It’s the taxes, stupid. Major rewrite 8/7/2018

Posted on June 29, 2018

I finally renamed this page.   It’s trite, but maybe it’s true.

This page is my attempt to explain the vast gulf between what the citizens of Vienna said they wanted in the Maple Avenue Vision, and what the Town actually implemented in MAC zoning.  The Maple Avenue Vision talks about preserving  Vienna’s small-town nature, providing open space for public enjoyment, creating affordable housing, and having a vibrant downtown retail sector.  MAC does pretty much the opposite of all of that.  It brings in big buildings, the “open space” requirement is a sham, the public space being created is not pleasant, it prevents having an actual zoning-based affordable housing program.  The idea of making Maple more walkable is confusing at best.  And the Town has not done even the most basic estimates of the long-run impact on traffic and town population.  And the financial incentives of MAC are so strongly in favor of housing that the Town is considering amending MAC to require a minimum amount of retail space in each building.  Instead of a commercial renaissance, they have to rein MAC in to keep it from destroying retail space on Maple.

Here’s my bottom line.  If you try to think of MAC as fulfilling the Maple Avenue Vision, as I once did, you will only end up confused.  The Maple Avenue Vision is irrelevant.  Instead, think of MAC zoning as making economically efficient use of the land on Maple, subject to a handful of constraints on how the buildings must look.  Once you have that firmly in mind, it all snaps into focus and more-or-less every aspect of MAC makes sense.

The simplest way to make sense of MAC zoning as a Vienna resident is this:  for us, perhaps MAC is mostly about maximizing tax revenues.   At the end of the day, pretty much the only thing we’re going to get from this is a greatly expanded tax base.  All the rest of the nice ideas of the Maple Avenue Vision?  Pfft — there’s nothing in MAC zoning that will make those things happen.

Let me be clear:  I do not think this was consciously about taxes.  The Town of Vienna’s first set of drawings of large buildings on Maple was done in 2010.  Later, they hired mainstream consultants to draft the law.  I do not think that, at any time, or in any way, individuals guiding this process said, or even thought, “let’s maximize tax revenues”.  What I am saying is that the outcome of that complex process — of starting with citizen input, then trying to judge what the largest acceptable buildings might be, then calling in outside experts to draft the law — had that effect.

Instead, I think MAC zoning is economically efficient – almost.   And vastly higher tax revenues are a side-effect of that.  MAC zoning maximizes the value of the land by allowing construction of the largest, highest-dollar-value buildings that the Town Council thought would be tolerable on Maple Avenue.  It was, after all, written by professionals whose first instinct would be to do exactly that – don’t waste value.  And so it asks for virtually nothing back from the builders in the form of open space or affordable housing.  And that net result is that by maximizing the dollar value of the buildings, you maximize tax revenues.  My best guess based on a detailed set of “pro forma” calculations, typical MAC redevelopment will result in a 10-fold or better increase in the value of the property.

I say MAC was almost economically efficient because MAC does impose some constraints that probably reduce the dollar value of the buildings somewhat.  Those constraints have to do with aesthetics — the overall appearance of the buildings.

All MAC buildings have to adhere to a uniform set of architectural guidelines.  Most importantly, even though the buildings can be 62′ tall to the top of the parapets, they can only have four floors.  And the first floor retail must have 15′ tall “upscale retail” ceilings.  Left to their own devices, I suspect that most developers would likely fit at least five floors in that space.  And so that aspect of MAC probably does not maximize building dollar value and tax revenues.

The only other economically significant constraint that I see is that the Town is now considering setting some minimums on the amount of commercial space, essentially grandfathering whatever first-floor commercial space exists now.  If that passes, that will an additional significant constraint on the dollar value of these buildings.  Other than those constraints on how the buildings look — only four tall floors, upscale retail first floor — MAC zoning does nothing out of the ordinary that would reduce the dollar value of the resulting structures.

How much tax revenue are we talking about?  The 444 Maple West/Tequila Grande is a good example.  Right now, it has a tax valuation of about $6M.  My best estimate is that, as proposed, it will be worth about $75M based on a detailed pro-forma (best guess using national averages) analysis.  (The builder offered an estimate in excess of $100M, but I am fairly sure that he “capitalized gross rent” instead of net — he forgot about the cost of operating the building, and how that drags down the value).   If my figures are about right, then the increase in Town real estate taxes from 444 Maple West will be about $150,000 per year. 

There are other significant revenue sources.  Water bills, maybe $48,000.    If each of the 160 apartments at 444 Maple West uses half as much water as my household does, that would be a further $48,000 in revenue from the water bills.  Additional retail taxes, maybe another $98,000.  Right now, Vienna retail sales average $18,000 per Vienna resident  (Census Bureau).  This building would add about about another 275 resident.  If existing Town retail sales are mainly to Town residents (i.e., we are not currently “destination retail”), and the new residents spend in line with the existing average, and the Town only collected two percent of that on average (the meals tax is 3 percent), that  would be another $96,000.  And there are other taxes, such as those on home-based businesses.  It is plausible to guess that the total town revenue increase would be around twice the property tax revenues alone.

That’s gross revenue, and presumably there would be some costs.  But plausibly, not much.  The Town isn’t going to build any new infrastructure to serve these new buildings.  Schools are run by Fairfax County, and those costs are not the Town’s problem.   The Town doesn’t provide trash service to these new commercial buildings.  I doubt there are going to be a lot of additional police calls at the luxury condos for Marco Polo or the high-end apartments for Tequila Grande.   The cost of water and sewer service will come out of the water bill revenue, but to the extent that a lot of the bill covers infrastructure maintenance, that portion of the payment would be additional net revenue for the Town.  There may have to be some one-time improvements on the side streets (e.g., sidewalks) in response to the increased cut-through traffic.   But, plausibly, that’s about it.

If we extrapolate that to all the buildable area under MAC, this begins to look like real money.  The Town expects about 70% of the 106 MAC-zoned acres to be developed.  If all of that MAC-buildable property gets developed at the same scale, it would generate around $4M in increased property taxes, and plausibly $8M in total revenue increases.  That’s sizeable in relation to a Town operating budget of around $22M.

This is a particularly big deal because Town taxes are very tightly limited by Commonwealth statute.  So an untapped revenue source of that size is of great significance.  Virginia statute spells out the items that the Town may tax, and the allowable maximum tax rates.  For example, absent a Town-wide referendum to approve it, the most the Town could charge as a meals tax is 4%, shown here.  And if you’ve ever looked at the Town budget and wondered why there was (e.g.) a special tax on banks, that’s because Virginia specifically allows that.

What started me down this path was that I found so much of the Town government’s discussion of MAC zoning to be so illogical.  I’ll preface this next section by saying that I didn’t make these things up.  This is a mix of arguments I have heard from Town officials, combined with sentences where I have compared the Town’s planning documents with what has actually occurred.

I now realize that the discussion seemed illogical because I was still trying to figure out how MAC zoning fulfilled the Maple Avenue Vision.  And, I guess, because Town government was (and still is) pretending that it does.  Only when I rid myself of that notion, and accepted that MAC more-or-less is designed to make economically efficient use of the land, did any of the stuff below begin to make sense.

So here’s a list of the things I have found most peculiar about the Town’s presentation and discussion of MAC zoning.

Vienna has too much vacant retail space, so we require that all new MAC buildings have additional retail space.

This one, I wish I were making it up, but I am not.  Maple Avenue is our main retail center.  The Maple Avenue Vision calls for developing a vibrant downtown.  So, something about Maple Avenue retail is prompting this.  Near as I can tell, Town officials appeal to the (presumed) high vacancy rate of retail space as showing that something needs to be done.  And, near as I can tell, the solution involves increasing the amount of retail space.

Myself, I see no crisis in Vienna retail.  I find it hard to get a parking space on a Saturday afternoon.  I typically won’t drive on Maple after about 10 AM on Saturday due to the crowds.  And, at least where I shop, there’s no sign of distress.  The strip shopping centers have all had recent make-overs, maintenance looks good, and so on.

Finally, I have seen what distressed retailers of goods look like.  They always end up consuming their inventory to stay afloat, and you always end up seeing skimpy stock and bare shelves before they go under.  I was a die-hard Magruder’s shopper, and toward the end, if I wanted canned goods, I counted myself lucky if there were half-a-dozen on the shelf.  I don’t see anything like that where I shop.

Now, the Vienna office space market is in bad shape.  We have several vacant office buildings.  But that’s true across Fairfax County.  There’s nothing unique to Vienna about that.

The great irony here is that, because it is more lucrative to build residential space than to build retail, with MAC zoning, builders are reluctant to build retail.  The Town is thinking of changing MAC zoning to mandate a minimum amount of retail space — basically, to freeze in place the amount of retail that exists right now on Maple Avenue.  So MAC has gone from a way to have retail blossom on Maple, to a law that requires a fix so that retail is not driven off Maple by housing.

So “vacant retail” makes no sense as a reason for MAC.  But when viewed from the angle of total Town taxes, “destination retail” is what you would want.  Retail space brings in not only property tax receipts, but significant additional tax receipts from retail taxes (e.g., the 3% restaurant meals tax).  And “destination retail” not only captures Town resident dollars, it (in theory) brings in dollars from out-of-town.  So there is an emphasis on producing “luxury retail” space, with high ceilings and glass-fronted buildings located directly on the sidewalk.  Building more retail makes no sense as a way to help current retailers, but it makes perfect sense from a Town revenue standpoint.

Vienna’s commercial space is out-of-date because builders are unable to build under current C1 zoning.  That’s why we need MAC.  And we need to keep the MAC regulations loose, and not hassle the builders too much, otherwise builders might choose to build C1 buildings, and we don’t want that.

Builders and to some extent Town officials use the threat of a “by right” building under current commercial (e.g., C1) zoning to justify larger buildings under MAC.  In effect, they argue that we have no choice but to allow these very large MAC buildings, because otherwise builders have the right to put up ugly C1 buildings.  Putting aside the economics of that (below), much of the justification for MAC is that builders weren’t building anything new.  When you put all that together, the argument is that we need MAC because they won’t build under C1, and we have to accept whatever they come up with under MAC because they would otherwise just build under C1.

To understand this, you have to realize what MAC does, versus standard commercial (C1) zoning.  C1 is commercial use — the majority of the building has to be devoted to commercial use, not housing.  And building can only by three stories for a total of 35 feet high.  MAC?   Four stories high with parapets up to 62 feet.  And everything but the first floor may be housing, not retail.

I believe the “C1” threat is a hollow threat mostly because C1 buildings are required to be at least 51% commercial space.  There is essentially no market for new office space in Fairfax today (vacancy rates are about 19%), and the Town already has several vacant office buildings.  So that means 51% of the building would have to be retail space.  In a three-story building, that further implies that one-third of the retail would be second-floor (undesirable) retail space.

My estimates suggest that a C1 building on the scale of (e.g.) the 444 West Maple building would simply be economic suicide.  Work out the simple arithmetic for a three-story C1 building with the footprint of 444 West Maple, with underground parking.  They would end up with something like 116,000 square feet of retail space.  That’s more than the Giant Food Shopping Center complex (108,584 square feet).  I doubt they could possibly rent that in any plausible amount of time, particularly as Vienna will not support a 4th large grocery store.  By itself, that’s about a 10 percent increase in the Town’s retail space.  And one-third would have to be undesirable second-floor retail.

If they merely built two floors over parking, they’d still have to fill about 75,000 square feet of new retail space.  While it might be possible to do that, it’s certainly a risk.  And the building in that configuration likely would not be profitable due to the low “cap rate” (i.e., eventual sales price) for retail square footage.  I will (eventually) provide a separate page where I put estimates from a pro-forma profit and loss model that I have created.

You can think of it this way:  Residential space is substantially more desirable than retail space.  Under C1, each desirable square foot of residential drags along an additional square foot of less-desirable commercial space.  By contrast, under MAC, taking the 444 West Maple building, every square foot of residential has to carry along little over 0.1 square feet of retail.  My estimate for 444 West Maple is that the retail space matters so little, it could literally go unoccupied and the builder would still make a profit.  Essentially, the retail “burden” on the C1 building is 10 times higher than on the MAC building.

The upshot is that large buildings that are feasible under MAC probably could not be built at a profit under commercial (C1) zoning.   The retail space simply is not that valuable, and building a lot of housing would require building a LOT of new retail.  And unlike the Town’s story, that’s the story consistent with relatively little new retail space being built.

So the idea of the “C1” threat makes no sense as an excuse for allowing very large buildings.  But from the standpoint of building the highest-dollar-value structures possible, the bigger the better.  Bigger buildings are worth more, generate more property tax, and bring more people in to pay water bills and boost retail sales tax revenues.  From the standpoint of maximizing the value of the resulting buildings, any reason for a bigger building is a good reason.

We need affordable housing in Vienna, so the first building approved is a block of $1.3M luxury condos.  The second one has projected apartment rents so high that the majority of Town staff would not be able to rent an apartment there.

The $1.3M figure is my best guess, given the $1M asking price for the new three-story condos around the corner on Center Street.  The apartment rent argument was actually presented to the Planning Commission.

My own calculation shows that, taking the tax impacts into account, the rent for a two-bedroom apartment would be adequate to pay the mortgage on my house.  So, crudely put, if that’s affordable housing, then apparently I already live in affordable housing.

And now I know that, in fact, Virginia statute specifically describes how a Town may go about implementing an affordable housing program.  And by may, I mean, that’s the only way Virginia allows zoning laws to be used for that purpose.  MAC was set up in such a way as to preclude an actual affordable housing program.  See this page on affordable housing

So writing the law to prevent having an affordable housing program makes no sense for affordable housing.  But it makes perfect sense for maximizing the dollar value of MAC-developed structures.  First, any limit on density (required to have an affordable housing statute) limits the size of buildings.  And then, if the Town actually did require reduced rents on some units as a quid-pro-quo for higher density, that would reduce the value of the building and hence the property taxes.  (The value of a commercial building is more-or-less the value of the rental stream, capitalized.  Reduce the rents, you reduce the value of the building).  Finally, people of modest means just don’t spend as much in retail.  A true affordable housing program, using the zoning laws, is a dead loser from the standpoint of dollar values and dollar flows.

Maintaining small-town Vienna is of paramount importance, so the second building under consideration will be, by far, the largest single commercial structure ever built on Maple, in terms of volume. 

The assertion about small-town is directly out of the Town’s planning documents.  The estimate of the size is mine.  The 444 West Maple is one big block of a building, somewhere around 350′ long, just under 200′ wide, and 55′ tall to the roof (almost 62′ to the tops of the parapets).  Just multiplying those dimensions, you end up with just under 4 million cubic feet.  The volume enclosed by the Giant Food shopping center building, by contrast, assuming an average roof height of 20 feet, is just over 2 million cubic feet.

Again, total nonsense when viewed in its face:  We must build huge buildings in order to preserve our small town.  But perfectly reasonable when viewed from the standpoint of making economically efficient use of the land.  Bigger is better, from that perspective.

N.B. The Giant shopping center was built in 1961.  So 444 West Maple will break a half-century record when built.

Traffic flow on Maple will improve because we will be closing some curb cuts. 

Yes, the Town actually says this.  And that’s apparently as deep as the long-term overall traffic planning goes.  In terms of the impact of adding (say) 5000 new residents directly on Maple avenue, over the long run — the Town is silent.  My estimate is here.

Even on the narrow claim about curb cuts, I find several things about that statement to be questionable.

First, closing curb cuts does not change the number of cars turning off the street.  All it does is increase the odds that multiple cars will be trying to use the same curb cut at the same time.

Second, in my experience, the actual factor determining Maple Avenue transit time is the stoplights.  Period.   Going a little faster or a little slower between red lights just means spending a little longer or a little less long sitting there waiting for the light to turn green.  And the lights are synchronized.  If you could have squeaked through one light — well, as your reward, you get to wait at the next light up the road.

Third, that traffic flow analysis doesn’t include the effect of having (say) 75 drivers trying to turn left, across Maple, just east of the Nutley Street light, every rush hour morning.  See next point.

But if people are worried about the eventual traffic impacts, that might limit the amount of development possible.  And that, in turns, limits the long-run increase in the value of property on Maple Avenue, and the resulting tax revenues.  So you have to turn a blind eye to the eventual congestion issues that a large increase in Town population, all of it on Maple, will create.

We want people to use alternative transportation, so we’re not going to provide any easy way for residents of 444 West Maple to drive to the Metro.

OK, this one doesn’t really belong in this list.  This is just my particular pet peeve, because this is what is going to drive cut-through traffic in my neighborhood.

Despite being located adjacent to Nutley,  there will be no direct connection between 444 West Maple and Nutley Street heading south.  People who want to drive to Metro in the morning can either try to make a left, across Maple, during morning rush hour traffic, to get to the Maple/Nutley light, or cut through the neighborhoods behind the new building and eventually get to the Courthouse /Nutley light.)

The Town expects to get roughly 50 new housing units a year on Maple, due to MAC zoning.  The first two projects contain more than 200.  Giant Food, by itself, will likely contain at least 600. 

The first part is from the Town’s Comprehensive Plan.  The second part is actual counts and my extrapolation.   We ain’t getting 50 a year.

My estimate of the resulting increase in population is that those three — Marco Polo, 444 West Maple, and Giant Food (developed at the same density as 444 West Maple) — will add more population than Vienna gained over the entire decade from 2000 to 2010. And all of it concentrated on Maple Avenue.

Apparently the Town had never estimated the number of new residents it was going to get.  I have supplied some rough estimates here:  MAC and Vienna population

Again, a limit to growth is a limit to growth in the value of property on Maple and the resulting Town tax revenues.  From that standpoint, the fact that growth far exceeds what was expected is not a bug, it’s a feature.