ECONOMICS UNIQUENESS

INVESTING IN THE SENSE OF PLACE ■ 37
architectural value is oft en in the hands of property owners or outside investors
who may lack the specialized knowledge to do respectful and tasteful work. Th is
raises coordination issues involving the amount of resources to be spent by these
owners and investors. Coordination is also needed regarding the aesthetic and
architectural criteria for them to follow.
Regulation, Incentives … or Both?
Th e most straightforward way to align private incentives with the socially optimal
preservation decision is regulation. Banning the demolition or alteration
of all the buildings worth preserving would ensure that the social optimum is
attained. However, this approach could face resistance. In terms of fi gure 2.3, the
H owner of a building with architectural value would expect a profi t P in the event
i
0 of preservation and a presumably larger profi t P if the building were demolished
i
and replaced by new construction. Th e analysis above shows that this presumably
larger profi t is overestimated in a context of decentralized investment decisions,
because it ignores the impact of the decision on the heritage value of the
area. From the owner’s point of view, regulations preventing demolition result
0 H in a relinquished profi t P − Pi . Because regulations do not apply to neighbors
i
with properties of lesser architectural value, this approach would be perceived
as unfair.
In the absence of regulations on preservation, aligning private decisions
with the social optimum would require ensuring that the owners of buildings
with architectural value would be indiff erent concerning the choice to demolish
or renovate them. In practical terms, in addition to the transfer T , the own-
i
ers of those buildings should be confronted with additional resources R if they
i
agree to preserve and renovate the building. Th is bonus should be equal to the
expected foregone profi t P i
0 − Pi
H . Th e slope of the cost function C in fi gure
2.4 is determined by the size of this renovation bonus. In the simplest case, in
which all properties with architectural value are similar, the bonus is the same
for all of them and the cost function C is linear. Figure 2.4 was drawn under
this assumption.
However, determining the level of the transfer R i that would lead to indiff erence
between demolition and renovation in each case may be diffi cult in practice.
Th ere is too much uncertainty on future property prices for this to be a workable
solution. Moreover, expectations on future property prices may diff er substantially
among property owners. Th is is why it might be necessary to reach an
explicit agreement with the owners. One way to do this is to establish a preservation
easement, whereby the right to demolish or alter the property is bought by
the project. In this case, a negotiation between the project and individual owners
is needed to determine the level of the transfer R i that would make each of them