Most of a city is privately built
Walk through almost any city and most of what you see, including apartment buildings, offices, shops, warehouses and many parking structures, was financed by private parties. Public bodies usually build and maintain streets, parks, schools and utilities, and they set the rules for everything else. Private investment supplies the bulk of the remaining physical growth.
Understanding what that capital does, and does not do, helps explain why cities negotiate with developers and why those negotiations can be contentious.
Who the private players are
The private side is not one actor but a chain of them.
- Developers identify sites, assemble approvals, arrange financing and manage design and construction. They typically take the early, riskiest steps, such as paying for studies and permits before knowing whether a project will go ahead.
- Lenders provide most of the money for a project, usually as loans. They care chiefly about being repaid and will often require that the developer commit its own funds first.
- Equity investors put in money that absorbs losses first and earns higher returns if things go well.
- Builders and suppliers carry out construction and often share some cost risk.
- Owners and operators manage buildings after they open, collecting rent and paying for upkeep.
Each expects compensation for the risk it carries, and each can walk away from a project that no longer makes financial sense.
What private investment brings
The main contributions are fairly concrete.
Money at scale. City budgets rarely cover large construction programs on their own. Private capital can finance housing, workplaces and commercial space without direct public spending.
Market knowledge. Developers and lenders spend their working lives judging what tenants and buyers will pay for. That knowledge can keep a project from building something nobody wants, though it is not infallible and markets shift.
Project management. Coordinating design teams, contractors, inspections and financing is a specialized skill. Experienced firms often do it more efficiently than a public agency building a one-off project.
Taxable property. New or improved buildings usually increase the property tax base, which can support public services. The size of that gain depends on assessment rules, any tax abatements granted and how long the buildings take to fill.
Choice and flexibility. Because private projects respond to demand, they can deliver a variety of products faster than centralized planning generally can.
What private investment does not do on its own
Investors respond to financial returns, not to public goals. Left alone, the market tends to build where profit is most reliable and to skip needs that pay poorly, such as deeply affordable housing, accessible design beyond legal minimums, public open space or services in neighborhoods with low rents.
It also tends to avoid sites with high uncertainty. Contaminated land, tangled ownership or weak nearby markets can raise costs and risk until the numbers do not work. This is one reason cities sometimes use subsidies or partnerships to bring private capital into places it would not otherwise go.
There is also a timing mismatch. Investors often plan to hold a project for a limited number of years and then sell or refinance. A city, by contrast, lives with the result for generations. That difference is a reason to be careful about promises that depend on a single owner staying committed.
What public bodies should require in return
Because private capital serves private goals, public bodies use their authority to make sure development also serves public ones. Common tools, which vary by jurisdiction, include:
- Zoning and design standards that set what can be built, how tall, and how it meets the street.
- Impact fees and exactions that make new development contribute toward the roads, utilities or parks it will strain. Who ultimately pays these costs, buyers, tenants, landowners or builders, is debated.
- Affordable housing requirements or incentives, such as density bonuses that allow extra height in exchange for public benefits.
- Infrastructure conditions, since a development may need new pipes, signals or road improvements before it can open.
- Environmental and cleanup obligations, especially on formerly industrial land.
- Reporting and monitoring, so the city can verify that promises are kept.
A sensible approach is to ask for requirements that are clear, predictable and tied to a real public need. Demands that are too heavy can make projects unprofitable, so nothing gets built; demands that are too light leave the public with the costs and the developer with the gains. Finding the balance is a judgment call, and reasonable people disagree about where it lies.
The negotiation problem
Developers usually know their costs and margins far better than the city does. Without independent financial analysis, a city can end up giving away more than necessary, or insisting on terms that quietly kill a worthwhile project. Many cities test proposals using their own review of a development pro forma, or hire outside advisers to do so, in order to see what a project can afford.
Transparency helps too. When the rules are published in advance and applied consistently, developers can price them in, and residents can see that deals are not made behind closed doors.
Trade-offs worth naming
Attracting investment is often described as plainly good, but it carries trade-offs. New investment can raise land values, which benefits owners and may squeeze renters and small businesses. It can improve a neighborhood and also change who can afford to live there. These effects vary widely by place and cannot be predicted with confidence in advance.
Cities are also often tempted into attracting investment by competing against one another with incentives, which can leave all of them giving up more public revenue than any would have chosen alone.
A balanced view
Private investment is a necessary part of how cities grow, and treating developers as villains or as saviors both miss the point. Capital goes where returns look adequate; the public sector’s job is to set fair rules, protect what the market ignores and make sure the community can see what it is getting. The better the public side is informed, staffed and open, the more likely the arrangement is to serve more than one party.