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PLAIN ECONOMIC SENSE
For release after Jan. 11, 1999
Column 363
Alternatives for Setting Subdivision Density Goals
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
Recent debate over land use has generated interest in the merits of setting density goals for new subdivisions. Discussions in Ames and other communities provide an opportunity for examining alternatives for implementing such goals and the implications for new subdivisions.
Option 1. Mandatory Density Limits for All New Subdivisions. A zoning board or council could adopt a density goal and then apply the goal to all new subdivisions presented for approval after an effective date. If, for example, we assume a goal of four housing units per acre, developers and prospective home buyers preferring larger lots face three options: (1) conform to the goal; (2) find an alternative jurisdiction; or (3) bid up the price of existing larger lots that are grandfathered in. Assuming that some new subdivisions would offer lots smaller than the stated goal, this option may actually result in a density that is higher than the four units per acre.
Option 2. Offsetting Ratios to Achieve Density Goals. A zoning board and council could adopt a density goal and over time approve large-lot subdivisions in a ratio to offset small-lot subdivision areas with density greater than the goal. A queuing process would likely be needed for large-lot subdivision developers. Should a lottery be used? Should the large-lot certificates go do developers on a first-come first-served basis?
Alternatively, the local board could adopt a policy of approving a limited ratio of large lots per development, or per developer. Several issues develop if each development is required to have a specified ratio of small and large lots. The specified ratio may not match the housing market demand for each size of lot or a developer's interest in specializing in a particular market segment. The rate of appreciation and values of large and small lot homes would likely be affected if each development were required to include small-lot homes to offset large-lot homes. Developers may want to create a certificate market to buy and sell large-lot allocations.
If the requirements were applied to each developer, larger developers could propose a large-lot subdivision for every small-lot subdivision. However, new and small developers may not have similar flexibility and profit potential without assistance or regulatory relief.
Option 3. Graduated Fees to Achieve Density Goals. Many zoning boards and councils charge a subdivision fee to recoup costs of subdivision plat review and the approval process. Since the cost-of-sprawl literature suggests that public infrastructure maintenance costs for large-lot developments are higher than for small-lot developments, there may be a basis for local boards to develop a graduated impact fee schedule for new subdivisions.
For example, one community charges a filing fee of $75 plus $5 per lot for each new subdivision. A graduated approach would be to hold the fee constant for new subdivisions that meet the density goal, while increasing the base and per lot fee for new subdivisions that do not. A five fold increase would be $375 plus $25 per lot. A 10-fold increase would be $750 plus $50 per lot. While the increases represent a disincentive for developing large-lot subdivisions, such developments would not be prohibited and the impact fees charged may still be smaller than the similar fees charged in some of the more densely populated states.
The level of graduation in the rate structure could be based on extra infrastructure maintenance costs, market demand factors and community priority level placed on increasing density to preserve open space. Extra revenues could be applied to infrastructure maintenance, affordable housing initiatives, open space preservation or other purposes deemed appropriate.
It is worth noting that owners of higher value large-lot homes already pay more property taxes than lower valued small-lot homes. However, in Iowa residential property taxes are not uniformly taxed on an ad valorem basis compared to other property classes. Also, flat rate user fees are increasingly replacing property taxes for funding maintenance of drinking water, sewers, storm sewers and streets. So, infrastructure maintenance may be a legitimate use of subdivision fees, particularly for rapidly growing areas.
Option 4. Graduated TIF Support for Achieving Density Goals. In one community, a higher level of Tax Increment Financing (TIF) support is provided to developers that target middle-income homes on smaller lots. This approach may be justified on two levels. First, middle-income homes are generally less profitable for builders to build compared to high-income homes. Thus, this approach may help to address an identified income segment for which there is a housing gap. Second, this approach would contribute to the achievement of higher density.
Concluding Perspective. Incentive approaches may provide developers and home buyers with more flexibility than strong regulatory strategies. The detail written into the stated goals and implementation process may likely vary by community size and capacity for measuring outcomes. Unilateral efforts by cities may create free-rider problems. Without incentives for coordination of density goals across jurisdictions, rural subdivisions outside city limits may spring up without conforming to city density goals -- only later to be annexed by the city thus undermining local efforts to increase density.
All Iowa communities may not be interested in coordinating or setting density goals, monitoring progress, or reporting results to a state land use agency, unless state law requires it and funding is provided for the new mandate. Many cities are simply interested in generating more housing and are not likely to be interested in density goals that can impede development. Thus, substantial change in Iowa's land use trends may require a substantial state initiative.
Edelman is a professor of economics and an extension public policy specialist at Iowa State University.
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