Sunday, January 17, 2016

How Federal Regulations Work Against Urban Development

Walkable urban buildings at the scale of these three-story townhomes receive very little federal support and mixed-use versions with ground-floor shops are hard to finance thanks in part to federal regulations.  Photo: Regional Plan Association.
I just read an excellent report by Christopher Jones and Sarah Serpas of the Regional Plan Association.  The Unintended Consequences of Housing Finance (2016) discusses how federal regulations channel federal loans and loan guarantees overwhelmingly to low-density, car-dependent buildings such as detached houses, make it difficult to finance shorter mixed-use buildings, and have caused banks to view shorter mixed-use buildings as an "unconforming" product type, which makes banks reluctant to provide financing for this type of building.  Without federal support and with difficulties in obtaining private financing, shorter mixed-use buildings become more difficult to build, even though more Americans want to live in walkable neighborhoods and these types of buildings are more likely to get local approval than taller buildings.  Not only is walkability hurt, but poverty becomes harder to address as neighborhoods with concentrations of poor people continue to see disinvestment.

According to the report, 81% of federal loans and loan guarantees go to support single-family home ownership.  This low-density form of housing makes it tough to achieve walkability, since it spreads a population out over a large area, making it difficult to support a range of commercial services within walking distance.  Of the 19% of federal loans and loan guarantees that are left over for multifamily housing (townhouses and apartments) the commercial floor space or income in buildings that receive support is typically capped at 10-25%.  This means that it is difficult or impossible to receive federal support for a mixed-use building that is less than five stories tall.  In many communities, zoning codes prevent apartment buildings that are five stories or taller from being built.  Shorter buildings that are more likely to get community support can't get federal support.  Federal regulations that deny federal loans and loan guarantees to shorter mixed-use buildings imply that these buildings are more risky, yet the authors found that this is not the case, and in fact that the financial risk is actually lower for developments in walkable mixed-use neighborhoods, than for developments in single-use single-family neighborhoods.  Many banks refuse to provide financing for "unconforming" short mixed-use buildings.  As a result, these projects are more difficult and more expensive to finance, and the users of that space face ultimately higher costs, assuming that the building can be built at all.

I usually focus on the very real obstacles that local zoning codes present to urban development, but the obstacles that come from federal regulations are serious as well.  It's not an accident that short mixed-use buildings, the type of buildings that could be the next step forward on walkability for most American communities, are hard to finance and build.  The regulations against, from the local to the federal come from an earlier era where the dominant ideology was to separate land uses and foster a car-based transportation system.  Many people now see flaws in the car-oriented approach, but our federal regulations still stand in the way of deploying the kind of buildings that could transform our neighborhoods.

Read the report (it's only eight pages) and write your federal representatives and President Obama telling them to provide more federal support for multifamily housingraise the caps on commercial floor area in buildings that get federal support and create a secondary market for mixed-use loans like the secondary market that facilitates the flow of capital into "conventional" buildings.

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