Development without Developers
Last time in The Gentrification Aesthetic, we covered why we might not want investors/capital to totally dominate the project of development. Development being the repurposing and reshaping of the urban environment, from opening a restaurant to building an apartment complex. If we accept that premise, what alternatives do we have? The basic idea is that as you lower the requirements of both financial and human capital for development, smaller and more independent entities can do a larger portion of said development. Instead of giant real-estate developers being responsible for the conversion of a home into a 12 unit apartment complex, you can have the original homeowner and a local construction firm manage it. Instead of 15 consultants and a board of investors being involved in the opening of a coffee shop, it can be a local family pooling their savings so that they can serve their community. How exactly you lower these initial capital requirements looks slightly different for small real estate and for small business, but there are thrulines in the ways a regulatory environment can disproportionately advantage “developers”. Here we’re going to focus on real estate, and we’ll cover small businesses in a future post.
Real Estate
In much of the US, and California especially, any new development involves a regulatory environment that is, to put it lightly, labyrinthian. In some cases, such as the construction of a 20 story tower in the downtown of a city, this is probably justified to a large degree. In other situations, less so. If I was a homeowner and wanted to take my plot and convert it to a small apartment building, let’s say 12 units, I’m going to need an veritable army. A bevy of environmental consultants, lawyers, engineers, and architects. If I want it done in a reasonable amount of time, I may need to hire so called “permit expeditors”, individuals who are paid to learn the secret buttons of the local government (and maybe bribe some city officials) in order to process your paperwork in a timely manner. Even if an individual has the funds to go through all this, there is so much domain knowledge involved in knowing what contractors to hire that almost nobody will be able to bring a project to completion. So instead, they sell the land to a “developer” who has internalized all that domain knowledge and has piles of capital in case unexpected costs (like studying if the building’s shadows are too long) arise.
I am not here to tell you that “regulations are bad”. Environmental quality is important. Safety is important. Equity is important. The problem is that not building things has costs too! The sprawling development that results from our current system is terrible for equity and environmental quality. Alongside that, even when structures do get built, the constraints imposed by our current system result in construction that many find unattractive. As soon as one zooms out and looks beyond the level of an individual project, it becomes clear that our current system is frequently an abject failure at cultivating the values it professes to be protecting.
What we can do is focus on making compliance costs a bit more reasonable, and that can start by looking abroad to see what other places do.
Obviously zoning and and how discretionary planning plays a big role here, but that’s been discussed well elsewhere. If you want a refresher comparing those rules between the US and elsewhere, I recommend this blog post by Urban Kzchoze. However, I’m going to focus on the way environmental and safety rules are handled in Japan compared to in California (though many states follow a similar model). I’m sure I’ll miss some things, but I want to compare the basic pieces.
Let’s look at environmental assessment requirements, known as CEQA in California. These are regulations that stipulate preemptive checks for whether a project will impose a negative environmental impact. In the world of CEQA, sometimes these can include things that aren’t even environmental impacts, but we’re going to avoid that rabbithole for now. Suffice to say, CEQA regulates “bad things this building might do to its surroundings”. The core problem here is that CEQA, and similar legislation across the country, is not only highly complex, but tries to do everything upfront to account for any risk of generating externalities. CEQA is also enforced primarily by lawsuit, instead of by a planning department. This means instead of submitting your plans and being told “yes” or “no” by a department that can then give you advice on how to fix the potential issue, you must prepare your plan and then pray that nobody in the area decides to sue. Generally municipalities make some small projects exempt, but it’s also often possible to sue and contest that decision. If that happens, you’ll have to lawyer up and make your case that the impact of your project is within legal limits. All together, that leaves you with a system that looks something like this on paper:
In contrast, Japan is a country not known for having rampant environmental destruction or frequent water supply poisoning, but they generally do things differently. At the heart of the difference? The fact that mitigating environmental impact, and other similar project risks, is considered to be within the domain of building codes. This means that the pipeline a project goes through for approval looks like this:
The contrast with a system like CEQA is obvious: there’s no discretionary enforcement or legal mazes. You submit a proposal, the relevant departments determine whether it is up to code, and if you are compliant with codes then you can begin construction. Japan does have Environmental Impact Assessments, but they’re only required for residential developments larger than 75 hectares, and large industrial projects. Generally speaking, environmental concerns will be handled by the flowchart above. This makes the compliance costs more transparent because the project owner can read through the codes and reliably determine what they need to do. There’s no risk of a neighbor suddenly deciding that your eves are the wrong shape and bringing you into a legal battle. It also makes the government internalize the costs of determining whether a building is compliant, rather than outsourcing it to project owners, lawyers, and political bodies. The permitting organizations may require a fee, but that fee will be up-front and there are reasonable incentives to keep fees low.
These features serve to make the system smoother and to reduce the minimum requirements of human and financial capital for projects. Remember, we’re not debating what specific environmental rules are good, but instead the system by which those rules are implemented. This alternative model shows us that we can still protect our urban environment from projects with undue externalities, but that there are ways of doing so that make everything cheaper and easier without any apparent increase in how much environmental damage actually occurs.
I won’t pretend the Japanese system is perfect, or that any system is perfect. The core of what I hope you walk away with is this: regulations like CEQA impose a big cost on projects, and there are very strong reasons for us to want to keep capital requirements low on small to midsize projects. When looking at a regulatory requirement ask yourself how many people, and how much cash, it will take to achieve compliance. As that number rises, ask whether the burden being imposed is commensurate to the risks being mitigated. Look carefully at systems in other places, especially abroad, to understand how real the risk you’re trying to mitigate is. Remember that not building has costs too. Last of all remember that raising the human and financial capital requirements always means giving larger developers more control over your landscape. As you move to reduce those costs, you move away from developers building everything, and towards a world where small projects can be handled by a local landowner and construction company. A developer, not a Developer.
If you want a city truly built for the community, you need to let a broad swath of community members participate in the city’s construction, not just put a few of them in charge of setting the rules.
