Sustainable Development Metrics

By David Godschalk, FAICP, and Emil Malizia, FAICP

We did not inherit the earth from our ancestors; we borrowed it from our children. This adage reflects the essence of sustainable development whether applied to the environment, economy, or the social and cultural sphere. Sustainable land use and transportation are different from the suburban auto-dependent sprawl development that has dominated the North American landscape since 1950. Compact, mixed use, walkable, transit-oriented places offer significant environmental, economic, and social benefits. Yet local political forces, vested interests, and professional inbreeding often conspire to continue the status quo.

Designers, developers, planners, and other advocates for sustainable land use want to embed the principles of sustainable development in their projects, but communication failures among them can handicap their work and lower the odds of project approval, given the organized parochial opposition they often face.

A sustainable development project must integrate and balance three major components:

1. Design elements
2. Development feasibility
3. Regulatory standards

Project design and site plan preparation are typically guided by professional best practices, design standards, legal codes, and regulations, rather than explicitly by the economic and financial dimensions of projects. The basic goal of this process is to craft designs that will be approved by clients and regulatory agencies.

Development feasibility analysis is typically based on expected rates of return from standard designs rather than from design alternatives geared to unique site and environmental conditions or aimed at creating outstanding architecture. The basic goal of this process is to propose projects that will be financially successful and will be readily approved by local regulatory agencies.

Regulatory review is typically carried out to implement standards and objectives in comprehensive plans, zoning and subdivision regulations, building codes, and public facility policies rather than as a conscious attempt to use incentives and criteria to achieve design and financial objectives. The basic goal of the review process is to ensure that reviewed projects protect public health and safety.

An integrated and balanced approach

When conceived as separate elements, design, development feasibility, and regulation may not contribute to sustainable development at either the project level or the community-wide scale. However, when we conceive of a framework made up of project design, development feasibility, and regulatory standards, linked together by their interactions, the value of integrating the roles becomes clear. The resulting framework is the development triangle.

Project sustainability depends on a balance of the three elements that are integrated with one another. But balancing the development triangle is not merely a question of achieving relatively equal weights for the three components. It is more a question of balancing the trade-offs between the components. These trade-offs can be expressed in terms of competition between the components' goals.

The trade-offs between design and development feasibility are exemplified by the notion of balancing project quality and profit. The competing goals are degrees of aesthetic and functional quality versus rate and amount of financial return.

The trade-offs between feasibility and regulatory standards are exemplified by the notion of balancing project intensity and the public interest. The competing goals are the density, scale, and financial return of the project versus its compatibility with environmental quality, community livability, and safety standards.

The trade-offs between regulatory standards and design are exemplified by the notion of balancing project flexibility and community standards. The competing goals are community livability, public health, and safety standards versus degree of design flexibility and freedom to explore aesthetic and functional quality.

The challenges of urban development are to break through the separate professional silos and find ways to balance the trade-offs so that the resulting mix contributes to a sustainable city.

Design, development, regulation

Underlying all development-triangle decisions is the root issue of feasibility. Feasible development projects appear to be reasonable, seem suitable for the intended uses, and ultimately can be carried out.

The regulation and design perspectives emphasize the physical feasibility of the project. The regulators apply public interest criteria as expressed in legally binding zoning that defines the development envelope of a site. Designers work within this legally defined development envelope to achieve the design quality they seek and the developer's program of land and space use.

Beyond physical and legal feasibility, the factor that determines whether a project is successfully developed is its ultimate economic and financial feasibility. Success in the market is determined by many factors, including local supply-and-demand conditions, emerging trends in space use, business and building cycles, and project timing. Those who comprehensively preview the impacts of a project and then revise components interactively to improve feasibility before making final decisions increase their chances of satisfying design, development, and regulatory feasibility requirements.

For such a preview and revision process, we propose three economic and financial techniques that can account for interactions among project design, development, and regulation: 1) cost-driven and market-driven analyses, 2) discounted cash flow analysis, and 3) solvency analysis.

The first technique is a form of static or cross-sectional analysis that accounts for the project at one point in time; the second and third make use of dynamic analyses that account for the project over time. Among the advantages of these techniques is their ability to inform planners and designers about the responses of developers to regulatory and design proposals and to allow them to revise their proposals to accord with market feasibility.

Static financial analyses

During project inception, developers employ "back-of-the-envelope" techniques, such as cost-driven and market-driven analyses, to gauge whether additional time, effort, and funds should be devoted to the project under consideration. Usually, they are evaluating several project options simultaneously. If an idea seems promising, it is refined further and compared to other project options under review.

As a way to transition to a more formal feasibility analysis, the developer works with the designer to articulate the development program to address the physical and legal dimensions of feasibility. The developer then begins to "run the numbers" to address the economic and financial dimensions. The fundamental question the developer asks at this stage is: Under what conditions would the proposed project become viable? To address the economic and financial dimensions, both current and future conditions bear upon estimated project cost and estimated project value.

Cost-driven analysis begins with a calculation of the costs of site acquisition, construction, financing, and operations so that the necessary rent level for the project can be derived. Market-driven analysis begins with a calculation of market rents and operating expenses to arrive at the justifiable capital budget and residual funds available to purchase the land.

For preliminary analysis of a development project proposal, the static approach of market-driven and cost-driven techniques can show whether the project concept is in the ballpark. This may be sufficient to indicate whether project refinements should be pursued or the development strategy should be totally revised. (In the book, cost-driven and market-driven analyses are used to consider alternative development scenarios for a proposed apartment project on an urban site.)

Dynamic financial analyses

The feasibility of development projects whose income and expenditures are spread over several years is assessed with dynamic financial analysis, including both discounted cash flow analysis and solvency analysis. The approach is based on the time value of money — the reasonable idea that consumption now is preferred to consumption later. A borrower who wants to use money for development now is willing to pay interest to a lender as compensation for the lender's willingness to wait for repayment of the loan in the future.

Discounted cash flow analysis is the financial feasibility technique used to evaluate expenditures and returns from developing or investing in income-generating properties. For these projects, the timing of money inflows and outflows is the critical consideration. Discounted cash flow analysis enables real estate developers and investors to compare cost to value, taking time into account.

Mixed use infill development projects are more complex and challenging than single-use and greenfield projects. Because of their longer time horizons and more complex financial arrangements, infill projects are best understood with the use of discounted cash flow analysis, which captures the projected flow of transactions that occur from the start of a project to its conclusion.

(In the book, discounted cash flow analysis is applied to examine the controversial redevelopment of an urban site, converting the original low-density, suburban-style rental housing into a more intense contemporary mixed use infill project. When the revisions to the original plan supported by the neighbors generate an infeasible outcome, designers, developers, and planners are given suggestions about how to reach feasibility.)

Solvency analysis is a simpler form of dynamic financial analysis that keeps track of cash inflows and outflows over time. Project solvency is the ability to maintain a net positive cash position over the development period. (In the book, solvency analysis is applied to a residential subdivision project, as illustrated in the sidebar.)

Collaborative development

Designers and planners share many values and tend to agree on projects that would help create sustainable places to live, work, and play. They are well versed in the physical, legal, and institutional dimensions of development but less so in the techniques of development economics and financial analysis, what goes on "behind the curtain." The three techniques discussed in the book offer tools for expanding their understanding of the numbers underlying feasibility.

Developers are more concerned about the market for, and the financial implications of, their projects. Savvy developers recognize that they are producing space in buildings to satisfy two distinct markets: the space's buyers or renters and the neighbors and public at large. They could produce better projects for both markets if they worked successfully with designers and planners who understand the market and financial dimensions of development.

Each type of actor in the development triangle has an opportunity to contribute to project sustainability. Developers can envision feasible projects that not only return acceptable profits but also incorporate best practices in green building and walkable neighborhoods. Designers can envision beautiful projects that not only represent high-quality site planning and architecture but also meet community standards and are financially feasible. And planners can envision sustainable projects based on regulatory standards and incentives that not only implement the goals of community plans but also relate design and development proposals to the broader mandates of sustaining places.

David Godschalk is an emeritus professor in the Department of City and Regional Planning at the University of North Carolina at Chapel Hill. Emil Malizia is a full professor in that department.