Fred S. McChesney

Historic Self-Preservation

Fred S. McChesney*
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"Government control over private owners' use of their property empowers politicians to advance their own agendas. In particular, it allows politicians to threaten property owners with historic preservation status when the conditions do not justify political intervention."
Politicians regularly claim they can make our lives better, in ways that improve their own lots in life. Nothing wrong with that, if they deliver on the first part of the claim. Doing well by doing good is fine, even if the doers are politicians. If everybody is better off, bravo.

But all too often, the claim that they will do us good only results in their doing well at our expense. "Historic preservation" is a great example, as the citizens of Evanston, Illinois are learning the hard way.

In a historic-preservation area, changes to neighborhood buildings are prohibited unless authorized by local government. Authorization is to be granted only for changes in keeping with buildings' historic character. Done right, preservation promises social benefits, safeguarding neighborhoods with real historic value from degradation or destruction.

To many people, historic preservation is self-evidently a "good thing," needing little justification. Beautiful old neighborhoods are valuable, and once lost are irretrievable. It follows that they should be protected.

However, because preservation is deemed useful for the sake of maintaining value, it is worth analyzing more closely as a matter of economics. So viewed, historic preservation is not so obviously a good thing. It makes sense as a matter of economics only when several conditions hold.

First, private property owners must face some difficulty of coordinating their actions for the collective good that requires government intervention. (Economists call this a "collective action problem.") Some owners must want to take advantage of others, to the overall detriment of the group. As an example, take the oldest part of Evanston, whose houses—often remarkable architecturally—date from the nineteenth century. If one owner could make money by razing the house and erecting a high-price modern hotel, he might be better off. But his doing so makes the rest of the neighborhood worse off, with total wealth of all landowners together arguably diminished. Historic preservation to prevent that construction would be value-enhancing.

Thus the argument for historic preservation is very similar to that for zoning. Absent intervention by some outside agency motivated to maximize social rather than personal wealth, the rationale goes, individuals will choose what benefits them personally but constitutes a negative-sum solution overall. Just as putting a gas station in the middle of Beverly Hills houses would reduce the value of real estate in zip 90210 overall (the sort of problem zoning is supposed to solve), so would tearing down a block of historic colonial houses in the middle of Georgetown in order to build a modern high rise. When used wisely, historic preservation (like zoning) solves a true collective action problem among neighboring property owners.

There is a second necessary condition, nonetheless, for historic preservation to be desirable social policy. There are private alternatives to solving collective action problems, such as restrictive covenants among property owners to maintain their neighborhood's historic allure. All other things equal, reliance on government must be a lower-cost alternative.

But even if government's costs of action are lower than those of the private alternative, historic preservation has its dark side. Two problems arise. First, even when motivated altruistically, how are government actors to know which uses are value-maximizing? Freezing building changes today may well impose costs over time to property owners. Over time, shifting patterns of demand and cost typically make change desirable, in this respect as in most others. (In Evanston, for example, remodeling and particularly expansion of smaller houses are ubiquitous.) One must wonder whether government, which does not own the properties, will have the same quantity and quality of information that owners do about whether preservation makes sense.

More important, one cannot assume that even a well-informed government armed with historic preservation power will wield it in the public interest. Government control over private owners' use of their property empowers politicians to advance their own agendas. In particular, it allows politicians to threaten property owners with historic preservation status when the conditions mentioned above do not justify political intervention. The preservation threat then can be used to politicians' advantage, because they can extract payments from the private property owners to buy off the threat.

Currently, local politicians are brandishing the preservation club just that way in Evanston. The town (part of Cook County) is one of Chicago's oldest suburbs, dating from 1863. But before that, there was Northwestern University, incorporated by an act of the Illinois legislature in 1851. Four years later, the legislature declared "That all property, of whatever kind or description, belonging to or owned by said corporation, shall be for ever free from taxation for any and all purposes."

While this language seems as clear as it is categorical, Northwestern's exemption from taxation has long been a burr under local politicians' saddles. Evanston is a tax-and-spend town, perennially thirsty for new revenue. With a reputation of inhospitality to industry and commerce, the town forfeits much access to those tax bases, which settle instead in other suburbs. And so Evanston gazes longingly at Northwestern for fiscal salvation. Northwestern is an easy mark, clearly successful at raising money and possessing a large stock of immobile capital.

But how to pierce the protective armor of that state-granted tax immunity? The town's attack tactics have varied. In 1874, Cook County just ignored the immunity and levied property taxes on hundreds of parcels belonging to Northwestern, then attempted to seize and sell them when Northwestern refused to pay. Only an 1878 decision of the United States Supreme Court halted the local authorities' land grab. The town's lust for lucre has prompted other ploys, including attempts to impose a hotel-motel tax on a Northwestern conference center and a tuition tax.

Neither of these succeeded, although taxing students' tuition payments gets credit for ingenuity. Seemingly out of breath, the town was reduced by 2000 to abjectly begging the university to submit voluntarily to taxation. In hopes of shaming the university into paying, Evanston waged a public-relations campaign rebuking Northwestern for not paying its "fair share," a campaign for which the political beggars distributed "fair share" signs for Evanstonians to plant on their lawns. The university politely declined, apparently ending the tax issue.

But now, historic preservation has reinvigorated the seemingly spent politicians. Last year, the town established the Northeast Evanston Historic District—Northwestern University is in northeast Evanston—an act the university is currently contesting in court. (The author is a member of the Northwestern faculty, but has no involvement in the legal action.) Property owners in the district would need government permission to make any change to property visible from public rights of way (typically, streets). Any change means just that: not just a building's basic character (shape, façade) but doors, windows and anything else visible to the public could not be altered without town approval. Roofs. Fire escapes.

The minatory cloud of forced negotiation with local authorities over even trivial building changes is an excellent way to get Northwestern to think a second time about "voluntary" capitulation to taxation. In the debate over creation of the historic district, Evanston aldermen admitted that the real impetus was the never-ending campaign of mau-mauing the university for money. The very contours of the district betray its purpose, the lines drawn to include such "historic" Northwestern-owned structures as a faculty office building built in 1999, university parking lots, and a dormitory and gymnasium constructed in the 1970s. Many non-university homeowners in the proposed district—who, not surprisingly, complained of being included therein—have been gerrymandered out.

How this will all turn out in the courts remains to be seen. Already, though, one is struck by the town's tenacity in throttling the goose to get those golden eggs, and by its ingenuity in finding ways to do so. Denied taxation, the town turns to historic preservation. If the courts invalidate the use of historic preservation to bring the university to its knees, one wonders what comes next.

The Evanston episode, shows the darker side of historic preservation. There is no collective action problem requiring preservation status over Northwestern property: the university is the sole owner. Obviously, then, Northwestern knows what is value-maximizing for itself better than any local official or bureaucrat will. Because there is no collective action problem, the necessary conditions for preservation to make economic sense are lacking. But naturally, this is all of negligible concern to politicians focused instead on getting their "fair share."


* Fred S. McChesney is Class of 1967 / James B. Haddad Professor, LawSchool, and Professor, Department of Management & Strategy, Kellogg School of Management, Northwestern University. His email address is f-mcchesney at law.northwestern.edu.

For more articles by Fred S. McChesney, see the Archive.
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