Monday, August 4, 2008

For-Profit Management of Neighborhoods

Back in June, I began a series on "commercial neighborhoods." In the first post I gave three reasons that neighborhoods ought to be very different from one another, but argued that a single municipal government will tend to cover that diversity with blanket policies. In the second post I argued that democratic government tends to think short term, ignore minorities, and make unenforceable promises. In an anecdotal addendum, I showed how my experience one Sunday demonstrated how for-profit businesses care for individuals more than democratic politicians do.

For over a month now I have promised to explain what this would mean in practice -- but a cross-country move and the beginning of a new job have delayed me.

Let me begin by noting that this is not a new idea. In the nineteenth century, whole neighborhoods were built by developers. I'm failing to find the title on Amazon, but there is a very interesting study, surprisingly scholarly, on various methods of private policing, private infrastructure development, and private neighborhood development. Authorities ranged from street-car developers developing the adjoining lands (the profits on these lands are what funded the original street-car lines) to slum-lords building on the lands in-between street-car lines to ritzy co-ops voting members out of their neighborhoods. There were surely weaknesses of these systems, but the study shows their considerable strengths -- and when one compares the state of American cities under 19th-century capitalism to their state at the height of 20th-century authoritarian government, it is hard to deny that the previous system was better for the poor, better for immigrants, and better for community.

Private development is still common today. Condos, apartment buildings, some subdivisions, malls, and New York's unique housing co-ops are all examples of non-governmental, for-profit management. They work pretty well. Unfortunately, this private model is relegated to only the very local (apartment buildings) and the suburban -- places where there can be no true neighborhood. Indeed, it seems that the flight to the suburbs, and the consequent loss of neighborhoods, depends precisely on people choosing good management of bad places over bad management of our beautiful cities.

With that background in mind, I would like to work up from the most minimal level of local governance: the external appearance of properties. This is, I think, not insignificant. The trash in my neighbor's yard affects me almost as much as him. An ugly paint-job across the street affects me even more than it affects the occupant, since I see it out my window. Advertisements for pornographic performances on the same block as my family's favorite restaurant may seem like no big deal to some people, but they greatly affect my ability to take my kids out to eat, and the restaurant's ability to draw a wide base of customers.

Neighborhood means private properties in contact with one another. At least in externals, private properties simply are not private. My neighbors' decisions affect me.

Government cannot handle this problem. Municipal government is certainly not equipped. A councilman with care for 75,000 residents simply cannot think through my neighbor's trash situation. Nor does he have any incentive to worry about it -- as long as he has 51% of the vote, the rest of us just have to rely on the goodness of his heart -- and the absurd assumption that he shares our values. Is it really fair for all the different neighborhoods, and sections of neighborhoods, under that one councilman to be subject to his way of thinking? And in any case, the incentives for a politician are all short-term: the appearance of "doing something" is much more valuable to him than thinking through long-term solutions. We saw this last July, when our councilman pushed through a new law against fireworks -- but did nothing to enforce the law already on the books, and made no recognition that our lower-middle-class black neighborhood, with its stoop culture, is different from the ritzy white backyard-neighborhood to our south.

Devolving power to a neighborhood government doesn't work either. First, it's very hard to give these little councils sufficient authority: if they can't evict someone for leaving trash in his yard, or tear the pornographic posters out of the bar's windows, then all their deliberations are an exercise in futility. Second, they too are politicians, with their inherent preference for short-term balms and blanket solutions. Third, because it's hard to keep up on neighborhood politics, participation in neighborhood elections tends to be minimal -- meaning that whereas the city-wide politician needs to win an election where maybe 60% of residents participate, the neighborhood politician generally runs unopposed, or at worst faces 20% of voters who actually know who's running. Accountability to 11% of residents is almost no accountability at all.

It would be better if the neighborhood were privately owned. The model would be something like a condo. All houses in St. Paul's Rondo, or the western half of Washington's Old City, perhaps, would be owned by a private corporation. This corporation would then sell the predominant share of each property to individual owners. There need be no condo fee, though there could be.

For example, a business owner on H St., or a home-owner on 6th St., would purchase the property from another private owner. But 10% (perhaps) of the purchase would go to the neighborhood corporation. If I buy a property for $200k, I pay $180k to the previous owner, $20k to the Neighborhood. If I then sell for $300k, the Neighborhood pays me back my $20k, but takes $30k (10%) from the sale. For improving the property $100k, I take $90k of profit. But if I sell for $150k, the Neighborhood pays me my $20k but only gets $15k from the next guy. (Alternatively, the Neighborhood could charge a rent, determined as part of the original purchase agreement.)

In short, the Neighborhood Corporation has a vested interest in my property value going up. It thus has a vested interest in the positive development of the neighborhood and in finding tenants who are going to positively affect the neighborhood.

This interest might seem to work toward gentrification. Because the NC wants property values to go up, it prefers to buy from the poor and sell to the rich. But because 90% of profits go to the private owners, they to benefit from this dynamic. The poor old lady whose house suddenly appreciates 100% only gets 90% of that profit -- but that's a lot of profit, and she is suddenly not such a poor old lady anymore.

Moreover, private development naturally seeks niches. There is a limit to how many rich people can move into neighborhoods. Of course the various NC's will try to bring in the highest-value clients. But once those are used up, they will also try to find any clients who will pay. Full houses are worth more than empty ones.

And the dynamic might not be as bad for the poor as it seems. It is an odd fact that the old neighborhoods that were ritzy a hundred years ago contain a remarkable confluence of rich and poor housing. If you walk around Capitol Hill, our old neighborhood in Washington, you will find huge mansions a block away from, or even right next to, tiny hovels. The same is true of Summit Avenue here in St. Paul. Why? Before we try to answer that, we should simply acknowledge the fact: for some reason, rich people did choose to live in a neighborhood where the poor were close by.

The reason why is perhaps that the rich need the poor -- to clean their houses, to run their businesses, etc. A maid, or a nanny, will be willing to take less pay if she doesn't have to commute an hour to work: that's the nature of the market. So on some level, the rich have to make a bet that the value of cheap labor close at hand is greater than the risk of living near dirty poor people. This is true even in suburbia, where rich towns almost always have poor towns nearby, and even cheap developments within them. But I will bet -- in part based on the historical evidence of our old neighborhoods -- that it will be even more true in cities. First, because suburban living is based on the idea of sorting, while urban living is based on the idea of mixing: the presence of the poor is less abhorent when you're used to the city. Second, because urban living is essentially pedestrian: in the suburbs, the poor might be willing to drive fifteen minutes to their places of work, but in the city, they want to walk.

In any case, I think there are natural incentives to having the poor live close to the rich -- incentives that private management will seek out. Politicians, however, because they prefer short-term balms ("clean out the vagrants!") and because they have no reason to consider long-term economic consequences (ignoring, for example, the way housing codes price out the poor), have tended to produce economic sorting even in our cities. Again, just look at Summit Ave., Capitol Hill, or any other such neighborhood today.

Back to trash. The Neighborhood Corporation will make a compact with those who buy into the neighborhood. It could exist on any number of levels, based in part on law and in part on the market. On the lowest level, it could just regulate the external appearance of properties. It could say, "when you decide to own in our neighborhood, you agree to be subject to our decisions about exterior appearance. You agree to clean up your trash when asked; and you agree that if you do not clean up your trash, you will be forcibly evicted." Or perhaps you agree to clean up your trash without being asked. Of course, a government can do this too. But because the Neighborhood Corporation has a financial interest, it has a greater concern to balance, on the one hand, the cost of eviction (essentially, a lost sale) and on the other hand, the cost of not enforcing laws. This is a difficult balance; and it is one that democratic governments have no incentive to carefully weigh.

Of course there will need to be clear contracts. This becomes more apparent when it comes to external appearance. When I buy into the neighborhood, I will make an agreement with the NC about what kind of building I can do on my property, or what processes I will pursue in adjudicating those decisions. Again, this is a very tricky balance. Perhaps the NC should have plenary authority to decide, without reason given, that Smith can build six stories up but Rodgers can only build three. That would not be unreasonable -- and the decision should ultimately be made, not based just on the need of the property owner, but on the overall impact on the neighborhood as a whole. Perhaps it would be good to submit to such rules, if you think the neighborhood is well managed. But perhaps you will prefer greater clarity: a body of binding case-law, clear rules that can only be changed by vote, grandfather-clauses, etc. This is all complicated, and will require lawyers. But it is far better than current decisions, which are based, not on the good of the neighborhood, but on the good of the politician.

Take an example. North of our old neighborhood in Washington was a vacant lot and a developer dying to build big. The neighborhood politicians want "smart development" -- which means, of course, whatever they want it to mean. They express concerns about traffic, appearance, history, etc. But ultimately, their bread is buttered with grand-standing, not with thought. If the neighborhood were managed by a Corporation, they might do a study, or give careful thought, to how that traffic, and marred sight-lines, and all the rest will actually affect property values long-term. The politician has no reason to do this. In fact, the main politicians making the decision are only part-time. Can we really expect them to think this through carefully?

There are problems, of course, with adjoining neighborhoods. If that development is too tall, it will block the sight-line of the next neighborhood north. But that too can best be adjudicated by corporations: a simple question, from ours to theirs, how much they are willing to pay to keep their pretty sight-line. It requires clearer thinking about whether anti-development moves are really worth it. Perhaps they are. But if it's a poor neighborhood, will they really want to pay to keep their view of the Capitol? Ultimately, the Corporation is subject to the will of the people: even the poor have options, and if another neighborhood, is cheaper, or costs the same, but maintains better views . . . well, the market will sort out the vast myriad of factors people weigh. At least it will have far greater accountability than the politicians.

We move into greater complexity. From trash and the color of houses, we move up to the height of buildings, and various kinds of zoning. At each step, the Corporation must carefully consider the costs and benefits of restricting people's liberties, and the million balances required to make a neighborhood work.

As a last, most complicated, example, consider roads. It might seem that this is where the corporation model falls apart. Should one neighborhood really be able to block access to another? Is it fair if we can make commuters drive 25mph to get to work? The simple answer is, yes, if people are using our neighborhood's roads, they should be subject to the needs of our neighborhood. But again, the corporation model allows for balance.

A central business district may decide that it needs roads out to the suburbs -- out through poor neighborhoods -- to get people to work, and to make its Central-Business-District Neighborhood profitable. And it can enter into a partnership with the other districts. Imagine, for example, K St. NW financing the roads through H St. NE -- so that H St. doesn't have to pay for them -- then paying a monthly rent, determined by H St., to keep that road open and going, say, 40 mph. If H St. asks too much, the deal collapses, and they build their commuter road elsewhere. But H St. can probably get a lot -- and turn it over to improving their neighborhood. And if the H St. corporation makes a bad deal, and people leave the neighborhood and property values fall, that corporation suffers for its mistakes. It is true accountability, something greatly missing in the road decisions of the twentieth century.

The Government cannot be laissez-faire, to be sure. Above all, it must maintain contracts, so that when individuals make a deal with a Corporation, the deal is maintained, and there aren't tricks that undermine the contract. Government must coordinate what truly needs coordination. At a far extreme, for example, neighborhoods might create their own police forces -- but you'll still probably need inter-jurisdictional police forces, just like municipal police forces now depend on state cops, the FBI, etc. There will still be laws that the community deems necessary as a basic matter of human rights, and the State must enforce those. The State might still provide basic services for the poor (education?) -- but without preventing corporations from providing parallel services, to lessen the State's burden and to give the poor options.

It is beyond the scope of this already-long post to explain how to get from here to there, and how to prevent the State from encroaching, taking away power from the corporations in such a way that it undermines their beneficent purpose. But we might begin by simply granting neighborhood charters on auction, and letting the market sort out neighborhood boundaries, neighborhood characters, and the price of it all. We might sell truly blighted neighborhoods off first, and see what happens. But give business a chance to do what government has manifestly failed to do for our urban neighborhoods.