Tuesday, March 29, 2005

Development Incentives

The PG is reporting a new plan floated by Mayoral Wannabe Bill Peduto to encourage Green Development through non-tax incentives.

For those not in the development know, over the life of a building it is possible to save substantial money in utility costs and employee costs by using more efficient and people friendly Green design upfront. So if you're looking at developing and owning a building over the long haul, Green design can be a good idea. The LEED guidelines from the US Green Building Council, if you're interested, can be found here. Pittsburgh's Green Building Alliance can be found here; Pittsburgh has a pretty good record so far with Green Building.

OK, I've glossed over a bunch of stuff, but one of the major drawback right now to developing Green in Pittsburgh is that so few people actually are able to do it and do it well. A Gold Rated Building is extremely difficult to achieve as the requirements are quite stringent and difficult, from a short term cost perspective, to justify. Typically, unless a building owner/developer is in it for the long term, it does not make economic sense to build green, unless you can charge a premium for it upon resale.

Typically, governments use Tax Credits or other Tax Incentives to lower the barrier to entry for developers. Thus, you end up with Low Income Housing Tax Credits (LIHTCs), Keystone Opportunity Zones (KOZs), Historic Tax Credits, Tax Increment Financing Areas (TIFs), Local Economic Revitalization Tax Abatement (LERTA), and Act 42/77. The City/State/Federal Government(s) lower the initial cost of development in exchange for some other good that otherwise would not have happened, from historic preservation to development in underserved areas.

[Yes, TIFs and the like can be abused, but in the textbook case the government ends up deferring taxes that would not have existed if the project wouldn't have happened. TIFs are far less egregious than outright grants or low interest loans, in my opinion.]

Anyway, Peduto is proposing something slightly different: deferring or adjusting rules in order to facilitate Green Development. The theory is if the City allows developers to bend density regulations in exchange for green development assurances, developers will build green. Short version that the developer will see: more green = more units = more income.

The proposal is conceptually intriguing, but I wonder how it would work with the new PA Uniform Building Code. I also wonder how this will jive with certain fundamental physical limitations, i.e., number of parking spaces, elevator sizes, stair sizes, etc. It seems that the benefit of the increase in density may be offset by those restrictions, making the whole program a wash.

A different concept which could be used is based on the Historic Easement program in which a developer is paid by a private interest to preserve the historic integrity of a building rather than demolish in exchange for the developmental rights. Could there be a formulation where some organization, say, The Heinz Foundations, pays a developer the difference between developing traditionally and developing Green? In exchange, the private interest could have something less tangible, like air-rights, or something equally mundane.

Another idea could be a Green Credit, sold to a tax syndicate to be used as equity on the building.

While I'm not panning Peduto's idea here (there's nothing much to react to yet), I believe that developers are going to look at the short term gains over the long run savings.

In short: Financing is a bitch.

More commentary once more information is available.

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