SLAYING THE RENT DRAGON
Value Capture for the Common Good
‘Society is shifting from a production mode based on value created in a market system (through labor and capital) to one which recognizes broader value streams. These streams are experienced as ‘contributions’ to structures based on the co-construction of shared resources, also known as ‘commons’.’
https://commonstransition.org/value-commons-economy
The Rise of the Commons
All over the world, the rise of citizen-driven initiatives in service of the commons is a growing phenomenon, as people seek to improve the lives of themselves and those around them, and as tangible ways for them to address bigger social and environmental concerns.
From community gardens and urban farms to bike kitchens, from makerspaces to tool libraries and libraries of things, a plethora of civic projects, contributed to freely by community members, are helping communities to be more connected, resilient and safe, as well as contributing to objectives including circular economy and reducing carbon emissions.
These initiatives are not a less important adjunct to the roles of business and government, but all too often they are treated as such, and their value underestimated. Like many forms of for-purpose enterprise, the value they generate is far more than purely financial, however it is typically their financial performance on which their worthiness is judged, and on which their survival often depends.
The Double Standard of ‘Self Sustaining’
In the 1990s, I worked as a volunteer full time (10am — 6pm, five days a week) around university contact hours with a grassroots community group called Urban Ecology Australia, established in 1991.
UEA emerged out of the Greenhouse ’88 conference in Adelaide, with the mission of changing how cities — the largest human artefacts with immense capability to damage or heal ecosystems — are made. This movement was advocating for ecological cities, before green cities became a thing.
During my time at the Centre for Urban Ecology, the ‘shop front’ of UEA, I learned an incredible amount by doing, and through mixing with people who were professionals in, or who were studying, architecture, interior design, economics, law, public engagement and communications, community building, and political activism.
I also got to meet a wide variety of people, and was fortunate enough to have wonderful opportunities, including those which would go on to influence my professional career, as a result of my involvement. I would go so far to say that I learned at least as much, if not more, through my five years there as I did at university because of exposure to ideas and ways of thinking that were outside the mainstream. My experiences in this sector also assisted and supported my studies, and vice versa.
This place, this Centre and the activity and connections it enabled, was extremely valuable to me and to many others, but not in a way that could be communicated on a balance sheet.
Such initiatives require physical space and resources, and typically the only entities who could fund a space big enough for model making, delivering workshops, creating a library, producing educational materials and hosting visitors (aside from wealthy benefactors, if one could be found) are government, institutional or ethical corporate sponsorship.
The small amount of rent needed to keep the Centre for Urban Ecology operational was paid for by State government, initially, then through a Federal government grant. That is, until the criteria for those grants was changed to only be available to groups whose focus was directly related to nature conservation, rather than those engaged in political advocacy about how we needed to reshape city making in order to sustain natural ecosystems. The consequent shrinking of available space following a move to a new, smaller premises also meant a dissipation of volunteer energy. This demonstrated to me how much physical space shapes what is possible, and that if infrastructure is that which enables something to happen, then space (and rent) is infrastructure.
It was hard to be self sustaining as a not for profit community group. And rent was the constant, overriding cost.
Every NGO has a similar story — creating more work for an already overworked volunteer (or underpaid staff member) by applying for grants, when all that was really needed was money to pay the rent or photocopier bill.
Look at any grant program, and funding is unlikely to be able to be used for the two key things that drive activity: access to space, and paying people for their time and skills, ie. no core funding. Some years back, a major funder in the US recognised this, and moved away from program funding to offering support for core funding to enable an organisation of committed, skilled, motivated individuals to exist, without tying up operational capacity in perpetual grant-hunting:
Organizations participating in BUILD receive a multi-year funding commitment. A significant portion of that commitment comes in the form of general operating support, with the remainder designated as core support for institutional strengthening.
Big things can’t grow unless they’re supported when they are little, yet the vast majority of grassroots initiatives are still hobbled by a mindset which is expressed in ways such as ‘it needs to be self-sustaining,’ ‘how many jobs will it generate?’ and ‘why should government pay for it?’
Why must it be a requirement on citizens, who are gifting their time to work on socially beneficial activity, to be ‘self-sustaining’, but all too often not the well-resourced corporations that benefit from the public purse in various ways? Other common assets like libraries are dependent on government and other funding sources, and not self-sustaining. Then there’s the issue of this value creation sustaining commoners, as individuals. How might this be ‘self-sustaining’ for them, in terms of foregone income? Unlike those who capture private gains from public value, they are unable to capture any percentage of their value creation to pay their rent, mortgage or living expenses.
There’s no guarantee any such initiative will create jobs, and even if it does, likely not in its initial phases — but in any case, it’s an incubator, where people develop skills and networks, and from that, may create livelihoods and businesses. And we fund all sorts of startup incubators.
And why wouldn’t government pay for it? We actively fund (subsidise) many entities or activities because they are helping deliver on a societal goal we’ve decided is important.
There is a massive double standard when it comes to what government expects to be self-sustaining, and how it defines value.
If you are running a Veteran’s Shed which can show it is keeping people out of the mental health system, a value on the cost saving to the public purse (cost per day x number of veterans x days in shed in lieu of health system) should be able to be calculated, and that funding transplanted into preventative and supportive activity — say, properly funding and supporting more sheds.
Even where this value can be demonstrated, even where it is providing employment through enterprise, it doesn’t result in guaranteed support as essential social infrastructure.
Vancouver’s Sole Food Street Farms, the largest urban farm project in North America, employs marginalised people to grow quality food at commercial scale.
During the past seven years, Sole Food Street Farms has transformed acres of vacant and contaminated urban land into street farms that grow artisan-quality fruits and vegetables. By providing jobs, agricultural training, and inclusion in a community of farmers and food lovers, the Sole Food project has empowered dozens of individuals with limited resources who are managing addiction and chronic mental health problems.
…a study conducted at Queen’s University that concluded for every dollar Sole Food paid to its employees, $1.70 was saved to the health care system, the legal system, the social assistance system, the prison system, and the environment. Meanwhile, Sole Food also contributes to the local economy.
Yet…with the high property values in Vancouver, capitalism causes economic competition that Sole Food can’t always overcome.
For example, when WestPark (a parking management company) began managing a lot Sole Food had leased, the farm lost some of its land to make way for parking spaces. Another one of Sole Food’s farms is being repossessed this year, and the organization must move by autumn. Sole Food’s business model, putting profit secondary to their focus of employing people in need, makes them less competitive in Vancouver’s cutthroat real estate market. As Ableman says, “we are merely temporary placeholders for developers until they’re ready to make the big bucks.”
Despite all the value it delivers, including savings to the public purse, Sole Food remains precarious because it doesn’t own the land.
Sole Food receives money from the city, and a number of other philanthropic sources, because its income does not cover its costs. It’s not ‘self sustaining’. But money is going to be spent somewhere, whether it’s subsidising a job which creates multiple benefits for both the individual and society, or paying for unemployment, health and other costs.
Meanwhile, it’s considered ‘economic development’ to offer sweeteners to large corporations to come to a city, town or region and bring their jobs, the ‘attract and retain’ approach. This is also public money spent on job subsidies. But as local economic development expert, attorney and economist Michael Shuman notes, ‘attract and retain’ can often mean a foolish investment of public funds.
The bigger question is: why would a city not want to invest in an asset in which its people are already invested, which addresses multiple policy objectives simultaneously, especially if it can save public money?
There’s no reason a municipal or state government cannot enter into a ‘partner state’ arrangement with initiatives proposed by citizens, an approach which has been formalised in Bologna, Italy and other places with regulation.
Or a public authority can act directly, as the orchestrator and curator for activities that would struggle to be viable without such support. The city of Berlin is subsidising a secondhand store within established retail premises:
At the new store, the city pays rent for the floor space itself and selects merchants to run stalls. None of the products these merchants sell are new to the market, but B-Wa(h)renhaus stands out in one important respect: Many of the items on sale have been recovered from the city’s recycling system, or are from sources that might not normally find their way to stores. These include recycled electrical goods that have been fixed, checked and come with a one-year warranty. The stalls also sell products and goods that have been made exclusively by upcycling discarded materials.
Even without considering the wider, often difficult-to-quantify contributions of commons based initiatives to social capital, environmental improvement, health and wellbeing and local economic development, this ‘self-sustaining’ mantra is a false binary.
All business, all human activity, is directly (through tax breaks, grants) or indirectly (public infrastructure like roads, ports, a literate and trained workforce, communications infrastructure) subsidised to one extent or another by government.
A ‘tax break’ for business is just another way of saying ‘government grant’.
Government funds are public funds. Why should community based initiatives, often run on a volunteer basis by members of the public, have to be self-sustaining? It is an economic apartheid, an expectation applied liberally to less well resourced sectors, while the distribution of large amounts of public funding to other sectors is normalised, including windfall gains resulting from planning and infrastructure decisions which enables siphoning of millions from the public realm to the private. Although some of this is clawed back for public or common benefit through various forms of ‘value capture’, the true capture of value is from the public to the private.
One reason why citizen driven and community based initiatives struggle is that there is no ‘reverse value capture’ mechanism — a way to capture value for regenerative activity undertaken to improve communities — because it often falls outside the realm of market transactions.
Many studies have been undertaken on the value of unpaid domestic and care work, which is also non-market, non-transactional and not included in formal economic accounts. Similarly, the unpaid care work for the wider community is missing off the balance sheet. Both are essential for the functioning of the economy that is counted.
In Australia, this was estimated to be almost half of the country’s GDP, with those statistics from over twenty years ago. More recent statistics for the state of Victoria reveal a similar picture.
There is a broken ‘feedback’ loop in both the domestic and commons sphere, where value generated by social reproduction at both the household and community scale is rendered invisible on the books.
But let’s pause for a moment for a short primer on ‘value capture’, and how government decisions lead to immense financial gains for private interests.
Value Capture
‘In the last year of our property boom, in 2017–2018, land values in Australia went up over $660 billion dollars in one single year.’
— Karl Fitzgerald, Director, Prosper Australia
Six hundred and sixty billion. Increase in land value. In a single year.
$660,000,000,000.
(Hang on, is that the right number of zeroes? Yes.)
In ONE year, the value of land in Australia went up by this astronomical amount. How?
The value of land doesn’t change because it somehow transforms from being made of earth to being made of gold. The value of property increases because of its access to existing or future public goods, like transport, utilities (power, water, gas), parks, beaches, schools, and sporting facilities.
Land rezoning and infrastructure decisions, such as rezoning from industrial or farmland to residential land, or building a new transport hub, generate windfall gains to private owners. While some of this is captured in the form of development contributions, the private value capture is much greater than what it contributes back to public coffers.
Rezoning of land and infrastructure investment decisions undertaken by government create enormous amounts of private value:
Throughout Australia, when land is rezoned from industrial to high-rise residential, a charge is levied to help fund the required infrastructure. A well-situated industrial site in Sydney’s inner west was bought for $8.5 million, rezoned high density residential, then sold again for $48.5 million. The 470% windfall was the result of a government decision: rezoning.
A detailed study on the impact of the New York High Line and uplift value undertaken by Dark Matter Labs revealed a similar scenario:
…the High Line cost $187m to build, it contributed to an additional uplift of $3.4bn for nearby properties, yet the government has only received $103m in additional property tax. The rest went to private landowners.
On the one hand, we have unearned value being extracted from the public realm as ‘rents’ (windfall gains); on the other, commons and public benefit initiatives in danger of not building up enough ‘escape velocity’, or atrophying as large chunks of revenues they do generate or source vanish into the rent vortex - or losing their work altogether because they don’t own the land.
This ‘rent dragon’ seems to be hogging a lot of gold.
Slaying the Rent Dragon
‘Show me a first-generation fortune and I’ll show you a successful partnership between a talented individual and society’s invisible venture capitalist, the commons.’
— William H. Gates, Sr.
When private developments occur, the developers and the people who buy into them benefit from public investment in all sorts of common assets. Access to those assets increases the value of private property.
But there is no mechanism to do the reverse, to capture unearned income (rents) and channel it back to those who are value creators and contributing to wider social good, where one of the overriding costs is rent (access to space), the infrastructure of commons initiatives. People need places that are neither public nor private in which to gather to talk, plan, work, design, learn, make.
And no matter the value of their work, unless they OWN their premises, their position will be precarious:
The project commandeered unused land and in collaboration with local residents and the Municipality established two interconnected hubs for growing food, recycling material waste, conducting ecological education and cultural interchange. The Colombes sites were planned with a 10–15‐year horizon and were to become part of a network of civic hubs of local resilience to be further developed after the 2014 municipal elections. After only 4 years of full operation, however, a new conservative right‐wing Municipal government closed the project down, but not before significant protests.
The South Central Farm was an urban farm and community garden located in an industrial area of South Central Los Angeles which was in operation between 1994 and 2006. At 14 acres (5.7 ha), it was considered one of the largest urban farms in the United States. The farm was sold in 2004, and the farmers were evicted in 2006. On July 5, 2006, workers began bulldozing the farm amidst strong protest and acts of civil disobedience.
In the vast majority of cases, there is no way commons initiatives can compete in a commercial real estate market — if you want to build a community garden, you need land. If you want to establish a bike kitchen, you need space. And while part of their revenue may be generated through trade (ideally, more than any revenue from grant money), they are not a business.
These initiatives are usually run by unpaid or underpaid people, generate social and economic value, but are always scrabbling for comparatively small amounts of money, applying for grants and inventing new projects when all they want to do is pay the administrative costs which fund the architecture of co-operation.
It grates on me to see citizen innovators working so hard, often foregoing income they could have earned and time they could have used otherwise, only to see hard-earned grant money go straight out the door again in rent or other operating expenses, and especially to see years of community investment destroyed by myopic decision making, such as the two examples above.
As I wrote in my previous piece, ‘Making Room for the Community Based Circular Economy’:
…in my research and experience, the major barrier to getting established is access to capital, and specifically space. The cost of rent can make or break civic assets such as these.
The issue of rent is central to whether such spaces can survive and thrive.
This opens a broader question of who and what the city is for, and whether affordable spaces for uses that cannot compete in a purely commercial sense have a role in the city — if so, there needs to be support which will include paying for space, as unless a suitable space can be donated or purchased, rent will be an ongoing and major cost.
How can communities, who are generating significant public value, capture some of that value to sustain their activities (and as part of that, sustain the lives of the individuals contributing)?
There are existing models for ensuring a much greater percentage of windfall gains are captured back for investment in public goods and services:
Australian Capital Territory has been doing it since 1971, charging 75% of the market price for new property rights granted through rezoning.
Late in 2018, the City of Parramatta, NSW, enacted a requirement that developers pay a contribution of 50% of land value uplift as a way of addressing this:
For proposed development and planning proposals outside of the CBD, Council’s primary position is that satisfactory arrangements for the provision of community infrastructure will be taken to have been made when the value of the planning agreement contributions is equivalent to 50% of the land value uplift.
And just west of Melbourne, a local council and a football team have leveraged value capture to build a new multi million dollar stadium without Federal or State funding:
Western United and a local council are building a $150 million football stadium essentially out of thin air, thanks to a concept called value capture.
And in May 2021, the Victorian Treasurer implemented a 50% tax on developer and land speculators who reap windfall, gains if the gain is over $500,000 or more:
In addition to capturing more value back for infrastructure investment, a portion of this could be hypothecated for commons based activities, or any other worthy initiative where much social benefit could be leveraged from a comparatively tiny bit of funding.
The unearned income (‘rents’) extracted from communities could be captured to pay the rent of commons initiatives — or even buy land and buildings to free up revenue that would have gone on rent, and not only direct a flow back to an initiative, but also to sustain commoners themselves.
Using the same model in the examples above, it is entirely possible to create a fund where part of the capital gains of property speculation can be captured to create a perpetual flow of revenue for commons based initiatives.
As someone who has looked for funding and found that many initiatives somehow fall through every crack, and fought for funding for those initiatives on more than one occasion, funders: don’t make it an onerous process, and keep in mind that well-intentioned criteria may inadvertently exclude so many worthwhile initiatives — ‘please attach your latest board minutes’ might render an initiative ineligible, as they may not have minutes (or a Board). They might be overwhelmingly focused on saving veterans’ lives or building open source platforms for local food networks. Building a relationship with these initiatives is a better way of determining accountability for funding than box-checking.
There are good reasons for some commons initiatives to formalise, to bring in some of their revenue through trade, or to experiment with new approaches to investment such as equity crowdfunding or capped investment, and to diversity their income base so they are not dependent on one major funder, whose priorities may change.
However not all of them will have the motivation or skills to do so, yet those smaller initiatives can achieve big things — they are creating experiences that contribute to wellbeing, offer educational opportunities, make a community interesting, attract visitors, and foster civic pride:
Imagine what would be possible for communities freed from their ongoing battle with the ‘rent dragon’ - what could flourish once the ‘Smaug’ of their operations is removed from the equation.
If the ‘Rent Dragon’ is irking even Silicon Valley billionaire tech titans like Peter Thiel, then it’s about time it was slain.
One thing I’ve been thinking about as a venture capitalist in Silicon Valley is the vast majority of the capital I give to the companies is just going to landlords. It’s going to commercial real estate and even more to urban slumlords of one sort or another.
- Peter Thiel, Founder, PayPal
Slaying the ‘rent dragon’ — by capturing more of the ‘rents’ extracted from communities and using them to eliminate the rents charged to communities — would enable a latent pile of ‘gold’, in the form of money and human energy, to go to productive activities that deliver community and social benefit.
The models to make this happen exist, and are already in operation in some jurisdictions in Australia and around the world.
If you are aware of others, please leave a comment.
