The District of Columbia needs more housing. Since 2000, 338,000 people have left the District because of high housing costs, outbid in the pursuit of scarce apartments and houses by incoming residents. Problem is, the congestion already clogging regional roads makes permitting new car-dependent infill development politically and logistically challenging. The only feasible major growth in the city can occur near new Metro lines or existing ones with spare peak capacity. The best way for the city to accomplish this is by auctioning off development rights along existing and proposed transit corridors to pay for capital improvements to the Washington Metropolitan Area Transit Authority, thereby improving public transit and legalizing development along it.
If you take a stroll through Washington’s NoMA (North of Massachusetts Avenue) district, you’ll have a sense of the value-creating power of prudent transit investment in high-rent, congested metropolitan areas with headroom for denser development. The neighborhood has grown out of a new Metro station on the Red Line, combined with an “upzoning” allowing the creation of taller buildings.
Unfortunately, the city left a lot of money on the table when it built the new station and removed the regulatory barrier to new development. According to the Washington Post and Zillow, land prices in NoMA range somewhere between $50 to more than $100 per buildable square foot. When the city allows denser development with no fee, it grants all the windfall value created to the landowner. Imagine a parking lot owner with a 3000-square foot lot worth $75 per buildable square foot, valuable because it’s near public transit and the core of the city. When the land is upzoned from allowing 3-story buildings to allowing 10-story buildings, he sees the value of his empty lot rise from $675,000 to $2,250,000—which he can now sell to a developer to lock in his profit.
There’s nothing wrong with removing unnecessary regulatory barriers to make society wealthier. In fact, it’s highly desirable. But the increased value of upzoned land is only possible because of the public improvements — parks, streets, transit and utilities — and the collective private economic activity surrounding the land site, not from any improvements made by the landowner. This is particularly true when new development is dependent on new transit improvements for political and logistical viability. Landowners who gain from new transit infrastructure and upzoning should have to chip in for the taxpayer-funded improvements that make their windfall gains possible. Why socialize the infrastructure costs but privatize the land value gains when the infrastructure costs could pay for themselves privately?
In NoMA’s case, landowners chipped in $25 million of the $120 million Metrorail station through a special property tax assessment. That’s better than nothing, but the NoMA Business Improvement District estimates that 7 million square feet of development were made possible by the new station and the concomitant rezoning. At $75 per buildable square foot, that would be $525 million in new land value created. In other words, NoMA landowners netted a $500 million profit from $100 million of local and federal taxpayer investment plus the less restrictive zoning. Again, that’s a good thing but the cost of infrastructure benefits should fall as much as possible on those who directly benefit from it, not on taxpayers.
Bottom line, the city should sell new development rights at or near market prices along transit corridors, dedicating the funds to improvements to the WMATA transit system. This way, the city can accommodate more offices and residents with less displacement, bolster transit ridership and reduce the burden on taxpayers required for new infrastructure. The small private landowner investment in the NoMA Red Line station is a good start, but landowners should be paying more of the costs of locally beneficial infrastructure improvements, not taxpayers.
This piece originally appeared in Washington Examiner