Real Estate Economics

in Urban Design:
The Role of Civic Economics in Place-Making

© 2004 Michael von Hausen MLAUD, MCIP, CSLA

President, MVH Urban Planning & Design Inc., Vancouver, British Columbia, Canada
vhausen@telus.net or www.mvhinc.com

Connecting Urban Design and Urban Land Economics.

Prepared by MVH Urban Planning and Design, Inc. for the Urban Design Certificate Program
The City Program, Simon Fraser University www.sfu.ca/city September 2004

With financial assistance from The Real Estate Foundation of British Columbia
CONTENTS

Preface……………………………………………………………….……….……..1

Summary…………………………………………………………..……….………2

Introduction……………………………………………………………….………3

Fundamentals of Urban Design Economics………………….…..……5

10 Principles of Urban Design Economics……..………………….….7

14 Value-Added Urban Design Features..………………………..…..8

Net Neighbourhood Economic Gain (NNEG)………………....…….9

Financial and Policy Incentives……………………………...…………10

Urban Design Economics Checklist…………………………….…….12

Conclusions……………………………………………………………….….13

Bibliography and Further Reading…………………………………..14

 Preface

I have worked in land development, finance, and urban design for 25 years. I have always pondered the
idea of a better way to look at traditional real estate economics beyond serving only the developer and
investor. Real estate financial analysis is slanted that way. Justification for that approach is that it is
primarily private sector profit driven based on ownership and property rights. The physical results,
especially in the longer term, are not always positive as short term cost factors in most cases favour
short-term gain. The surrounding neighbourhood suffers by this approach frequently with limited benefits
and local government more often is caught with the costs of longer-term growth. Recently, the winds
have shifted slightly in better favour of local governments as they are getting more involved and
neighbourhoods take a more active interest in their future.

The issues we face in transforming this traditional approach include:

 Measurement: Are we measuring the right things that really matter to the community or just
business or private interests (e.g., increase in residential units, commercial space, building
permits versus air quality, safety, design quality, and open space increase)?
(See Northwest Watch, Cascadia Scorecard 2004; This Place On Earth 2002: Measuring What Matters;
www.northwestwatch.org)

 Complexity: How do we simplify or transform the seemingly complicated private sector real
estate model so that the municipality or regional district, urban designers, other professionals,
and residents can understand and benefit from that perspective as a tool in urban design and
planning?

 Value: How do we better communicate the value of urban design and policy beyond design and
planning concepts that are perceived in many cases to hinder more the real estate process than
benefit it?

 Equity: How can we still be fair to the developer who takes the risk, yet respect the immediate
and longer term needs of the local government and neighbourhood?

An Urban Design Economics approach outlined in this discussion is not meant to erode private profits,
nor complicate things further, but to create a more diverse definition of profit and gain that can be shared
with the local government and the surrounding community. The actual Return on Investment to the
investor would not necessarily be decreased as the value-added cooperation would enhance the return to
all those involved.

We are facing many challenges in sustainable urban design and many of these are rooted in our classic
economics approach that exploits natural resources without considering the longer-term implications of
our actions. There are no easy answers as this approach has been engrained in many of our business
and real estate processes. However, it is time to reevaluate this approach to craft a more equitable and
robust approach that better balances site and neighbourhood interests.

About the Author

Michael von Hausen is President of MVH Urban Planning & Design Inc., an international consulting practice
in sensitive land development planning, sustainable urban design, and community partnerships in Canada,
United States, and Mexico. He brings 25 years of teaching and working across North America in the areas
of land development planning, finance, and urban design. He is the chief instructor and curriculum
coordinator of the award-winning Urban Design Certificate program at Simon Fraser University. Michael’s
expertise includes urban development economics, alternative development standards, integrated
neighbourhood design, community ecological planning, and sustainable urban design. His graduate work at
Harvard University specialized in real estate development economics and urban design.

Urban Design Economics page 1

 URBAN DESIGN ECONOMICS
Building VALUE in Community Design
“The very beauty that attracts him who has money makes pleasant the life of those among whom
he lives, while anchoring him and his wealth to the City.
- Daniel Burnham, Plan of Chicago, 1909, page 8.

Summary
There is wealth, value, and wisdom in good urban design. The fundamental difference from conventional
real estate economics is that urban design economics should involve more than the private sector’s
primary profit motive. Local government and community should also play a prominent role in a truly “civic”
design plan that takes into consideration public motives as well. This more robust, inclusive, and holistic
approach should lead to greater local “ownership” and pride, a more inclusive design process, better
design, and higher overall returns to the developer, the local government, and the community.

Simply, in true place-making terms, good urban design fits its site and its surroundings. The result –
better fit, more efficiency, and improved return on investment. This type of good urban design should not
only contribute to the short-term business motives of the developer but helps finance longer term
necessary services and amenities that go along with expanding the community. This is what I refer to as
the Net Neighbourhood Economic Gain (NNEG) approach to urban design. This means that the
neighbourhood is better off after development than before. The urban designer, or at least one member
of the urban design and development team, has to be well informed to assemble and coordinate the
multiple interests involved in urban development.

Traditionally, there has been a significant gap between the financial analyst and the urban designer. That
gap is closing slowly, as many professionals are realizing design and the strategic thinking around it are
critical building blocks in the return on investment equation. Simply, everything is connected to everything
else. Urban design elements such as land use, building form and intensity, road design, ecological
planning, landscape sensitivity, lot design and infrastructure planning are all cost and value components
in the financial analyst’s cash flow analysis. Moreover, these elements directly affect real estate
appraisers analysis of location, use, proximity, visibility, accessibility, density, and other factors affecting
real estate value to the investor and tax assessment for the municipality.

This discussion will focus on the economic aspects of urban design. Although, the social/cultural and
environmental aspects will be touched on as spin-offs of economic benefits, they will not be dealt with
directly. Detailed financial analysis will also not be included but touched on in terms of concepts and
principles. Three major aspects of urban design economics will be discussed:

1. Urban Design Economic Fundamentals: These fundamentals will include issues around profit
and equitable distribution, risk assessment and opportunity cost, investment analysis and return
measurement;
2. Ten Urban Design Economic Principles: These principles will reinforce the understanding of
urban spatial economics and urban design through the clear definition of time-honoured concepts
that will serve well as a continuing reference in formulating urban design economic strategies;
3. Net Neighbourhood Economic Gain Analysis (NNEG) Tool: The NNEG approach will be
outlined in detail to take the fundamentals and principles one step further for practical application.
This analysis tool offers a method to measure a project against specific economic criteria and
interests of the private sector, local government, and the neighbourhood. Finally, financial
incentives for development will be discussed to create necessary counter measures to urban
sprawl and unsustainable urban design. A checklist on page 12 (UDECONlist) will conclude the
discussion to help analyze urban design projects from an economic perspective.

The objective is to move us as a community to higher common ground where the interests of the private
sector are considered in tandem with the interests of the local government and the surrounding
neighbourhood. These efforts will hopefully result in a broader-based wealth where real estate
development still satisfies or actually improves its profit but also contributes a much richer profit in the
form of improved health and sustainability of its surroundings whether it be in village, town or city.

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 Introduction

“Both public and private participants in real estate development share compelling reasons for
understanding the development process.”
- Miles et al. Real Estate Development: Principles and
Process, 2000, p. 3.

Urban Design Economics Defined: Urban Design Economics is the management of scarce real estate
assets that involves not only the developer but also local government, and the surrounding community.
Any development should add value to the community in the short and long term. Highest and best use is
modified to become “Most Appropriate Use”, providing reasonable return on investment to the developer
and necessary returns to the community. Short-term profit is balanced with long-term needs. Profit is
defined on a broader basis and becomes more than one-sided. It is measured from multiple perspectives
or the “triple bottom line” – social, environmental, and economic that measures the full costs of
development. The collective community benefits define the “Return on Investment” in urban design
economics.

Why Should We Care? There are a number of fundamental reasons why we should care about and
learn more about urban design economics:

1. Financing Growth: Municipalities are facing drastic federal and provincial cutbacks in their
capital budgets, infrastructure repair, and replacement. Cities like Vancouver, British Columbia
are developing further vehicles to finance community infrastructure including CAC (Community
Amenity Contributions) that share in the increased value associated with rezoning property to
help finance long term growth.

2. Infrastructure Deficit: In 1995, the Federation of Canadian Municipalities estimated the shortfall
in infrastructure repair (deficit) was $45 Billion. With inflation, that estimate should now easily be
in the magnitude of $50 to $60 Billion telling us simply that we can not afford to build our cities in
the same old way that is wasteful, inefficient and unsustainable.

3. Public Policy Sensitivity: In some instances, public policy and regulations do not create the
desired urban form or any development at all. Without an understanding of real estate
economics, good policy intentions can translate into negative unintended consequences. An
example is bonus density zoning and height relaxations to allow high-rise residential development
that encourages historic preservation in return for additional residential units. When there is no
demand for high-rise residential construction and only for low-rise residential construction, the
policy has no effect on the market and revitalization does not occur. In this case, the developer is
given something that makes no difference to the development decision.

4. Neighbourhood Orphan: Normally, the community or surrounding neighbourhoods are largely

left out of the financial equation, yet they are having much more political influence on
development approvals. There are opportunities to create “Net Community Gain”, where the
development’s goal is to improve the community in economic, environmental, and social
components, rather than undermining its value.

5. Value-Added Urban Design: Finally, there are some important urban design elements that add
significant value to the real estate development process and its product:
a. Public realm street and open space improvements;
b. Stronger financial and in-kind partners in associated projects;
c. Visualization of the site and context potential;
d. Safety and security design;
e. Civic improvements to social and recreational facilities; and
f. Sensitivity and fit with the adjoining neighbourhood.

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Why Should We Care?
Real Case 1: Equity in Development - Financing Affordable Housing. A municipality requested
$650,000 cash-in-lieu from a developer as a basis to support a 20% non-market housing policy. The
$650,000 was determined on the value of development; in this case a 26-unit townhouse development.
The developer responded by saying they could only afford $26,000. A municipal consultant hired to
evaluate the numbers found that the developer had grossly inflated the construction costs and that the
developer could more than cover the $650,000 municipal request while still assuming a reasonable return
on investment and equity. If the municipality had not done their due diligence and tested the developer’s
case, the municipality would have likely negotiated something much less and short changed the
community surrounding the development.

Questions:
1. What is a reasonable contribution by the developer?
2. Did the neighbourhood get enough benefits?
3. Does this request work in a declining economic environment?

Value Based Urban Design Economics Process and Logic Diagram

The purpose of this diagram is to simply illustrate how urban design quality can affect real estate profit
through the real estate development process.

1. Quality = Value
2. Value = Demand 1. Quality = Value DesignValue
3. Demand = Sales
4. Sales = Profit
5. Profit = Satisfaction

2. Value = Demand

3. Demand = Sales

4. Sales = Profit

Value returned
5.*Profit = Satisfaction to Investors and
Community
*PROFIT is defined as
broad based contributions to the community as well as the return to investors.
Profit also includes the “real costs” (full cost accounting) of the environmental
and social components affected by development and the benefits accrued from
development.

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 Fundamentals of Real Estate Economics

Understanding the basic economics of urban spatial form is important. Concepts like location, timing,
highest and best use, and risk analysis are the drivers for real estate investment and value.

Location and Value: Location generally determines land value. Often, the farther away from the city
centre, the lower the land value. The value of the property is also determined by its allowable uses
and density. In American cities this concept is not always the case because of inner city conditions.
Likewise, some rising “edge cities” and regional centres across Canada and the United States are
fetching similar or higher land prices than downtown because of their proximity to transportation,
excellent services, the concentration of jobs, and increased development density allowances.

Location Fundamentals in Real Estate Development

Real Case 2 - North False Creek Designed Value Case Study.
Renowned architect Arthur Erickson will create a “centerpiece” building for the North False Creek
Development in Vancouver. The 20-story waterfront building will showcase units of 2000 square feet that
will sell for $2 million or more that $1,000 a square foot. Arguably, these units will be the most expensive
in Vancouver. The unique twist is that the floor plate rotates several degrees on every floor creating a
unique curve. The buildings design also creates significant complications in the construction and cost of
the building. This example illustrates the value of creative urban design by a renowned architect on a
unique site. The building is to be a centerpiece for the 200-acre whose design will probably add value to
other buildings surrounding it, reinforcing that good design sells and adds value to the surrounding units,
noting that the developer - Concord Pacific, is expected to commit 20% of the units in the entire
development to non-market housing. To date, they have almost seamlessly integrated some of the mid-
rise non-market housing developments into the North False Creek landscape.

Questions:
1. What determined the value of the units?
2. How does the urban design add to the value of a building?
3. What role should the community and city have in the development?
4. Will the value of this asset go up over the long term?

Highest and Best Use Analysis: The concept of highest and best use is based on the use that can
provide the highest profit in the shortest amount of time with the least risk. It is very important in real
estate appraisals that consider location, market demand, and comparables among other things in
assessing real estate value. Unfortunately, this analysis does not take into consideration the social
and environmental aspects of the investment. It tends to exploit a site’s real estate resources rather
than look at the complete neighbourhood and its context.

Market Demand, Changing Economies, and Demographics: Reading the market is very
important in any business. Supply and demand for different land uses and types of buildings,
finishes, and ownership (freehold, strata, lease, and rent) is a fundamental economic concept. It
means that if land supply is low and demand for housing or other uses is high it will push the price for
that commodity up. Conversely, if land supply is high, demand declines and so does the price.

The emerging new economy or “third wave” is knowledge and information based; technology and
communications intensive; and globally connected. These trends are defining new and ever-
changing markets. The rise of the “City States” as competitive worldwide centres is growing, less
dependent on a provincial or national connection. “Silicon Valley North” - a high technology region in
Kanata, Ontario just west of Ottawa, is a prime example of this trend. This trend is also reflected in
the recent amalgamations of municipalities around Montreal, Ottawa, and Toronto. In urban design
terms, this is reflected in the rise of flex-space design for high growth high-tech companies, home-
based businesses, 24/7 services that support business 24 hours a day, and smart transportation such
as interconnecting airports with light rail transit and express bus systems.

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 Demographics (population trends and characteristics) are also very important to determine market
demand for a specific real estate product. The maturity of the baby boomers has created an aging
population and different lifestyles. These lifestyles and the trend towards smaller families have
created demands for smaller housing units and different design features. The focus on customer
needs and future trends are very important to ensure that the urban design fits the future population
or is flexible to respond to the changes.

Is it worth the Time and Effort - Opportunity Costs: Another fundamental economic concept is
“Opportunity Cost” or what are the costs of investing in this parcel of land versus another investment.
A good illustration of this concept is the opportunity cost of going to university is the lost income and
the cost of the schooling measured against the value added to you income and knowledge in the
longer term. In real estate, the opportunity cost of investing and holding raw land as compared to an
income property is the lost income from the income on the rental property versus the capital
appreciation of the land.

Profit Measurement, Risk Assessment, and the Bottom Line: Conventional bankers measure risk
factors that affect profit and determine the “bottom line”. The “bottom line” is the profit or yield on a
project. This profit is based on projected financial performance compared to their industry standards.
Their financing standards might vary from 15 to 30 percent return on equity (the amount developer’s
investment) based on the risk assessment of the project.

Some financial institutions like pension funds, have a very low cost of money (interest rate), so they
can reduce returns to 8 to 10 percent return on equity in very low risk real estate investments such as
an office building with long and secure tenant leases. Alternatively, the ultimate comparison is
against non-real estate investments. A good illustration of this concept is in the early 1980’s with
banks offering 10 to 15 percent returns on GIC’s and other similar investments with little or no risk
and high relative returns. Many investors chose the low risk route, while some real estate investors,
feeding on inflationary real estate pressures, went for the big return and lost in the real estate
collapse of 1983.

Short Term Returns and Sustainable Urban Design

“Hawaiians have 138 different ways to describe falling rain, we use two words for profit – gross
and net. Business does not discern quality from quantity in profit.”
– Hawken, The Ecology of Commerce, 1993.

The definition of profit should be expanded to other aspects of “gains”, both in the short term and long
term. Research in the New Urbanism movement, has compared short term gains of conventional
suburban development to the longer term higher gains of new urbanism developments. It was found that
the quality of the neighbourhood and associated amenities added significant value to properties over
time.

Source: Chris Leinberger, Arcadia Land Co.

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 Normally the tolerance for return and exit from a project is five to ten years in residential and some
are retained as commercial lease properties. Simply, businesses and banks want to get their money
out of a project as quickly as possible unless they want retain to it as a longer term “income property”
like a shopping centre, office building, industrial property or residential building.

Real Case Study 3:

Trump Tower, New York - Value in Urban Design?
Donald Trump is the developer of all developers. Seen as aggressive, outspoken, and arrogant by many,
I learned one thing recently visiting the Trump Tower in New York and the future site of the Trump Tower
in Chicago. He knows how to create quality and associated perceived value in urban design. His use of
location, design features, and visibility are some of the keys to his success. The pink marble, mirrors, and
brass finishing might seem a bit excessive, but the development makes its own collective quality
statement. From the public accessibility, to the door attendant, and the public washrooms, a seamless
theme of quality prevails. The one lesson: detail in urban design is necessary to define value.

Questions:
1. What are the weaknesses in this argument?
2. How could this development contribute to the sustainability and social equity of the surrounding area?

10 Urban Design Economic Principles

1. Location, Location and Timing: The importance of location and timing cannot be
overemphasized. A 100% corner means that the site has access, visibility, and demand for the
proposed use. Without location, there is little necessity for the land use, unless you create your
own image and your own market such as a unique resort or a destination retail use that has the
critical mass to attract consumers by itself. Timing is also very important. If the demand changes
for the specific demographic target market (age, lifestyle), then the market could dissolve with it.

2. Profit Driven: Real estate development is a business. Like all businesses, it is primarily profit
driven. Without profit, there is no motivation for the bank to finance future developments.

3. Time is Money: The cost of money is critical to the development finance equation. A time delay
in approvals or construction of one year on a loan of $2,000,000 at 10% means a $200,000 cost.
That is why developers are very concerned about the timing for development approvals.
Approvals can vary, from as little as a few weeks for “outright” applications that require no policy
amendments and are permitted under existing zoning, to one to five years for complicated
rezoning applications.

4. Leverage is the Name of the Game: As the saying going- “always use someone else’s money.”
This means that the normal ratio of equity (your own money) 25% to borrowed money 75% is a
leverage ratio of 3:1, meaning you borrow three dollars for every dollar you commit in a house
purchase.

5. Quality and Design Sells: The 1930 design of the Empire State Building in New York City
provides light to all offices, setbacks of upper floors creates quieter offices, and more corners on
the building provides opportunities for more corner offices. William Lamb, the architect, under the
direction of one of the partners Jacob Raskob, maximized the building’s quality and at a height of
1250’, differentiated the Empire State building from any other building in New York City in what
was perceived as a marginal location. Details in design count. Higher quality can lead to higher
rents or sales price but care has to be taken to build to the consumer needs, otherwise it can be
wasted in unappreciated details that do not make a financial difference.

6. Know Your Market: All real estate markets are becoming more complex and sensitive,
especially as consumers become more informed. The developer has to know the consumers’
preferences and changing demands in order to design the right combination. Sometimes the
“window of opportunity” can slam shut very quickly without a close monitoring of supply and
demand.

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 7. Form Follows Finance: Financial institutions and companies like Hyatt, The Bay, Home Depot,
MacDonalds, and Wal-Mart have very specific design and site planning specifications based on
success in the past. Parking ratios, floor plate sizes, building orientation, and servicing all play
critical form-maker roles in urban design. Any deviation from these standards is considered risky.
.
8. Know Your Partners: In every development, the local government and developer have to work
together in developing the public and private parts of the development. The surrounding
communities are also playing an ever-increasing influential role in approvals and urban design
form. It is important for each of the stakeholders to know and appreciate the others goals and
needs to negotiate an equitable agreement.

9. Land Price as a Critical Success Factor: The land price is critical to the profit possibility in a
development. It helps determine the future price of the housing, commercial development or
other type of development and the profit potential of the project. If the land price is too high there
is little or no profit. If other cost factors like construction costs increase, profit decreases. In other
words, a high land price combined with project cost fluctuations can easily lead to project failure.

10. High Risk Should Mean High Return: Measuring the degree of risk and required return for the
risk is a tool financial institutions and other investors use in determining the minimum return on
investment. For example, Guaranteed Investment Certificates (GIC’s) at a local bank backed by
Government of Canada Treasury Bills are perceived as low risk and therefore vary from 3% to
4% on average. Whereas, a real estate investment could require a minimum 15% on equity
(developer’s investment) and a 30% on investment (cost) as a basis to proceed.

14 Value –Added Urban Design Features

1 Be Visible: Do not plan retail above or below ground level or in obscure areas since it affects the value.

2. Provide Easy Access: Easy access is critical to retail and office success.

3. Go with the Natural Flow: Designing with the land (topography, natural features, vegetation) adds value, wastes
less, and saves money in infrastructure and construction costs.

4. Design the Details: Kitchen and bathrooms are critical aspects of value in a house as are street trees, street
widths, nature trails, parks, and other public spaces.

5. Design a Community not a House: The amenity and service package are value-builders.

6. Think Two Sides: Retail can have two fronts, not just a front and a back; Roads should be developed on both
sides with economic assets that add value including parks.

7. Maximize Use: Consider a 24-hour cycle for every parcel of land.

8. Make Every Parcel of Land an Asset: With appropriate design main roads, dynamic parks, and adjoining
commercial uses can be valuable assets in the community with minimum nuisances.

9. Create Multiple Uses: Program streets for multiple users, create flex-parks that accommodate multiple users and
age groups, and create multiple possibilities for community facilities.

10. Promote Green Development: Minimize unnatural infrastructure –pipes and roads, in order to save costs.

11. Encourage Compact Communities: Clustering and concentration creates savings.

12. Provide Proximity: Distances to services and amenities make a difference in consumer demand.

13. Create Eyes on the Street: Surveillance is important to the perception of safety and security.

14. Be Flexible: Design for flexibility to respond to changing markets and specific demands.

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 Net Neighbourhood Economic Gain (NNEG)
Urban Design Project Analysis Tool #1:
P3 + N= NNEG
(Public/Private Partnership + Neighbourhood = Net Neighbourhood Economic Gain)

The simple but complex goal of the Net Neighbourhood Gain concept is to improve the surrounding
community with each additional development. This means that each development should contribute
something to the improvement of the neighbourhood beyond residential units, commercial space or other
internal interests that can actually detract from the character, values, and longer term interest of the area.

In this case, we look at the potential project and its fit from an economic analysis basis. We individually
analyze three separate interests – public sector (local government), private sector (developer), and
community (neighbourhood). Normally, the interests of the private developer are only measured in
terms of return on investment and associated risk. We should also consider the local government and the
neighbourhood interests in terms of value and potential benefits or losses.

3D Cost Revenue GAINS TOTALS: RETURN ON

ANALYSIS LOSSES GAINS LOSSES INVESTMENT
Short/ Long Term
Private Sector Hard Costs Land Sales Value ROI (short)
(Developer) Return on Investment
Soft Costs Unit Sales Sales
NPV (med.)
Time Costs Rent Rent Net Present Value
(current value of future
cash flow)

Image/Place
(long term- next
development)
Public Sector Roads/Land Levies Residual Net Losses
(Local Land Value Infrastructure
Government) Services Taxes Taxes Schools, fire, police,
Other local services
Value Spin-offs Net Gains
Taxes
Triple Bottom Other revenues
Line Services, Community facilities
(social, Public Non-market housing
environment, and Amenities,
economic) Ecology Place (long)
Community Services Amenities Quality of Life Net Losses
(Neighbourhood) Index Parking, traffic,
Traffic Services character, taxes

Value Value RE Value Net Gains

Real Estate Values
Triple Bottom
Line Services, Place (long)
(social, Public Livability, capital
environment, and Amenities, appreciation
economic) Ecology
EVALUATION SUMMARY COMMENTS: Red (stop!); Yellow (check); or Green (go)?

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 Financial and Policy Incentives
Many of the recent financial incentives for development emerged from declining cities in the United States
in the 1960’s and 1970’s. In the 1950’s, “Urban Renewal” took hold as a means to revitalize American
cities with limited results, especially since the concept was to remove the existing buildings for new
buildings, similar to clear-cutting a forest. Everything goes, including the intricate social web that existed
in the neighbourhood. The result was generally regretful as many families were uprooted and moved to
new or other neighbourhoods. The classic example areas of Brooklyn and Lower Manhattan in New York
City that were removed in favour of new housing and road works under the direction of Robert Moses.
This was unlike how the famous Avenue des Champs-Elysées was created in Paris when Baron Eugene
Haussmann removed in 1853 a huge swath of existing buildings in favour of the grand boulevard. One
wonders what public outcry both Haussman and Moses faced, however, it was generally overcome by a
top-down decision-making process that favoured largely city interests over local interests and
participation.

Out of the early 1960’s Jane Jacobs emerged with her seminal work The Death and Life of North
American Cities that harshly criticized the “bigger is better trends” and the destruction of established
neighbourhoods with the intention of curing more complex social and economic ills. As people fled in
droves to the suburbs to escape the civil unrest and racial tensions of the inner city, local governments
thought of creative ways to make the inner cities more attractive and to save the important buildings
through historic preservation measures.

Other indirect financial incentives also emerged to make the public realm more lively and safe through
“Bonus Zoning” or “Incentive Zoning”. Many of these incentives originated in the 1961 Zoning Ordinance
of New York City. As a result, numerous plazas were designed in return for additional density with very
limited results. The plazas in Manhattan generally were not located near or connected to transit, had very
limited public amenities, were not interlinked and were not properly oriented for sunlight and safety. The
Seagram Building on Park Avenue built for Canadian interests by the famous Modernist architect Mies
van der Rohe in the early 1950’s and One Liberty Plaza across from the former World Trade Centre site
are examples of those limited urban design solutions.

Seagram Building and Plaza, New York City

The results created empty plazas as illustrated above and significant financial returns to the developers.
Further analysis in the 1980’s revealed these inequities between public and private benefits. Research in
the 1970’s by William Whyte, author of The Social Life of Small Urban Spaces, created more livable
green spaces (movable chairs) in plazas but did not remedy the fundamental design and location flaws.
In Canada, financial tools have been very limited, since the same extreme inner city conditions did not
exist at the same urgent scale as in American cities. What did emerge was “discretionary zoning” in cities

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like Vancouver that provided additional bonus density in return for including specific uses such as
residential space above commercial ground floor uses.

The following section summarizes some of the direct and indirect financial incentives used by local
governments to pay for community amenities, services, and cultural services. Alternatively, these
financial and policy tools are used to create incentives to redevelop underutilized or depressed areas.
Some of the examples are adopted from the United States but provide possible tools for Canadian
municipalities.

Direct Financial Incentives

Tax Abatement or Deferral: Tax abatement or deferral reduces the amount of taxes on a property or
deferred them until a future date. This program is popular in the United States where depressed areas
need to be revitalized. The problem of equity arises if other similar users pay more and therefore create
unfair advantage.

Development Cost Charge Credit: A development cost charge credit to the developer can reduce costs
in situations where the required improvements are already provided on site or are provided in a form that
reduces off-site requirements. An example of this credit is where a on site stormwater detention pond
provides no run-off and therefore the off-site upgrade or replacement of stormwater pipes is not required.

Cash in Lieu of Parking and Park Space: The developer instead of providing parking or park space on
site provides cash. The money is collected and pooled for upgrading, acquiring, or developing other land
in the area for those purposes.

Tax Increment Financing (TIF): This tool has been used in the United States to finance developments
in depressed areas of cities. Tax Increment Financing (TIF) uses the concept of the future increment in
tax increase associated with improvements to help increase the financing on the property.

Transfer of Development Rights (TDR): Transfer of Development Rights is another vehicle used in
Canada for historic preservation and conservation of sensitive environmental areas. The development
rights of part or the whole property is transferred to the balance of the property or to another site.

Accelerated Depreciation (Historic Preservation): Tax concessions have also been popular especially
in the United States. Accelerated depreciation of the capital asset (e.g., building and improvements) has
been used to increase the attractiveness of retaining heritage buildings, increasing the after depreciation
benefit and cash position of a property in the short term.

Indirect Financial Incentives

Bonus Zoning: Bonus zoning provides increased floor space in return for desirable uses that are
encouraged in the area. The City of Vancouver encourages residential uses over ground floor
commercial uses especially in neighbourhood centre areas to encourage increased activity and a safer
community.

Discretionary Zoning: Similar to Bonus Zoning, Discretionary Zoning allows other uses under specific
conditions that are fulfilled by the development but does not necessarily provide additional density.

Comprehensive Development Districts: Comprehensive Development Districts or Zones are also

becoming a more common tool to enable custom solutions that allow mixed uses, and other land uses
that would not normally be permitted.

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Urban Design Economics
 Urban Design Economics Checklist
Urban Design Project Analysis Tools #2 and #3
There are four building blocks that help us gain a better understanding of Urban Design Economics:
market forces, financial analysis, design value, and partnerships. The following four building blocks and
checklist provide additional tools to analyze an urban design proposal from an economic perspective.
Market Forces: Location, supply and demand, trade areas, demographics, market niches, image,
context, timing, and approvals.

Financial Analysis: Risk analysis, revenue and costs, static and dynamic cash flow analysis, the time
cost of money, land use value, rezoning and value, and most appropriate use.

Design Value: Spatial configuration, access, proximity, safety, details, function, visibility, quality, comfort,
sustainability, and the green factor.

Partnerships: Individual stakeholder goals, accountability, responsibilities, equitable distribution of

benefits, financial risk, and rewards.

Economic Urban Design Checklist (UDECONlist)

A. MARKET ANALYSIS and CONTEXT ANALYSIS
1. Supply and demand: land uses, units, sizes, trends, and gaps
2. Niche markets: smaller potential market areas that fit the neighbourhood (custom fit)
3. Demographics/trend lines: growth, age, size of family, income, and other characteristics
4. Comparable products and community contributions
5. Market segmentation in pricing, quality, and product differences
6. Land/housing trading prices and future sensitivities
7. Absorption rates of housing units, commercial space, industrial space and other
8. Scenarios: What if something different happens than the predicted trend, how can we respond?
9. Competition coming on line and the effect of timing on our product
10. Planning policies both current and future: How will public policy like densification affect our product?

B. URBAN DESIGN ECONOMICS

COSTS
o Hard costs
o Soft costs
o Fixed/variable costs
o Sensitivity Analysis of increases and decreases in costs
o Special Costs/Contamination/Off-Sites
o And other levies;
REVENUE
o Price structure
o Absorption rates
o Sensitivity analysis of increases and decreases in price and revenue
RETURNS
o Risk/return ratio (RRR): Concept of degree of risk or potential downsides to project
o Comparable Value (CV) and Capitalization Rate (CR): Ratio of cash flow to sale price of
comparable income producing property
o Return on Revenue (RR): Return on the revenue generated on from project compared to equity
investment or total investment
o Return on Equity (ROE): Return of money invested (Return on cash)
o Return on Investment (Project Cost) (ROI): Return on total cost (soft and hard costs as well as
equity and financed portion)
o Internal Rate of Return (IRR): Cash flow and present value of future sale and cash flows.
o Net Present Value (NPV): Discounted cash flow of development over time
o Net Neighbourhood Economic Gain NNEP: Facilities, land, and other contributions

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Urban Design Economics
 CONCLUSIONS
Good urban design and smart urban design economics have the potential to draw further wealth, wisdom
and value from development. The developer, local government, and the neighbourhood all have
important roles in urban design economics in order to create a net gain for everyone. Naturally, this is
somewhat of an ideal, however, it serves the seeds for new thinking and an enlightened perspective. The
developer does not have to be the “bad guy”. The neighbourhood does not have to be the developer’s
biggest nightmare and local government can be a facilitator to seek the goal of “Net Community Gain”.

Care has to be taken in the use of the term “public/private partnerships” especially since these past so-
called partnerships have resulted in some instances in lopsided gains to the private sector, and long-term
liabilities to the public sector, or disaster to all parties involved. If we truly want to create “partnerships”,
they have to be better balanced. This balancing act should be extended to looking at longer-term benefits
such as life cycle costs that truly engender sustainable urban design. Through tools like the Net
Neighbourhood Economic Gain (NNEG), a better balance can be created. Through the process, the
partnership and associated goals are better understood from the onset so that results are more
consistent. Otherwise, the traditional perception (not necessarily the reality) that the developer wins all
prevails. The shared responsibility comes from informed and educated parties as to what the others
interests are and then satisfying those interests to the extent possible and reasonable.

In order for this to happen, three barriers have to be eroded by the three parties involved:
1. Developer (private sector): The perception that the developer wins all at the cost of the
neighbourhood and the city’s long term growth needs;
2. Local Government (public sector): A more aggressive and proactive stance of local
governments to check the private sector numbers against growth needs and to better balance the
equation; and
3. Neighbourhood (local community): A conscious effort to educate and inform neighbourhoods
as to what is fair to ask for and have them inform the process as committed owners in the area.

In sum, the job ahead is significant. With an enlightened approach to urban design economics, three
parties are genuinely engaged in the development process. The results can be a richer and more
enduring urban design with more involvement and accountability by all parties involved. Let us look
forward to a more powerful and lasting common ground that provides greater returns for all involved.

Summary Concepts to Remember

 Net Neighbourhood Economic Gain (NNEG): Better Off in the Longer Term
 3D Urban Design Economics: Developer, Local Government and Community
 Value-Added Urban Design: Efficient, Inclusive, and Long Lasting

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Urban Design Economics
Bibliography and Further Reading on Urban Design ECONOMICS

Beck, N. Excelerate: Growing in the New Economy. Harper Perennial edition, Toronto, 1996.

Beatley, Timothy and Kristy Manning. The Ecology of Place: Planning for Environment, Economy and
Community. Island Press, Washington, 1997.

Beyard, M. and Pawliewicz, M. Ten Principles for Reinventing America’s Suburban Strips. Urban Land
Institute, Washington, 2000.

Calthorpe, Peter and William Fulton. The Regional City: Planning for the End of Sprawl. Island Press,
Washington, 2001.

Commission for Architecture and the Environment. The Value of Urban Design. Thomas Telford, London,
2001.

Eppli, M. J. and Tu, C.C. Valuing The New Urbanism: The Impact of the New Urbanism on Prices of
Single-Family Homes. Urban Land Institute, Washington, 1999.

Foot, D. Boom, Bust and Echo: How to Profit from the Coming Demographic Shift. MacFarlane, Walter
and Ross, Toronto, Ontario, 1996.
nd
Fader, S. Density By Design: New Directions in Real Estate Development. (2 ed.) Urban Land Institute,
Washington, 2001.

Fosum, H. L. Communities in the Lead: The Northwest Rural Development Sourcebook. Northwest Policy
Center, University of Washington, Seattle, 1993.

Goldberg, M. and Chinloy, P. Urban Land Economics. John Wiley & Sons, Inc., New York, 1984.

Goldenberg, S. Men of Property: The Canadian Developers Who are Buying America. Personal Library
Publishers, Toronto, 1981.

Hawken, P. The Ecology of Commerce: A Declaration of Sustainability. Harper Collins, New York, 1993.

Jacobs, Jane. The Death and Life of Great American Cities. Vintage Books, New York, 1961.

Lozano, E. L. Community Design and the Culture of Cities. Cambridge University Press, New York, 1990.

McMahon, E. Green Enhances Growth. Planning Commissioners Journal, No. 22, Spring 1996.
rd
Miles, M., Burens, G., and Weiss, M. Real Estate Development Principles and Process. (3 ed.) Urban
Land Institute, Washington, 2000.

Newman, P. and Kenworthy, J. Sustainability and Cities: Overcoming Automobile Dependence. Island
Press, Washington, 1999.

Northwest Environment Watch. Cascadia Scorecard: Seven Key Trends Shaping the Northwest.
Northwest Environment Watch , Seattle, 2004. (www.northwestenvironmentalwatch.org)

Northwest Environmental Watch. This Place On Earth 2002: Measuring What Matters. Northwest
Environment Watch , Seattle, 2004. (www.northwestenvironmentalwatch.org)
O’Neill, D. Smart Growth: Myth and Fact. Urban Land Institute, Washington, 1999.

Phillips, P. D. Economic Development for Small Communities and Rural Areas. University of Illinois,
Urbana-Champaign, 1990.

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Urban Design Economics
O’Neill, D. Smart Growth: Myth and Fact. Urban Land Institute, Washington, 1999.

Porter, D. The Practice of Sustainable Development. The Urban Land Institute, Washington, 2000.

Schmitz, A. and Brett, D. Real Estate Market Analysis: A Case Study Approach. Urban Land Institute,
Washington, 2001.

Rypkema, Donavan D. The Economics of Historic Preservation: A Community Leaders Guide. The
National Trust for Historic Preservation, Washington, 1994.

Riddell, T., Shakelford J., and Stamos S. Economics: A Tool for Understanding Society. Addison Wesley,
Massachusetts, 1987.

Schumacher, E. F. Small is Beautiful: Economics as If People Mattered. Sphere Books, London, 1974.

Seattle Engineering Department. Evaluation of the Burke-Gilman Trails Effect on Property Values and
Crime. City of Seattle, Seattle, Washington, 1987.

Whyte, W. Cluster Development. American Conservation Association, New York, 1964.

Wilson, A., J. Uncapher, L. McManigal, L. Hunter Lovins, M. Cureton and W. Browning. Rocky Mountain
Institute. Green Development: Integrating Ecology and Real Estate. John Wiley & Son, Inc., Toronto,
1998.

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Urban Design Economics
 Simon Fraser University at Harbour Centre

The City Program, an integral part of Continuing Studies at Simon Fraser University,
offers one-day courses in Vancouver and Calgary for mid-career professionals; an
Urban Design Certificate Program; and free evening public lectures on a wide range
of urban issues.

The City Program

Simon Fraser University at Harbour Centre
515 West Hastings Street
Vancouver BC V6B 5K3
Phone: 604.291.5254/5079
Fax: 604.291.5098 city@sfu.ca

Download City Program brochures including the

Urban Design Certificate Program brochure:

http://www.sfu.ca/city

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Urban Design Economics