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Development


Businesses no longer want office parks, and that can mean more revenue for cities

Businesses are making moves toward neighborhoods that are accessible by transit and easy to walk around in. For cities, it's a smart financial move to view the change in preference as one that's here to stay.


Pike + Rose. Photo by Dan Reed on Flickr.

A recent story in the Washington Post covered a move by Merrill Lynch from a Montgomery County office park you can only get to by driving to the Metro-accessible Pike & Rose development on Rockville Pike. Though commercial lease terms are typically confidential, experts say Merrill Lynch chose to pay 40% higher rent for the new location, which is a five- to ten-minute walk to the White Flint Metro station.

This isn't an aberration. Just a few miles south of Merrill Lynch's office, Marriott is considering move its headquarters from a conventional office park in Bethesda to somewhere else in the region. The CEO told the Washington Post, "I think it's essential we be accessible to Metro and that limits the options."

This preference isn't just limited to two companies. A report in late 2013 found that 83% of the new office space under construction in the region is within a quarter-mile (a five-minute walk) of a Metro station. That is no coincidence.


Headquarters of Marriott International in a Bethesda office park. Image from Google Maps.

Local tax bases will shift

These trends are telling, and local leaders concerned about future budgets should take notice. Buildings like the one Merrill Lynch is moving into command higher rents and are more valuable to investors. And because cities and counties raise much of their revenue from real estate taxes levied ad valorem, meaning the tax is a percentage of the assessed value of the property, they mean more tax money.

Also, local governments often prefer office development to housing development since offices tend to pay more in local taxes than they use in services.

In Loudoun, for instance, the county claims that each new home costs the county $1.62 in added county services—schools, roads, sewers, etc.—for every extra dollar collected in taxes. Homebuilders say the cost is more like $1.20, but either way, each new house is a net cost to the county under its current tax structure. Communities with a healthy mix of commercial and residential development can provide excellent public services at manageable tax rates.

The moves of Merrill Lynch and Marriott as well as the Metro-proximity of new office space show the direction the office market is moving. If state and local governments want to attract and retain the offices of large Fortune 500 companies like Marriott and Merrill Lynch (a subsidiary of Bank of America), they need to plan for and support the types of mixed-use, walkable, transit-rich development companies seek and are willing to pay a premium for.

The future is already here

Fortunately, much of the infrastructure is already in place. The Washington region still has plenty of Metro stations that have not met their full development potential. Furthermore, the new development Metro spurs doesn't necessarily burden the existing infrastructure. In fact we found that car traffic in Arlington's Rosslyn-Ballston corridor declined while development boomed.

It's too early to tell whether leaders are fully aware of what it's going to take to attract commercial development. In good news, the Silver Line's expansion into Virginia has already sparked office construction in Tyson's Corner and the Wiehle-Reston East station, allowing the commonwealth and Fairfax County to expand and capture more economic activity.

Likewise, Maryland Gov. Larry Hogan chose to continue the Purple Line, an investment that will improve mobility and will create more places in Maryland that attract taxpaying office tenants. Montgomery County Executive Ike Leggett successfully pressured the state to reconfigure Old Georgetown Road near White Flint as a narrower complete street, not the wide auto-sewer the state had suggested.

But the region has made its share of mistakes, too. The cancellation of the Columbia Pike streetcar with no credible plan for any transit improvements ensures that new economic development will largely bypass that section of Arlington.

Creating neighborhoods that give residents and workers practical options to walk, bike, ride transit, or drive will improve the quality of life and also helps the jurisdiction's bottom line. Leaders who want to continue providing high-quality public services to residents without raising tax rates need to attract commercial tenants who are willing to pay higher rents and thus generate more tax revenue.

Leaders have a choice with limited funds: they can use public money to build new arterial roads and fail to spur economic growth or they can invest in the harder, but rewarding, transformation of places like Tysons and White Flint into the nodes that spur the economic development patterns of the future.

Parking


Mayor Bowser wants to raise DC's parking tax. Here's who would win and who would lose out

In her annual budget, Mayor Muriel Bowser has proposed fully funding DC's share of WMATA's costs. Part of that cost would come from a higher sales tax on parking garages and lots. Will the DC Council go along? If it does, who will pay more?


Photo by Trakker on Flickr.

Under Bowser's budget, the tax would rise from 18% to 22%, raising $9.9 million out of the $30.8 million by which DC's payment for Metro transit service will rise this year.

Bowser also wants to raise the general sales tax from 5.75% to 6% and use that money to fight homelessness.

Bowser's staff compiled a set of comparable cities and their parking taxes.

  • San Francisco: 25%
  • Chicago: 22% weekdays, 20% weekends
  • Baltimore: 19%
  • Pittsburgh: 31%
  • Miami: 20%
  • New York: 18.5%
The new rate would put DC around the middle of the pack among cities on this list.

Who pays if rates rise?

Most analysis of the tax, like that from DC's CFO, has assumed that parking rates will rise, and commuters will be the ones paying. Some arguments for the tax cite this as a plus.

For example, unlike many taxes, this will affect both District residents and non-District residents who commute into DC. Past DDOT analysis has estimated that about two-thirds of the vehicles on DC streets during rush hour are from non-residents. Metro service, which the tax money will help fund, also benefits people who live all across the region and not just DC residents.

Also, the federal government subsidizes parking by letting federal and private-sector workers (if their employers offer the program) pay for up to $250 a month of parking out of pre-tax salary. (Sadly, that figure is now only $130 for transit riders).

This means that if garages raise their rates in response to the rising tax, many people will not feel the full brunt of the increase. The money is going to Metro to compensate, in part, for the revenue WMATA lost when the federal transit benefit dropped to $130 in January 2014 and some long-distance riders stopped riding Metro.

Metro riders weathered a price increase of 3% for rail and 9% for bus (and double for bus-and-rail riders). A 4% increase in parking costs is wholly in line with this.


Car cost image from Shutterstock.

But... will rates rise?

This analysis assumes that the tax will drive up parking prices. Economics 101 says that if you impose a tax, it will increase the price of the good, lowering the quantity demanded. Will that happen here?

The parking market is a little different than most markets. For one thing, at least for daily parkers, garages generally post prices and collect cash payments in round numbers which include the tax. This is different from the way it works at a store or restaurant. There's incentive for the garages to keep their prices at a round number of post-tax cash dollars.

Also, parking operators are in the business to make money, so aren't they already charging as much as the market will bear? In other words, if they could raise their prices when there's a new tax, why don't they just raise their prices now regardless?

Well, isn't that true of all markets? But in most markets, competition drives down the prices of goods. If you're making more money than a small profit over and above the cost of providing the service, someone else will enter the market too and try to undercut you.

Parking isn't really a competitive market. In the short run, the supply of parking is absolutely fixed, and there isn't empty land to turn into new parking in central DC. Also, many people also only really want to park in the building where they work, are going to the doctor, etc. and aren't shopping around. That's especially true when a company is buying parking for executives.

These factors make the parking market closer to a monopoly and/or oligopoly, and consequently, the pricing is more at the level that maximizes total revenue in the entire market, a level that's higher than the perfect competition price.

Therefore, there's some reason to conclude that garages already charge as much as people will pay, and can't easily raise rates a few percent.

The other possibility is that garages actually could charge more, but nobody wants to be the first; with the tax, it will trigger a wave of price increases.


A garage in Phiadelphia. Photo by John Donges on Flickr.

Philly parking operators and an expert agree

When Philadelphia was debating the level for its parking tax, the parking operators commissioned an economic analysis that concluded that the burden would fall on them rather than on consumers. It says:

In the short run, a change in the parking tax has no impact on the parking rates paid by the consumer. Consequently, the parking facility operator pays the entire amount of a parking tax increase. Parking facility operators face the same short run problem every day—how to maximize revenue.

In other words, parking operators are already charging as much as they can and the price consumers pay is determined by the number of spaces and the demand for parking, not by the level of taxes. The level of taxation and the other costs of operating a facility do not affect the price charged or the number of spaces available unless the costs are so great that the operator shuts down the facility.

In the long run the story is quite different. An increase in parking taxes discourages the rejuvenation of aging facilities, the replacement of facilities lost to development, and the construction of additional facilities. Thus higher parking taxes will decrease the long-run supply of parking, will increase the cost to the public of parking, and will decrease profits to owners of parking facilities.

Further, should an additional parking facility be required, a higher parking tax implies that the facility will require larger subsidies to develop than it would in the absence of the parking tax increase.

Rick Rybeck, a transportation consultant who previously worked as deputy associate director for transportation policy and planning at DDOT, agreed. He wrote in an email, "For the most part, parking operators are charging the maximum prices that they can charge for parking. If operators are charging the maximum possible price for parking at their location, an increase in sales price will not immediately increase the price of parking."

"Instead, the additional tax will reduce the net revenue to the operator, effectively reducing the base price for parking that the operators collect," Rybeck added. This would just come out of their profit margin, if that margin is large enough (or, depending how the parking deals with buildings are structured, out of the building owner's revenue from leasing the parking to an operator.)

In the long run, this might lead to less incentive to build parking, though DC is not Philadelphia. The Philadelphia report is saying that it might no longer be economically viable to take land in job center areas and use it for surface parking lots or garages. In and around downtown DC, that became the case long ago, and all new parking is underground.

Underground parking is already so expensive to build that developers build what they think is necessary to attract the kinds of tenants they want. According to testimony developers have given at zoning hearings, the revenue from the parking often doesn't cover the cost of building it (though, once it's built, they certainly want to try to sell it).

Maybe a slightly higher parking tax would lead a few companies to rethink exactly how much parking they really need in an area with plentiful transit service.


Jack Evans in a car. Photo by Elvert Barnes on Flickr.

What will the DC Council do?

The tax increase first has to go to the Committee on Finance and Revenue, which Jack Evans chairs. He is one of the council's most anti-tax members, but is also now the DC Council's voting representative on the WMATA Board and a longtime supporter of keeping Metro strong.

At a recent hearing on WMATA, he said, "I am a big fan of Metro. I served on the baord back in the 1990s and I serve on it again today. Metro is responsible for moving a million people around the area and is critical to the well-being of the metropolitan area."

Evans may not like the tax, but if he wants his committee to remove it, he might have to find the money elsewhere in his committee's budget. More likely, he could try to convince Chairman Phil Mendelson to rearrange the budget in other areas to make up for the money. Evans also opposes the sales tax increase.

In an op-ed in the Georgetowner, Evans wrote,

What is my greatest concern in my initial review of the budget? Proposals to increase our sales and parking taxes. ... This latest [parking tax increase] is a triple whammy. When it's more expensive and difficult to find a parking spot, people are less likely to go out, spend money in the District and generate tax revenue.

Plus, most of these costs get passed on to residents, making it more expensive for people to park near their offices, restaurants and stores. More than a third of those parking in garages are District residents. So, in effect, we are taxing our own people again and again.

Evans makes one strange link when he talks about parking being "more expensive and difficult to find." In truth, more expensive does not mean more difficult. If anything, it's the reverse; more expensive parking means there's more available and it's easier to find. Also, when Evans says a third of affected drivers are District residents, even if drivers do pay more (which isn't certain), two-thirds come from outside DC.

Evans' committee will mark up its section of the DC budget on May 13. After that Chairman Mendelson will propose his own set of changes, and the council will vote on the budget on May 27th.

Development


Smarter growth will expand Prince George's tax base

Prince George's County Executive Rushern L. Baker III wants to raise real property tax rates by 16% to increase funding to public schools. The real way to boost Prince George's economy is to develop around its gateway Metro stations near the DC line.


The area around the Capitol Heights Metro station is underdeveloped. Image from WMATA.

Prince George's is home to the lowest median home values and highest property tax rates in the region, largely because of the low home values in its older, deteriorating communities that border the District of Columbia. Seven of the county's 15 Metrorail stations are in these gateway neighborhoods, but they all are devoid of any substantial transit-oriented development (TOD).

Improving existing home values will strengthen the tax base

Like many other suburbs, Prince George's County has historically been a bedroom community. The county's largest source of tax revenue comes from real property taxes, and 61% of taxable real estate is residential property.

It stands to reason, then, that even small increases in existing home values in the county would go a long way to raise revenues even without any major large-scale development.

Currently, median home values in the five Prince George's county subdivision areas bordering the District of Columbia fall 10-31% below the countywide median value of $269,800. If existing home values in these areas simply rose to that level, the county's taxable real estate base would increase by approximately $2.47 billion. That would add approximately $23.7 million annually in revenue to the county.

Of course, if the county got serious about developing the seven Metro stations located in these struggling communities (Capitol Heights, Addison Road, Cheverly, Southern Avenue, Naylor Road, Suitland, and West Hyattsville), real property revenues would soar much higher than the median.

Undeveloped transit station areas undermine economic growth

Shockingly, Prince George's current General Plan doesn't recommend any substantial growth around six of the seven Metro stations near the DC border over the next 20 years. (The Suitland station, next to the U.S. Census Bureau, is the exception.) Indeed, the county's planners believe there are currently "too many" Metro stations in the county and that developing all of them would "undermine economic growth."

More specifically, planners say that the six gateway Metro stations bordering DC, plus the four stand-alone MARC stations, plus all the planned stand-alone Purple Line stations should only account for 15% of the county's future growth in the next 20 years. That equates to fewer than 600 new housing units per transit station.

By contrast, the General Plan recommends putting 30-40% of the county's projected growth and development over the next 20 years—or up to 25,000 new housing units—far away from transit and mostly outside of the Beltway. This recommendation appears despite county-funded research that concludes that failing to focus on TOD puts the county "at a continued disadvantage relative to its neighbors."

Prince George's has continually squandered opportunities to focus its attention on revitalizing its neighborhoods inside the Beltway. Continuing to encourage scattered development away from transit has crippled the county financially, environmentally, and aesthetically.

Gateway communities can't wait 20 more years to redevelop

The close-in Prince George's neighborhoods and Metro station areas near the DC line are likely the first thing the region's current and prospective residents think about when determining whether they would like to live and work in the county.

Until Prince George's County improves its gateway neighborhoods, it will be difficult for it to attract the region's best and brightest. The county can't wait another 20 years for that transformation to happen.

County executive Baker is rightly concerned with diversifying the county's revenue base, creating more jobs, and expanding the county's commercial tax base. To that end, he has advocated strongly for developing the end-of-line Metro stations at the Beltway's edge.

For example, he's called for the FBI to relocate its headquarters to Greenbelt Metro, for the state housing agency to relocate to New Carrollton Metro, and for a new regional medical center to come to Largo Town Center.

Likewise, the General Plan's strategy to direct 50% of future growth to the seven largest Metro stations (including the three mentioned above) plus National Harbor, and to create three "downtowns" at Largo, New Carrollton, and Prince George's Plaza, is sensible.

Still, the county's economic development strategy should also reach beyond downtown, and deeper inside the Beltway, to the neighborhood Metro stations near the District's edge. Most of the new development that the General Plan currently contemplates for outer-Beltway suburbia should instead go toward these gateway areas.

Prince George's County cannot simply tax itself out of last place in the region. Instead, its leaders need to become better stewards of the public's trust and the public's resources. The county's transit-rich gateway neighborhoods are economic engines ready and waiting to be fired up, but county leaders have to ignite the switch.

Prince George's must get serious about revitalizing its old streetcar suburbs. These vital neighborhoods can't be left to languish for another generation.

Crossposted on Prince George's Urbanist.

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