Private Real Estate Investment: Data Analysis and Decision Making_3

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Private Real Estate Investment: Data Analysis and Decision Making_3 30 Private Real Estate Investment TABLE 2-1 Numeric Values for Variables in Functions for Utility and Optimal Advertising a b g A0 q .5 4.1 3.1 100 .07 Utility 358,071. Advertising 43.0556 FIGURE 2-4 Maximum utility when allowed advertising, A, is optimal advertising, A*. in parameters. Remember also that the actual values have no meaning except in reference to other values calculated in the same way. The importance of the general model is that it achieves an optimum for all combinations of numerical values given the parameters. What we are interested in is what happens when equilibrium is disturbed. Assume you are considering a certain community for locating your business. You find the present condition (equilibrium for our purposes) of sign regulation as plotted in Figure 2-4. How does a change in the political landscape change your decision to locate? How does it change the fortunes of market participants? How does that change of fortune affect other business owners’ decisions to locate in the community? Taking aesthetic regulation as just one example of the restrictions on freedom of choice imposed by government, what would you expect the aggregate effect of numerous restrictions to be? A reduction in the value of g from the 3.1 shown in Table 2-1 to 2.3 results in a reduction in both allowed advertising, A ¼ 35.9375, and, as expected, utility, U ¼ 82,218, as shown in Figure 2-5. Combining the last two plots in Figure 2-6 shows the cost, in terms of lost utility, of reducing the effectiveness of advertising,g. It is this argument that 31 Land Use Regulation 82,218. 35.9375 FIGURE 2-5 Utility from reduced advertising. Cost of Reducing g Utility Lost Utility A′ A* Advertising FIGURE 2-6 Reduction in advertising from the optimal and resultant loss in utility. may persuade the one vote an investor needs from the local council. If the vote is close and swing vote is rational, this argument may only need to ring true with that one member. Utility, U, changes with the change in allowed advertising, A, the efficiency of advertising, g, and community disutility for advertising (as expressed 32 Private Real Estate Investment through Env), b. The effect on utility of a change in allowed advertising is greatest when the efficiency is highest. This is reasonable as the merchants lose more and tax revenue falls more. IMPLICATIONS The implications of this exercise should be clear. 1. People make decisions on the margins. Marginal analysis is a very powerful tool for measuring the net effect of a tradeoff between two alternatives. Many, if not all, economic choices between two alternatives may be modeled on a cost–benefit basis provided one makes plausible assumptions about how people generate well-being, happiness or utility. 2. Any item on the list of development constraints mentioned in the introduction to this chapter could be substituted for the one illustrated here. The aggregate of all such constraints, if applied by a heavy-handed legislative body, can operate as a strong disincentive to entrepreneurial activity in a community. 3. Arguments for change and arguments for preservation are often equally persuasive, especially when couched in an emotional framework. Alternatively, a balanced, methodical approach to resolving these issues is preferable when rational people of good intent must agree on how change is to be implemented. A CASE STUDY IN AESTHETIC REGULATION The developer who appears at the city council meeting waving his arms and talking about utility functions runs the risk of having Security escort him outside the city hall. The power of the general result above is often lost in the day-to-day implementation of policy. What follows is an example of how the thinking described above may be employed to construct a good argument in a specific case. The fact situation involves an independent hardware store in a municipality in California. The store has been in the same location for over 15 years. The Excel worksheet that accompanies this chapter provides a detailed historical record of sales for the past five years. The store is located in a commercial project of approximately 22,000 square feet, of which the store itself comprises 40% of the area available for lease. The remaining 60% is leased to other tenants at approximately the same rental 33 Land Use Regulation rate as the hardware store. A 30-foot-high, ‘‘pylon-style’’ interior illuminated sign occupies a spot on the perimeter of the project. The owner/operator of the store is not only a long-standing and admired member of the local community, but he holds an undergraduate degree from West Point and a Masters in Business Administration from Columbia University. Local city officials respect his integrity and business acumen such that any estimate he might be required to make of the impact of city regulatory action on his business would be viewed as factual and well reasoned rather than self-serving. Municipal revenue is generated from three sources. Local gov ...