The Cost of Regulation

By Scott Sumner.

"The federal government is in the process of auctioning off a famous office building in Laguna Niguel, California. The Chet Holifield Federal Building, sometimes referred to as the Ziggurat, was designed by William Pereira, a well regarded architect. It’s an interesting building, done in a sort of Mesopotamian style, but to my eye not particularly successful:

The OC Register has had a series of news stories on the auction, where feverish bidding has pushed the price to a much higher than expected level.  This is presumably because the property includes not just the office building, but also 89 acres of land in one of California’s most desirable communities, just a few miles from Laguna Beach.  The article contains this graph:

Note that the original asking price was only $70 million.  One reason why people were caught off guard is that this is actually the GSA’s second attempt to sell the building:

By the way, this is the second auction for the 53-year-old Ziggurat, The first, which required the buyer to preserve the Ziggurat structure, drew no bids. The lengthy response to the latest auction – without that restriction on development – suggests the buyer will likely demolish the structure designed by the late famed architect William Pereira.

Not a single developer was willing to bid even $70 million for this highly desirable property at a time when there was requirement that the building be saved.  Once that restriction was lifted, at least two developers were willing to pay more than $150 million (and the auction is still ongoing.)

From this information, we can infer that the economic cost of this particular regulatory barrier was at least $84 million, the difference between the current auction price and the previous auction’s reserve price.

But even that figure is a gross underestimate of the cost of regulation for this property.  Although the new owner will be allowed to remove this eyesore, they will continue to face a Byzantine thicket of regulations and lawsuits, from all sorts of interest groups that hope to minimize the amount of development.  After all, this is California.

While I cannot be certain, I suspect that a developer would be willing to pay many hundreds of millions of dollars for this property if given a completely free hand to develop it any way they wished.  I also suspect that the resulting development would be extremely impressive—the sort of grand project that the US used to be good at doing, but that has somehow become beyond our ability."