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The Allure of Public/Private Development

by Doug Kaplan
October 03, 2008

A few years ago, I ran into the administrator of the Santa Cruz County Redevelopment Agency. Our real estate development company had recently completed a small office building located on the periphery of the agency’s 3,760-acre redevelopment project area and the new tenant, Charles Schwab and Co., was ready to move in. After saying nice things about the building, the redevelopment administrator asked me: “How did it go?”

“Construction was uneventful,” I told him, “but getting permits was a nightmare.”

“You should have come to us,” he said. “We could have helped you.”

And he certainly could have helped us, since, as an executive director of a California redevelopment agency, he had at his disposal an arsenal of powerful weapons that he could deploy in aid of our project: He could exercise the power of eminent domain to seize our neighbor’s property, which he could use to augment our site; he could issue tax-free municipal bonds, which he could use to help finance our project; and perhaps most importantly, he had access to a priceless fast track through the tortuous regulatory and entitlement process.

We didn’t need more land. We didn’t need financing. As for his willingness to serve as our Virgil guiding us through the dark worlds of planning and building departments, that would have been tempting, but, as I said to the administrator, helping us navigate our way through his and his colleagues’ convoluted procedures was not the best use of his time.

“You’re the government,” I told him. “I don’t want you to do more for me; I just want you to do less to me.”

He didn’t understand. He just stared at me with the same perplexed expression that I’ve seen so many times on the faces of other redevelopment directors, economic development coordinators, members of committees with names like “Task Force for Economic Revitalization,” consultants hired to craft “Economic Development Strategic Plans,” and other well-meaning government officials who were dumbstruck by my response to their question, “How can we help?”

Our county’s economic development officer didn’t understand when I accepted her invitation to join her economic development task force, but on one condition: The task force would hold a single meeting during which we would agree to submit a one-page report to the county supervisors suggesting that the major obstacle to economic development was the supervisors themselves.

A local city manager and his economic development director didn’t understand my reaction to their invitation to form a “public/private partnership” to transform the blue-collar town’s former post office into a white-tablecloth restaurant. “If you really want to revitalize the downtown,” I told them, “then light the sidewalks, fix the roads, take care of the police, support the schools… .” The city manager interrupted: “Doug, people are shooting each other outside city hall. The council wants me to do something now!”

Today, in my home state of California, almost 400 cities and counties have gone into the development business by establishing captive government development agencies (typically, but misleadingly, called redevelopment agencies) that now control project areas covering more than 1.2 million acres, representing almost 15 percent of the assessed value of all real property in the state. These powerful agencies are sitting on war chests containing just under $10 billion in cash (as of June 30, 2006), which they are using to lavish subsidies and favors on large retailers, hotel operators, shopping center developers and other “public/private” partners. Meanwhile, business owners and developers like us, who choose to remain independent, are forced to run an ever-expanding gauntlet of government-imposed regulatory, administrative, and financial obstacles that make our work difficult and sometimes impossible. Today, a private developer faces a difficult choice: Go into business with the local development agency, or go it alone at great cost and peril.

Though this choice is rarely made explicit, sometimes it is. For instance, when San Jose shopping center owner Dennis Fong refused to cooperate with the local redevelopment agency, the agency responded by voting to seize Fong’s property through eminent domain and transfer it to the agency’s “public/private” partner in a competing project across the street. (The agency partially excused its action by claiming that it would be too “confusing to national retailers if two developers were recruiting tenants at generally the same time for the same market area.”)

More often the choice to join forces with the local government development agency is presented subtly, even innocently, such as the time the Santa Cruz County redevelopment administrator said to me: “You should have come to us. We could have helped you.” But however presented—whether as a threat or a friendly offer—the message to the development community from cities and counties across California and much of the nation is consistent: “We’re no longer just fee-collecting regulators; we’re now developers. We write the rules, we referee the game, and now we want to play. You’re welcome to walk onto the field alone, but do you really want to?”

 

A Development Odyssey

We walked onto the field alone when we began the Schwab project. Let me tell you what it was like.

Hello, Anybody Home? Before we could begin construction of the 2,700-square-foot Schwab building—about the size of a normal home—we needed a building permit, but before we could apply for a building permit we needed a “development permit,” which is best understood as a permit to apply for a permit. At the time, our county Planning Department would not accept walk-in applications for development permits, nor would it allow walk-in attempts to schedule an appointment—it would only accept telephone requests for an appointment. That presented a problem, however, since the employee responsible for scheduling appointments only accepted phone calls during a brief window of time once a day. We knew from previous experience that we would face tough competition from other applicants, all of whom would be trying to get through to the sole scheduler so, in anticipation of the problem, we ordered a service from the phone company called “repeat dialing,” figuring that this would help us snag an open line. Unfortunately, the County Planning Department was one step ahead of us: It had recently installed voicemail, so even though we could now get around the constant busy signal, we could only leave a message. We did get through—to voicemail—and we did leave our message, and then, like a nervous actor waiting for a callback after the big audition and afraid to wander more than 10 feet from the phone, we waited. Everybody in our office was told that if anyone from the Planning Department called: “Drop all other calls. Don’t put the department on hold. Don’t take a message. Make an appointment!”

This Will Only Take a Moment. We were fortunate: Our building was tiny and our project unopposed, so our permits only took 20 months to process.

Just One More Department. We submitted 17 sets of plans that were routed to the 14 separate departments, agencies, and individuals who were charged with issuing the dozen separate approvals we needed to build our 2,700-square-foot building. By the time we were finished, we had passed an all-too-familiar milestone in our community: The number of government employees involved in the review and processing of our permits outnumbered the number of construction workers who would eventually build the building.

A Few Conditions. The planners assigned to our project loved to write reports. The environmental coordinator wrote a report for the project planner who produced a 45-page report for the zoning administrator who generated reports for the Planning Commission, which made recommendations to the Board of Supervisors. Everybody got reports. All these reports were finally distilled into a 12-page development permit, which contained more than 60 conditions, including a last-minute surprise that granted us permission to build an office building, provided that not more than half of the building was used for offices. Buried in a chart that was buried in the county’s zoning code, unnoticed by us and unnoticed by our project planner until late in the application process, was a requirement limiting the amount of office space within the “C1” commercial zone to no more than 50 percent of a building’s floor area. Our only remedy was to apply for rezoning—a half-year-long ordeal that would take us before the Planning Commission and Board of Supervisors.

Money, Money, Money. We paid about $40,000 in fees, which worked out to about $15 per square foot of building area. This does not include the cost of public improvements that we were required to build, nor does it include the cost of consultants and engineers that we hired to respond to the Planning Department’s endless requests for additional information. Altogether, we paid 27 separate fees, some more than once. One of these fees, the application fee, was charged “at cost,” which meant that the planner assigned to our project billed us $73 an hour for his time (which probably accounts for the 45-page reports).

Rules and Regulations. We had to comply with the Uniform Building Code and the Americans with Disabilities Act—that was a given—but we also had to comply with the jumble of rules and regulations buried in our county’s 1,184-page zoning code, the County General Plan, and County Design Review Ordinance. We had to comply with prevailing wage regulations since our water connection was deemed a “public project.” We also were caught in the clash of well-intentioned but often contradictory regulations issued by autonomous agencies like the fire district, water district, sanitation district, Redevelopment Agency, Federal Emergency Management Agency, and Regional Water Quality Control Board. (When the rules and regulations of autonomous bodies conflict, heaven help you, because nobody else can.)

A Matter of Taste. We hired a talented architect who designed a handsome building. Our project planner agreed; nevertheless, he regretfully informed us that we would have to redesign the building since it did not comply with a county design review regulation that dictated that all new development must be compatible with the surrounding neighborhood. Our building was not compatible, he said, and indeed it wasn’t. The immediate “neighborhood” consisted of an adjoining office building that we owned, a freeway that ran along the western boundary of the project, and a fast food restaurant and run-down gas station on opposite corners across the street.

We walked into the Planning Department in October 1996 seeking permission to build a tiny office building. We walked out in May 1998—nearly 20 months and over $40,000 later—shell-shocked but still standing, with permits in hand. As I later told the redevelopment administrator, the project from that point forward was uneventful and just six months later—one-third of the time it took to get permits—Charles Schwab & Co. moved into its new office.

 

A Story of Government Planning

Meanwhile, a different story was unfolding elsewhere in the county’s 3,760-acre redevelopment project area. Here are just the highlights, with a prologue that begins in the 1980s:

1980s. Orchard Supply Hardware, Nob Hill Foods, Home Depot, and other retailers consider building stores within the boundaries of the future project area. All abandon their plans after preliminary discussions with a demanding and often hostile county government. (Orchard Supply, for example, after completing preliminary studies, discovers that the county will demand nearly half a million dollars in impact fees and, like the others, walks away.)

1987. The county forms its own government development agency.

1990. The new government development agency seeks advice from the retail consulting firm of Keyser Marston Associates, which subsequently produces a report titled “County of Santa Cruz Retail Development Potential.” The $38,000 report does not mention the retailers who explored opening stores in the county but fled after learning what it would cost, but it does find that the county is underserved and concludes with six “key findings”:

• Among the department stores, Macy’s, Ward’s, and Nordstrom are absent.

• There are no fashion specialty stores in the county.

• Among discount/department stores, Target, Whole Earth Access, and Wal-Mart are absent.

• Among promotional tenants, about 35 Northern California tenants are not represented.

• There are no warehouse retail operations in the county.

• There are no catalog showrooms in the county.

(As an aside, some county residents wonder why the agency paid a consultant $38,000 to learn which stores are not in the county.)

1991. The County Board of Supervisors adopts the following economic development goals:

• “The Board will undertake appropriate economic development projects to increase local government revenues in order to provide expanded public services to the community.” (Translation: “We need money, so let’s develop something.”)

• “The Board will seek to coordinate and to act as a clearinghouse for economic development activities throughout the county.”

September 1994. The county’s in-house economic development coordinator submits to the Board of Supervisors an Economic Development Strategy Implementation Plan, which, among other recommendations, calls for the creation of a County Economic Development Strategic Action Team that will coordinate development of nine targeted industries, including “recycled manufacturing … high-tech recreation equipment design and manufacturing … Biotech … [and] marine sciences.”

November 1994. The administrator of the county’s redevelopment agency tells the supervisors that the agency is ready to enter into a public/private partnership to pursue an “exceptional project.” He writes that the “use of both eminent domain and financial assistance should only be used when there are overriding public benefits and where it can be demonstrated that such assistance is necessary for the project to proceed. While there are few projects which would meet such a test, there are some exceptional projects which will warrant such special consideration.”

1996. The agency and its public/private partner commence the “exceptional project”—a two-store retail center for Circuit City and Toys “R” Us.

Elsewhere in Santa Cruz County, city development agencies were doing the same thing. In the City of Watsonville, at the southern end of the county, the government development agency had demolished an entire city block, displacing 29 businesses, some of which had been operating in the same location for nearly 30 years—all to make way for a public/private development that never materialized. At the northern end of the county, in Santa Cruz—a city notorious for making life miserable for private developers— the government development agency ejected long-established, locally owned businesses to clear land for a public/private shopping center anchored by Cost Plus, OfficeMax, and PetSmart.

Today, in cities and counties throughout California, government development agencies are doing the same.

 

Planning Means Control

Does it really matter that local governments have become one of the driving forces behind commercial development in California and elsewhere in the country? It does.

First of all, government development agencies undermine the laws and traditions that curb the ability of our elected officials to impose their individual tastes on the rest of us. When an Oakland city council member said, “In a very progressive city like Oakland, Wal-Mart is not a favorite store. Target might be,” the audience could dismiss the comment as the personal taste of a young professional attorney. But the moment she and her colleagues adjourn their council meeting and immediately reconvene as the city’s development agency—poof!—like Clark Kent stepping out of the phone booth as Superman, she is instantly transformed into a public official with the means, money, and power to impose her tastes on every shopper in the community.

But it is more than just a matter of taste. Government development agencies give public officials extraordinary power to protect individual self-interest. In the mid-1990s, shortly after the popular owner of the City of Santa Cruz’s largest bookstore completed his term as mayor and a director of the city’s development agency, the agency inserted unusual conditions in its development agreements for two public/private projects near the former director’s bookstore. One agreement, which was for a large downtown retail/office complex, included this condition: “… no part of the Site shall at any time be used as a bookstore operated by a national retailer of books.” The second agreement, which was for a major public/private shopping center project, prohibited bookstores altogether.

Government development agencies are also guilty of driving up the cost of doing business, particularly when it comes to land values. In the early 1990s the San Jose Business Journal reported: “The San Jose Redevelopment Agency paid $2 million, or $182 a square foot, for the 11,000-square-foot San Jose Metropolitan Chamber of Commerce building in downtown San Jose in March. Almost every other building sold in 1992 went for less than $100 a square foot, and many went for less than $50 a square foot.” More often than not, local governments don’t catalyze private development; they drive it away by making it too expensive. A variation of the same theme came up during my conversation with the city manager and economic development director who wanted to give us money to turn their town’s old post office into a white-tablecloth restaurant. “You won’t attract developers, you’ll drive them away,” I told them. “If I was the next developer to come along and I wanted to put a nice restaurant in the Lettunich Building (which was located one block away), I wouldn’t because I could never compete with your subsidized restaurant. You can’t be just a little pregnant,” I said. “It’s all or none. If you subsidize one business, you have to subsidize them all.”

Government development agencies also contribute to the homogenization of America’s cities and towns. Swing by the Las Vegas Convention Center in the middle of May and you’ll see why. Every spring, at the annual meeting of the International Council of Shopping Centers, you’ll find government officials from villages, towns, and cities across the country who have come to Las Vegas to woo the nation’s largest retailers and developers. They offer lavish subsidies to land big deals, which is just one more reason that “small is beautiful” is morphing into “bigger is better,” and “national chain” is trumping “locally grown” in communities nationwide.

Finally, and most importantly, government development agencies undermine communities. Jane Jacobs, in The Death and Life of Great American Cities, alluded to this when she wrote: “Successful city districts are never dotted with junkyards, but that is not why these districts are successful. It is the other way around. They lack junkyards because they are successful.” In other words, “A city area … is not a failure because of being all old. It is the other way around. The area is all old because it is a failure.” She understood what government development advocates have difficulty comprehending: Public development is something done for a community, not by a community, and therefore is more likely to harm than help.

Government development officials use words like “building” and “plan” as nouns. Their agencies produce a plan; they deliver a building or project. But in vibrant communities, words like “plan” or “building” are primarily verbs: a talented chef planning his own restaurant; a co-op owner remodeling her flat; an immigrant couple juggling multiple jobs, saving so they can start a business; even a grumpy developer on the prowl for tired buildings to restore—people, all day, every day, planning and building a better life for themselves and their families, friends, congregants, customers, and community. When government development officials step in, take over, and do for people what people want to and should do themselves, these officials are substituting their plans and structures for the life, spirit, and activity that is a vibrant community.

The next time a government development official determines that something “cannot be accomplished by private industry acting alone,” he or she should ask: “Why not?” If the answer is too much government interference, then the solution is less interference, not more. Or think of it this way: If cutting taxes, reducing fees, and streamlining regulations benefits government’s public/private partners, then think what miracles could occur if government did the same for everyone. Do less to us and watch us have fun taking care of the rest.

 

Mr. Kaplan is co-founder of the Lomak Property Group, Inc. This article is excerpted from his longer article “Simplify, Don’t Subsidize: The Right Way to Support Private Development,” published by the Institute for Justice, June 2008.


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