New Transportation Regulations: Their Impact on Land Use and Development

In an attempt to mitigate Southern California’s traffic and air quality problems, public officials have adopted far-reaching policies and regulations which tackle the complex relationships between traffic, transportation, parking, land use, and development density. As a result, entitlement policy and project approval conditions are being reshaped to reflect new transit-promotion and traffic reduction priorities.

The New Order

The South Coast Air Quality Management District (AQMD), under Regulation XV, has already imposed transportation demand management requirements on employers of 100 or more persons. By 1993, Regulation XV is expected to apply to employers of 25 or more employees.

Similarly, the AQMD is considering adopting regulations affecting “indirect sources” of air pollution. These “indirect sources” include land uses which generate a high level of traffic trips, and presumably include shopping malls, civic and public facilities, sporting event and meeting facilities, and so on.

The Air District also is encouraging the adoption of Air Quality Elements as part of local General Plans, with the goal of placing a significant portion of regulation and enforcement on local government.

At the State level, the recent passage of Propositions 108, 111, and 116 will have an equally critical impact in rewriting Southern California’s transportation and development policy. Further, as demonstrated by Assembly Speaker Brown’s sponsorship of AB 4242 earlier this year, the Legislature appears intent on taking action during 1991 to endow some regional entity, whether existing or newly created, with broad powers to influence local land use decisions. In fact, the Congestion Management Plans required under Proposition 111 will likely require review by more than one regional agency.

Given this sudden and striking policy shift toward a regional transportation perspective, it is clear that traffic and transportation priorities will frequently be the determining factor of how, when, and where Southern California real estate developers conduct their business. But how will this transportation/traffic focus manifest itself? In particular, how will development patterns, land use policy, and real estate investment decisions be affected by these new rules and regulations?

The Value of Tenancy

For office developers particularly, Regulation XV will reinforce a reality already imposed by the capital markets: tenants will drive the marketplace. Today, without a substantial anchor tenant in hand, a developer simply can’t access financing sources. Now, with a project’s ability to secure entitlements largely dependent on the tenant’s ability to comply with Regulation XV, the large tenant is able to force a fundamental restructuring of the developer/tenant relationship.

In the future, project locations will be selected by the tenant based on the ability to conform to Regulation XV, favoring areas that are well-saved by transit and/or a TMO. Overall, the developer and tenant will likely work under a variety of joint venture arrangements, with the tenant bringing the ability to survive the entitlement process and the capability to secure project financing, and the developer offering a track record of delivering product and managing project risk.

Over time, as the supply/demand equilibrium returns to “normal,” more traditional merchant development activity will likely take place. Even so, as long as these new transportation priorities are still in place, the tenant will drive the entitlement process, and the AQMD will drive the tenant’s location decision.

Zoning for Traffic

In land use policy, the past is future. For the last 50 years, the zoning ordinance, with its emphasis on single purpose use districts, has been the primary regulatory tool of development in Southern California. The earlier waves of our region’s development, organized around access to the Red Car rails, occurred without benefit of a comprehensive body of land use regulations.

In re-creating an emphasis on transit and mixed use, there is little zoning precedent on which to rely. Thus, it is likely that zoning policy and code interpretations will be difficult to predict.

As traffic mitigation and transportation enhancement become the overriding goals of local municipalities, the zoning code will be used in new and innovative ways. Mixed use and proximity to transportation corridors will be two key phrases which will be frequently mentioned in Planning Department staff reports in the 1990’s. Increasingly, zoning approval will be based as much on the number of trips generated by a proposed project as by the project’s land use or density configuration.

Revised zoning ordinances and specific plans will be written to encourage high-density mixed uses along transportation corridors and nodes, discourage abundant on-site parting, and redistribute commercial and residential development opportunities to shorten trip lengths. Transit-linked density bonus and parking reductions will become an increasingly common tool for meeting public objectives.

However, although we may know how to write the rules, our public officials have never administered policies such as these. A long learning curve, with interdepartmental disagreements, internal code inconsistencies, elongated entitlement processes, and missed market opportunities, is likely.

Public/Private Partnerships

Do these new transportation and regional land use regulations mean the end of the “zoning for dollars,” post-Proposition 13 priorities, in which many localities sought real estate development for the monies those projects would bring to a city’s General Fund? Probably not, although the rules of the game will change.

One change will be caused as cities ask themselves, “How do we qualify for some of those transportation matching funds that Sacramento is handing out under Proposition 111?” The answer may be an old buzzword: public/private partnerships.

The scramble by cities and counties for new sources of State funding will provide substantial opportunities for public/private partnerships, particularly since allocation of these funds is frequently conditioned by local matching grants. A dollar spent by a developer for traffic mitigation will be a much welcomed expenditure at City Hall if that dollar can also be counted toward a municipality’s matching fund contribution. Since the State hasn’t yet figured out how to hand this money out themselves, developers and cities who participate in the process together and jointly work with the State to write the funding allocation rules stand to benefit enormously.

Joint development projects at transit nodes will be another major source of public/ private partnerships. With state and local governments trying to maximize their return on billions of dollars of public investment in transportation infrastructure, transportation-related partnerships will be comparable in importance to redevelopment in the 1980’s. This will include tri-party partnerships between developers, transit agencies, and local government that involve a significant mixing of uses at relatively high densities, in order to capitalize on the pedestrian activity (as well as the entitlement processing and entitlement financing advantages) generated by the transit access.

Incentivize, Incentivize

The public sector, with its new emphasis on traffic-reduction and transit promotion at every level of government within California, is reordering the patterns and processes of real estate development for the next decade and beyond.

Overbuilt markets, a lack of capital for real estate development, and a recessionary economy all spell a hiatus from the development trends we are used to seeing in Southern California. What a perfect time for the public sector to announce its change of direction, to articulate its new order, and to establish clear and positive incentives along with its rewritten regulations. In the near term, projects are likely to be few and far between, and the ones which do surface will be owner/user or tenant-driven. Why not use the slack time to focus on public incentives which create the desired private development?

Many questions remain to be answered. For instance, what credit will be given by the AQMD for locating next to a transit node when the capacity of the transit system to deliver employees to that location may be years away? Will a corporate entity be able to earn Regulation XV credit for taking trips off the roadway network at one location and transfer that credit to another location where development is proposed?

But the opportunity now exists for government and the development community to work together. The private sector’s challenge is to help shape the new rules in a way which captures the potential benefits of linking land use and transportation objectives within the context of a development project. And the public sector’s challenge is to realize that private sector real estate investment can be productively channeled to support government expenditures for new transportation infrastructure.