Rather than proposing a restoration of rights to private owners, Nelson concluded that it would be best to recognize that zoning had become a de facto property right, held by the political actors who controlled the community. The trouble with this redistribution of use rights, Nelson argued, was that the community’s right of control could not be sold to parties who could make better use of it. He proposed to make zoning fully fungible. The sales would be consensual: The existing political body would have to be satisfied with the price that developers would offer to change zoning to accommodate new uses. Developers, having purchased the use rights, could proceed with their plans without further ado.
I later made a similar proposal within the framework of law‐and‐economics in The Economics of Zoning Laws (Johns Hopkins University Press, 1985). As the Coase theorem would suggest, which party owns the right to develop is irrelevant if the right is easily transferred. To developers frustrated by growth‐control zoning, Nelson and I said, Get over it and trade.
California leaders have come around to a conclusion that many economic studies have supported: Zoning has caused the state’s unreasonably high housing prices that are holding back many businesses that cannot hire out‐of‐staters. Zoning has also contributed to urban sprawl in that land‐use regulations have deterred the increased density of housing near business centers and mass‐transit stations. New housing for those who have jobs in Sunnyvale is built miles away in Stockton. The legendary commutes from the Central Valley to Silicon Valley have wasted gas, congested roads, and stood in the way of the state’s greenhouse‐gas reduction goals.
Financial interest / The California State Legislature has responded to this in typical fashion. It has, with numerous laws, ordered the local governments to revise their local master plans to accommodate more development. As Elmendorf points out, these never work. The reason for their failure, I submit, is in the construction of local master plans, which are written as unranked grab bags to appeal to every interest. Of course, we want higher‐density development near our transit stations, public officials say, but we also must preserve open space, groundwater sources, endangered species, prime agricultural land, historic structures, and traditional community character. And so the projects don’t get built.
Elmendorf realizes that the top‐down approach won’t work without making more intensive development in the financial interest of the community that controls zoning. Instead of dealing with developers on a parcel‐by‐parcel basis, he proposes that the state give localities the right to auction the right to develop more intensively—“upzone”—entire areas whose development would meet state goals. Developers would bid for these rights in a competitive market and the rights would be transferable among parcels within a designated area. The revenue from the auctions could be used for any local purpose, such as new parks, road repairs, or just tax reductions. To make sure the upzoning rights would fetch a higher price, the community would, Elmendorf submits, try to commit itself in advance to smoothing any other bumps in the development process, such as sewer connections, impact fees, and parking requirements.
Too many interests? / As a law professor, Elmendorf is aware that there are some legal niceties to be dealt with. The plan looks like “contract zoning,” whose quid‐pro‐quo dealing is frowned upon by courts. But he points out that his proposed deals, requiring state approval, are much more indirect than contract zoning and so are likely to pass legal muster. The popularity of tradable pollution emission permits has undermined concern about selling the right to develop. Some might say the proposal is a “regulatory taking” of the property owner’s pre‐existing development rights but, if so, the value of those rights in most California communities is so low as not to be worth litigating. Legal barriers are not the issue that gives me pause.
What concerns me about the proposal is that the local elected officials, who are empowered to design and implement the upzoning auction, cannot reliably deliver development rights. Elmendorf is aware that the development process involves many interested parties who need to be satisfied before the permits can be granted. Some years ago, these became so convoluted that California legislation established institutions to deal with them. Among the institutions are community benefit agreements (CBAs), which corral community factions and negotiate with developers to satisfy local interests. Among the major factions who have availed themselves of CBAs are labor unions, which can demand that only union workers be employed in the projects. The union members do not have to be community residents and the added cost of labor can discourage some otherwise desirable projects.
CBA beneficiaries are unlikely to look kindly on a plan that monetizes the value of their benefits as a result of open bidding for them. They aren’t against developers paying; it’s who gets the proceeds that would concern them. A program to auction upzonings would make it clear how much current CBAs cost the community at large. If the CBAs are left in place, the value of upzoning rights would be reduced by the need for the developer to satisfy various factions. It would seem obvious that upzoning auctions would produce revenue that actually benefits the entire community instead of the better‐organized interest groups, and those groups would not appreciate the public exposure of their cost to the public at large.
The other parties to whom attention must be paid are homeowners who are especially close to the upzoning area. Nearby homeowners are usually the first to cry Not in my backyard! in response to an upzoning proposal or even a project that actually complies with all existing standards.
As I have written in The Homevoter Hypothesis (Harvard, 2001), NIMBYism is not necessarily irrational, even if opponents of development sometimes trot out far‐fetched concerns. A home is the biggest single investment most people have, and the risks of adverse neighborhood effects are concentrated in that immobile asset and are not covered by homeowner insurance. You can insure against the structure burning down but not against increased crime or loss of a pleasant view. Homeowners instead use zoning as a substitute for value insurance.
Upzoning auctions might actually add to homeowners’ perceived risk of land‐use change. In the present (dysfunctional) system of case‐by‐case negotiation, homeowners at least are presented with a tangible project that they can address in zoning hearings and other forums. But a development right purchased at an upzoning auction has no physical embodiment. It is merely an enhanced Floor Area Ratio, allowing a building of greater height or lot coverage. Its use is constrained by the zone, but its size and other elements of its configuration are left largely to the imagination. Of course, there can be later public review of specific projects but, as Elmendorf points out, the community authorities have a strong incentive to clear the way for developers in order to enhance the value of the development rights they are selling. It is likely that homeowners would double down against the use of an upzoning auction.
All this is not to throw cold water on the Elmendorf proposal. He is correct that the prospect of cashing in on development rights will make it easier for local authorities and most of their constituents to accept state demands for upzoning. If nothing else, the proposal will expose the mendacity of many of the arguments against infill development. What may be needed to make this idea work is some additional insurance for nearby neighbors who would bear disproportionate burdens to their expectations of the status quo. Putting together that kind of market would be a useful addition to this worthy proposal.
