California community redevelopment agencies’ demise leaves void

California’s 397 urban redevelopment agencies officially closed shop on February 1, 2012, due to legislation passed June 29, 2011. Thus, California real estate developers are uncertain about the direction of their future business at the demise of the state’s dysfunctional urban redevelopment agencies.

Before the state’s budget crisis, redevelopment agencies operated primarily off of revenue created from the increased property taxes generated by improved properties. These agencies acquired property in poor condition and facilitated its improvement by selling it to private owners at a discounted price.

At their best, redevelopment agencies acted as the friend of urbanity, financing infrastructure improvements and revitalizing previously decrepit neighborhoods. The results were affordable housing for low- and middle-income occupants, and a stimulated local economy resulting from the improved properties and the revenue they brought in. In return, the state’s coffers received a boost in the form of increased taxes on now-improved properties, which were previously underutilized.

However, more recent practices by redevelopment agencies have garnered a host of criticisms. Instead of using funds for the purpose of improving deteriorating neighborhoods, during the latter period of redevelopment agencies’ tenure, money has been directed to irrelevant, pet projects with little to no direct benefit to low- or middle-income individuals. Insufficient oversight has resulted in agency funds being misapplied to extravagant sports stadiums rather than property renovations in low-income areas.

With the phase-out of redevelopment agencies, California’s agencies are now assessing whether they will start or complete projects previously under contract or consideration. The agencies will be terminating as many projects as possible, but will complete those to which they committed before June 29, 2011.

first tuesday take

State-funded urban redevelopment agencies were a welcome intervention when they were created in the 1940s, but the extinction of their present-day exercise in non-productivity is no cause for grief. This is part of the sometimes painful process of burning fat off the state budget.

The result of the Great Recession will be a leaner state budget, limited to more fit and efficient agencies. As all business people know, a recession is a terrible thing to waste, and trimming inefficiencies such as these is the silver lining to this economic cloud.

While the original purpose of redevelopment agencies is still admirable, their more recent tactics in revitalizing neighborhoods have veered off track. Building expensive sports complexes creates more jobs—good—but it changes a community; it doesn’t preserve it. Instead of a stable local economy with jobs that match the cost of living, such luxurious projects create upscale neighborhoods with low-income job opportunities. A popcorn vendor can’t live and work in the same city.

Thus, jobs are created, but the city’s original occupants and current employees are forced to find housing elsewhere. Recently, the state’s urban redevelopment agencies accomplished nothing different than private organizations do. Their function had deteriorated and they became superfluous.

Instead of trusting in long-term employment based on a fortuitous wave of business from a state government briefly flush with cash, agents who worked on these projects must put their energy into a more stable real estate niche consistent with fundamentals – not handouts.

The moral of the story? Agents must turn their attention to a recession-proof method of practicing their business, one which is less beholden to third-party support. Property management has proven itself as a dependable source of income for agents and brokers. Homeownership rates and rental vacancy rates historically move in opposite directions. During the bubble years, sales were a primary source of business for agents. However, the tables have now turned as rental vacancy rates are proportionally declining.

If city zoning boards will allow increased urban density, agents may find the new direction of real estate to be more stable and profitable than in the glory days of now- extinct urban redevelopment agencies.

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Re: “An Uncertain Fate for Urban Projects in California” from The New York Times