An Economic Impact Report on the effect of house size limits was made public on February 24th. 

An important issue for many when considering massing and scale standards is whether they support or detract from property values. A short answer is that it depends on what characteristics confer value. There is an ingrained assumption that limiting size also limits potential profit. It is true that limiting size may limit unit sale value, but this is not the same as limiting profit. Depending on the neighborhood and the reason for purchasing a unit in a given neighborhood, building larger units may or may not confer more profit.

The primary concern for residents in Boulder is impact new, more restrictive house size limits will have on property values, not the profit a developer makes from turning smaller houses into bigger houses.   From the 1st paragraph, the report is starting off on the wrong question. 

The results indicate that in a few neighborhoods, restricting size might restrict profit in an upwardly bound market, but that in most neighborhoods, creating units near the current size limit increases cost such that little profit is gained despite a much higher sales price.

In other words, this generic study says that developers have little profit incentive to build houses to current maximum size limits (not new proposed limits).  

In some areas of Boulder, building age increases value, while in others, new construction adds value. Larger lot size adds to value in some areas and adds little difference in others. Average building value per square foot varies by area. In each of the areas examined, these factors vary and add differing amounts to the total value of land and buildings. Land values change as building types change so a differential for land value for each area was formulated based on building value to calculate change in land value resulting from the interaction of land value and building value (in all areas, as building value rises land value also rises by some amount).

The first part of this paragraph is common sense.   That land value and building value is correlated is not surprising either.   I’d like to know the formula and resulting differential for each area, as well as the definitions for each area. 

Why compare Option 1 FAR to 0.7?  The current FAR limit is higher.  What about the other proposed limits to house sizes (wall plate height, articulation, building lot coverage?).   And isn’t there a big difference being proposed in what is considered part of the FAR ratio (outbuildings, garage space, below grade, etc?).  

This analysis is based upon the idea that the potential profit available from increasing unit size is part of the profit to existing owners when they sell (that is, that zoning regulation is capitalized into lot value. Thus a net profit of zero or greater indicates that redevelopment is feasible for a given lot size and floor area ratio. The results indicate that building the largest house does not necessarily confer the best net profit for the existing owner. Reducing the unit size lowers the total unit value, but increases the net change to the owner in most areas. In other words, a current property owner is likely to make more money with a smaller addition than with a larger one in most areas of Boulder.

An existing owner might realize profit when they SELL, but that’s very different from realizing value by adding an ADU for aging parents or putting in an extra bedroom for a growing family.   At least I can agree with the last sentence, our experience is also that the largest house doesn’t equal the largest profit. 

Think of the chart above as potential developer profit at building costs of $200/SQFT in generic, undefined areas.   It’s unrealistic, but not surprising to see massive mathematical profits for ridiculous scenarios, such as building a 35,000 sqft monstrosity in “Central Boulder.”  Nor is it surprising to see losses  in other areas for building impractically massive homes where there is no demand, because the formula results in profit.  

One problem with the analysis is the generic nature of it.  It doesn’t reflect the added burden that owners, particularly of small lots, will face when trying to expand their property.   They either won’t be able to do it at all, or the added square footage won’t be adequate.  The analysis also doesn’t take into account the economic loss many owners will face because the potential to expand their property has been removed under the new rules.   By the way, that potential existed prior to the new regulations, was likely assumed at the time of purchase, and now risks being regulated away.

Another problem is oversimplification.    The old regulation was on FAR, the new proposed regulations have multiple points of control (wall plate height, building lot coverage, and FAR). The proposed rules for what counts in FAR  are also different.   

The impact of the proposed Option 1 FAR limits should not have an adverse impact on any of the areas evaluated. In all areas except for Crossroads and East Boulder, where no scenarios for redevelopment as modeled showed a profit, the proposed FAR regulations appear to be at a threshold where adding to unit size is feasible, and in addition appear to add to potential profit in most areas. 

At the moment financing and sales trends militate against a continuation of pop and scrape development. Recent sales trends show a decline in sales (a 48 percent year over year decline in Boulder from November, 2007 to November, 2008). This low level of sales is likely to continue until pricing reaches a level consonant with national economic trends and the financial sector of the economy recovers. House pricing is traditionally known as “sticky,” meaning that most people will hold a unit in a down market until prices improve. With fewer people willing to sell and with lenders exercising tighter standards out of aversion to risk, construction is likely to slow or halt. 

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