Strong Towns

by Charles L. Marohn Jr.

  This all changed when I met Joseph Minicozzi, an architect and urban planner living in Asheville, North Carolina. Joe is the founder of Urban3, a cutting-edge firm doing data visualization, property tax analysis, and return-on-investment modeling. Our work is so complementary that we have not only become frequent collaborators, but also deeply committed friends. There are few people as generous as Joe and I am extremely grateful for the time we have spent together.

  Urban3 is best known for their three-dimensional models of financial productivity. Before I ever looked at Taco John’s, Mills Fleet Farm, or the core downtown of Brainerd, they were doing similar analysis for entire cities.

  While I talk about productivity in terms of farm fields, Joe talks about gas tanks. When considering the fuel efficiency of a vehicle, it is absurd to think of it in terms of miles per tank. Just because a vehicle has a big fuel tank doesn’t mean it’s using gasoline productively. We all understand that the most productive vehicle is going to be the one that gets the most miles per gallon. The hybrid Prius is going to make more productive use of gasoline by getting you further per gallon used than the Ford F-350.

  For cities, land – particularly land served by expensive municipal infrastructure – is the finite resource. How productive a community is in utilizing that resource has a direct bearing on the community’s wealth and its capacity to endure in this infinite game.

  One of the early models Joe put together was in response to criticism a colleague of his was receiving. His colleague was redeveloping a dilapidated building downtown and, as part of a street renovation project, benefited from a sidewalk widening and some decorative benches placed in front of his building. Critics called this an unwarranted subsidy and pointed to the local Walmart as an example of a business operating in the free market, without subsidy. Joe did the math.

  Like Mills Fleet Farm, the Walmart is a large taxpayer, but it consumes 34 acres of land, all of which is provided with permanent municipal utilities. The downtown building under renovation sits on just 0.2 acres of land. It is also served by utilities, albeit at a very different level of intensity.

  Table 7.1 shows Joe’s apples-to-apples analysis of financial productivity for these sites:7

  Table 7.1 Comparison of Walmart versus Downtown Redevelopment

  Asheville Walmart Asheville Downtown Building

  Land Consumed (acres) 34.0 0.2

  Total Property Tax per Acre $6,500 $634,000

  Total Sales Tax per Acre $47,500 $83,600

  Residents per Acre 0 90

  Jobs per Acre 5.9 73.7

  In every measurement of productivity, the downtown building vastly outperforms. It pays nearly 100 times more property tax per acre. It pays 76% more retail taxes per acre. It has 12 times the jobs and, on top of it all, people live in the downtown building. Nobody is living at Walmart, at least not legally.

  It takes only 2.6 acres developed to the intensity of that single downtown building for Asheville to raise as much revenue as the entire 34 acres of the Walmart site. That’s the same return at a fraction of the financial commitment, with a model that is more adaptable and resilient over time.

  The team at Urban3 has modeled hundreds of cities around North America. This massive data set has revealed a near-universal set of trends, results that are consistently observed in cities of all sizes, in all geographies, using all taxing systems, across the continent. These include:

  Older neighborhoods financially outperform newer neighborhoods. This is especially true when the older neighborhoods are pre-1930 and newer neighborhoods are post-1950.

  Blight is not an indicator of financial productivity. Some of the most financially productive neighborhoods are also the most blighted.

  While there are exceptions for highly gentrified areas, poorer neighborhoods tend to financially outperform wealthier neighborhoods.

  For cities with a traditional neighborhood core, the closer to the core, the higher the level of financial productivity.

  The more stories a building has, the greater its financial productivity tends to be.

  The more reliant on the automobile a development pattern is, the less financially productive it tends to be.

  The traditional development pattern – even when blighted and occupied by the poorest people in our communities – is financially more productive than our post-war neighborhoods, regardless of their condition. Across North America, our poor neighborhoods tend to subsidize our wealthy neighborhoods. Generally, the places this doesn’t hold true are communities where the poor have been displaced out to the edge.

  None of this would surprise our ancestors. One evening, Joe and I were wandering through the library at Harvard’s Graduate School of Design, where Joe had done his graduate work. We were browsing town planning books from the late 1800s and early twentieth century. Repeatedly in these publications, we came across a simple metric they used for measuring success: value per acre.

  I have a civil engineering degree, a graduate degree in urban and regional planning, and decades of experience. Joe has an architecture degree, graduate work in planning, and a similar level of experience. We were never taught about value per acre. It is lost wisdom, abandoned along with so many of our ancestors’ hard-gained insights.

  Lafayette’s Return on Investment

  The outstanding question that many technical professionals have for me about the value-per-acre analysis is how closely it correlates to the actual return on investment. Value per acre looks at wealth creation, but a full return-on-investment analysis would examine both the expenses and revenues associated with different development patterns. Skeptics dismiss value per acre for this reason.

  There is a powerful rationale to prefer the value-per-acre heuristic: It’s simple math. A full return-on-investment analysis, on the other hand, is a massive undertaking. It involves looking at all of the many sources of revenue a city has, the multiple types of ongoing expenses it incurs, and then allocating those to properties to make a comparison. For every hour spent doing a value-per-acre analysis, we would need to spend dozens to analyze a similar area with a return-on-investment calculation.

  I’ve been involved in enough projects, and walked enough neighborhoods, to have a lot of confidence in the value-per-acre approach. Even so, there is a lot at stake for professional experts, public officials, and large developers; each have strong incentives to prefer their intuition over mine when it comes to large investments and big projects out on the edge of town. Therefore, when asked to assist Urban3 in doing a full return-on-investment analysis for the city of Lafayette, Louisiana, I jumped at the opportunity to put value per acre to the test.

  It passed the test, of course. It took us a year to produce a profit and loss map for the city, a graphic analysis that combined the revenue associated with each parcel with its expense. The map had the same basic pattern as the value-per-acre analysis. Parcels with high financial productivity – high value per acre – tended to be profitable, or closer to profitable, than other properties. The historic center of the city, and some of the surrounding core neighborhoods, were cash-flow positive, while the edge was dramatically cash-flow negative. The further from the center, the worse the financial shortfall became.

  Beyond validating value per acre as a heuristic, the Lafayette project was stunning for the insights it provided. Perhaps the most jarring were the top line numbers; Lafayette has $16 billion in total tax base but $32 billion in public infrastructure. Instead of a private investment to public investment ratio between 20:1 and 40:1, Lafayette’s is 1:2. Two dollars of public investment have only produced one dollar in taxable wealth, a stunning lack of financial productivity. I’ll note that, in terms of North American cities, there is nothing abnormal about Lafayette’s development pattern.

  The median family in Lafayette pays $1,500 per year in taxes to the local consolidated government. For the local government to make good on every promise they have made – to fix every street, maintain every pipe, take care of every drainag
e system – taxes for the median family will need to increase to $9,200 per year. That is one out of every five dollars a family makes, just to keep what they have.

  That will never happen, and so like cities further along this experiment – places like Detroit – the people of Lafayette are going to make decisions on what they maintain and what they let go, what neighborhoods they hang on to and the ones they allow to fall apart.

  To say these are difficult cultural conversations is understating the obvious, but there is a wrinkle common to many cities like Lafayette that makes this dialogue even more problematic. When we did the research, we found that the newest neighborhoods out on the edge were the most financially insolvent. However, everything there is relatively new – they are in the Illusion of Wealth phase of their development cycle – and so, until something must be maintained, these edge neighborhoods are cash-flow positive.

  In contrast, the core neighborhoods – those neighborhoods that are very poor and blighted but also very profitable over the long term – have suffered from decades of decline and neglect. The infrastructure there is falling apart; the neighborhoods are desperately in need of investment. They have generated plenty of cash to pay for their basic maintenance, but it has been squandered in other places, largely subsidizing new growth out on the edge.

  For the dispassionate observer, it’s pretty clear what needs to happen: The free cash flow from the edge development needs to go to shoring up basic infrastructure in the core neighborhoods. When the edge developments require maintenance, those should be the places where the public obligations are wound down.

  Lafayette is a municipal corporation. If it were run like a corporation, this would merely be a necessary shifting of resources from a failing division to a profitable one, a way to strengthen the overall corporation. We don’t generally run our incorporated municipalities like corporations, however. It’s hard to imagine the affluent – in their newer homes on large lots paying substantial taxes out on the edge of town – voting for local government officials that promise to intentionally abandon their cul-de-sac to free up the cash needed to make substantial improvements to the high-crime, poor neighborhoods.

  The merciless nature of the math suggests this will be resolved in time. How that happens is as unclear as it is inevitable.

  Personal Preferences

  While I find it silly and tiresome, I feel compelled to address the most common critique I receive on the value-per-acre analysis: It doesn’t take personal preferences into account. As often stated to me, many people prefer to live in a single-family home on a large lot along a cul-de-sac. They don’t want to live within traditional neighborhoods in close proximity to other people. Americans want big box stores, strip malls, and fast food, not corner stores and mom-and-pop restaurants. Or so it’s stated.

  Ironically, this critique comes most often from professional staff working for local governments, as if their role isn’t steward of the municipal corporation but something more akin to customer service, with a customer-is-always-right ethos.

  Let me state the obvious: Every personal preference comes at a price point. I prefer lobster to hamburger, trips to Europe over camping at the state park, box seats over sitting in the outfield upper deck. I choose to enjoy hamburger, camping, and the view from the cheap seats because I value my money more than my first preference. I don’t lament this choice – I truly love a good burger, camping with the family, and a day at the ballpark – but I know that, if I had unlimited funds, my preferences would be expressed differently.

  Let me make another obvious observation: Since the end of World War II, public policy at every level of U.S. government has focused on subsidizing the purchase of single-family homes. If the government were willing to subsidize lobster to be cheaper than hamburger, I’d continuously dine on lobster. More to the point, I’d express a strong personal preference for lobster. The longer this subsidy went on, the more entitled my expectations for lobster would become.

  Middle-class housing subsidies and transportation spending are the bread and circuses of modern America. Americans express a preference for single-family homes on large lots along cul-de-sacs because that’s the lifestyle we subsidize. We’ve been willing to bankrupt our cities, and draw down the wealth prior generations built, in order to provide that subsidy. It can’t go on indefinitely.

  As a voter, as a property owner within a municipal corporation, as a person living cooperatively with my neighbors in a community, I can respect that some people prefer development styles that are financially ruinous to my city. My local government should not feel any obligation to provide those options, particularly at the price points people expect.

  Living in a Strong Town is a cooperative effort, one where everyone is welcome. Even so, the process of harmonizing competing objectives in an infinite game means that some development options now widely available to Americans will no longer be available at price points people have come to expect. Those able to process that basic truth are going to be best positioned to adapt to what comes next.

  Notes

  1 http://www.empirestatebuildinginvestors.com/25-billion-empire-state-building-appraisal-6.html

  2 City of Brainerd Comprehensive Plan, https://www.ci.brainerd.mn.us/DocumentCenter/View/797/Brainerd-Comprehensive-Plan-2004-PDF.

  3 This is all original data I gathered from the county’s public website as well as my own interviews with business owners. It is documented at https://www.strongtowns.org/journal/2012/1/2/the-cost-of-auto-orientation .html.

  4 https://www.chainstoreage.com/wp-content/uploads/2013/07/ ConstructionSurvey_2013.pdf.

  5 http://www.nahbclassic.org/generic.aspx?genericContentID=260013/.

  6 https://proest.com/office-building-construction-costs-per-square-foot/.

  7 Data provided by Urban3, https://www.planetizen.com/node/53922.

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  Making Strong Investments

  Our cities need to be done with building horizontal infrastructure. We already have more public obligations than can be supported by the private wealth in our communities. There is no informed reason why we would add more promises we can’t keep. The challenge we now face is making productive use of that which we’ve already built. In the infinite game of building human habitat, that is a complex undertaking. In the realm of public investment, it requires an entirely different model.

  Cities must run at a profit. They must create 20 to 40 dollars of private wealth for each dollar of public infrastructure liability. In North America, thousands of once-prosperous neighborhoods are now locked in a cycle of decline. In others, large flows of capital have overwhelmed existing development patterns, artificially inflating real estate prices and dislocating many. Our challenge now is to use the resources we have to more productive ends.

  Doing this in complex human habitat, where the goal is not merely to become financially strong and resilient, but to do so while harmonizing an infinite number of competing objectives, presents a paradigm-busting challenge. The systems we’ve built to replicate the post-war development pattern are so effective, and so embedded in society, that is it difficult to conceive of an approach that places stability above growth.

  Starting with our most financially productive neighborhoods, we must become far more sophisticated and purposeful in the way we make public investments.

  The Barbell Investment Approach

  Any American who opens a private investment account is subjected to a series of questions designed to help them ascertain their comfort with risk. It’s not clear to me if the Securities and Exchange Commission has mandated this or if the legal counsel at brokerage houses collectively determined this was a good defensive measure. Either way, the correct answer to the long stream of questions is the same: medium.

  Do you want to invest in a company specializing in crypto-genetic-tech or do you prefer a money market account? Are you more comfortable putting your nest egg on red at the roulette wheel or would you prefer to bury it in the backyard? The quest
ions are designed to let investors know that there are high-return approaches that come with a lot of risk as well as low-return approaches that are safer.

  And most of us prefer medium. Most investors desire to take some risk in order to have some upside potential in their portfolio, but they don’t want to be reckless. Medium seems prudent, like wearing khaki pants and a blue sport coat yet donning a splashy tie. Or a black dress with pearls. It’s grounded, yet with a little bit of embellishment. It feels right.

  Unfortunately, the medium investor is the sucker at the card table, the one unlikely to experience more than modest gains but to suffer disproportionately when things go poorly. They have little upside potential but lots of downside risk. They invest heavily in index funds to capture the long-term compounding of the market without understanding the decades-long gaps between market highs, corrections, and a return to the prior high. There is comfort in the crowd. Medium.

  Sophisticated investors protect themselves from loss while simultaneously exposing themselves to upside potential. They are never going to have the anxiety of suffering great decline, but they do have a reasonable chance of experiencing significant gain. They do this by avoiding a medium approach and instead clustering their investments into two extreme categories: very low risk and very high risk.