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Wednesday
Jul232014

National Gathering Update

Registration is now open to our members for the 2014 National Gathering in Minneapolis, September 12-14, 2014.

CLICK HERE TO RESERVE YOUR SPOT AT THE STRONG TOWNS NATIONAL GATHERING

Last week we announced that Monte Anderson will be keynoting the event. This week we want to announce one of the other exciting items that is scheduled to happen: release of Transportation in the Next American City.

Yes, Saturday morning we are going to give attendees an early sneak peak at the long-awaited Strong Towns report on mobility and transportation. There will be no cameras or recording devices and lots of time for discussion and feedback. Not only will attendees get the information before everyone else, but we need you to help us finalize this important message. Be part of the team -- see you at the gathering.

Optional Friday Morning Workshop

On Friday morning prior to the start of the Gathering (8:30 AM – 12:00 PM), Chuck Marohn will be conducting a stand-alone workshop that covers the in-depth look at the Curbside Chat and Strong Towns transportation principles.  AICP credit will be available for this workshop and will be a separate fee of $65. To register, click here.

Accommodations

A hotel room block is available at the Hyatt Regency at the south end of Nicollet Mall in downtown for $109 a night. Rooms are available through the block on Wednesday-Sunday nights.  The Hyatt is conveniently located along the 18 bus line which will get participants to all the weekend’s events. It is 8 blocks from the Blue Line LRT which runs to the MSP Airport.  The rooms contracted through the block will receive complementary wi-fi access. Rooms will be available through August 8 and you can book a room directly through this special website interface: https://resweb.passkey.com/go/StrongTowns

We hope to see you all at the Strong Towns National Gathering!

Wednesday
Jul232014

The Monkey Parking Arbitrage

Wikipedia describes “arbitrage” as follows:

In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.

Arbitrage is a simple, common and accepted investment strategy. Today, large banks make billions on the arbitrage opportunity set up for them by the U.S. government. Banks serve as intermediaries for the Treasury Department, who sells government bonds to take on debt, and the Federal Reserve, who buys the bonds with printed money (quaintly called “Quantitative Easing”). The price difference is not a commission or fee, it is the difference between the price set by the Treasury and the price on the “open market”. We can debate how open a market is when it is dominated by one entity with bottomless pockets, nonetheless, for the banks involved, this spread in prices becomes an arbitrage opportunity. There is a guaranteed market and thus, for the banks, an instant and risk free profit.

I once read a book that described an early arbitrage of gold in European markets. This was hundreds of years ago. Some bankers had figured out that there was a distortion between the price of gold in one market – say Germany – and another, like England. Using a fancy telegraph machine to communicate prices, the bankers would buy gold at a lower price in one market and then sell it at a higher price in another. After shipping risks, the price difference was an instant and risk free profit.

High frequency traders are, in a way, creating an artificial arbitrage when they use their co-location in the exchanges and their super-fast networks to get out in front of traders. They distort prices slightly ahead of known demand and, in doing so, create instant and risk free profits for themselves. This is a little different in that the HFT’s actually artificially create the arbitrage opportunity; HFT is not about price discovery but about creating that arbitrage.

We are comfortable with most of these arbitrage opportunities and even praise them as a smart and innovative aspect of capitalism and free markets. Indeed, the job of a market is price discovery and so arbitrage is a necessary and important balancing mechanism. Yet one simple form of arbitrage – one available to the ordinary guy with a car and a smart phone – has infuriated public officials, as well as some drivers and fairness advocates, in San Francisco.

Monkey Parking (twitter) is an app that allows someone to alert drivers when a parking spot is coming available. A driver looking to park then bids on that spot and the individual vacating waits for them to show up. Monkey Parking handles the transaction, the seller leaves the spot and the driver pulls in.

Obviously an app like Monkey Parking would not work in my hometown of Brainerd, Minnesota. Here there is so much parking that nobody would ever pay for it. The supply, even at a price of zero, vastly exceeds the demand. This is true for most American cities, even where they charge for parking. In San Francisco, however, there is a huge arbitrage opportunity because, at current prices, there isn’t enough parking to meet the demand. Those who use the Monkey Parking app are engaging in the long accepted practice of arbitrage. They are exploiting the difference between market prices – the cost of parking set by the authorities and the actual cost the market will pay – and pocketing the difference as instant, risk free profit.

San Francisco officials are not sold on the merits of arbitrage as a way to correct market imbalances, as least not when it comes to parking. The city has issued a cease and desist to Monkey Parking and has threatened any who use it with enormous fines. Here is what City Attorney Dennis Herrera said in a press release:

"Technology has given rise to many laudable innovations in how we live and work -- and Monkey Parking is not one of them," Herrera said. "It's illegal, it puts drivers on the hook for $300 fines, and it creates a predatory private market for public parking spaces that San Franciscans will not tolerate….People are free to rent out their own private driveways and garage spaces should they choose to do so. But we will not abide businesses that hold hostage on-street public parking spots for their own private profit.

Note that the only reason it is illegal is because the city has said so. There is nothing inherently illegal about what Monkey Parking does. Neither the company nor the app occupies any parking spot or creates an agreement for occupying a parking spot. The city of San Francisco has simply decided that they don’t like it. Ironically, the city has indicated Monkey Parking violates California’s Unfair Competition Law, but who is Monkey Parking competing against? They simply facilitate an arbitrage no differently than the telegraph allowed those bankers to arbitrage gold prices. Would San Francisco have shut down the telegraph?

There are three market responses to solve this problem. The first is to allow the people of San Francisco to use Monkey Parking and other similar apps to continue to arbitrage the difference in prices. This is politically unpalatable because it is seen as unfair by those who would like to be able to pay the below-market price for parking. It is also dumb because, from a market perspective, the taxpayer has paid for those parking spaces and is allowing the value they created to leak to private individuals.

The second is to build more parking. The arbitrage opportunity is available because, at the current price, more people want to park than there are available parking spots. The problem here is a difference between supply and demand. Build more parking and San Francisco can keep the price to park at the current level. Of course, one must question whether or not the city can break even building more parking at the current low rates. I suspect, as do some others with more insight, that they cannot, that they are in fact currently losing money subsidizing parking. At the end of the day, losing money on parking is also dumb policy.

This brings us to the obvious response, the choice that the market is screaming for: raise the price of parking. If parking were more expensive, there would be a balance between supply and demand and the Monkey Parking people would have nothing to arbitrage. The city/taxpayer would capture that difference and there would be ample amount of parking available at the current market price. The people who like their parking at below-market prices wouldn’t like it, but then again, wouldn’t we all prefer to pay less than cost for the products and services we use. The world doesn’t work that way (at least not for long).

I’m rooting for Monkey Parking in this one. If you believe our cities have too many parking lots and not enough productive space, you should be too.

Tuesday
Jul222014

The cost of auto orientation, update

The Taco John’s versus the “old and blighted” story is one of the most compelling that we share in our Curbside Chat. Here you have two blocks that are identical in every way, except one: the pattern of development. They are the same size, the same shape, abut the same thoroughfare, adjoin the same neighborhood and have the same amount of public infrastructure investment. Only a block separates them and so it is truly an apples-to-apples comparison.

The old and blighted block is a remnant of the incremental, historical development pattern. It represents one of the first increments of growth that cities experienced on their periphery; a small investment in a pop up box. This is the cheapest, credible investment that someone could have made in a commercial property here in my hometown back in 1920. In their comprehensive plan, the city has indicated that this block is a redevelopment opportunity that would, to use their language, ultimately become “auto oriented”.

This is exactly what happened two blocks, which used to look like the “old and blighted” block but now contains a new Taco John’s. Definitely auto-oriented with a large off-street parking lot, two drive through lanes, a large sign and a setback/orientation consistent with highway development. If we are to believe the city’s planning documents, this entire corridor will someday transform into a collection of buildings of similar design and orientation.

It is the math that makes this such a compelling story. While we are predisposed to favor the new over the old, and we discount the value of those “blighted” properties, looking at the numbers sets us straight. In this case, that run down block that the city and others would like to see replaced is actually 41% more valuable than the brand new Taco John’s. In a property tax system like we have here in Brainerd, that means the city gets 41% more taxes from the old and blighted block than it is getting from the exact same sized block with the brand new drive through restaurant. (And in a sales tax system, the difference is likely to be the same, although the perverse incentives of such systems tend to dominate).

In the investment world, that would be called an opportunity. We can see in that old and blighted block an asset that is clearly undervalued by the current paradigm. The city discounts that asset and works to undermine it in favor of the auto oriented asset that they value more. This is true even though the latter returns less, and that is completely ignoring the cost of the 26 years’ worth of tax subsidy (yes, you read that correctly). This city invested 26 years of subsidy payments to get a property that, in the year 2033, will pay substantially less than what it replaced.

And that assumes the drive through restaurant holds its value. Let’s examine that assumption.

The original analysis of the Taco John’s block versus the “old and blighted” block used property valuation data publicly available from the Crow Wing County Assessor. This is the value that is used to compute the amount of tax these properties pay to the city (before removing the subsidy, in the case of the Taco John’s). We did the analysis in 2011 using the numbers posted at that time. Three years later, they have been updated to reflect changes in the market. Here’s what we now find.

There are eleven properties on the “old and blighted” block. In the three years since we last looked, five of them have lost value while six of them have increased in value. The net is a $32,000 decline, which is a 3% loss from the starting value. Given the market conditions, that’s a pretty stable block.

That stability is in sharp contrast to what has happened at the Taco John’s. In that same period of time, it has lost $184,700 in value, a full 23%. The prospects for success in the year 2033 aren’t looking that great at the moment.

And it should be noted that, even if there were no tax subsidy to the Taco John’s, the city would be collecting 79% more taxes from that old, run down, blighted block than they are collecting from the shiny new investment up the street that they worked so hard to get.

This is not an anomaly. The traditional development pattern – the way our ancestors, worldwide, built places for thousands of years – has enormous financial productivity and resiliency. This approach creates more real wealth for the community, pays more taxes per foot and holds its value in good times and in bad far better than anything we’ve built in our new, auto-oriented experiment.

And thus the opportunity. How much more valuable could that “old and blighted” block be – and remember, it is already outperforming its competition – how much more valuable could it be if we actually played to its strengths? What if the highway out of in front of it didn’t make it terrorizing to park there? What if we slowed down those cars and made it so people could cross it on foot or bike? What if there were some shade trees for people who walked the block and went to these businesses? What if the lighting were scaled for people and not a highway interchange? What if it was easy and comfortable for the people from the adjacent neighborhood to walk or bike here? What if there was a bike rack? What if we swept the sidewalk?

Instead of systematically devaluing our city, instead of spending our money on things that aren’t paying back, there are a ton of small, affordable things that could be done to improve the value of our asset that are already outperforming other assets we are spending millions on. These opportunities are everywhere, we just need to start seeing them.