n but to value h i s land at replacement c o s t when e v a l u a t i n g the v i a b i l i t y of development. 8 7 7 See, f o r example, C l a y t o n , 1980, 35. 71 b. D i s p o s i t i o n A l t e r n a t i v e l y , the o r i g i n a l landowner may s e l l the pro p e r t y i n i t s undeveloped s t a t e . Assuming that he i s informed, he w i l l demand a premium f o r the economic value of the r e s i d e n t i a l development p o t e n t i a l . If the o p p o r t u n i t y to b u i l d housing has any value in the market at a l l , he may r e a l i z e an unearned r e t u r n as a r e s u l t of the bonus, depending on h i s i n i t i a l e x p e c t a t i o n s and the r i s k s he has i n c u r r e d . In the l i t e r a t u r e , t h i s i s commonly r e f e r r e d to as a " w i n d f a l l " p r o f i t . 8 8 But what " i n c e n t i v e " i s l e f t f o r the subsequent landowner? Through h i s a c q u i s i t i o n of the s i t e the subsequent owner has p a i d a premium f o r the bonused d e n s i t y and has, t h e r e f o r e , a r e a l land c o s t / d w e l l i n g u n i t which must be passed on to consumers. If the marketplace f u n c t i o n e d e f f i c i e n t l y , i t would be expected that the amount of the premium would be such that any abnormal retu r n s for the developer would be captured by the landowner. The subsequent owner may s t i l l r e a l i z e abnormal r e t u r n s i f : » the r e s i d e n t i a l d e n s i t y was underpriced i n the t r a n s a c t i o n ; or • i f market c o n d i t i o n s change and housing demand r i s e s . The subsequent owner might a l s o s e l l the prop e r t y , earning abnormal r e t u r n s f o r the same reasons as noted above. However, Hagman and M i s c z y n s k i , 1978. 72 he a l s o i n c u r r e d some r i s k by paying a premium f o r the r e s i d e n t i a l d e n s i t y . If the market f o r housing d e c l i n e s , or should development c o s t s r i s e unexpectedly, he may be unable to develop or to re-coup h i s investment through d i s p o s i t i o n of the p r o p e r t y . 8 9 The o p p o r t u n i t y to earn abnormal r e t u r n s as a consequence of improved market c o n d i t i o n s or uninformed buyers and s e l l e r s should not be confused with the i n c e n t i v e intended through the d e n s i t y bonus. While the market f o r downtown housing may be po o r l y d e f i n e d and, over time, even v o l a t i l e , the p o s s i b i l i t y of earning abnormal ret u r n s i s always present because: • market c o n d i t i o n s may f l u c t u a t e s i g n i f i c a n t l y ; and • some i n v e s t o r s r e cognize, and can take advantage of imp e r f e c t i o n s i n the marketplace. T h i s i s e q u a l l y true f o r any land use and f o r any r e a l e s t a t e investment. 9 T h i s r i s k i s not p e c u l i a r c h a r a c t e r i s t i c of a l l forms of to note that t h i s was not a had been exposed t o . to bonused s i t e s but i s , r a t h e r , r e a l e s t a t e . I t i s i n t e r e s t i n g r i s k which the o r i g i n a l landowner 73 2. Commercial/Residential D e n s i t y Bonuses The second general form of bonus i s one i n which landowners are permitted to c o n s t r u c t a given amount of a d d i t i o n a l commercial f l o o r s p a c e p r o v i d i n g they c o n s t r u c t , or cause to be c o n s t r u c t e d a r e l a t e d amount of r e s i d e n t i a l f l o o r s p a c e . Again, we w i l l c o n s i d e r f i r s t the o p t i o n s open to the o r i g i n a l landowner at the time of the bonus's i n c e p t i o n and then the s i t u a t i o n f a c i n g subsequent owners. a. Development The landowner may choose to b u i l d only that amount of b u i l d i n g p r e v i o u s l y permitted, i g n o r i n g the d e n s i t y bonuses. If demand e x i s t s to support a d d i t i o n a l commercial and/or r e s i d e n t i a l f l o o r s p a c e the landowner may c o n s i d e r using the bonus since a smaller development may r e s u l t i n an u n d e r u t i 1 i z a t i o n of the s i t e ' s p o t e n t i a l . The landowner's d e c i s i o n to u t i l i z e the bonus w i l l depend on s e v e r a l f a c t o r s : • supply/demand c o n d i t i o n s f o r commercial space; o supply/demand c o n d i t i o n s f o r r e s i d e n t i a l space; • the r e l a t i v e v i a b i l i t y of commercial and r e s i d e n t i a l uses; • the l e v e l of expected r e t u r n r e l a t i v e to h i s r e q u i r e d r e t u r n ; • the extent to which he can overcome other c o m p l i c a t i o n s r e l a t e d to the combination of uses on a s i n g l e s i t e . 74 Each of these f a c t o r s w i l l be c o n s i d e r e d i n t u r n . • Supply/Demand C o n d i t i o n s f o r Commercial Space The landowner's w i l l i n g n e s s to b u i l d w i l l depend l a r g e l y on h i s p r o j e c t i o n of the p r o j e c t ' s f u t u r e stream of revenues, which in turn w i l l be a f u n c t i o n of expected rent l e v e l s and occupancy r a t e s . Rents and occupancy r a t e s are a f u n c t i o n of both competition i n the market and the general l e v e l of a n t i c i p a t e d demand. If expected demand supports c o n s t r u c t i o n of both the base f l o o r s p a c e and the bonused increment the landowner might co n s i d e r using the bonus. A n t i c i p a t e d demand for commercial space i s normally a p r e r e q u i s i t e f o r development, but i t i s by no means a s u f f i c i e n t c r i t e r i o n for a mixed-use p r o j e c t . • Supply/Demand C o n d i t i o n s f o r R e s i d e n t i a l Space The landowner w i l l examine the p o t e n t i a l r e t u r n s from the bonused r e s i d e n t i a l component. Regardless of h i s a t t i t u d e towards v a l u i n g the land component at h i s r e a l cost or i t s replacement c o s t , he w i l l want to i d e n t i f y the buyer sub-markets for which the d w e l l i n g u n i t s might be t a r g e t e d and the l i k e l y r e t u r n s to accrue from each sub-market o p t i o n . If the r e s i d e n t i a l component were v i a b l e , one would expect the landowner to be more w i l l i n g to use the bonus although, again, r e s i d e n t i a l v i a b i l i t y would not l i k e l y be a s u f f i c i e n t c r i t e r i o n 75 f o r undertaking t h i s form of development. • R e l a t i v e V i a b i l i t y of Commercial and R e s i d e n t i a l Uses The landowner w i l l be p r i m a r i l y i n t e r e s t e d i n the o v e r a l l r e t u r n generated by the mixed-use p r o j e c t . The landowner, i t was suggested e a r l i e r , may have the a b i l i t y to i n c o r p o r a t e an otherwise uneconomical r e s i d e n t i a l component i n t o a mixed-use p r o j e c t because p o t e n t i a l l y low revenues can be o f f - s e t by: • a zero land c o s t / u n i t ( at l e a s t f o r the f i r s t owner ) ; and • by the excess revenues generated by the bonused commercial component, for which net o p e r a t i n g revenues are not r e q u i r e d to cover land c o s t s . In both i n s t a n c e s , i t i s assumed that the landowner does not value land at i t s replacement c o s t . Any " i n c e n t i v e " would app a r e n t l y l i e i n the r e s i d u a l o p e r a t i n g income generated by the t o t a l commercial component a f t e r the subsidy ( i f one i s r e q u i r e d ) was t r a n s f e r r e d to the r e s i d e n t i a l component. 9 0 For an i n c e n t i v e to e x i s t , net revenues from the o v e r a l l p r o j e c t must exceed the developer's r e q u i r e d r e t u r n , thereby r e s u l t i n g i n an unearned r e t u r n . I f t h i s 9 0Under c o n d i t i o n s of very low o f f i c e demand and very high housing demand, i t i s c o n c e i v a b l e that the r e s i d e n t i a l component might a c t u a l l y s u b s i d i z e the commercial component. 7 6 increment does not e x i s t , the i n c e n t i v e w i l l not e x i s t . T h i s s i t u a t i o n i l l u s t r a t e s a fundamental r e l a t i o n s h i p e x i s t i n g between the commercial and r e s i d e n t i a l uses i n the b u i l d i n g f o r the o r i g i n a l landowner. If the market f o r both i s strong, then both components may be b u i l t . If o f f i c e demand i s high and r e s i d e n t i a l demand low, a s u f f i c i e n t i n c e n t i v e may e x i s t f o r the i n i t i a l landowner to develop ( assuming he does not value land at i t s replacement cost ) but which, nonetheless, depends on the l e v e l of rents and the r a t i o and ab s o l u t e amounts of the bonused d e n s i t i e s . If o f f i c e demand i s low, and r e s i d e n t i a l demand i s high or low, an i n c e n t i v e to provide housing may e x i s t depending on: • the net revenues generated by the o f f i c e space and d w e l l i n g u n i t s ; o the extent to which one of the uses r e q u i r e s subsidy; and • on the assumption which the landowner makes about the land's value i n the f e a s i b i l i t y a n a l y s i s . Another, a l b e i t unusual, s i t u a t i o n might e x i s t in which, d e s p i t e low l e v e l s of demand f o r both o f f i c e and r e s i d e n t i a l f l o o r s p a c e , a landowner might s t i l l choose to develop using the bonused d e n s i t y . T h i s might occur where the landowner i s w i l l i n g to forego short-term r e t u r n s in order to s a t i s f y long-term investment o b j e c t i v e s . 77 • P o t e n t i a l Returns R e l a t i v e to Required Returns Greater r e t u r n s , i n an abs o l u t e sense, are not a v a l i d i n d i c a t o r of the presence of an i n c e n t i v e . The b e n e f i t of ret u r n s generated by using the bonus can only be eval u a t e d with respect to the r e q u i r e d rate of r e t u r n f o r each i n v e s t o r . Beyond the l e v e l of r e t u r n which a given i n v e s t o r might demand, an i n c e n t i v e ( or a d d i t i o n a l r e t u r n ) might be r e q u i r e d to a c t u a l l y i n i t i a t e r e s i d e n t i a l development. • Complications of Mixed-Use Despite the p o s s i b i l i t y of c a p t u r i n g unearned r e t u r n s , a number of c o m p l i c a t i o n s can a r i s e i n the design and o p e r a t i o n of mixed-use p r o j e c t s which may, i n some s i t u a t i o n s , make i t very d i f f i c u l t to use the bonused d e n s i t y at a l l . D i f f i c u l t i e s may e x i s t with re s p e c t t o : 9 1 • p h y s i c a l design - the arrangement of uses and s t r u c t u r e s o n - s i t e , s p i l l o v e r of noise and overview, d i f f i c u l t i e s i n r o u t i n g mechanical, e l e c t r i c a l and s t r u c t u r a l systems through the b u i l d i n g ; • p r o j e c t f i n a n c i n g - the need f o r separate long-term mortgages f o r d i f f e r e n t b u i l d i n g components; • s e p a r a t i o n of ownership - the need to l e g a l l y 91 Petersen, 1976; Baxter, 1975, 13. 78 subdivide the land and/or b u i l d i n g components, p a r t i c u l a r l y where ownership of the commercial component i s r e t a i n e d by the developer but d w e l l i n g u n i t s are s o l d s e p a r a t e l y ( as an e n t i r e r e s i d e n t i a l b u i l d i n g or as i n d i v i d u a l condominiums ) ; • a l l o c a t i o n of o p e r a t i n g e x p e n s e s / r e s p o n s i b i l i t i e s among tenants/owners. In some s i t u a t i o n s , such c o m p l i c a t i o n s may impose a d d i t i o n a l c o s t s or r i s k s on developers and r e q u i r e higher l e v e l s of re t u r n as compensation. In other s i t u a t i o n s , the c o m p l i c a t i o n s may pose problems which p r o h i b i t development e n t i r e l y , or at l e a s t cause delays u n t i l circumstances change s i g n i f i c a n t l y . The prudent landowner w i l l c o n s i d e r each of these f i v e f a c t o r s c a r e f u l l y in judging the b e n e f i t s to be gained through using the bonus. S e v e r a l i m p l i c a t i o n s are immediately apparent: • the p o t e n t i a l b e n e f i t of the bonused d e n s i t y to landowners w i l l depend l a r g e l y on p r e v a i l i n g market c o n d i t i o n s , which can vary s i g n i f i c a n t l y from l o c a t i o n to l o c a t i o n and which can f l u c t u a t e d r a m a t i c a l l y over time; • the p o t e n t i a l b e n e f i t of the bonused d e n s i t y w i l l depend l a r g e l y on the c h a r a c t e r i s t i c s of the landowner or i n v e s t o r h i m s e l f - h i s p e r c e p t i o n 79 of and t o l e r a n c e f o r r i s k and u n c e r t a i n t y , h i s development o b j e c t i v e s and the f i n a n c i n g terms and tax p o s i t i o n which might be unique to him; • the p o t e n t i a l b e n e f i t of the bonused d e n s i t y w i l l depend l a r g e l y on the unique c h a r a c t e r i s t i c s of the s i t e and p r o j e c t being c o n s i d e r e d , and on the extent to which c o m p l i c a t i o n s can be overcome without undermining the p r o j e c t ' s v i a b i l i t y . But there i s s t i l l another o p t i o n f o r the landowner who has j u s t been granted a d e n s i t y bonus - he may s e l l the pro p e r t y . b. D i s p o s i t i o n As noted e a r l i e r a landowner, in determining h i s asking p r i c e , w i l l c o n s i d e r the f u l l development p o t e n t i a l of the pro p e r t y . The oppo r t u n i t y to b u i l d a d d i t i o n a l o f f i c e space and dw e l l i n g u n i t s may be a very marketable commodity. The s e l l e r , in r a t i o n a l i z i n g the highest reasonable asking p r i c e , w i l l make a judgement as to the economic worth of that o p p o r t u n i t y and ad j u s t the ask i n g p r i c e a c c o r d i n g l y . He w i l l argue that p r o s p e c t i v e developers may f u l l y u t i l i z e the bonus, and so he w i l l c a p i t a l i z e i t s value i n t o the asking p r i c e . In a competitve market, one would expect buyers to estimate the revenue p o t e n t i a l of the per m i t t e d and bonused d e n s i t i e s and ad j u s t t h e i r o f f e r p r i c e to the maximum which they are able to pay while ensuring that t h e i r r e q u i r e d r e t u r n w i l l s t i l l be 80 r e a l i z e d . As such, one would expect that i n a c o m p e t i t i v e market the bonused d e n s i t y , i f capable of c o n t r i b u t i n g p o s i t i v e l y to the developer's r e t u r n s , w i l l be i n c o r p o r a t e d i n t o the land p r i c e by both s e l l e r s and buyers. The a d d i t i o n a l commercial d e n s i t y , f o r example, may assume a land v a l u e / b u i l d a b l e square foot equal to that of the base commercial d e n s i t y , or i t might assume a lower value i f the r e s i d e n t i a l market i s slow ( and where the commercial space would be expected to s u b s i d i z e the bonused r e s i d e n t i a l space ). The s i t u a t i o n f a c i n g subsequent landowners under the c o m m e r c i a l / r e s i d e n t i a l d e n s i t y bonus would be s i m i l a r to that d i s c u s s e d under the simple r e s i d e n t i a l d e n s i t y scheme. Land v a l u a t i o n theory suggests that subsequent landowners w i l l pay a premium for the bonused d e n s i t y i f i t has any p o t e n t i a l i n the marketplace at a l l . Even i f the r e s i d e n t i a l market i s poor, a premium may be c h a r g e d / o f f e r e d f o r the p o s s i b i l i t y which e x i s t s to develop r e s i d e n t i a l uses should market c o n d i t i o n s change s u b s t a n t i a l l y i n the f u t u r e . Subsequent owners s t i l l have the o p t i o n to develop or s e l l , but the p o t e n t i a l f o r g e n e r a t i n g abnormal r e t u r n s w i l l have been s u b s t a n t i a l l y reduced as a consequence of t h e i r having p a i d , to some extent, f o r the value of the bonused d e n s i t y . Having p a i d f o r the bonus, subsequent landowners must now argue before the approving a u t h o r i t i e s that they must be granted the f u l l bonus, f o r i t i s a n e c e s s i t y i f the p r o j e c t i s to be economically v i a b l e . 9 2 Given that the bonus 3 2 Whyte, 1981, 23. 81 has been p a i d f o r , the p r o j e c t ' s v i a b i l i t y may very w e l l be dependent upon i t . E. PROBLEMS AND SHORTCOMINGS The p r e v i o u s d i s c u s s i o n i d e n t i f i e s l i m i t a t i o n s with respect to the p o t e n t i a l e f f e c t i v e n e s s of r e s i d e n t i a l d e n s i t y bonuses as a mechanism f o r s t i m u l a t i n g the development of downtown housing but the inherent flaws i n bonusing must by made more e x p l i c i t y e t . While the f o l l o w i n g c r i t i c i s m s stop short of suggesting that r e s i d e n t i a l d e n s i t y bonuses can never be e f f e c t i v e they do suggest that t h e i r e f f e c t i v e n e s s may be q u i t e l i m i t e d i n the short run, and even more s e r i o u s l y l i m i t e d in the long run. 1 . Can The Bonus Be A c c u r a t e l y C a l c u l a t e d ? It i s extremely d i f f i c u l t to a c c u r a t e l y c a l c u l a t e the amount of bonus needed to provide a s u f f i c i e n t i n c e n t i v e f o r a v a r i e t y of i n v e s t o r s . It was noted e a r l i e r that the a n a l y s i s u n d e r l y i n g the c o n s t r u c t i o n / e v a l u a t i o n of a l t e r n a t i v e bonus schemes i n the s e v e r a l c i t i e s examined c o n s i d e r e d only the before - t a x r e t u r n s generated from the f i r s t f u l l year's o p e r a t i o n of p r o t o t y p i c a l mixed-use p r o j e c t s based on a l t e r n a t i v e bonus r a t i o s . While t h i s may be the approach adopted as a p r e l i m i n a r y t e s t of a p r o j e c t ' s p r o f i t a b i l i t y by developers, the approach misrepresents the true p o t e n t i a l 82 r e t u r n s to i n v e s t o r s by f a i l i n g to c o n s i d e r : 9 3 • the tax consequences of the p r o j e c t ; • the p o s s i b i l i t y of o p e r a t i n g leverage ( which may incr e a s e net cash flows i n the long run ) ; • the impact of f i n a n c i a l leverage (borrowing ) on i n v e s t o r r e t u r n s ( omitted in some s t u d i e s ) ; • the impact of c a p i t a l a p p r e c i a t i o n and the proceeds from fu t u r e d i s p o s i t i o n of the property; ® the v a r i a t i o n of r e q u i r e d r e t u r n s which e x i s t s among d i f f e r e n t c l a s s e s of i n v e s t o r s ; « the impact on f u t u r e land values r e s u l t i n g from any down-zonings which may have preceeded, or may be imp l i e d by the bonus; and • the range of cost/revenue estimates r e f l e c t e d i n the market at a given p o i n t i n time. By using " developer's p r o f i t ", however d e f i n e d , i t i s i m p l i c i t l y assumed that the impacts of a l l of the above on i n v e s t o r s ' r e t u r n s are i n c o r p o r a t e d i n t o the c a p i t a l i z a t i o n r a t e or expected s a l e s p r i c e of the p r o p e r t y . However, the b a s i s on which to estimate accurate c a p i t a l i z a t i o n r a t e s or expected s a l e s p r i c e s f o r o f f i c e and r e s i d e n t i a l uses combined may be d i f f i c u l t to determine because: • there may be few comparables, as downtown mixed-use 9 3 F o r a d i s c u s s i o n of the importance of these investment c o n s i d e r a t i o n s see Greer (1979). Peat Marwick and Par t n e r s ( 1973, I I I , 15-18 ) a l s o emphasize the l i m i t e d view of r e t u r n s r e f l e c t e d i n the " f i r s t year only " a n a l y s i s . 83 p r o j e c t s are not yet p l e n t i f u l ; and • the complexity and dynamic nature of market c o n d i t i o n s , government subsidy programs and p h y s i c a l design s o l u t i o n s which vary over time and among p r o j e c t s may make comparisons with other mixed-use p r o j e c t s very tenuous. y F a i l u r e to c o n s i d e r the long run, a f t e r tax impacts of the bonus may l e a d to a bonus r a t i o which i s e i t h e r u n n e c e s s a r i l y generous or i n s u f f i c i e n t to induce long term investment i n mixed-use p r o j e c t s . As Peat Marwick and Partners d i s c o v e r e d i n t h e i r survey of Toronto's downtown developers i n 1973, the f e a s i b i l i t y a n a l y s i s used by most developers tended to be c o n s e r v a t i v e , s i n c e i t b a s i c a l l y u nderstated the r e t u r n to the i n v e s t o r : "In our i n t e r v i e w s developers agreed that i n p e r i o d s of r i s i n g r e n t s and land v a l u e s , the p o t e n t i a l r e t u r n to t h e i r investment would be g r e a t e r than that-c a l c u l a t e d i n a simple r a t e of r e t u r n f e a s i b i l i t y a n a l y s i s . " In favourable market c o n d i t i o n s ( e.g r i s i n g revenues ), the r e t u r n s p r o j e c t e d in the f e a s i b i l i t y s t u d i e s reviewed would c l e a r l y understate p r o f i t a b i l i t y and suggest that g r e a t e r d e n s i t i e s and bonuses should be p e r m i t t e d than may be necessary to achieve a given rate of r e t u r n . These d i f f i c u l t i e s d e al s p e c i f i c a l l y with p r e d i c t i o n s of the net cash flows of a p r o j e c t f o r d i f f e r e n t i n v e s t o r s , but a second and r e l a t e d d i f f i c u l t y compounds the problem s t i l l 84 further - how does one estimate the amount of economic incentive necessary to stimulate use of the bonus? 9" As discussed e a r l i e r , returns are earned in many ways - as payment for the use of c a p i t a l , as a reward for expertise or talent, and as compensation for assuming r i s k . Whether or not returns are " unearned " depends upon the i n i t i a l expectations of the investor - how much did he expect to receive in payment for his c a p i t a l , expertise and assumption of r i s k . If the incentive is intended to provide an economic inducement, that i s , an unearned return beyond that which would have been required by the investor, i t i s necessary to f i r s t know the investor's expectations with respect to returns. In this regard, i t has been very d i f f i c u l t to find any empirical investigation/estimates of investors' expected returns from mixed-use development as compared to other classes of real estate or other types of investment. There is yet another way of viewing the amount of bonus required and the method of i t s ca l c u l a t i o n . Generally, the amount of bonused density i s argued to be dependent on existing and expected market conditions, with f e a s i b i l i t y analysis being necessary to determine the f i n a l density figures. However, as Clayton Research A s s o c i a t e s 9 5 have argued, any increase in 9"The problem of d i f f e r e n t i a t i n g " earned " returns from " unearned " returns is endemic to investment analysis generally, and not limited to the application of bonuses ( although c r i t i c a l to i t ) . 9 5 Clayton Research Associates Ltd., 1980. 85 p e r m i t t e d d e n s i t i e s w i l l r e s u l t i n a r e i a t i ve advantage ( a d d i t i o n a l d e n s i t y f o r a zero land cost ) f o r e x i s t i n g landowners i n the bonus area. As such, they argue: "The c o r r e c t a d d i t i o n a l r e s i d e n t i a l d e n s i t y i s a f u n c t i o n of other p l a n n i n g c o n s i d e r a t i o n s . In other words, good planning p r i n c i p l e s and the a b i l i t y of the i n f r a s t r u c t u r e to support a d d i t i o n a l d e n s i t y may d i c t a t e a set of maximum d e n s i t y r e g u l a t i o n s or parameters w i t h i n which i t would be prudent to keep new development. 9 6 " One c o u l d argue that d e n s i t y maximums should be d e f i n e d only by the same non-economic c o n s i d e r a t i o n s ( environmental impacts, s e r v i c e c a p a c i t i e s , e t c . ) which provide the b a s i s f o r p u b l i c land use c o n t r o l g e n e r a l l y . 2. Can The In c e n t i v e Remain Over Time? Both the l i t e r a t u r e and the f e a s i b i l i t y s t u d i e s examined argue that the determination of f i n a l bonus r a t i o s / d e n s i t i e s must, by d e f i n i t i o n , r e f l e c t those d e n s i t i e s r e q u i r e d to cr e a t e an i n c e n t i v e . F e a s i b i l i t y analyses have t y p i c a l l y been based on c u r r e n t , short run market c o s t s and p r i c e s , p a r t i c u l a r l y where the analyses c o n s i d e r only the f i r s t year's o p e r a t i n g flows. F o l l o w i n g the subsequent re-zoning, the bonus r a t i o s / d e n s i t i e s may be unchanged f o r many years d e s p i t e changes i n market c o n d i t i o n s which occur over time. The i n i t i a l r a t i o s / d e n s i t i e s w i l l r e f l e c t only the c u r r e n t c o s t / p r i c e r e l a t i o n s h i p s i n 9 6 C l a y t o n Research A s s o c i a t e s , 1980, 28. 86 r e s i d e n t i a l and o f f i c e markets. If at the time of the bonus system's c o n s t r u c t i o n , the r e l a t i o n s h i p s do not favour housing, a r e l a t i v e l y l a r g e bonus may be r e q u i r e d . 9 7 However, as c o s t s or p r i c e s change, or where government i n t e r v e n t i o n s are m o d i f i e d , the b a s i s f o r r a t i o n a l i z i n g the chosen r a t i o s / d e n s i t i e s w i l l s h i f t . The d e n s i t i e s r e q u i r e d to i n i t i a l l y c r e a t e the i n c e n t i v e may become e x c e s s i v e or i n s u f f i c i e n t w i t h i n a very short time, p a r t i c u l a r l y where market c o n d i t i o n s are r a p i d l y changing. The bonus has no way of a u t o m a t i c a l l y a d j u s t i n g to changing circumstances so as to maintain a s a t i s f a c t o r y i n c e n t i v e (where one e x i s t s ). I t i s not reasonable to assume that a l l aspects of i n v e s t o r s ' and the market's v a r i a b i l i t y can be i n c o r p o r a t e d i n t o a p r e s c r i b e d r a t i o of permitted/bonused d e n s i t i e s which w i l l continue to provide an i n c e n t i v e through time. If an i n c e n t i v e i s to be maintained ( i f , in f a c t , one e x i s t s at a l l ) , the bonus r a t i o s / d e n s i t i e s must remain responsive to p e r i o d i c s h i f t s i n market c o n d i t i o n s . I t might be d e s i r a b l e , t h e r e f o r e , to have in pl a c e a bonus system which always prov i d e s an i n c e n t i v e to at l e a s t some landowners and one which i s capable of a d j u s t i n g to changing market c o n d i t i o n s . But while a s e l f - a d j u s t i n g system would be most p r a c t i c a l , no such system appears to e x i s t in p r a c t i c e . I d e a l l y , a system by which the 9 7 I t i s worth n o t i n g that i n s e v e r a l f e a s i b i l i t y s t u d i e s ( Realesearch, 1974, 7-9; W i l k i n , 1979, 104 ) market c o n d i t i o n s were so poor ( i . e . c o n s t r u c t i o n / f i n a n c i n g c o s t s too high and expected revenues too low ) that s u b s t a n t i a l decreases in assumed land, value and i n c r e a s e s i n permitted d e n s i t i e s were only expected to have a m a r g i n a l l y b e n e f i c i a l impact on p r o j e c t f e a s i b i l i t y . 87 market's a c t i o n s ensure that an i n c e n t i v e e x i s t s ( but which a l s o keeps i t to a minimum through competition ) might be the most e f f i c i e n t and most e a s i l y manageable. The method by which the value of T r a n s f e r r a b l e Development Rights ( TDR's ) i s e s t a b l i s h e d through the i n t e r a c t i o n of buyers and s e l l e r s might pro v i d e a s t a r t i n g p o i n t f o r beginning to c o n s t r u c t such a system. A l t e r n a t i v e l y , the d e n s i t y r a t i o s used i n a given bonus scheme c o u l d be monitored r e g u l a r l y and adjustments made as market c o n d i t i o n s change. 3. For Whom Is The Bonus An I n c e n t i v e ? It was argued e a r l i e r t h a t , i n c o m p e t i t i v e markets, land values should a d j u s t i n the long run ( i f not immediately ) to c a p i t a l i z e any economic value which the bonused d e n s i t y generates at a given p o i n t in time. As such, i t has been argued that any unearned r e t u r n s or " i n c e n t i v e s " generated by the bonus are l i k e l y to accrue only to the o r i g i n a l landowner. Subsequent owners may s t i l l capture unearned r e t u r n s i f market c o n d i t i o n s become s i g n i f i c a n t l y more favourable f o r development ( or i f s e l l e r s were not w e l l informed ) , but those returns w i l l not have been c r e a t e d as a r e s u l t of the bonused d e n s i t y . It might be d e s i r a b l e f o r the expected ret u r n s a s s o c i a t e d with the bonused d e n s i t y ( or the amount of bonused d e n s i t y i t s e l f ) to remain u n c e r t a i n - c o n t r i b u t i n g to greater u n c e r t a i n t y i n the market and making i t d i f f i c u l t f o r e x i s t i n g landowners to demand a high premium for the r e s i d e n t i a l development p o t e n t i a l . 88 S u p e r f i c i a l l y , one might expect g r e a t e r u n c e r t a i n t y to l e s s e n the extent to which f u t u r e b e n e f i t s are c a p i t a l i z e d i n t o l a n d v a l u e . R e a l i s t i c a l l y , one would expect the marketplace to q u i c k l y develop other means of e s t i m a t i n g the expected value of the d w e l l i n g u n i t s and the p r o b a b i l i t y of being granted a p a r t i c u l a r amount of bonus on a given s i t e . P a r t i c i p a n t s i n the land market would c a r e f u l l y watch the outcome of development a p p l i c a t i o n s and the s u c c e s s / f a i l u r e of mixed-use p r o j e c t s . At the same time, approving agencies would l i k e l y be c r i t i c i z e d f o r having vague goals and being u n p r e d i c t a b l e or a r b i t r a r y i n t h e i r a p p r o v a l s . S t i l l , with l i m i t e d d i s c r e t i o n a r y powers the approving a u t h o r i t y might r e t a i n some chance of rewarding developers f o r p r o v i d i n g housing. Where the i n t r o d u c t i o n of d e n s i t y bonuses f o l l o w s the down-zoning of commercial development p o t e n t i a l ( as has occurred i n s e v e r a l c i t i e s ) , i t i s q u e s t i o n a b l e as to whether the bonus w i l l c r e a t e any i n c e n t i v e at a l l , e s p e c i a l l y f o r recent land purchasers. Land values p r i o r to down-zoning w i l l have r e f l e c t e d the pre v i o u s commercial p o t e n t i a l . When that p o t e n t i a l i s reduced, e x i s t i n g owners may incur a r e a l or, at l e a s t , an o p p o r t u n i t y c o s t i n terms of di m i n i s h e d land v a l u e s . The premium c r e a t e d by the r e s i d e n t i a l bonus may or may not f u l l y compensate owners f o r the l o s s i n v a l u e . 9 8 Where compensation i s i n s u f f i c i e n t , one might expect landowners to ho l d the p r o p e r t i e s u n t i l they are able to e i t h e r s e l l or Dewees, 1975, 45; Western Realesearch, 1974, 21. 89 develop them without i n c u r r i n g a l o s s . Depending on market c o n d i t i o n s , the amounts of d e n s i t y i n v o l v e d , and the h o l d i n g a b i l i t y of i n v e s t o r s , the adjustment in land values c o u l d r e q u i r e a long p e r i o d of time ( duri n g which housing may not be b u i l t ) . 4. Do A l l Landowners Receive An In c e n t i v e ? F i n a l l y , i t has been argued that only some of the o r i g i n a l landowners may r e c e i v e the f u l l b e n e f i t of any i n c e n t i v e generated by a bonus - those who have no long term i n t e n t i o n s of remaining a c t i v e i n the market. For r e p e t i t i v e , " permanent " d e v e l o p e r s / i n v e s t o r s , the unearned r e t u r n s generated by t h e i r f i r s t development or land d i s p o s i t i o n w i l l be r e q u i r e d f o r the purchase of new s i t e s in the area ( now having an added premium fo r the bonused d e n s i t y ) . T h i s group w i l l be r e q u i r e d to value t h e i r e x i s t i n g land h o l d i n g s at t h e i r c u r r e n t market value and w i l l thereby reduce the l e v e l of r e t u r n achieved, perhaps to a p o i n t which e l i m i n a t e s unearned r e t u r n s . In the end, the bonus might c r e a t e unearned r e t u r n s f o r " one shot " developers and land s e l l e r s but, f o r r e p e t i t i v e d e v e l o p e r s / i n v e s t o r s , i t may only c o n t r i b u t e to higher land c o s t s for f u t u r e a c q u i s i t i o n s . 90 F. SUMMARY OF CRITICISMS It has been argued that the method of c a l c u l a t i n g the amount of bonus r e q u i r e d to c r e a t e a meaningful i n c e n t i v e f o r long term i n v e s t o r s has been g r o s s l y o v e r - s i m p l i f i e d , i f not m i s r e p r e s e n t a t i v e of i n v e s t o r s ' l i k e l y r e t u r n s . A f a r more s o p h i s t i c a t e d methodology would be necessary to provide a more c r e d i b l e estimate of the r e q u i r e d i n c e n t i v e . Secondly, even i f the i n c e n t i v e were a c c u r a t e l y c a l c u l a t e d at a given p o i n t i n time, i t s value c o u l d be expected to f l u c t u a t e with changing market c o n d i t i o n s . But even i f i t c o u l d a u t o m a t i c a l l y a d j u s t f o r market changes o c c u r i n g over time, land value and investment theory both suggest that the i n c e n t i v e ' s economic value would l i k e l y be c a p i t a l i z e d i n t o land value and l o s t to subsequent purchasers. In p a r t i c u l a r , o r i g i n a l landowners ( at the time of the bonus's i n t r o d u c t i o n ) who chose to s e l l t h e i r p r o p e r t i e s may capture an unearned r e t u r n , absorbing any " i n c e n t i v e " generated by the bonus. Subsequent landowners c o u l d be expected to pay- f o r the bonused d e n s i t y and, depending on p r e v a i l i n g market c o n d i t i o n s , the r e s i d e n t i a l component may r e s u l t i n e i t h e r an economic advantage or f i n a n c i a l burden f o r the mixed-use p r o j e c t . 91 V. BEYOND THE BONUS Recognizing the market's tendency to e l i m i n a t e a l l but the most expensive housing from the core area i t i s c l e a r that p u b l i c e f f o r t s to encourage or to ensure i t s p r o v i s i o n represent a major i n t e r v e n t i o n i n t o the workings of the marketplace. In the absence of such p u b l i c i n i t i a t i v e s there i s every l i k e l i h o o d t h a t the growth of downtowns w i l l continue to be dominated by business expansion, making the prospects f o r a l a r g e r r e s i d e n t i a l base i n the area even more d i s t a n t . The goal of i n c r e a s i n g the stock of housing in the area may be a p p r o p r i a t e ; indeed, one i s hard pressed to f i n d a l a r g e North American c i t y that i s not su p p o r t i v e of the g o a l . Housing i s argued to be d e s i r a b l e not only for i t s own sake ( 1 i f e s t y l e / l o c a t i o n a l c h o i c e , e f f i c i e n c y of p u b l i c investments ) but a l s o f o r the support which i t i s b e l i e v e d to lend to other a c t i v i t i e s o c c u r i n g i n the area ( market support, labour supply, s a f e r s t r e e t s / p a r k s , and so on ). The preceeding a n a l y s i s of the p o t e n t i a l e f f e c t i v e n e s s of r e s i d e n t i a l d e n s i t y bonuses suggests that the technique, at best, may be e f f e c t i v e f o r only a small group of o r i g i n a l landowners. While subsequent owners may c o n s t r u c t mixed-use p r o j e c t s , such i n i t i a t i v e i s most l i k e l y to come from improved r e s i d e n t i a l market c o n d i t i o n s , or l e g a l requirements to do so ( even i f the f i n a n c i a l r e t u r n s are minimal ) . Des p i t e the 92 need f o r a d d i t i o n a l i n t e r v e n t i o n s to support housing, i t i s d i f f i c u l t to argue t h a t , i n the long run, bonus schemes are not b e n e f i c i a l , i f only i n a very l i m i t e d way. They may make s e v e r a l v a l u a b l e c o n t r i b u t i o n s towards i n c r e a s i n g the supply of downtown housing: • by drawing a t t e n t i o n to the c i t y ' s e f f o r t s to s t i m u l a t e housing c o n s t r u c t i o n ; • by encouraging the development of mixed-use p r o j e c t s which, themselves, might s t i m u l a t e development and consumer i n t e r e s t i n downtown housing; and • by p r o v i d i n g an i n c e n t i v e f o r at l e a s t some developers to provide housing. Although r e s i d e n t i a l d e n s i t y bonus systems are probably not capable of s a t i s f y i n g the high e x p e c t a t i o n s which t h e i r proponents may have for t h e i r e f f e c t i v e n e s s , d i s m i s s i n g t h e i r c o n t r i b u t i o n e n t i r e l y would probably do the technique a d i s s e r v i c e . In c r e a t i n g a r e s i d e n t i a l environment, whether at the u n i t l e v e l or f o r the mixed-use area as a whole, simply p r o v i d i n g the u n i t s through d e n s i t y bonuses may not s a t i s f y a more comprehensive set of p u b l i c o b j e c t i v e s with respect to housing. A blanket bonusing approach may le a d to housing i n u n d e s i r a b l e s i t u a t i o n s and/or forms. There may be need f o r a d d i t i o n a l c o n t r o l p r o v i s i o n s / i n c e n t i v e s r e l a t e d to q u a l i t a t i v e aspects of p r o j e c t s , the i n t e g r a t i o n and i n t e r f a c e of d i f f e r e n t b u i l d i n g 93 a c t i v i t i e s , and to the r e l a t i o n s h i p of new b u i l d i n g s to adjacent s i t e s / b u i l d i n g s . A d d i t i o n a l l y , there may be r e q u i r e d s p e c i a l p r o v i s i o n s f o r the treatment of small s i t e s , the phasing of development and the t r a n s f e r of development p o t e n t i a l . Recognizing the bonus's l i m i t a t i o n s , i t i s u s e f u l to b r i e f l y d i s c u s s other t e c h n i q u e s / a c t i o n s which might be used to augment or use i n place of bonus systems. The course of a c t i o n in a p a r t i c u l a r s i t u a t i o n would depend on the u n d e r l y i n g goals which housing was expected to achieve and, as noted e a r l i e r , these may be r e l a t e d to e i t h e r the s p i n - o f f b e n e f i t s a c c r u i n g to other downtown a c t i v i t i e s or to the b e n e f i t s of housing f o r i t s own sake. Each w i l l be d i s c u s s e d i n t u r n . A. HOUSING AS A "MEANS" It i s not i n c o n c e i v a b l e that the i n t e r e s t s which dominate a mu n i c i p a l c o u n c i l may be sup p o r t i v e of housing only because of the expected b e n e f i t s f o r downtown businesses and p e d e s t r i a n s . What i s p e r c e i v e d as most important would be the numbers of people which housing might c o n t r i b u t e to the area, and not so much the presence of the housing i t s e l f . In a d d i t i o n to techniques aimed at i n c r e a s i n g the housing stock ( d i s c u s s e d i n the next s e c t i o n ) , there may be s e v e r a l " non-housing " a c t i o n s which c o u l d be e q u a l l y and, perhaps, more e f f e c t i v e in i n c r e a s i n g the number of people using downtown. One approach might be to i n c r e a s e the amount and v a r i e t y of 94 a c t i v i t y i n the area and so i n c r e a s e i t s drawing power. Techniques might i n c l u d e the p r o v i s i o n of i n c e n t i v e s f o r crowd-gen e r a t i n g a c t i v i t i e s ( e.g. t h e a t r e s , r e s t a u r a n t s , a marketplace or e x h i b i t i o n c e n t e r ). The i n c e n t i v e s might i n c l u d e d e n s i t y bonuses, land s u b s i d i e s or j o i n t p u b l i c / p r i v a t e ventures.. Complementing or l e a d i n g these new a c t i v i t i e s might be the undertaking of p h y s i c a l improvements to the downtown's p u b l i c area's - sidewalks, p l a z a s , parks, n a t u r a l amenities, and so on. In a d d i t i o n to p h y s i c a l / d e s i g n improvements ( l i g h t i n g , l a n d scaping, a c c e s s i b i l i t y , signage, e t c . ) , e f f o r t s might be made to provide a s k e l e t o n program of s p e c i a l events or entertainment f o r p u b l i c areas. A second approach might i n v o l v e improving p u b l i c a c c e s s i b i l i t y to the area - i f i t i s easy to enter by f o o t , c a r , b i c y c l e or p u b l i c t r a n s i t , the volume of downtown users might i n c r e a s e s i g n i f i c a n t l y . S p e c i f i c a c t i o n s might i n c l u d e improving p e d e s t r i a n routes i n t o and through the area, i n c r e a s i n g access to parking f a c i l i t i e s ( and/or lowering p a r k i n g r a t e s during non-working hours ), d e s i g n a t i n g b i c y c l e routes while a l s o p r o v i d i n g storage f a c i l i t i e s , and improving bus s e r v i c e and/or lowering f a r e s f o r shoppers dur i n g non-working hours. A t h i r d approach might i n v o l v e s u b s t a n t i a l l y i n c r e a s i n g r e s i d e n t i a l d e n s i t i e s in areas immediately adjacent to the downtown. Greater r e s i d e n t p o p u l a t i o n s w i t h i n a convenient walking or busing d i s t a n c e might lend support to the area's 95 r e t a i l a c t i v i t y and i n c r e a s e p e d e s t r i a n volumes on p r i n c i p a l shopping/access s t r e e t s . Each of these approaches r e q u i r e s p u b l i c commitment and a degree of c o o p e r a t i o n between the p u b l i c and p r i v a t e s e c t o r s . A community might embark upon a l l three approaches and achieve many of the goals which housing i s a l s o aimed at r e a l i z i n g . I t i s c o n c e i v a b l e that the improvements to the area's a c t i v i t y base and image might f u e l market demand f o r housing i n the area and, in the long run, c o n t r i b u t e i n d i r e c t l y to i n c r e a s i n g the area's r e s i d e n t i a l base. B. HOUSING AS AN "END" IN ITSELF Where communities wish to develop a s u b s t a n t i a l housing stock downtown, for i t s own sake, they may choose to u t i l i z e a bonus system but they would probably be b e t t e r served by d i r e c t i n g t h e i r energies to the use of other methods. R e s i d e n t i a l d e n s i t y bonus systems must be kept in p e r s p e c t i v e with other mechanisms for p r o v i d i n g housing - mechanisms which may be more e f f e c t i v e and l e s s c o s t l y in p a r t i c u l a r s i t u a t i o n s . While i t i s beyond the scope of t h i s t h e s i s to d i s c u s s the r e l a t i v e advantages and disadvantages of a l t e r n a t i v e mechanisms, i t i s worth i d e n t i f y i n g s e v e r a l which have been used by l o c a l and f e d e r a l p u b l i c agencies b e f o r e . By f a r , the m a j o r i t y of mechanisms are aimed at s t i m u l a t i n g the supply s i d e , e n c o u r a g i n g / r e q u i r i n g developers to provide housing of some type or amount. Among the mechanisms which provide an inducement 96 a r e : • p u b l i c s u b s i d i e s of the f i n a n c i n g c o s t s of the r e s i d e n t i a l component; • pr o p e r t y tax exemptions; • r e l a x a t i o n of e x i s t i n g land use c o n t r o l s ; • shortened p r o c e s s i n g / a p p r o v a l p e r i o d s f o r r e s i d e n t i a l and/or mixed-use p r o j e c t s ; • i n c r e a s i n g the supply of land zoned f o r r e s i d e n t i a l uses; and • d i r e c t p u b l i c involvement aimed at s t i m u l a t i n g and f a c i l i t a t i n g the market or f i l l i n g i n sub-market vo i d s which the market has f a i l e d to s a t i s f y . Mechanisms i n c l u d e land assembly, d i r e c t construction/management, j o i n t ventures and demonstration p r o j e c t s . Other mechanisms are of a more p r o h i b i t i v e nature, aimed at f o r c i n g the i n c l u s i o n of housing or r e s t r i c t i n g the o p p o r t u n i t y to develop other uses. These mechanisms i n c l u d e : • re-zoning land ( p a r c e l s or areas ) to permit only r e s i d e n t i a l or mixed-use s t r u c t u r e s ; • i n c l u s i o n a r y r e q u i r e m e n t s 9 9 • r e s t r i c t i o n s of r e s i d e n t i a l development p o t e n t i a l " I t i s worth n o t i n g that while bonuses were intended to f a l l w i t h i n the former " inducement " category, once subsequent owners have p a i d f o r the bonused d e n s i t y , the bonus may be, i n p r a c t i c e , l i t t l e more than an i n c l u s i o n a r y requirement ( p a r t i c u l a r l y where i t i s matched to bonused commercial d e n s i t y ). 97 i n competing areas o u t s i d e of the downtown. A second group of mechanisms may be used to s t i m u l a t e the demand for housing in the area. These i n c l u d e : • household income support for r e n t e r s and/or condominium purchasers; • an increased number/variety of a c t i v i t i e s i n the area which make i t a more a p p e a l i n g p l a c e to l i v e ; • improvements i n the p r o v i s i o n of support s e r v i c e s f o r area r e s i d e n t s ( homecare, c h i l d c a r e , e t c . ) and in the amount and q u a l i t y of p u b l i c amenity areas. 98 VI. DIRECTIONS FOR FURTHER RESEARCH Debates over the d e s i r a b i l i t y of housing i n the downtown, and the most e f f e c t i v e ways of p r o v i d i n g i t , are s u b j e c t s which i n v i t e and r e q u i r e f u r t h e r e x p l o r a t i o n and r e s e a r c h . Issues r e l a t e d to the s o c i a l , environmental, p h y s i c a l and economic i m p l i c a t i o n s of the p o s s i b l e s c e n a r i o s for the downtown provide ample l a t i t u d e f o r both focused i n v e s t i g a t i o n and c r o s s -d i s c i p l i n a r y a n a l y s i s , whether one's i n t e r e s t s l i e i n t h e o r e t i c a l c o n s t r u c t s or case s t u d i e s . The f o l l o w i n g r e -statement of some of the " unknowns " d i s c u s s e d i n the t h e s i s might provide some i n i t i a l ideas f o r f u r t h e r r e s e a r c h . • How v a l i d are the arguments which underly the goal of i n c r e a s e d housing? What are the f u l l range of b e n e f i t s and c o s t s to be considered and to what extent can they be measured and compared? How should the t e c h n i c a l a n a l y s i s be organized and presented to decision-makers so as to c l e a r l y i d e n t i f y the consequences of the opt i o n s which e x i s t ? How much impact has downtown housing had on v i t a l i t y in s p e c i f i c downtowns? • Can those who might choose to l i v e downtown be i d e n t i f i e d and t h e i r numbers estimated? What kinds of housing ( form, u n i t s i z e , c ost ) are r e q u i r e d to meet t h e i r demands? What amount of s u b s i d y / u n i t would be r e q u i r e d to make the u n i t s v i a b l e w i t h i n 99 s p e c i f i c s i t u a t i o n s ? What are the i m p l i c a t i o n s of d i f f e r e n t r a t i o s of residents/employees i n terms of any measurable, comparative i n d i c a t o r s ( e.g. r e t a i l v i t a l i t y )? For a p a r t i c u l a r c i t y , what would be the i m p l i c a t i o n s of having no housing whatsoever i n the downtown, as compared to p o l i c i e s advocating as much housing as employment, more housing than employment, and so on? How do i n v e s t o r s ' r e t u r n s from mixed-use b u i l d i n g s compare with r e t u r n s from s i n g l e purpose b u i l d i n g s ? To what extent are a d d i t i o n a l r e t u r n s , beyond those r e c e i v e d f o r s i n g l e purpose b u i l d i n g s , necessary to compensate developers? Are the occupants of mixed-use b u i l d i n g s s a t i s f i e d with the combination of uses and form in which they l i v e ? To what extent are the uses mutually s u p p o r t i v e ? What e x p e c t a t i o n s / a t t i t u d e s do r e s i d e n t s have towards any sense of cohesion which may or may not e x i s t among r e s i d e n t s of d i f f e r e n t b u i l d i n g s ? Should any e f f o r t be made to provide or p r o t e c t those f e a t u r e s of the downtown which might c o n t r i b u t e to a sense of community, however that might be defined? How c o u l d a bonus system be designed to be s e l f -a d j u s t i n g as market c o n d i t i o n s change? How might the b e n e f i t s of a bonus be assured of f a l l i n g upon 100 those who b u i l d housing, and not. on those who p r e v i o u s l y owned the land? How much commercial development p o t e n t i a l does a given downtown need to accommodate i t s growth and ensure s u f f i c i e n t c o m petition i n the land market? What has been the a c t u a l impact of r e s i d e n t i a l bonus systems in s e l e c t c i t i e s i n terms of the number and kinds of u n i t s b u i l t , the r o l e of the bonus i n a f f e c t i n g the development d e c i s i o n and the p a t t e r n and form of the downtown's r e s i d e n t i a l component? In p a r t i c u l a r s i t u a t i o n s , how e f f e c t i v e might other mechanisms be in s t i m u l a t i n g housing c o n s t r u c t i o n in comparison to d e n s i t y bonuses? What kinds of p u b l i c commitments would be required? 101 V I I . CONCLUSIONS AND IMPLICATIONS A community can choose the kind of downtown which i t wants - there i s no p r e s c r i b e d , s i n g l e s o l u t i o n f o r what or how i t should be, although there are c o s t s and t r a d e - o f f s a s s o c i a t e d with each c h o i c e . The recent experience of l a r g e North American c i t i e s suggests t h a t , on paper at l e a s t , p o l i c y makers have wanted t h e i r downtowns to become both a center of commerce and a symbol of the community's v i t a l i t y and c h a r a c t e r . In p r a c t i c e , however, the b i a s towards s u s t a i n e d employment growth has c l e a r l y dominated both the p u b l i c and p r i v a t e s e c t o r s ' a t t i t u d e s towards the area's r o l e and p o t e n t i a l . While e f f o r t s have been made to s t i m u l a t e the p r o v i s i o n of housing, the consequences of commercial expansion ( h i g h land c o s t s , s p e c u l a t i o n , d e t e r i o r a t i n g environmental q u a l i t y ) have s t i f i l e d most attempts to p r o t e c t or introduce housing i n t o the area. In the competition f o r space, housing has l i t t l e leverage a g a i n s t the a b i l i t y of commercial a c t i v i t i e s to generate higher r e t u r n s and so b i d higher p r i c e s f o r land. P u b l i c p o l i c i e s aimed at pursuing and supporting both employment and r e s i d e n t i a l a c t i v i t i e s appear ambivalent, f o r the s c a l e of commercial development seems to have precluded the p o s s i b i l i t y of a g r e a t e r amount of housing. C l e a r l y , the d e s i r e to encourage housing and the ways in which employment growth i s accommodated cannot be c o n s i d e r e d i n i s o l a t i o n from one another. 102 The f i n d i n g s of t h i s i n v e s t i g a t i o n have i m p l i c a t i o n s f o r both the f u t u r e r o l e of downtowns and f o r the c o n s t r u c t i o n and choice of mechanisms used to i n f l u e n c e or c o n t r o l the use of land. F i r s t l y , the q u e s t i o n of whether there should or should not be more housing in the downtown must be viewed more as a s t r a t e g i c c h o i c e ( what downtown should be ) than as a bandaid for the area's problems ( i . e . being l i f e l e s s , unsafe, i n e f f i c i e n t ) . The downtown's r o l e as a l e g i t i m a t e and d e s i r a b l e r e s i d e n t i a l area has i m p l i c a t i o n s f a r beyond the p r a c t i c a l matters of how to provide housing. For example, the determination of a r e l a t i v e or " t a r g e t " balance between housing and employment, ( be i t d e f i n e d i n terms of acreages, f l o o r s p a c e , p o p u l a t i o n s i z e s , growth r a t e s , or whatever ) would seem to be an obvious requirement at the p o l i c y l e v e l , yet there i s l i t t l e i n d i c a t i o n that i t has been r i g o r o u s l y examined in the m a j o r i t y of downtown plann i n g s t u d i e s reviewed. One would expect that a more e x p l i c i t d e s c r i p t i o n of the area's r e s i d e n t i a l r o l e might begin to b r i n g i n t o q u e s t i o n the assumed c o n t i n u a t i o n of unconstrained employment growth in the area. Where housing i s to serve only as an appendage to the expansion of business, the l i k e l i h o o d of housing being developed downtown, and the q u a l i t y of the r e s u l t i n g l i v i n g c o n d i t i o n s , probably become matters warranting r e - c o n s i d e r a t i o n . A d d i t i o n a l l y , the need for housing w i t h i n the downtown's commercial areas should be re-examined in l i g h t of the c o n t r i b u t i o n which adjacent r e s i d e n t i a l p r e c i n c t s can make to the downtown's v i t a l i t y and e f f i c i e n c y . It may be s u f f i c i e n t to have r e l a t i v e l y dense 103 r e s i d e n t p o p u l a t i o n s adjacent to the downtown without r e q u i r i n g that people l i v e w i t h i n the commercial areas themselves. Dw e l l i n g u n i t s may be permitted i n commercial areas, but not s p e c i f i c a l l y encouraged ( through i n c e n t i v e s ) or mandated ( through development requirements ). As d i s c u s s e d e a r l i e r , there appears to be l i t t l e evidence of the impact of e x i s t i n g or p r o j e c t e d r e s i d e n t s w i t h i n commercial areas on the r e a l i z a t i o n of broader p u b l i c g o als f o r those areas. Secondly, the i l l u s i o n that most developers r e c e i v e economic i n c e n t i v e s - and that the bonus i s l i k e l y to be a d e c i s i v e means of a c h i e v i n g the goal - should not be promoted without more c o n v i n c i n g arguments f i r s t being e s t a b l i s h e d . The suggestion that a r e s i d e n t i a l base can be generated on the back of commercial development i s perhaps w i s h f u l t h i n k i n g . In r e l y i n g on d e n s i t y bonuses, the t i m i n g , i n f a c t the very p o s s i b i l i t y of a c h i e v i n g the d e s i r e d r e s i d e n t i a l outcome i s s t i l l a f u n c t i o n of the marketplace, and p o l i c y makers may f e e l that that i s not good enough. Where p o t e n t i a l downtown r e s i d e n t s cannot support the c o s t s of housing, i t i s u n l i k e l y to be developed. The u s e f u l n e s s of r e s i d e n t i a l d e n s i t y bonuses has probably been o v e r - s o l d - in f a c t , where r e s i d e n t i a l d e n s i t i e s are simply added to e x i s t i n g d e n s i t i e s , the r e s u l t appears to be nothing more than an " up-zoning " - a b e n e f i t to o r i g i n a l owners but nothing that w i l l provide an i n c e n t i v e over time. L i k e w i s e , the combination of a d d i t i o n a l c o m m e r c i a l / r e s i d e n t i a l d e n s i t i e s i s e q u a l l y u n l i k e l y to provide an i n c e n t i v e to any but those o r i g i n a l owners who choose to s e l l , r a t her than develop 104 t h e i r p r o p e r t i e s . On balance, d e s p i t e the small c o n t r i b u t i o n which bonuses might make to p u b l i c awareness and mixed-use development, t h e i r presence may a c t u a l l y do more to undermine e f f o r t s to encourage housing by c a s t i n g the i l l u s i o n that something c o n s t r u c t i v e i s being done, and t h a t housing w i l l emerge because the bonuses are i n p l a c e . A r e c o g n i t i o n of the l i m i t a t i o n s of bonuses may, i n f a c t , do more to s t i m u l a t e the c r e a t i v e development of a l t e r n a t i v e means for p r o v i d i n g housing i n the downtown, and thereby improve the l i k e l i h o o d of r e s i d e n t i a l development o c c u r i n g . As such, the a l t e r n a t i v e mechanisms i d e n t i f i e d i n Chapter F i v e may be the only e f f e c t i v e way of ensuring the i n t r o d u c t i o n of any amount of housing downtown. T h i r l d l y , i f p o l i c y makers are i n t e n t on having more people l i v e downtown they w i l l have to demonstrate a stronger commitment than simply p r o v i d i n g i n c e n t i v e s and s u b s i d i e s to s t i m u l a t e the c o n s t r u c t i o n of s u i t a b l e d w e l l i n g u n i t s . There may be need f o r p u b l i c improvements with respect to the d e l i v e r y of s o c i a l s e r v i c e s , the p r o v i s i o n of open space and p u b l i c f a c i l i t i e s and the l e v e l of environmental q u a l i t y g e n e r a l l y . T h i s i n v e s t i g a t i o n has drawn a t t e n t i o n to the need f o r on-going e v a l u a t i o n of new techniques i n planning and land use c o n t r o l . While r e s i d e n t i a l bonuses have only r e c e n t l y been a p p l i e d i n the downtown, the need f o r a more r i g o r o u s examination of t h e i r a p p l i c a t i o n i s both warranted and overdue. 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