The Case For Subsidizing the Mermaid Bar

George Skelton, the venerable Los Angeles Times political columnist, recently came out in favor of Gov. Jerry Brown’s plan to eliminate redevelopment. Skelton’s Exhibit #1 is the Dive Bar, a hangout on derelict K Street in downtown Sacramento that is now one of the city’s hottest night spots – complete with a mermaid tank – thanks partly to the redevelopment subsidies provided to the project’s developer.

“Look, I've got nothing against mermaid bars,” writes Skelton, who is widely admired (by me among others) for a thoughtful, common-sense viewpoint. “In fact, state government used to work best when legislators hung out in one near the Capitol. I just question whether state government — any government — should be helping to pay for a mermaid bar.”

Skelton’s comments reminded me Zev Yaroslavky’s rant in the ’90s, back when he was on the Los Angeles City Council, that redevelopment funds should not be used to subsidize theaters and nightspots in downtown LA “just so yuppies can dance on Spring Street.”

I’ve got more than a little sympathy for this viewpoint. Lord knows I’ve been critical of redevelopment over the years, especially the way cities have played the redevelopment game for their own narrow financial gain. And I remain something of critic today, despite my current status as a mayor and, hence, the chair of a city redevelopment commission.

But there is a legitimate public policy argument for subsidizing mermaid bars. It’s kind of complicated and it has a lot of caveats, which I’ll get to at the end. Despite the current rhetoric from the redevelopment establishment, this argument is not about creating jobs. After all, mermaids account for only a few of those 300,000 jobs supposedly at risk if redevelopment is eliminated, and in any event the job-creation argument is typically trotted out only when redevelopment is being threatened by the state.

Rather, this argument is about creating compact, compelling places in urban locations – a form of human settlement that is probably more fiscally and environmentally sustainable than sprawl – so that more people will live and work in such locations.

Redevelopment is a mechanism to stimulate and direct real estate development. The point of redevelopment is to direct both public and private investment into specific geographical areas – often older areas that have become rundown and are suffering from disinvestment. The original “urban renewal”-type reasons for this governmental intervention still stand: The more these older areas slide, the more they will cost the government in police protection, social services, and other costs associated with dysfunction.

Of course, there are plenty of places in California that need stimulated investment more than K Street (though it remains a stubbornly derelict street surrounded by renewed urban affluence) and there are plenty of ways to stimulate investment other than subsidizing a mermaid bar.

But the recent move toward encouraging compact urban development in California makes the argument for certain types of redevelopment subsidies even more compelling. Infill development is more expensive than greenfield development, so, all other things being equal, it’ll be at a disadvantage. But laying down infrastructure in sprawling greenfield locations is inefficient and, in the long run, more expensive. Furthermore, encouraging people to live and work in compact urban neighborhoods has an enormous environmental benefit, especially in reducing the overall amount of driving and. Consequently, greenhouse gas emissions, overall gasoline usage, and other pollutants.

You might be thinking my argument is that a mermaid bar on K Street is far more cost-effective and environmentally beneficial than a mermaid bar in an auto-oriented strip mall in Roseville. This is partly right, but there’s more to it than that.  People make choices about where they live, work, and otherwise spend their time not based on proximity to mermaid bars alone but based on their overall sense of whether the community meets their needs – jobs, amenities, schools, recreation, shopping, and so forth. Any developer can tell you that in order to succeed in the marketplace they either have to provide all these things or else make sure they are close by. And what those amenities are will differ depending on the market you’re aiming for. So if public policy efforts are going to be geared toward creating urban communities that are compact and efficient yet also complete communities that are competitive with sprawling alternatives, those policy efforts will include providing people with amenities they want. Like shopping centers. Or golf course. Or schools. Or mermaid bars. (To be fair, in the case of the Dive Bar, the redevelopment agency subsidized a developer, who built a project and found the mermaid bar as a tenant.)

The obvious question that arises is why the market can’t provide mermaid bars on its own. After all, our cities are crawling with urban hipsters young and old these days (not the least of whom is Gov. Brown himself, who lives in a redevelopment-subsidized loft in Sacramento). Can’t a mermaid bar survive on its own without redevelopment subsidies? Or, more to the point, wouldn’t hipsters live in urban locations with our without redevelopment subsidies?

This is the eternal question about redevelopment and it is, in part, unanswerable. The only serious policy research – most notably a 1998 study by the Public Policy Institute of California called “Subsidizing Redevelopment”  – ever done on the question of whether all that tax revenue generated in redevelopment areas would have occurred anyway answered that question with a solid maybe. So I don’t have hard numbers to back me up. But my smeller tells me that, given the complexity of urban development, a lot of this stuff would never get built without redevelopment subsidies. Our cities would suffer as a result and we’d have more sprawl and less compact development. For my money, that’s bad for everybody.

But I’m willing to admit that we in California have gotten so used to redevelopment as being our first, last, and only way to do this that we’ve forgotten that other ways might work just as well. After all, the goal here isn’t to figure how to funnel property tax money to developers. The goal is to figure out how to make urban development projects pencil out. Redevelopment may be an effective way of doing that – and it may be the way we’re used to – but it’s not the only way.

In the end it wasn’t the redevelopment subsidies that succeeded in persuading the yuppies – or, to update the term, hipsters – to dance on Spring Street in downtown L.A. It was a very simple policy change instituted by Mayor James Hahn in 2001, which waived all parking requirements for adaptive reuse projects downtown and in Hollywood. With the stroke of a pen, Hahn turned the conversion of old office buildings into lofts from a money-loser into a desirable real estate investment. Eliminating the parking requirement put money in developers’ pockets – or, at least, their pro formas – just as surely as a redevelopment subsidy.

In other states where rules on tax-increment financing rules are strict, cities use other methods such as density transfers to create the cash required to make projects work. In Seattle, where the use of TIF is strictly limited under state law, the city routinely makes projects work by permitting transfer of development rights from one property to another, thus bestowing a profit opportunity that wouldn’t otherwise exist. Seattle has done this downtown a few times and the city is about to undertake a similar effort to make a redevelopment plan work in South Lake Union, the underutilized neighborhood just north of downtown that is largely controlled by Microsoft billionaire Paul Allen.

Los Angeles has used this same trick a couple of times, most notably back in the 1980s, when the city gave developer Rob Maguire about 20 extra stories on his Library Tower building in exchange for a nine-figure investment in the renovation of the Los Angeles Central Library. And L.A.’s power brokers are gearing up for a dramatic expansion of this method – known locally as the Transfer of Floor-Area Ratio, or TFAR program – if redevelopment goes away.

So the bottom line is that there’s a pretty compelling argument for subsidizing the mermaid bar no matter what George Skelton thinks. But there may not be a compelling argument that the only possible way to do this is through the tax-increment financing mechanism contained in the California Redevelopment Law.

As I wrote last month (CP&DR Insight, Vol. 26, No. 2), it’s long past time to reinvent redevelopment. But as we work our way through California’s profound fiscal crisis, we’ve got to stop confusing ends with means. Instead of going all out to protect how we do something – because everybody’s used to it and all the agencies and consultants are invested in that particular method. Instead, we’ve got to focus on what we’re trying to accomplish and look at all the different ways we can pursue that goal given “the new normal” that now rules our lives. In other words, small-r redevelopment must go on – with some kind of subsidy for private development projects, even those featuring mermaid bars. But that doesn’t necessarily mean big-r Redevelopment is the only way to get the job done.