New York officials regret not knowing that when the city considered rezoning a neighborhood around the Gowanus Canal in Brooklyn, speculators would capture much of the publicly created land value. Could that happen here? Read on…
What We Didn’t Know Then
Land Lines The Lincoln Institute of Land Policy
By George W. McCarthy
April 14, 2020
Excerpts:
In my October message, I ruminated on the classic lyric by Bob Seger: “Wish I didn’t know now what I didn’t know then.” The lyric provides an invitation to reflect on lost innocence. Though that column was written not long ago, it already feels like the product of a different era. In that column, I invited readers to share their own “lessons learned,” and got several interesting responses.
An…example arrived from our partners in New York, who wish they didn’t know now that when the city considered rezoning the neighborhood around the Gowanus Canal in Brooklyn, speculators would lay claim to potential future land values—to the tune of billions of dollars—almost immediately.
This neighborhood, built around a mostly abandoned industrial canal, is one of the last affordable places in Brooklyn. It is well-located—next to Park Slope and close to Prospect Park—and well-served by transit. It remained affordable because the canal was badly polluted with industrial waste over many decades. The Environmental Protection Agency (EPA) put the canal on its Superfund National Priorities List in 2010, formalizing a cleanup plan in 2013.
The city is only now preparing to release its proposed zoning plan for public review. So how could speculators capture so much of the future publicly created additions to land value? For one reason, they’ve known for over a decade that the area would likely be rezoned; the New York City Department of City Planning invited public comment on a rezoning study in 2008. And once the area became a Superfund national priority, the race was on to buy up everything available.
In the face of this spree, residents became concerned. A coalition of housing and community development advocates organized to defend the neighborhood. They asked the Lincoln Institute for help understanding whether rezoning might gentrify the neighborhood by increasing land and property values and displace current residents. We recommended a firm that could analyze historical and potential future property values.
That firm looked at 798 land properties designated for rezoning. Based on very conservative assumptions, they estimated that the land value of those parcels increased by $2.1 billion to $2.4 billion between 2013 and 2018. They then looked at the 387 parcels that were most likely to be redeveloped after rezoning and estimated that their land values would increase another $1 billion to $1.7 billion. The total increase in the land value created by rezoning the Gowanus was $3 billion to $4 billion, but almost two-thirds of it was captured by landowners by 2018, before any rezoning had been put into effect.
In New York, development rights are traded and transferred in a billion-dollar private market. This allows developers to build beyond current zoning limits by buying unused building rights from nearby landowners. Purportedly, JPMorgan Chase paid $200 million to purchase the right to add 18 floors to its headquarters on 270 Park Avenue, which was built to its zoning limits. Oddly, the public sector doesn’t participate directly in these markets; if it did, the city could have sold the new development rights it created in the Gowanus for upwards of $3 billion. This increased land value was the product of public action—rezoning and investment in the cleanup—and should not have ended up in the pockets of landowners or developers.
In the case of places like the Gowanus, we need to stop making windfalls available to landowners and developers and find ways to recover the land value created by public action—whether through direct investment or policy change. And we need to recognize that timing is important. Speculators will act in a nanosecond to manifest a value proposition. The public sector needs to be ready with policies and procedures to claim what is rightfully its own before the speculators show up.
Commentary:
This happens again and again… local governments giving away windfalls created by public investments funded by taxpayers.
If this happens in New York City can it happen here in Oregon and Washington? It already has. Nearby Seattle’s new Capitol Hill light rail station land values had been increasing by 15 percent annually before the station opened. There are signs that similar land value increases have been occurring in Portland’s Southwest Corridor where light rail plans are underway. Yes – the public sector needs to begin immediately preparing value capture mechanisms to claim what rightfully belongs to the public, not to private landholders.
