Tag Archives: regulation

Aerostates, Geopolitics and the interpretation of regulations

Last Sunday’s Washington Post featured an article covering the ongoing saga between the Big Three US-based network airlines (American, Delta, and United) and the Middle East Three (Emirates, Etihad, and Qatar) airlines over the rules for air travel and the role for government in regulating it, as well as funding it. The intersection of air travel, the shape of the global economy, and the challenge of defining the role of governments in a globalized economy.

Mark Gerchick summarizes the stakes:

This fight is not just about legacy companies trying to hold market share against entrepreneurial upstarts — a dynamic in aviation since the likes of People Express fought to wrest a slice of transatlantic travel from British Airways three decades ago. Today’s Persian Gulf challenge is more fundamental, a new business model that relies on three tectonic shifts in global aviation: a gulf-ward lurch in the world economy’s center of gravity; a dramatic loosening of trade restrictions on where, when and how the world’s airlines can fly; and the emergence of the “aerostate,” where world-class aviation is a critical economic engine deeply integrated with the state itself.

Global Governance and Aerostates:

Connectivity to the rest of the global economy is incredibly valuable; longer-range aircraft offer global reach.

While the shift of the global economic center of gravity is notable, the most interesting developments in this row concern geopolitics and global governance. Since last writing about this a year ago, there hasn’t been much regulatory action. The stakes are largely the same as laid out a year ago.

However, a few things have changed. While the US DOT hasn’t taken any action, both Delta and United cancelled their Dubai services. The service pattern is now entirely asymmetric – the ME3 serve thirteen destinations in the US, while American carriers serve none in Qatar or the UAE.

Dubai emerged as the archtype of the aerostate – where the lines between the airline business and government policy have blurred, even disappeared.

Ironically, the stated reason for United dropping their service between Washington Dulles and Dubai was the loss of the contract to carry US government employees and contractors, as required by the Fly America act. The winning bidder for the US government contract? Emirates, thanks to a JetBlue codeshare ensuring Fly America compliance.

Impacts of Regulatory Interpretation:

This case is an interesting example of the wide latitude for interpretation of broadly similar legislation. The intent of Fly America (and other rules like Buy America) is to keep US government spending with US-based businesses.

That winning contract will save those government employees a lot of money. The GSA’s interpretation of the Fly America rules is good for the government as a consumer – but at the cost of taking business away from a US-based airline in favor of a foreign one with an almost entirely domestic codeshare partner. In FY15, United Airlines’ contract with the GSA for IAD-DXB cost $979 per coach seat, and $7,114 per business class seat. Emirates/JetBlue won the FY16 contract with prices of $699 and $6,600, respectively. That’s a 28% savings for the government on the coach ticket.

Similar rules such as Buy America for transit projects include interpretation focused on ensuring taxpayer dollars are spent with US businesses. Unlike the Dulles-Dubai contract, where an American company offered the same product, many key transit projects rely on rolling stock that isn’t manufactured in the United States. Compliance therefore requires ‘final assembly’ at US factories, despite the bulk of the manufacturing taking place overseas.

This additional expense certainly creates some additional business, but does so at great expense – both by increasing the cost of rolling stock, but also by reducing the number of firms able to successfully win the contract and comply with the rules. It also makes the purchase of ‘off-the-shelf’ trainsets from foreign manufacturers effectively impossible. It also makes each railcar purchase a one-off design, complete with all of the associated development costs to de-bug and test a new design.

It’s worth considering how such similar laws can result in such divergent outcomes.

WMATA, the NTSB, and the FRA: or, what do you mean the Metro doesn’t count as a railroad?

FRA Type II Safety Glass in a WMATA rail car. Photo from nevermindtheend.

FRA Type II Safety Glass in a WMATA rail car. Photo from nevermindtheend.

Last week, the National Transportation Safety Board issued an urgent recommendation to the US Department of Transportation and the US Congress to re-classify WMATA to be regulated under the authority of the Federal Railroad Administration. The NTSB usually waits until their full report on an incident is complete to make recommendations. If the preliminary conclusions from a report warrant immediate action, they will issue an urgent recommendation – this recommendation falls into the urgent category. The NTSB’s reports are thorough, but usually not released quickly (the full report from WMATA’s June 2009 Fort Totten crash was approved in July 2010). There will likely be more recommendations in the NTSB’s final report.

Looking at the NTSB’s letter, there are two distinct conclusions:

  1. WMATA’s existing safety oversight is inadequate.
  2. The Federal Railroad Administration has the appropriate regulatory tools to address these inadequacies, and therefore should have safety oversight over WMATA.

The letter documents the numerous occassions the NTSB has asked for strengthened safety oversight: “In general, the NTSB investigations of WMATA found that although safety program plans were in place, they were not effectively implemented and overseen.”

The curious part is the specificity of the second recommendation. Instead of suggesting that the existing safety oversight authorities through the Federal Transit Administration be strengthened to include the kinds of tools available to the FRA, the NTSB instead recommended a dramatic shift. The NTSB’s previous investigations specifically recommended that Congress act to increase safety oversight for the Federal Transit Administration:

In the NTSB’s investigation of the June 22, 2009, WMATA accident near the Fort Totten station, we called for increased regulatory oversight of rail transit properties and recommended that the DOT seek the authority to provide safety oversight of rail fixed guideway transportation systems, including the ability to promulgate and enforce safety regulations and minimum requirements governing operations, track and equipment, and signal train control systems.

Unsatisfied with both the pace of progress as well as the likelihood of resolving this conundrum soon, the NTSB is recommending shifting WMATA to the FRA’s jurisdiction as the most expedient option. Neither the legislation to expand safety oversight under the FTA, nor the region’s plans to replace WMATA’s existing safety oversight committee with the Metro Safety Commission would rise to include the regulatory tools available to the FRA:

Based on testimony from representatives of the TOC and the FTA during the NTSB’s June 23, 2015, investigative hearing on the January 12, 2015, WMATA Metrorail accident, the NTSB further concludes that neither the regulatory changes the FTA can make as a result of MAP-21 nor the proposed creation of a Metro Safety Commission will likely resolve the deficiencies identified in safety oversight of WMATA.

The only rapid transit system under FRA regulation is the PATH system connecting New York and New Jersey. Only four rail rapid transit systems that cross state lines – WMATA, the PATCO Speedline between Philadelphia and New Jersey, Metrolink in St. Louis, and PATH.

The NTSB suggests that PATH’s regulation under the FRA is due to the cross-jurisdictional nature of the service, but this doesn’t seem correct. In the NTSB’s accompanying blog post for the letter, they make the case that other transit agencies are regulated under the FRA (even though the use of the plural here is incorrect – there is only PATH):

There is precedent for the FRA oversight of WMATA that we have recommended because there are some transit agencies in this country that are currently under FRA safety oversight. For example, the FRA provides direct oversight over the New York and New Jersey PATH system instead of using state safety oversight agencies.

PATH’s regulatory jurisdiction is an anachronism. Because PATH previously shared a short section of track with the Pennsylvania Railroad, it was also considered a railroad. And while it remains under FRA jurisdiction, it only operates as a rapid transit system under several waivers that grandfather the system from FRA regulations aimed at mainline freight and passenger railroads.

Even with waivers, the impact of this unique set of regulations is substantial:

Before each run, PATH workers must test a train’s air brakes, signals and acceleration, Mike Marino, PATH’s deputy director, said in a telephone interview. When a train gets to its terminus, workers repeat the test.

In addition, every 90 days all of PATH’s rail cars undergo a three-day inspection at a facility in Harrison, New Jersey. Brakes, lights, communications, heating and air conditioning, signals and odometers are all checked, Marino said.

Many of these FRA regulations carry over from past generations of railroading. They’re extraordinarily detrimental to the progress of high-speed rail and passenger rail. This memo gives some regulatory background to the FRA’s role. It specifically discusses light rail transit operations and the potential for shared use of mainline rail tracks (as PATH used to do), and by doing so highlights exactly how many FRA regulations make little sense (by mutual agreement between the FRA and transit operators) for rail transit operations. Numerous waivers of these regulatory requirements would be required from the start.

Like PATH, WMATA is not a mainline railroad. It’s not hard to understand why the NTSB would think that the FRA’s authority to inspect, fine, and shut down non-compliant operators is necessary; but those authorities also come with a rulebook that won’t make much sense to apply to WMATA.

Ultimately, the division between what is under the FRA’s jurisdiction is almost entirely arbitrary:

FRA will presume that an operation is a commuter railroad if there is a statutory determination that Congress considers a particular service to be commuter rail. For example, in the Northeast Rail Service Act of 1981, (3), Congress listed specific commuter authorities. If that 45 U.S.C. 1104 presumption does not apply, and the operation does not meet the description of a system that is presumptively urban rapid transit (see below), FRA will determine whether a system is commuter or urban rapid transit by analyzing all of the system’s pertinent facts. FRA is likely to consider an operation to be a commuter railroad if:

  • The system serves an urban area, its suburbs, and more distant outlying communities in the greater metropolitan area,
  • The system’s primary function is moving passengers back and forth between their places of employment in the city and their homes within the greater metropolitan area, and moving passengers from station to station within the immediate urban area is, at most, an incidental function, and
  • The vast bulk of the system’s trains are operated in the morning and evening peak periods with few trains at other hours.

Examples of commuter railroads include Metra and the Northern Indiana Commuter Transportation District in the Chicago area; Virginia Railway Express and MARC in the Washington area; and Metro-North, the Long Island Railroad, New Jersey Transit, and the Port Authority Trans Hudson (PATH) in the New York area.

Despite PATH’s history, it’s regulated by the FRA because Congress said so. The three specific criteria listed don’t particularly apply to PATH, or WMATA, or any other rapid transit system (nor some mainline rail systems that offer a high level of all-day passenger service).

A few things to note:

The NTSB can only make recommendations. The NTSB is not a regulatory agency, they are charged only with investigating safety-related transportation incidents. Their independence is by design – any regulatory agency must consider both costs and benefits to a regulation, while the NTSB’s purpose is to conduct independent investigations and offer their recommendations solely on the basis of improving safety.

This particular recommendation is for the USDOT to seek reclassification of WMATA as a ‘commuter railroad’ via congressional action. Perhaps in considering any action, Congress might consider addressing the other shortcomings in transit safety oversight.

Despite the FRA’s impact on PATH operations, it’s worth considering if additional safety inspections might help improve WMATA’s operational discipline. The FTA’s Safety Management Inspection report (the first such safety report for the FTA, under the new safety role authorized by Congress as a part of MAP-21 but deemed insufficient by the NTSB) identified several shortcomings in WMATA’s procedures and practices. Stronger safety oversight might help address those problems; the question is if the FRA is the right regulatory body and if their rulebook is the right one to use.

Flipping Houses, Zoning Codes, and Building Codes

DC row houses - the first CC image hit for "dc house flips" on Flickr. Photo from Elvert Barnes.

DC row houses – the first CC image hit for “dc house flips” on Flickr. Photo from Elvert Barnes.

Earlier in May, local public radio station WAMU aired a lengthy three-part report on the collateral damage involved in house flipping in DC. Martin Austermuhle’s series offers a window into the nightmare for buyers of newly renovated homes – often converted from single family rowhomes into multi-unit buildings – who soon learn that their dream home is actually a nightmare of shoddy work and potentially illegal construction.

The three-part series focuses on buyers, developers, and the city’s regulatory response.

As horrifying as these stories are, Austermuhle correctly focuses on the challenges of enforcing the building code as the root cause of these problems, rather than the zoning code.

Small-scale development is an important tool in strong markets (like DC) to respond to demand for new housing. So many opportunities for small-scale urban development have already been regulated out of existence in American cities. The people buying these flips aren’t suckers taken by con men; they represent the market for additional housing in a city like DC.

Shoddy flips shouldn’t put those remaining opportunities for small-scale development in DC at risk, because the problem here is with building code enforcement and inspection, not with zoning. But whenever there is outrage, there is a strong urge for the city to do something, even if it doesn’t address the stated problem.

The zoning code is not the building code

Tales of illegal construction in flipped houses might stoke the fears of development opponents, but the problems described in the series involve errors in construction.

Too often, cities attempt to use the zoning code as a catch-all regulatory structure, encompassing economic development goals, social policy, etc. Part of this is out of convenience (I did have at least one proponent express support to me for DC’s recent zoning code changes in rowhouse neighborhoods due to the challenges in enforcing the building code – both for approvals and for construction inspections). I suspect part is also a confusion of the issues, thinking that because zoning deals with the city therefore zoning is an appropriate place for regulations about the city.

This series helps clarify the differences; Austermuhle correctly gives zoning only a cameo appearance.

Pop up limits

Even with the focus on building code enforcement, that doesn’t stop public calls to address development issues via zoning restrictions. However, it’s not clear that zoning would stop the flips. House flips are hardly limited to structures with the opportunity to increase the total number of units.

Enforcement matters:  One example of shoddy construction also includes blatant violations of the zoning code. What good will modestly tighter zoning regulations do without basic enforcement? Perhaps zoning isn’t the root problem; enforcement is.

Building codes matter

While zoning codes often get the attention, this doesn’t mean building codes aren’t important factors in determining the shape of the city. Houston famously (or infamously) lacks standard, use-based zoning codes. However, Houston’s building code and other regulations still mandate many of the aspects commonly found in zoning codes: minimum on-site parking requirements, minimum lot sizes, etc. It’s not a regulation-free environment.

Even when the building code sticks to more traditional subject matter, there can still be a tremendous impact on the financial feasibility of certain types of construction. In February, Let’s Go LA featured a guest post from LA Architect Tom Steidl about local differences in LA’s high rise building codes that make Vancouver-style towers less financially feasible:

Towers in Los Angeles tend to have significantly larger floor plates than those in Vancouver and US cities that have embraced high-rise design. The primary reason for this isn’t differences in land use or zoning codes. It’s mainly building code and fire department regulations that require additional floor area be added to the core of the tower. In addition to making our towers more bulky, this added floor area increases construction cost and reduces affordability.

One of LA’s quirks (now removed from the code) was a fire department mandate for rooftop helipads. But, as Steidl notes, each requirement that reduces the efficiency of the floor plate adds to the total cost. High rises are already expensive to build and will only pencil out under certain circumstances. Adding costs on the margins only makes the developer’s pro forma more challenging.

The building codes matter. But, LA’s quirky code provides a cautionary tale on policy relying on high rises alone to absorb housing growth. As Payton Chung has written, achieving mass market affordable housing via expensive construction types is a challenge – particularly in DC.

A comprehensive approach to affordable housing in strong markets like DC and LA can’t ignore the key role of small-scale, low-rise development in providing affordably built housing. This means projects of the type taken on by house flippers; smaller scale projects that increase a single lot into 2-4 units.

Poor construction risks eroding confidence in small-scale construction that is vital to meeting housing demand. Likewise, a strong, predictable, and nimble team of inspectors needs to effectively enforce DC’s building codes to manage this period of change.

Lawsuits: the American Way.

Maybe they will help. Writing about some of the same flippers as Austermuhle (and working in parallel), Ian Shapira at the Washington Post notes that some of the same flippers have been sued by DC’s newly elected Attorney General. A more robust consumer protection watchdog can’t hurt, and could even help jump-start a more robust system of code inspections.

Governing transit: the regulated public utility

Public utilities, from Chris Potter. CC BY 2.0

Public utilities, from Chris Potter. CC BY 2.0

The MBTA is struggling, but they’re not the only transit authority facing both near and long-term challenges. The MTA in New York is trying to find the funds for its capital plan; WMATA is facing systemic budget deficits while trying to restore rider confidence in the system.

For-profit corporations such as airlines aren’t the right answer to govern transit in an American context. So, what kind of structure could work?

Writing at Citylab, David Levinson made the case for structuring American transit operations as regulated public utilities, able to pull the best elements of private sector management and pair them with the fundamentally public purpose required for urban mass transit.

David cites seven key elements of this model:

  1. Competitive tendering for services
  2. The ability to raise fares (with regulatory approval)
  3. Using a smartcard as a common platform for fare payment
  4. Specific contracts with local governments to operate subsidized service
  5. Ability to recapture land value through land ownership and real estate development
  6. Access to private capital markets
  7. Local governance, funding, and decision-making

These elements aren’t substantively different from the elements of German public transport governance reforms outlined by Ralph Buehler and John Pucher: competitive tendering for many services, increased fares, investments in technology to improve capacity, efficiency, and revenue. Public regulation oversees these efforts to operate the core business more efficiently.

Lisa Schweitzer (USC Professor focusing on urban planning and transportation) offered extensive feedback on her blog (in several parts). All are worth reading, I’ve linked to each and included a short summary and/or quote:

1. On the regulated public utility concept: “First of all, even though quangos [a British term: quasi-autonomous non-governmental organizations – what we’d usually refer to as a public authority] are somewhat insulated from voters and politics, they still have play with budgetary politics, and those games are where lots of stupid enters into transit provision.”

Schweitzer identifies three main problems with applying the concept to transit. First, unlike water or electric service, the demand for transit use isn’t universal. Aside from a few dense cities, there isn’t necessarily a built in customer base. Second (and related to the spotty demand for transit service), some jurisdictions can/do opt out of transit service, hurting the overall network. Third, unlike water or electricity, there are many different levels of transit service.

2. The challenges of competitive tendering: the devil is in the details for how to successfully structure operations contracts: “And that’s a really the key point for competitive tendering and service quality gains you hope to achieve: if you are going to to do this, you need to be clear on service expectations. The reason the cable guy gets to treat you like crap is that’s not part of the franchise agreement which centers on channels and rights for particular sports events–not customer service response times.”

3. Farecards and technology: Schweitzer notes that most transit agencies already offer smart farecards, but perhaps a regulated utility would have more incentive to invest in technology to collect additional revenues or adopt policies (such as all-door boarding, or proof of payment) that would speed operations and improve efficiency. This is really a matter of institutional incentives rather than simply adopting farecards.

4. Capital cost recovery: While Levinson argues that new transit lines should only be built if they can break even on fare revenues and value capture from adjacent land, Schweitzer counters that this formulation depends on the mode and the type of transit line:”Right now, you have jurisdictions with people who are very avid about wanting rail transit. We must have rail now.”

“You want a train? Fine. Either let us build 70 100-story apartment complexes next to the station (if it pencils for us) or you pay whatever portion of the capital and operating costs that apartment complex would have covered for the utility. Your choice. Again, rich districts can have their single-acre lots if they want, and they can have their trains if they want them–even if nobody wants to take the train and they just use it as decoration. They just can’t stick the rest of us with the bills for those trains.”

5. Asset values and access to private capital: This isn’t exactly a silver bullet. For as well as competitive bidding worked for London’s buses, the similar deal for the Underground flopped:” The Metronet-London Underground deal came about in 1998 in part because the transit provider, Transport for London, was financially stretched and their capital stock decayed. This is a big deal: taking over large capital stocks is risky, let alone doing so because you have to bail somebody out. It means you probably have crumbling assets with an uncertain price tag to fix.”

In London’s case, one rail company delivered on their agreements while another operator came back to the public for additional funds and eventually went into bankruptcy: “While newspapers blamed the public sector partner for failing to manage the contracts properly, the public audit on the deal cited Metronet’s own corporate governance and poor management as the primary reason for the failed partnership.”

6. Local funding: While Schweitzer sees the virtues of local funding, there are risks to completely forgoing federal funds. If there is a chance to reform things, it will likely involve the feds: “If we really do believe that there are normatively better ways for cities to be, then there is a role for federal governments to play in setting standards and incentives.”

David, freed from the space constraints of Citylab when writing via his own blog, responded in depth:

1. The regulated public utility model: “I imagine like most reforms, it would be phased in, tested, refined, and revised in the various laboratories of democracy. Some city has to go first, some other city has to go second, and hopefully learn from the first, before every last city does.”

2. Competitive tendering: “…the answer is quite complicated about how to configure to maximize consumer welfare, and experimentation is probably required. Just giving the system away is certainly not the answer. Having the franchises be of a limited duration (5-7 years, e.g.) is better than a 20-30 year franchise. This is feasible for buses where the capital is the ultimate in mobile capital. It would be much harder for a traditional utility where the infrastructure is expensive, embedded in the ground, and long-lived.”

In other words, it’s a lot easier to structure a deal for competitive contracts for bus operations than it is for fixed, naturally monopolistic rail services – both in terms of structuring the deal, and in terms of attracting operators.

3. Farecards: “I would go further and say we should have pre-payment via stop-based farecard reader, i.e. all significant bus stops should have arterial BRT like payment”

4. Capital cost recovery: “Capital investments are new stocks while operating expenditures are continuing flows. From a public policy perspective, continuing with existing commitments (which may be an implied social contract) may be more important than making investments that bring about new commitments. Thus new commitments (such as new rail lines which have irreversibly embedded immobile capital) should only be undertaken if we believe at the outset (admittedly a forecast, which have problems) that they have cost recovery.”

5. Asset values: “Investing in new infrastructure is a lot riskier than investing in already built infrastructure (thus the early financiers of the Channel Tunnel got wiped out twice, similarly the Dulles Greenway and many other privately funded pieces of new infrastructure that were either more expensive than expected, or built too far in advance of demand.”

The broad concept of a regulated public utility has a lot to recommend: it threads the needle between the public purpose inherent to modern transit, while also pulling the best elements from private enterprise and the benefits of running a service-oriented business like a business.

While demanding additional efficiency from transit operators, German public policy worked in concert with these reforms – traffic calming, dense development around transit stations, and increased taxes and fees on car-based transport both improved transit’s attractiveness and also provided new revenue sources.

As Dr. Schweitzer notes, the single biggest take-away from Levinson’s article is the concept of transit as a public utility in the first place. Getting over that mental hump can open doors to plausible reforms.

What might those reforms be? In addition to Levinson’s list, Ralph Buehler and John Pucher offer their lessons from the German experience:

  • Encourage regulated competition; take advantage of private sector expertise
  • Collaboration between local governments, transit operators, and labor unions
  • Focus on profitable services – not to ignore ‘equity’ services. Jarrett Walker would refer to this as a focus on ‘ridership’ routes instead of ‘coverage’ routes – and building political consensus around this isn’t an easy task!
  • Collaborate with other transit operators; encourage easy exchanges between systems for passengers, interoperable systems, etc.
  • Improve service quality; focus on customer service.
  • Increase transit’s competitiveness with complimentary public policies – for example, increased fees on driving/owning a car, encouraging dense development near stations, etc.

All in all, the list is quite similar to Levinson’s.

However, in Germany, the push towards some of these reforms came from the outside (EU regulations); existing transit operators viewed them as a threat forcing reform and a new focus on customer service, efficiency, and overall quality – all while working to reduce costs. Similar to an airline facing bankruptcy, German operators used the EU mandate to find common purpose with their unions to improve efficiency and reduce overall costs.

Both Schweitzer and Levinson sing the virtues of local funding, but reform of this magnitude might require outside stimulus. In the same vein as Schweitzer’s defense of federal experimentation in policy, the federal government is well suited to fill that role. However problematic the federal focus on streetcars may be, the federal focus has certainly shifted the attention of local governments; the TIGER grant process shook up the traditional relationship between the FTA serving a few transit authority grantees. The projects might not be the best investments in mobility, but it does reveal the potential for the feds to drive change in transit governance.

Real estate as investment vs. real estate as city-building

CC image from John M.

Fundrise is one of the most hyped developments in real estate in recent years. Is it a major shift in real estate investment? Maybe, maybe not. If nothing else, Fundrise and the surrounding hype/criticism exposes the dual nature of real estate as both an investment and the critical element of how we build our cities.

In last week’s Washington Post, Jonathan O’Connell sought to burst the bubble by soliciting the opinions of various real estate and financial experts on the terms and conditions that Fundrise offers to potential investors:

“I would never recommend this kind of investment for my clients,” said Russell McAlmond, president of Evergreen Capital Management. “It has almost every kind of risk imaginable that one may have with commercial real estate. If it works and they find a tenant, you may receive some kind of return, but by taking huge risks.”

Said Derek Tharp, of Mote Wealth Management: “They may have noble intentions and it may work, but if anybody does do this, this should be money they could otherwise just flush down the toilet.”

The problem with the evaluation of these experts is that the mis-diagnose the purpose of an investment in a Fundrise offering. Emily Badger responds in Atlantic Cities: 

Crowdfunded real estate isn’t an important idea because it may enable the lady next door to make it big like a real-estate developer. It’s an important idea because it changes the trajectory of neighborhoods. The crowdfunding mechanism changes what gets built. O’Connell’s query with wealth investors – who have no reason to be interested in this question – misses this point.

This isn’t to say that the wealth managers aren’t correct; investing all of one’s savings into Fundrise would not be a wise investment. But they approach Fundrise with a fundamentally different mindset than one does if they think of it as Kickstarter for cities. It’s not as if donors (perhaps a more useful term in this case than ‘investors’) are rigorously investigating the potential returns of such investments – Gawker raised more than $200,000 to buy a video of Toronto Mayor Rob Ford allegedly smoking crack, after all.

The combination of common purpose, a large base of donors/investors allows for individuals to risk little individually (some Fundrise shares are as small as $100) while potentially pooling resources at a sufficient scale to have an impact. I suppose one of the wealth managers could make the case that the $100 share would be better invested in an IRA, but that likely misunderstands why someone would buy such a share (or why someone gives money to a Kickstarter campaign, or to a political candidate).

So, will it work? That is, will it deliver quality projects while satisfying the demands of investors (whatever those demands may be – if they exist at all) so that people will still give up their money for new projects? Matt Yglesias is skeptical (for a variety of legal and technical reasons), but notes that if it works, it could do so by slaying neighborhood opposition to new development:

Still, the main reason I want to believe isn’t because I hope for a huge return, it’s about politics. Specifically the toxic local politics that too often loads the dice against change and new businesses. Here in Washington, even a proposal as innocuous as replacing a vacant storefront with a functioning restaurant attracts politically potent complaints about noise and traffic…

The real promise of Fundrise is that it gives pro-growth members of the community a way to become literally and figuratively invested in the success of a project. A building owned by hundreds of local people, rather than owned as part of a pooled investment vehicle marketed to pension funds, is one that’s much more likely to get a sympathetic hearing from local authorities. It’s also one that’s much more likely to inspire people to show up to meetings and hearings and make the case for development and expansion. As George Mason University Law School’s David Schleicher has observed, despite the stereotype of politically powerful real-estate developers, in practice most cities’ legal framework “creates a peculiar procedure that privileges the intense preferences of local residents opposed to new building.”

The other potential benefit isn’t just in cutting through local politics, but in better aligning the dual roles of real estate investment and city building. In a profile of Fundrise in the New York Times, founder Ben Miller put it this way:

They realized that who the investors are and where the money comes from determine what gets built: distant private equity backers who see a deal as simply an investment vehicle tend to put up cookie-cutter projects and strip malls anchored by chain stores — hardly what the community may want or need.

“Who your money is affects what you build, but no one ever thinks about that,” said Benjamin Miller, who also co-founded a site called Popularise that lets developers solicit input from the community. “We’re taking an institutional asset and changing who gets to invest in it.”

In other words, a great deal of real estate development simply follows the path of least resistance. If Fundrise really takes off, it will do so by changing that path on the finance side. The Fundrise management team is also selling themselves, as they are essentially asking for silent partners for these projects. If their investors are to help smooth over an approvals process, they’ll need to feel involved enough in the concept to lend their support – in addition to their cash.

They are selling the chance to help shape the city more than they are selling the chance to invest in it.

Housing demand and the regulatory path of least resistance: Seattle and microapartments

Seattle Space Needle. Photo by author.

The feature piece in The Stranger last month delved deeply into Seattle’s trend of micro-apartments. Dominic Holden offers an in-depth look at not just the development trends, but the politics of the policy and planning conversation around development in an expanding city.

A few things popped out:

Room for rent: The article describes Seattle’s micro-apartments like this:

But inside each town house, the developer was building up to eight tiny units (about 150 to 250 square feet each, roughly the size of a carport) to be rented out separately. The tenants would each have a private bathroom and kitchenette, with a sink and microwave, but they would share one full kitchen for every eight residents. The rent would be cheap—starting at $500 a month, including all utilities and Wi-Fi—making this essentially affordable housing in the heart of the city.

If that sounds familiar, it should – it’s a situation similar to what already happens in big cities – renting a room in a group house. For a fraction of cost of a studio or 1-bedroom apartment, you can instead rent a room in a shared house. Considering that comparison, there is clearly a market for these kinds of spaces, and it’s not exactly new.

It ain’t much, but it’s home: While the rise of micro apartments is in the news in Seattle, it’s not a new thing for cities. Single-room occupancy (SRO) apartments have a long history in cities. The Blues Brothers highlighted this housing typology in their 1980 homage to the city of Chicago (“how often does the train go by?” – “so often you won’t even notice it.”).

Chicago’s WBEZ documented the dwindling numbers of SROs in the city, noting how this particular form of affordable housing has served a different market of individuals than the kinds of tenants mentioned in Seattle:

The Chateau is among the city’s shrinking pool of single-room occupancy hotels (map below), which offer an important housing option for people with low- and fixed-incomes. SROs also serve clients with troubled credit or criminal histories. The North Side has long been an SRO hub, but in recent years many such buildings have been purchased by developers and closed, only to reopen as more expensive housing — often beyond the means of prior tenants. Some SRO residents and community organizers worry the Chateau Hotel might be the next building in this trend.

The key difference is in the level of maintenance, and thus the target market. Nonetheless, it’s not hard to see how micro-apartments like likes in Chicago or the new construction in Seattle would appeal to a number of potential markets. None other than The Stranger’s own Dan Savage makes note that he lived in an SRO when first moving to Seattle, and “I wasn’t sketchy then, I’m not sketchy now.”

As a part of re-evaluating the SRO’s sketchy reputation, Next City focused on the role this type of housing can have in the future of our cities.

Meeting housing demand: As Holden notes, a dynamic and expanding city like Seattle needs room to grow, and needs opportunities for a wide range of incomes. He also makes note of the only sure-fire way American cities have to meet growing demand post-WWII – sprawl. “Accommodating our growing population by shipping workers into the low-density sprawl of the exurbs is not the way a city should operate.”

This isn’t unique to Seattle. Other cities (including New York and DC) are struggling to meet the demand for housing, and are considering micro apartments as one potential solution.

The politics of neighborhood opposition: Holden’s Stranger article offers a fascinating dive into the politics of those opposed to these projects. Holden examines the stated objections to these projects (which include everything but the kitchen sink – or, in the case of complaints about shared kitchens, why not bring it up?) and finds most opponents to be “dramatically exaggerating”  the impacts. “Tick through the neighborhood groups’ complaints,” he writes, “and they don’t add up to a logical argument.”

The two issues in opposition that Holden deems to have legs deal with a tax break loophole for these developments and an exemption from the city’s normal design review process (more on this later). The principal objection is that the apartments count as many units for the purposes of a tax break, but few units to avoid the threshold for additional design review scrutiny.

Holden’s article goes into substantial detail about his interactions with some of the individuals and groups in opposition, highlighting a kind of fanaticism. Even without the crazy elements, the strength of the opposition and relative lack of proponents involved in the discussion shows the kind of game theory challenge for urban development regulations – opposition is strong, but only in a narrow segment of the population; support is broad, but few individuals feel the need to organize in favor of developments like micro apartments. The existing legal procedures favor the organized, and therefore give organized groups leverage in discussions.

The limits of design review: While a procedural loophole exempts micro-apartments in Seattle from design review (and Holden flags this as a legitimate complaint from opponents), there are limits to what such reviews can accomplish. Holden notes that such reviews in Seattle are largely administrative. He also ferrets out the intentions of those pushing for design review: “What public reviews will do is give activists a chance to obstruct microhousing by quibbling with the appearance.”

Holden understands the importance of process, and the cost it can impose on any new development. Since developers must (at a minimum) cover their costs to even entertain a proposed project, any increase in procedural time and costs means those costs must eventually be baked into the cost of the final product.

If the city pursues design and environmental reviews—which could improve the aesthetics and aren’t inherently flawed processes—they should be administrative reviews. They should be conducted by city staff who notify the public but limit input to letters in writing. They shouldn’t involve neighborhood meetings that are easily sidetracked, shouldn’t require multiple revisions to the architecture, and shouldn’t allow appeals.

If the public is allowed to obstruct these projects—and their arguments thus far have been specious—the results will be predictable: Every time developers must redesign the buildings to satisfy the neighbors, every time the project is delayed for further review, every time a spurious appeal is filed, the more it costs to build that project. And that has one predictable outcome: It will make them more expensive to rent, i.e., fewer people will be able to afford them. In other words, whether deliberate or not, the effect of neighborhood advocacy and its input on development projects will make living in these places more expensive and push out workers with less money. That would seem like a terrible mistake—unless pushing out poor people is the actual goal.

Development following the path of least resistance: Given the increasing costs of compliance with the regulations and procedures, it’s not hard to understand why so much real estate development seeks to follow the path of least resistance.

Leaving aside the question of whether micro-apartments are a worthy policy for cities to pursue (as opposed to other expansions of zoning allowances), it does show the catch-22 inherent in things like design review: the additional regulatory review is required because the outcome those reviews shape is a desirable policy goal – but the very cost of the review makes achieving those desired outcomes less likely.

The ideal would be a case where the desired outcome is prioritized, given the path of least resistance. Holden’s discussion of keeping reviews administrative and not subject to lengthy public hearings and appeals is an example. I suspect that (with the exception of some special cases), changing the outcomes from the path of least resistance cannot be accomplished through de-regulation alone.

However, the larger question looms in the background: what agreement is there about the most desired outcomes?


Capacity on the Northeast Corridor

Tucked into the testimony of Amtrak President Joesph Boardman at last week’s Senate hearing on the future of the Northeast Corridor is this graphic demonstrating the number of daily train movements by operator at different locations along the spine of the Northeast Corridor:

One interesting thing to note is the difference in the volume of Amtrak trains (light blue) north of New York, compared to south of New York. This also makes it easy to see the relative volume of Amtrak intercity trains and commuter trains, as well as a few freight movements per day north of Washington Union Station. Capacity improvements are needed to allow for a combination of increased intercity and commuter services (or even better), and other bottlenecks are likely in need of greater capacity for freight expansion on adjacent corridors.

In other Amtrak news, Systemic Failure takes note of the US rail regulatory apparatus continuing to shoot itself in the foot on even allowing efficient high speed rail and learning from everyone else around the world that has already done this hard work. The FRA rejected Amtrak’s reasoning below, with emphasis added by Drunk Engineer:

The assumption that the standards simplify the design process of the equipment and would save $2,000,000 per train set is false. The Acela example indicates the exact opposite to be true. The FRA rules, as existing and proposed, eliminate the possibility of purchasing off-the-shelf equipment. The engineering work required to design new compliant equipment alone would far outstrip any possible savings from the rules if there were any to be had.

For background on the previous history of the Acela’s regulatory weight problems, see posts here, herehere, as well as a GAO report here.

‘Snow’ links: finding the right level of regulation

Mush on my windowsill.

I’m sitting in DC, looking out a window at a mushy, mostly liquid ‘snow’ storm named after an obscure federal budgetary procedure. There’s a joke in there somewhere about failing to meet the hype. But instead, I’ll offer some links to articles of interest over the past few weeks.

Regulatory challenges. Slate blogger Matt Yglesias is buying a new house, and instead of selling his old condo, he plans on renting it out and turning it into an income property. He documents the bureaucratic red tape encountered in the process to make this business legal, highlighting the absurdity that drives people nuts about government bureaucracy – the fact that none of the hoops you must jump through seem to actually matter to the regulatory issue at hand:

The striking thing about all this isn’t so much that it was annoying—which it was—but that it had basically nothing to do with what the main purpose of landlord regulation should be—making sure I’m not luring tenants into some kind of unsafe situation. The part where the unit gets inspected to see if it’s up to code is a separate step. I was instructed to await a scheduling call that ought to take place sometime in the next 10 business days.

Yglesias notes that DC fares poorly on many metrics of regulatory efficiency and friendliness to entrepreneurs. Granted, those rankings all ought to be taken with a grain of salt, as they often fail to measure what really matters and instead focus on indicators not directly linked to entrepreneurship (there is also the matter of state-by-state rankings lumping in a city-state like DC into their metric – not exactly an apples-to-apples comparison).

The real issue, as Yglesias touches on in a later blog post, isn’t whether regulations are good or bad, but whether the regulations we have are effective and if they cover the right topics:

The way I would put this is that the American economy is simultaneously overregulated and underregulated. It is much too difficult to get business and occupational licenses; there are excessive restrictions on the wholesaling and retailing of alcoholic beverages; exclusionary zoning codes cripple the economy; and I’m sure there are more problems than I’m even aware of.

At the same time, it continues to be the case that even if you ignore climate change, there are huge problematic environmental externalities involved in the energy production and industrial sectors of the economy. And you shouldn’t ignore climate change! We are much too lax about what firms are allowed to dump into the air. On the financial side, too, it’s become clear that there are really big problems with bank supervision. The existence of bad rent-seeking rules around who’s allowed to cut hair is not a good justification for the absence of rules around banks’ ability to issue no-doc liar’s loans. The fact that it’s too much of a pain in the ass to get a building permit is not a good justification for making it easier to poison children’s brains with mercury. Now obviously all these rules are incredibly annoying. I am really glad, personally, that I don’t need to take any time or effort to comply with the Environmental Protection Agency’s new mercury emissions rules. But at the same time, it ought to be a pain in the ass to put extra mercury into the air. We don’t want too much mercury! We don’t want too much bank leverage!

The more ideological stance (regulation is bad!) might be easier to communicate; it might resonate with the public based on their experience at the local DMV. It’s a complicated reality, and our regulations not only need to reflect that, but also likely need periodic review and revision.

Regarding a common issue in the urban context, Matt writes:

“This city has too many restaurants to choose from” is not a real public policy problem—it’s only a problem for incumbent restaurateurs who don’t want to face competition.

This reflects some of the tension on liquor license moratoria in DC (see the discussion about IMBY DC). The contrasting position is that restaurants do indeed create some negative externalities that need to be addressed. The challenge for public policy is then in addressing the negatives without falling into the trap of mis-stating the problem.

Regulatory reform. Assuming we correctly state the problem, then what do we do to change things? DC is forming a task force to look at these issues. In some googling of related articles, I ran across an old op-ed from Helder Gil about a potential direction for regulatory reform, radical simplification:

One solution is the radical simplification of existing business laws and regulations. “Radical simplification” is the wholesale rethinking of a law’s original intent, its current actual effect and whether those two points still intersect in a way that advances public policy.
Consider the contrast to DC’s zoning regulation review process, and the power of the status quo bias. Even the terminology of ‘zones’ is no longer useful, Roger Lewis writes:

 Let’s dump the word “zoning,” as in zoning ordinances that govern how land is developed and how buildings often are designed. Land-use regulation is still needed, but zoning increasingly has become a conceptually inappropriate term, an obsolete characterization of how we plan and shape growth.

I would go farther than Lewis and suggest that the terminology is not the only problem; the content of the regulations is also problematic. Lewis goes on to list numerous shortcomings of the existing regulatory framework – perhaps inadvertently making the case for radical simplification?

Beware non-governmental regulation. To be clear, these challenges are not solely governmental. The burden often falls on the government in protecting the public purpose, but governments are not the only entities with the common good in mind. Consider the home-owners association.

Last month, the Washington Post reported on an epic legal battle between a Fairfax County HOA and a member over a very minor size violation for a political sign. HOA representatives on a power trip sought to impose penalties for violating rules that were not expressly granted to the HOA in the association’s bylaws. The HOA lost the case, the resulting legal fees bankrupted the association, forcing it to pursue the sale of a privately-owned park area.

These kinds of battles are common – and often invoke words like ‘tyranny’. They highlight both challenges of regulation and also of governance. Clearly, the content of some regulations are an issue, but so is the process for changing or even just reviewing those regulations.

Perhaps HOAs are not strictly necessary for a grouping of semi-detached homes (as is the case in the Fairfax County example), but some level of common-area administration is necessary in multi-unit buildings, no matter how you slice it. The need for HOAs also raises the question about the role of home-ownership in multi-unit buildings and the regulatory environment that enables it (see Stephen Smith asking “why do condos even exist?” at Market Urbanism) – which, after all, is a relatively young and untested legal field.

Middle class in Manhattan?

Manhattan. CC image from sakeeb.

Breaking news! Last week, the New York Times reported that it is expensive to live in Manhattan. The Times frames the question through the lens of the middle class, asking what the definition means in the context of they city’s densest borough.

In a city like New York, where everything is superlative, who exactly is middle class? What kind of salary are we talking about? Where does a middle-class person live? And could the relentless rise in real estate prices push the middle class to extinction?

There’s lots of discussion in the article about incomes in New York, as well as the high cost of living – particularly for housing. The article notes that the New York, urban context makes the traditional symbols of the American Dream (e.g. home ownership) less applicable, and most of the text is spent searching for some other indicator of middle-class-ness. Matt Yglesias notes that such a search for a single metric isn’t always useful. Likewise, it’s not as if this is a new topic in New York, or even for the Times.

There’s lots of discussion about housing costs and the demand for living in a place like Manhattan, but not a single word about housing supply. I understand the author is looking to explore the perception of what constitutes the middle class, but a word about the supply of housing is warranted. Even a short mention of the constraints to supply would be a worthwhile addition to these kinds of articles.

David Schleicher’s twitter response asked that same question, and provided a link to Glaeser, Gyourko, and Saks’ work on regulatory constraints to housing supply in New York. From the paper’s abstract:

Home building is a highly competitive industry with almost no natural barriers to entry, yet prices in Manhattan currently appear to be more than twice their supply costs. We argue that land use restrictions are the natural explanation of this gap. We also present evidence consistent with our hypothesis that regulation is constraining the supply of housing so that increased demand leads to much higher prices, not many more units, in a number of other high price housing markets across the country.

As noted, Manhattan certainly isn’t the only place with these kinds of constraints. Another recent article focuses on San Francisco, this one from tech writer Farhad Manjoo. Manjoo makes the case that San Francisco needs to grow in the face of tremendous demand for urban living. More importantly, he argues that opponents to growth, those who fear how growth might change the things they love about San Francisco, need to get over themselves.

Don’t look good fortune in the mouth. Yes, growth will bring some problems. But they’re not nearly as bad as the problems you’ll find in decline (ask Detroit). Instead of complaining or blocking growth, San Francisco’s old-guard would do better to propose ways to ease the city’s transition into its digital future. This doesn’t mean opposing newcomers. It means recognizing a new reality, that San Francisco needs to become much larger and more accommodating place than it is. And it means adopting polices that will make that reality a pretty good one.

In particular, for San Francisco, adopting that reality means one thing above all: It needs to build more buildings.

As an example of the fear of change, Manjoo links to this article by David Talbot, blaming the influx of tech workers to the city for forcing things to change – forcing the city to battle for its own soul.

One point that Talbot ignores is that obstructing the physical change in the city (e.g. blocking development) will not save the idealized city he loves. In fact, it might even accelerate the process of gentrification.  Some level of change is inevitable. Fighting any kind of change to the physical environment might even accelerate changes to the city’s socioeconomic environment.

While the overall thrust of Manjoo’s policiy is correct, it’s not hard to see why many fear for the loss of San Francisco’s soul. Manjoo laments that the city has not built more densely, and implies that old Victorian houses are the culprit: “this city is defined by, and reveres, its famous Victorian houses” he writes.  “Those houses are very pretty. They’re also very inefficient. Collectively, they take up a lot of space, but don’t house very many people.”

The truth is that San Francisco could add a great deal of new housing supply without touching those houses that are worthy of preservation. Consider this thought experiment from Keep Houston Houston for transit improvements and upzoning in the Sunset District:

All of this in one neighborhood, and without straying from the basic SF vernacular architecture of low/mid-rise, wood-framed buildings. Apply this same rubric to the rest of the city, allow towers in a few places, you could easily accommodate 200,000 more people.

Likewise, Stephen Smith makes the case for dramatic upzoning in large parts of Brooklyn, but not on the borough’s brownstone blocks:

In some neighborhoods, this sort of conservative zoning makes sense. The tree-lined blocks of Brooklyn Heights and Park Slope, for example, thick with brownstones and pre-war apartment houses, are urban treasures worth preserving.

But northern Brooklyn is not brownstone Brooklyn.

We’ve seen the same thing in DC (and seen the impacts of zoning). And we’ve also seen anecdotes of what adding new supply can do to downmarket properties, thanks to the process of filtering.

Each of these strategies at least hold the promise of keeping the market rate housing prices within reach for the middle class. Obviously, the dynamics of these markets are quite complex, and the nature of neighborhood change is not well-understood (not in a way we can forecast, anyway) and the housing market for a given metro area is larger than any one jurisdiction, but the macro signs are quite clear. Given the constraints to supply in the Zoned Zone, removing these regulatory constraints on the market’s ability to add supply seems like an obvious prerequisite to a change in policy.

To Charles Marohn’s concerns about density, and those that fear for San Francisco’s soul: will this new development ensure a quality place? No, probably not. But allowing this kind of growth is a necessary-but-not-sufficient condition.

Choice architecture and behavior change

CC image from sparktography.

In the DC urbanist blogosphere (or, David Alpert across multiple platforms), ‘choice’ is all the rage these days. GGW writes about DC Planning Director Harriet Tregoning being “pro-choice” on transportation; Alpert in the Post writing about housing choices and transportation options; and Alpert again talking about zoning and parking requirements on News 8.

And of course, who isn’t against choice? Richard Layman pushes back on the ‘choice’ rhetoric a bit, noting that maximizing choice alone isn’t sufficient for good policy, and then focusing on outcomes, noting that it’s about “making the right choices.”

My most recent Metro read was Richard Thaler and Cass Sunstein’s Nudge, devoted to a lengthy discussion of the vital importance of ‘choice architecture’ in our lives (also mentioned in Daniel Kahneman’s Thinking Fast and Slow – in the reading list). Choice architecture is all about framing the decisions we make, usually with large impacts on the final outcomes.

In that vein, Layman’s critique of the narrative about choice is spot on – there’s a lot more to a successful policy outcome than just providing choice. However, Thaler and Sunstein might disagree a bit with Layman’s goal of getting people to make the “right choices.” They frame their goals as using choice architecture to nudge us into better outcomes, while still being free to make choices as we see fit – calling this ‘libertarian paternalism.’  Making the choice for someone would be straight-up paternalism.

I don’t want to speak for Layman (and this is almost certainly splitting hairs in terms of semantics), but I can see how his framing on transportation choice would not meet the libertarian threshold. That sense of having decisions made for you certainly explains some of the all-too-predictable ‘war on cars‘ backlash, no matter how misplaced it might be.

There is also the matter of rhetoric. While simply maximizing choices might not be a complete policy, it makes an effective argument. Implementing a good choice architecture is imperative, but is also rather in-the-weeds for common debate. Given how skewed our transportation system is towards framing auto use as the default, changing the choice architecture often is the policy change – people’s behavior will follow.

Examples of transportation nudges can range from how fringe benefits are offered to employers to how parking is leased/bought in apartment buildings. Decisions about the physical environment, such as how much parking to build, are more about broader development markets, as renters/buyers already factor the price/availability of parking into their decision making.  Barring interference from something like minimum parking requirements in the zoning code, the choice is faced by developers, not end users.

The existence of such minimum parking requirements (as well as other aspects of land use regulation) is also an interesting look into choice architecture.  I’ve often heard Chris Leinberger speak not just about doing the right thing with development, but also shifting our regulations so that doing the right thing is easy. So much development follows the path of least resistance. In terms of choice architecture, they opt for the default. Even if not speaking about the choices of individuals (but rather firms and corporations), the impact of choice architecture is enormous.

The parallel that comes to mind is David Schleicher’s emphasis on the process of land-use decision making, and how that impacts outcomes. Schleicher’s argument is that our procedures for land-use decision making provide multiple opportunities for (as an example) NIMBYs with concentrated, hyper-local interests to influence decisions over broader, city-wide interests.  In essence, the procedures and process for this kind of decision-making is a kind of choice architecture – arguably, one with (in Richard Layman’s words) “sub-optimal” results. Opposed to the libertarian paternalism that aims to structure the choice architecture to achieve better outcomes, this architecture is not structured at all – there isn’t an architect.

Nonetheless, this is a complicated discussion – ‘libertarian paternalism’ and ‘choice architecture’ aren’t likely to be effective talking points in a community meeting.  There’s a reason why opponents to some of these changes fall back on incendiary language (“war on cars,” etc), as that rhetoric is simple and accessible.  The rhetoric of providing choice is just as simple (and, I would argue, more honest than the “war on cars”), even if the underlying policies must be more complex.

(EDIT: as I publish this post, Richard Layman writes another post on choice, also mentioning Thaler and Sunstein)