The Guru Is In
Vertical Urban Complexity
By David A. Smith
5 min read
In thermodynamics, entropy is, among other things, a measure of a system’s granular complexity – and in thermodynamics it is a fundamental law that entropy and complexity always increase. These same fundamental laws apply analogously in urban housing as cities become progressively more complex in their economics, built environment, and policy/law/regulatory framework.
• Complexity in urban economics. For four millennia, cities have been multi-purpose, adaptable incubators, where clever ambitious people come to generate inventions, business activity, and increasing wealth. As cities age and grow, their internal economic diversity rises, a trend accelerated by the information-based global economy, infinite connectivity and instantaneous communication, and spatially separated value chains.
• Urban built environment. To accommodate the continuously more labyrinthine economy, cities become ever more complex physical spaces – though it takes longer because property is more durable and more expensive to create. As cities go up and up, into the sky, via new technology (elevators, rebar, electricity, and broadband), the rising metropolis becomes both richer and more physically complex.
• Urban policy/law. With new business models, value chains, and uses of built space come new questions of law and property rights – so policy, law, and regulation increase their complexity as well – with a phase delay (years or decades), and by fits and starts. Zoning in America, invented to keep the slaughterhouse downwind and downstream, is only a century old and is being superseded by increasingly complex zoning plus development-approval supplements: environmental, wetlands, traffic, noise, even shadow reviews.
Turbulence ensues because these three cycles of rising complexity move at different rates: with law lagging, by the time the new policy response has become regulation, the fast-changing economy has speedily evolved yet again, disrupting the value of its own purpose-built urban environment. Schumpeter’s creative destruction does not apply to property: even superbly located buildings become economically obsolete as their systems (plumbing, wiring, lighting, elevators, HVAC), though functional, fall far below the level acceptable to a marketplace of ever-rising occupancy expectations. So our downtowns are dotted with shuttered dance halls, carriage factories, textile mills, train yards, and first-generation malls – which become economic dead spots.
Municipal government wants these shells revived, but the development economics do not work until the property removes its stranded-cost obsolete infrastructure. So government creates targeted redevelopment incentives: the historic tax credit (enacted 1976), the LIHTC (1986), the New Markets Tax Credit (2000), and their cousins the wind tax credit (1992) and solar tax credit (2005). Alas, these credits do not play well together.
Thus we have a huge tension between complex redevelopment and simplistic resources.
In urban redevelopment, complexity of use wins. What works in urban redevelopment is properties that are category-busters – mixed-income, mixed-use, mixed-finance properties. Verticality too furthers mixing: parking below grade, retail on the ground floor, hotel in lower floors, apartments above, and the apartments themselves may have different income levels and tenure models. This complexity adds value: shorter commutes, higher-efficiency use of transportation infrastructure, higher sustainability per cubic meter of inhabitable space.
In urban redevelopment, simplicity of resource rules. Each program is conceived in splendid isolation, as if every property were monolithic – one use, one building, one special purpose vehicle (SPV), one capital stack. Developers and financiers channel their creativity into accommodating, evading, or overcoming program uniformity: tracing of costs or basis or revenue, multiple owner SPVs within a single building, complete with cross-use easements and sharing agreements.
If somehow the clever development/financing team threads those needles, what happens after completion? As more and more activities can be profitably done at home, an apartment’s use becomes economically more complex when the home-to-work-commute is twenty steps in one’s pajamas from microwave and coffee maker to home office. Work-at-home challenges the bases of current occupancy and zoning rules. If you rent your LIHTC apartment on Airbnb, what if the resulting revenue puts you over-income? What level of Airbnb rental tips your apartment out of zoning compliance? For that matter, if an enterprising developer brought forward a work-at-home or Airbnb compatible property (say, for those who have limited physical mobility), what zoning would apply?
Thinking about this is giving you indigestion, isn’t it?
Legally, all new inventions are legal until the law catches up and rules them illegal. Zoning is a two-dimensional construct that struggles to address three-dimensional complexity, even as Airbnb is exploding notions of zoning.
For tax credit practitioners, this means:
• ‘Combined operations’ – Mixing multiple credits in Guru, continued from page 8 one property will grow, as will the amount of knowledge a developer or practitioner must maintain to remain competitive.
• Cross-resource knowledge and skill base is a comparative advantage, especially in repurposing legacy buildings that have become political headaches in revivable downtowns.
• Breadth of tax credit deep knowledge and market current insight is both a personal asset and an intellectual barrier to entry, so the more quickly you or your company masters mixing (say) New Markets with LIHTC, the faster your business will profit or your position in your company will rise. For policy makers, the obstacles to tax credit interoperability mean they connect inefficiently one with the other, adding soft costs and inhibiting the emergence of the high-efficiency, high-sustainability mixed-everything urban properties our cities need. Each is unique to its purpose; nothing is plug and play. In 1994, faced with the same conundrum, the seven leading computer gadgeteers agreed among themselves on a Universal Serial Bus for cross-gadget interoperability. Where is the tax credit world’s USB?
For policy makers, the obstacles to tax credit inter-operability mean they connect inefficiently one with the other, adding soft costs and inhibiting the emergence of the high-efficiency, high-sustainability mixed-everything urban properties our cities need. Each is unique to its purpose; nothing is plug and play.
In 1994, faced with the same conundrum, the seven leading computer gadgeteers agreed among themselves on a Universal Serial Bus for cross-gadget interoperability.
Where is the tax credit world’s USB?
