Unintended Consequences of Proffer Reform in Virginia

The Virginia legislature is moving forward with so-called “proffer” reform.  Proffers are local amenities such as parks, computers for schools, architectural changes and other benefits provided by housing developers to local governments in exchange for a relaxation of zoning restrictions on new housing development.  A bill to restrict these deals has passed the state’s House of Representatives and is moving through its Senate. While this prohibition on a “gray market” may appear to be good policy reform, the result will likely be less development and higher housing prices.  The reform seeks to ban all proffers that do not address “an impact that is specifically attributable to a proposed new residential development…”.

Local groups are famously resistant to housing development. This makes sense to some extent, because new development can impose external costs on existing residents in the form of traffic congestion and overutilized municipal infrastructure.  An ideal resolution of such external costs would be an explicit market for zoning change.  Such a market would allow developers to explicitly negotiate with relevant community groups and homeowners associations.  The consent of existing residents for new denser more urban development would be obtained in exchange for cash and/or home buyouts.  The payments would compensate existing residents for change.

Given that such explicit markets for zoning change do not exist, how should municipalities negotiate with housing developers? Some, such as Steve Teles from Johns Hopkins University and Jonathan Rauch from the Brookings Institution have argued that allowing a broad scope of for negotiation with less transparency can yield better political outcomes. Inability to accept community demands for ancillary benefits can prevent new developments from ever getting off the ground. Similarly, William Fischel of Dartmouth has long argued that allowing highly-specific tradeoffs for community support can make sense in many cases.

The Virginia bill would restrict local powers to negotiate highly specific development agreements without adding any mechanism that facilitates either an explicit or an alternative “gray” market to ensure that restrictions would encourage development. While it may seem sleazy to allow communities to demand computers for schools in exchange for denser development, if cash were exchanged for denser development, the cash recipients might very well use the cash for computers rather than a park or wider roads.  While the gray market is imperfect, putting more restrictions on it will make development less rather than more likely.

This blog post was coauthored with Cato research assistant Nick Zaiac.