Alchemy Developement

The Growth Ponzi Scheme

Reprinted from StrongTowns.org

We often forget that the American pattern of suburban development is an experiment, one that has never been tried anywhere before. We assume it is the natural order because it is what we see all around us. But our own history — let alone a tour of other parts of the world — reveals a different reality. Across cultures, over thousands of years, people have traditionally built places scaled to the individual. It is only the last two generations that we have scaled places to the automobile.

How is our experiment working?

At Strong Towns, the nonprofit, nonpartisan organization I cofounded in 2009, we are most interested in understanding the intersection between local finance and land use. How does the design of our places impact their financial success or failure?

What we have found is that the underlying financing mechanisms of the suburban era — our post-World War II pattern of development — operates like a classic Ponzi scheme, with ever-increasing rates of growth necessary to sustain long-term liabilities.

Since the end of World War II, our cities and towns have experienced growth using three primary mechanisms:

Transfer payments between governments: where the federal or state government makes a direct investment in growth at the local level, such as funding a water or sewer system expansion.
Transportation spending: where transportation infrastructure is used to improve access to a site that can then be developed.
Public and private-sector debt: where cities, developers, companies, and individuals take on debt as part of the development process, whether during construction or through the assumption of a mortgage.
In each of these mechanisms, the local unit of government benefits from the enhanced revenues associated with new growth. But it also typically assumes the long-term liability for maintaining the new infrastructure. This exchange — a near-term cash advantage for a long-term financial obligation — is one element of a Ponzi scheme.

The other is the realization that the revenue collected does not come near to covering the costs of maintaining the infrastructure. In America, we have a ticking time bomb of unfunded liability for infrastructure maintenance. The American Society of Civil Engineers (ASCE) estimates the cost at $5 trillion — but that’s just for major infrastructure, not the minor streets, curbs, walks, and pipes that serve our homes.

The reason we have this gap is because the public yield from the suburban development pattern — the amount of tax revenue obtained per increment of liability assumed — is ridiculously low. Over a life cycle, a city frequently receives just a dime or two of revenue for each dollar of liability. The engineering profession will argue, as ASCE does, that we’re simply not making the investments necessary to maintain this infrastructure. This is nonsense. We’ve simply built in a way that is not financially productive.

We’ve done this because, as with any Ponzi scheme, new growth provides the illusion of prosperity. In the near term, revenue grows, while the corresponding maintenance obligations — which are not counted on the public balance sheet — are a generation away.

In the late 1970s and early 1980s, we completed one life cycle of the suburban experiment, and at the same time, growth in America slowed. There were many reasons involved, but one significant factor was that our suburban cities were now starting to experience cash outflows for infrastructure maintenance. We’d reached the “long term,” and the end of easy money.

It took us a while to work through what to do, but we ultimately decided to go “all in” using leverage. In the second life cycle of the suburban experiment, we financed new growth by borrowing staggering sums of money, both in the public and private sectors. By the time we crossed into the third life cycle and flamed out in the foreclosure crisis, our financing mechanisms had, out of necessity, become exotic, even predatory.

One of humanity’s greatest strengths — our ability to innovate solutions to complex problems — can be a detriment when we misdiagnose the problem. Our problem was not, and is not, a lack of growth. Our problem is 60 years of unproductive growth — growth that has buried us in financial liabilities. The American pattern of development does not create real wealth. It creates the illusion of wealth. Today we are in the process of seeing that illusion destroyed, and with it the prosperity we have come to take for granted.

That is now our greatest immediate challenge. We’ve actually embedded this experiment of suburbanization into our collective psyche as the “American dream,” a non-negotiable way of life that must be maintained at all costs. What will we throw away trying to sustain the unsustainable? How much of our dwindling wealth will be poured into propping up this experiment gone awry?

We need to end our investments in the suburban pattern of development, along with the multitude of direct and indirect subsidies that make it all possible. Further, we need to intentionally return to our traditional pattern of development, one based on creating neighborhoods of value, scaled to actual people. When we do this, we will inevitably rediscover our traditional values of prudence and thrift as well as the value of community and place.

Alchemy’s Barb Terry shares her thoughts with the Midlands Business Journal

Midlands Business Journal article featuring Barb Terry

The end of sprawl? Not likely.

The urban dreamers who want sprawl to end really wear me out. You see, sprawl is bad. It costs a lot of money to have a spread out city: all that driving is inefficient, and it costs more to build and maintain spread out infrastructure, let alone service it with police, etc. Plus its so damn boring. Cookie cutter houses, lame strip malls, big parking lots. I agree with these people. I hate sprawl. But we have sprawl for a reason: its what the market for land use creates. You fight the laws of supply and demand at your peril.

Governments seem to have a bass-ackwards view of sprawl. Omaha is a case in point. Well-intentioned urban planners provide incentives for urban redevelopment. They go out and offer tax breaks to developers for building in the decaying downtown areas and then invest a fortune in public sponsored areas like parks, arts, and new street lights. Millions of dollars are borrowed to build a convention center that no one bothered to mention to KPMG that Omaha as a convention destination is probably not going to rank as high as oh, say, Orlando and Las Vegas.

Then, the State goes out and turns Dodge Street in to a highway and builds an overpass over 114th Street so that people can get to West Omaha faster. You’ve just pissed all the hard work of the those city planners down the leg. How? By reducing the time it takes to get to a home in West Omaha, you effectively reduce the net cost of living in West Omaha. Demand for businesses and housing in West Omaha increases, and ten years later the City finds itself trying to help developers turn Crossroads into a viable mall. Crossroads sucked, but it may have had a fighting chance before it took five extra minutes to get to Village Pointe.

There’s a couple of op-ed pieces in the New York Times that appeared on November 25th and 26th. One seems kind of interesting and is a concise thesis of a forthcoming book by Louise Monzigo. It describes how suburban office campuses have contributed to sprawl. She doesn’t mention it in the article, but I’m sure her book does: require developers to build parking garages, and you’ll get much more dense cities. She also raises an interesting question about infrastructure. The days gotta be over for cities building all this spread out infrastructure. We just can’t afford it any more.

But the other piece is from a Brookings Institution scholar who says sprawl is what caused our economic crisis and how exurbs (far suburbs) will never come back.This guy totally sucked the energy out of me. I was bored by the reverse-logic. Sprawl didn’t create the financial crisis, loose credit did. All those people who bought houses with 110% leverage were living the dream: home ownership. Where are the cheapest houses? On the edge of a city. Sprawl is a coincidental factor, not the cause.

Will the exurbs turn into dust and vanish like ghost towns? No. As much as urban planners would like them to, they’re not going away. They will come back. Why? Its cheaper to live at the far reaches of the city. It’s simple math. If I can buy a cheaper house on the edge and drive to work, why wouldn’t I? The only reason I wouldn’t is if my time was so valuable that I needed to be closer to my job and couldn’t afford to sit in a car two hours a day.

The only thing that will change this equation is $5 per gallon gasoline. Then it won’t make sense to live that far away. But that’s a whole other issue. What can government do to stop sprawl? Stop building infrastructure that can’t be paid for and serviced efficiently. Stop building sewers, water lines, and widening country roads into five lane divided highways. Essentially, the government policy on sprawl should be to do… Nothing. No more infrastructure. We, as taxpayers, can’t afford it.

Pinhook Flats Phase II Started

We’re pleased to announce that we’ve begun constructing the new building which will house 63 apartments.

Playing in the dirt at Aksarben Village.

UNO is Bullish on Enrollment

The OWH reported on a plan to increase enrollment at the University of Nebraska – Omaha to about 20,000 over the next eight years from it’s current level slightly below 15,500.

We at Alchemy Development can’t wait for the bigger crowds to mingle around Aksarben Village. Our motives are entirely selfish: the scavenger hunt for the annual Robert Hancock & Co. picnic at Stinson Park will become more challenging.

You see, more students translates into more shoppers and those shoppers will want more options for entertainment, dining, and (ahem) housing in the Aksarben Village neighborhood. More options means more challenging clues for the scavenger hunt.

Right now, it’s not too hard to find a cocktail napkin from Liv Lounge, a cupcake from Jones Bros., and a picture next to Omaha’s (the horse) statue and get back to home base in 15 minutes.

In a few years, we’ll have to nab a petunia from the florist, a pair of Smartwool socks from the fly fishing outfitter, an ostrich egg from Le Barouf, and three billiard chalks from Minnesota Fats’ Grill.

We’ll have to take the entire afternoon off.

Omaha in the Sky

OWH columnist Michael Kelly wrote about Omaha’s appearance in the most recent edition of the Delta Airlines in-flight magazine.

It’s a 28-page spread extolling all the economic miracles of the River City. Even Kelly blushes at some of the effusive praise lauded upon The Big O and wonders if Omaha can live up to such high expectations.

It’s as if suddenly Omaha entered the American consciousness the way Chuck Yeager emerged from the burning wreckage of his plane after breaking the sound barrier in the famous scene from “The Right Stuff”. (In this metaphor, the wreckage is the US economy, in case you couldn’t figure that out).

Enter stage left: Filthy prospector (like Mr. Howell in that dream he had on Gilligan’s Island).

Prospector/Howell: In the old days, when the inter-web was just beginnin’ to spit out it’s fanciful millionaires in Silicon Valley, Omaha was full of nuthin’ but hillbillies and cattle. Heck, Warren Buffett was just a crazy codger who clutched tightly to a bunch of businesses destined for the buggy-whip pile like in-sooo-rance and Coca-Cola. But today, everything is different! We’ve even got art on our corn silos!

(Sweeps hand across panorama of TD Ameritrade Park and First National Tower. Winks. Clicks spurs.)

(Enter well-dressed female executive in casual yet work-appropriate clothing. Possibly wearing stylish shoulder bag to represent modern version of Golden Sower statue.)

Executive: Now when we get stuck in conversations in other cities we don’t have to look at the floor and mumble something about Omaha being a great place to raise a family.

(Cue music: Emerson, Lake and Palmer. Fade to Black.)

Omaha’s denizens are wise to look such adulation with a bit of skepticism. It’s nice, but it’s a little like the girl who never got invited to the prom suddenly making head cheerleader. Or like the old cartoons when they ask for a volunteer to step forward and all but one actually step backwards. Suddenly some poor sap is out in front and gets sent into the mansion to look for ghosts.

The truth is that we’ve always been like Chuck Yeager Grinding it out year after year – going faster and faster. Nobody paid Chuck much attention with all the astronauts getting all the press. Now the astronauts have come back to Earth.

WSJ: Omaha Gets Smarter?

Is Omaha getting smarter? Well, not necessarily. At times, the level of intelligence actually seems to be inversely proportional to the amount of letters appearing after one’s name. European finance ministers are a case in point. Other times, the only reason some people were able to put on a cap and gown is that they managed to stay sober for 7% of their college career. Pity the chaps who were inebriated 94% of the time and just missed the gentleman’s D. If only Basketweaving 101 really was still on offer. Budget cutbacks are so cruel.

In spite of these collegiate misadventures, earning an advanced degree is still considered a nice way to develop an affinity for a football team or to have a reason to get a tattoo with Greek letters. It can also help obtain gainful employment. The fact is that people with sheepskins tend to earn more than their less-educated peers.

So the great news is that Omaha ranked sixth among US metropolitan areas With the biggest growth in the percentage of adults with college degrees over the past ten years. This bodes well for the health of the Omaha economy as these well-educated folk feed the grist mill of capitalism.

Aging Boomers – An urban myth?

The September 12, 2011, issue of Forbes features an article titled “Where the Boomers Are: Builders think empty nesters are moving to the big city. Guess Again.” Joel Kotkin and Wendell Cox cite the 2010 census as evidence that boomer populations declined by 10.3% over the previous decade. They go on to list their “Hot Spots for the Aging.”

1. Las Vegas
2. Phoenix
3. Tampa-St. Petersburg
4. Orlando
5. Riverside-San Bernardino
6. Raleigh
7. Austin
8. San Antonio
9. Jacksonville
10. Charlotte

Does this mean that developers and planners have been deluded for the past ten years as cities have sprouted new downtown housing? My downtown developer friends who sell condos would beg to differ. Many of their best sales are to gray hairs.

So what gives?

Affluence is the answer.

The authors did not make a distinction among income levels. There has been a slight increase in the number of affluent people above the age of fifty in many of America’s downtowns. Unfortunately, this has been swamped by the exodus of lower-middle-class folks who can’t possibly pay over $200 per square foot (let alone $2,000) presented in new developments.

All the jurisdictions above are in warm places with low taxes (excluding Riverside), and warm weather. Duh.

So, if you’re developing in urban areas you can benefit from the small minority of affluent seniors, but don’t bet on bucking the trend.

Pinhook Phase II Design Approved

The Aksarben Village Architectural Control Committee  has unanimously approved the new 63-apartment building at Pinhook Flats.

Shadow Lake Square Announcement

Shadow Lake Square
72^nd & Schramm Road
Papillion, Nebraska

On May 17, 2011, the Papillion City Council unanimously approved our $29 million project — a 261-unit mixed-use residential development named Shadow Lake Square. Designed as a pedestrian-friendly community that mirrors a modern trend in architecture known as “new urbanism,” Shadow Lake Square combines the attractions of apartment living with easy access to retail services. Shadow Lake Square will offer 184 one-bedroom units along with 77 two-bedroom units. Six of the one-bedroom units will be designated live/work, which means the units may be both a home and an office. Just one of the two-bedroom units is so designated. Plans call for construction to begin next summer with the first apartment’s available fall of 2013 and the project completed by 2014.

Download the plan here.