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Modeling the True Cost of Developments

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Modeling the True Cost of Developments

Skyline view of Madison, Wisconsin
Madison’s officials have long advocated building compact, walkable communities in the city’s downtown, which sits on an isthmus between Lakes Mendota and Monona.

The dispersal, density, and connectivity of new homes and businesses within a community influence both the cost of providing services to those homes and businesses and the tax revenues they generate. On April 6, 2015, in Madison, Wisconsin, presenters from Smart Growth America unveiled a new fiscal impact model, developed in partnership with the real estate advisory firm RCLCO, to better understand the effects of development density — the number of homes or businesses per acre — on cities. Traditional fiscal impact models estimate the costs and revenue of a development using an average cost per resident or employee without considering the density of units. Thus, according to these models, a suburban community of single-family homes on 5-acre lots is assumed to have the same impact on municipal budgets as a community with the same number of homes on half-acre lots. Research has shown, however, that low-density development with poor transit connections costs cities more per person than compact development with multimodal transportation options. “All else being equal,” says Chris Zimmerman, Smart Growth America’s vice president for economic development, “more compact development imposes a smaller cost burden on local governments….[B]y developing in a more compact fashion, we use land more efficiently and we maximize the revenue yield per acre, which helps our budgets.”

Elements of the New Model

The new model focuses on six municipal services: roads, water/wastewater, stormwater, fire protection, school transportation, and solid waste collection. Smart Growth America and RCLCO determined that the cost to provide these services had an obvious and measurable relationship to the density of homes and businesses within a development. Road construction and maintenance costs decline on a per capita basis as density increases, explains Patrick Lynch, Smart Growth America’s research director, because “[i]f you have a lot of people for a given length of road, then you are using that [road] more efficiently, so the average cost per capita should be lower.” Water/wastewater and stormwater services operate similarly. Low-density developments have more water, sewer, and stormwater pipes to maintain per capita, which increases costs. Stormwater management is also closely tied to roads because larger areas of impervious surfaces, such as roads and parking lots, require more stormwater pipes.

The costs of fire protection and solid waste collection are influenced by the amount of time it takes for a truck to complete a given task. For example, a truck in a low-density community will take longer to travel between locations and burn more fuel to collect the same amount of trash as a truck in a compact community. Similarly, low-density neighborhoods will need more fire trucks than higher-density neighborhoods to cover the same number of people while maintaining the same response time, all else being equal. School transportation is also affected by travel time and distance; the more dispersed students are, the more costly it will be to transport them to school. Compact and walkable communities foster walking rather than bus. For example, says Lynch, a community in Madison, Wisconsin with a density of 12 units per acre could support a high school whose students all reside within walking distance.

Density also affects the amount of tax revenue a municipality collects in two ways. First, as the number of taxable homes and businesses per acre increases, the tax revenue generated per acre will also increase. Second, Smart Growth America and others have found that density can create a walkability premium — an increase in the value of each square foot of a unit in a pedestrian-friendly community. Studies of cities such as Washington D.C. and Boston have shown that individuals are willing to pay more for homes with amenities accessible by foot.

Madison Case Study: The Pioneer District

Katherine Cornwell, planning director for Madison, Wisconsin, believes that the city, whose population is nearing 250,000, is poised to attract new residents and accelerate its rate of growth. In 2014, the city added 2,038 new dwelling units and $344 million in new construction. Over the next two decades, Madison expects to grow by 16 percent, adding 40,000 new residents. With its downtown hemmed in by two lakes, the city has been forced into dense, compact development. Moving forward, the city hopes to maintain this development pattern by organizing new growth around activity centers that are linked to each other and to the city’s downtown through new bus rapid transit lines. Madison does not want to “wantonly grow,” says Cornwell. “We want to make sure that every investment we make in infrastructure — the way we house people — leads to [not only] economic performance but also health [and] happiness.”

Smart Growth America tested the model for Madison by comparing a compact development scenario to base-density and low-density scenarios for the Pioneer District, a largely vacant tract of 1,400 acres that the city is considering redeveloping. The three scenarios assumed 4,779 total residential units and varied the total acreage used. The low-density scenario, at 4.1 units per acre, represented the highest annual cost to the city ($14.3 million in services) and generated the lowest amount of revenue per acre ($6,500). The base-density scenario, at 9 units per acre, would cost the city approximately $13.4 million in services and generate about $11,000 in revenue per acre. The compact scenario, at 16.2 units per acre, had the smallest impact on the city’s budget ($12.7 million) and generated the most revenue per acre ($16,000).

The differences in the net impacts of these scenarios are significant, with the low-density scenario generating a net revenue of $550 per acre for the city and the base scenario generating $1,100 per acre. Compact development would double the base scenario’s net revenue, reaching more than $2,200 per acre. If the city increased the total number of units by 50 percent and maintained the total acreage used in the compact scenario, it could realize nearly $3,000 per acre in net revenue annually.

Making the Case for Compact Development

Although Madison has generally strived to get the maximum density and efficiency from each parcel of land, “that’s not good enough,” says Paul Soling, Madison’s mayor, because the city has been unable to determine which policy is most effective or how to maximize the infrastructure that accompanies development. City officials believe that this new fiscal impact tool will help them better understand the costs of new development and, in turn, make it easier to advocate for compact development and investments in regional transit. Although low-density development with poor transit connections has been shown to be more expensive for cities than walkable communities, fiscal impact models do not usually account for the density and compactness of a development. The new fiscal impact tool from Smart Growth America and RCLCO demonstrates how density affects financial costs. Properly accounting for density’s impact on city services and revenue may make walkable communities more feasible.

A webcast of the presentations, along with a summary of the model’s methodology and the Pioneer District case study, can be found here.