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30 Private Real Estate Investment TABLE 2-1 Numeric Values for Variables in Functions for Utility and Optimal Advertising a b g A0 q .5 4.1 3.1 100 .07 Utility 358,071. 43.0556 Advertising FIGURE 2-4 Maximum utility when allowed advertising, A, is optimal advertising, A*. in parameters. Remember also that the actual values have no meaning except in reference to other values calculated in the same way. The importance of the general model is that it achieves an optimum for all combinations of numerical values given the parameters. What we are interested in is what happens when equilibrium is disturbed. Assume you are considering a certain community for locating your business. You find the present condition (equilibrium for our purposes) of sign regulation as plotted in Figure 2-4. How does a change in the political landscape change your decision to locate? How does it change the fortunes of market participants? How does that change of fortune affect other business owners’ decisions to locate in the community? Taking aesthetic regulation as just one example of the restrictions on freedom of choice imposed by government, what would you expect the aggregate effect of numerous restrictions to be? A reduction in the value of g from the 3.1 shown in Table 2-1 to 2.3 results in a reduction in both allowed advertising, A ¼ 35.9375, and, as expected, utility, U ¼ 82,218, as shown in Figure 2-5. Combining the last two plots in Figure 2-6 shows the cost, in terms of lost utility, of reducing the effectiveness of advertising,g. It is this argument that Land Use Regulation 31 82,218. 35.9375 FIGURE 2-5 Utility from reduced advertising. Cost of Reducing g Utility Lost A¢ A* Advertising FIGURE 2-6 Reduction in advertising from the optimal and resultant loss in utility. may persuade the one vote an investor needs from the local council. If the vote is close and swing vote is rational, this argument may only need to ring true with that one member. Utility, U, changes with the change in allowed advertising, A, the efficiency of advertising, g, and community disutility for advertising (as expressed 32 Private Real Estate Investment through Env), b. The effect on utility of a change in allowed advertising is greatest when the efficiency is highest. This is reasonable as the merchants lose more and tax revenue falls more. IMPLICATIONS The implications of this exercise should be clear. 1. People make decisions on the margins. Marginal analysis is a very powerful tool for measuring the net effect of a tradeoff between two alternatives. Many, if not all, economic choices between two alternatives may be modeled on a cost–benefit basis provided one makes plausible assumptions about how people generate well-being, happiness or utility. 2. Any item on the list of development constraints mentioned in the introduction to this chapter could be substituted for the one illustrated here. The aggregate of all such constraints, if applied by a heavy-handed legislative body, can operate as a strong disincentive to entrepreneurial activity in a community. 3. Arguments for change and arguments for preservation are often equally persuasive, especially when couched in an emotional framework. Alternatively, a balanced, methodical approach to resolving these issues is preferable when rational people of good intent must agree on how change is to be implemented. A CASE STUDY IN AESTHETIC REGULATION The developer who appears at the city council meeting waving his arms and talking about utility functions runs the risk of having Security escort him outside the city hall. The power of the general result above is often lost in the day-to-day implementation of policy. What follows is an example of how the thinking described above may be employed to construct a good argument in a specific case. The fact situation involves an independent hardware store in a municipality in California. The store has been in the same location for over 15 years. The Excel worksheet that accompanies this chapter provides a detailed historical record of sales for the past five years. The store is located in a commercial project of approximately 22,000 square feet, of which the store itself comprises 40% of the area available for lease. The remaining 60% is leased to other tenants at approximately the same rental Land Use Regulation 33 rate as the hardware store. A 30-foot-high, ‘‘pylon-style’’ interior illuminated sign occupies a spot on the perimeter of the project. The owner/operator of the store is not only a long-standing and admired member of the local community, but he holds an undergraduate degree from West Point and a Masters in Business Administration from Columbia University. Local city officials respect his integrity and business acumen such that any estimate he might be required to make of the impact of city regulatory action on his business would be viewed as factual and well reasoned rather than self-serving. Municipal revenue is generated from three sources. Local governments in California receive (1) a portion of state sales taxes equal to 1% of sales generated within their jurisdiction; (2) 12.8% of property taxes received by the county; and (3) a variety of grants-in-aid, revenue sharing, assistance, subventions, and pass-throughs from the state. Tax revenue generated from the hardware store operation over the past five years from the first two of these sources is calculated from the sales data and is also shown in the Excel worksheet. The city is too small to maintain its own police department. Therefore, the city contracts with the county sheriff’s department for police protection. The contract calls for four patrol units, seven days per week with relief; two traffic units (one five days per week and one seven days per week); 2.39 units of ‘‘Special Purpose Officer’’ (vice, homicide, etc.) for a total annual cost of $1,245,761 including all overhead, vehicles, uniforms, and benefits. The county uses a computer-aided dispatch system which tracks the exact time a unit is actually operating in a contract city. If a unit is called out of the area to assist on a priority call in an adjacent area not covered by the contract, that ‘‘time out’’ is tracked and not billed. From this information, the county estimates a ‘‘beat factor’’ for billing quarterly and to assist the contract city in budgeting. The beat factor is based on the total number of working minutes per year for the entire force. The beat factor multiplied times the cost times the number of units results in the amount billed for the specific service. Insurance is billed separately. The contract detail is as follows: Service type Patrol Traffic–5 day Traffic–7 day Special purpose Insurance Annual grand total Per unit $249,753 $140,950 $197,329 $72,463 Beat factor 0.7452 0.9487 0.9487 1.0000 Net # Units $186,116 4 $133,719 1 $187,206 1 $72,463 2.39 Total $744,464 $133,719 $187,206 $173,187 $7,185 $1,245,761 34 Private Real Estate Investment A conflict exists between the municipality and the property owner over the existing 30-foot pylon sign. As part of a city beautification effort, the city passed a sign ordinance limiting the height of commercial signs to eight feet. The ordinance provided for an amortization period, which has now passed, and the city ordered the sign removed. Existing parking requirements prevent dedicating any more land to the sign structure. If this were not so, its shorter replacement could be installed on a gently rising landscaped berm elevated above the parking lot grade, as is common in new developments. As it is now, vehicles may park adjacent to the sign. Because adjacent parked cars would block its visibility, the practical effect of any ordinance limiting sign height to eight feet is to eliminate nearly all of the commercially beneficial use of this sign. To simplify the calculation we make the following assumptions: 1. The sales revenue of the hardware store per square foot is representative of square foot sales revenue for the entire project. Therefore, sales and municipal revenues for the entire site are calculated by ‘‘grossing up’’ the sales from the hardware store. 2. The hardware store’s owner estimates sales will drop 25% if the sign is removed or replaced by a sign structure conforming to the new ordinance. This reduced revenue estimate is presumed to apply to other tenants equally. 3. There are approximately 40 signs remaining in the city affected by the sign ordinance. Because (1) this project is one of the larger projects among these sites and (2) not all projects experience the parking conflict which exacerbates the problem for this site, rather than a multiple of 40, one-quarter of the multiplier effect, a factor of 10 rather than 40, is applied to arrive at the total citywide effect of enforcing the ordinance on all non-conforming signs. 4. No cost of administration or litigation is considered. No cost of removal and replacement of the existing signs is considered. 5. No municipal revenue from the state other than sales tax is considered, although the financial health of the tenants and the landowner affects state income tax revenue and, therefore, the share of state grants to cities. 6. The maximum loss to the businesses is captured by the estimated 25% decline in revenue. This assumption may not hold in practice as many businesses operate at margins that would not accommodate such a sales decline. These businesses would fail, expanding the loss of municipal revenue to include the 75% expected to remain. No synergistic effect is considered. That is, the fact that the hardware store is the ‘‘anchor tenant’’ for this property and its fortunes have a large impact on the satellite stores is not considered. ... - tailieumienphi.vn