Guidebook to Funding Transportation Through Land Value Return and Recycling (2018)

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1 Guidebook to Funding Transportation Through Land Value Return and Recycling (the Guidebook) was developed as a guide to the potential consideration and implementation of land value return and recycling methods. Its purpose is to engage and motivate public policy makers to understand, consider, and, where appropriate, implement land value return methods to fund transportation investments. The Guidebook also aims to assist public policy makers in adapting land value return methods to their unique circumstances. It is geared toward policy makers in state and local governments, including governors, state legislators, officials in state transportation agencies and state economic development agen- cies, and officials within local governments and agencies. Organized into five chapters and eight appendices, the Guidebook elucidates various aspects of land value return methods. Chapter 1 discusses the objective and intended audience. Land value return and recycling methods refer to a subset of real estate–based value cap- ture methods. They are all economic development tools that can be considered for fund- ing transportation. These methods are presented in Chapter 2. The Guidebook adopts the following classification throughout: land value capture methods include land value return and recycling and land value return–like methods. The former is a beneficiary pays method focused on recycling the pure benefit of public investments in land value that accrues to landowners from improved access (land value return). In this case, landowners pay in pro- portion to benefit received. With transportation investment needs significantly outweigh- ing available resources, exploring land value return and recycling—a largely overlooked revenue source—could benefit the public agencies that build, maintain, and operate the transportation system. Land value return and recycling methods seek to internalize the ben- efits received from transportation improvements of any functional classification. Land value return and recycling can have positive effects on • Behavioral choices and • Development effects and patterns. Land value return and recycling methods are beneficiary pays methods with fees that are in proportion to the benefit. They are directed at fees based on land value alone and include the following methods: • Land value tax or split rate tax, • Betterment levy, • Special assessment district fees (based on land value only), • Sale of public land or air rights, • Lease of public land or air rights, and • Joint development fee or interface fee. S U M M A R Y Guidebook to Funding Transportation Through Land Value Return and Recycling

2 Guidebook to Funding Transportation Through Land Value Return and Recycling Land value return–like methods are motivated by cost recovery. They are directed at both land and property values jointly or at development activity by land use and include the following methods: • Transportation utility fee, • Tax increment financing, • Development impact fee, and • Exaction or proffer. Chapter 2 discusses the difference between the beneficiary pays principle and cost recovery. It notes that land value return and recycling internalizes positive externalities of transporta- tion and that the problem associated with funding a public good such as transport infrastruc- ture requires government intervention when it is also nonexcludable (i.e., when usage cannot be limited). Pricing such public goods is problematic, and it is in this context that methods like land value return and recycling can be justified. The use of land value return and recycling methods is motivated primarily by the principle that people and businesses who receive a direct and unique benefit from well-performing transportation infrastructure should help pay for the infrastructure’s construction, mainte- nance, and replacement. The sharing of this benefit returns a portion of the value created by the transportation investment to the government. Those who benefit from the infrastructure may do so directly (i.e., they use it) or indirectly (i.e., they own land near it, or a transit sys- tem they do not ride reduces congestion on a roadway they use). It is also possible, given the long useful life of infrastructure, that a beneficiary may not benefit now but will in the future. Land value return methods generate revenue from these beneficiaries in a way similar to the way user fees generate revenue from direct users of the transportation system (Figure S-1). Chapter 3 presents all land value return methods. A short description of each method, how it establishes revenue, and key considerations are provided, as are case examples that illustrate the method. For some methods, such as special assessments, tax increment finance, development impact fees, exactions, and sale or lease of public land or air rights, several examples from across the country as well as from other countries are presented. The Guide- book selects one to two examples as illustrations to highlight specific elements of land value return methods that may be useful for policy makers to consider. In the case of special assessment fees, an example of the Route 28 corridor improvements in Virginia is show- cased. Although special assessments in the United States are not strictly land value return and recycling, they can be made to be by focusing on land value alone. This example presents several actionable aspects for state departments of transportation, including the following: • State role in facilitating local contributions toward state transportation investments such as State Route 28. This effort involved the development of the institutional mechanism Figure S-1. Beneficiary pays principle.

Summary 3 called the transportation improvement district. A similar district is also used in the case of the Metrorail. • State role in partnering with local governments (multijurisdictional partnerships with Fairfax and Loudoun counties). • Advancing and funding Route 28 corridor improvements. • Stakeholder involvement. • Risk management through the use of backstops to hedge against real estate risks in the leveraging of real estate revenue–based financing in the early years of construction. • Development of a geographically differentiated fee. Similarly, other examples, such as the Oregon system development charges and transpor- tation utility fees; Texas’s reinvestment zones; Massachusetts’ and Washington, D.C.’s use of sale or lease of air rights; the joint development and lease of air rights on Interstate 670 (High Street Cap) in Columbus, Ohio; and Virginia’s proffers all present implementation aspects. All of the examples are unique in that they elucidate specific state action toward the implementation of land value return methods. Chapter 4 addresses two key considerations that are important to consider when the issue of whether land value return methods could be a viable funding source for transpor- tation investments is being determined. These considerations are associated with revenue feasibility and with whether land value return methods satisfy constitutional, statutory, and regulatory requirements: • Revenue feasibility. Can land value return generate sufficient revenue? The pursuit of land value return is sensible if the amount of anticipated revenue is able to fund infrastructure investment to an acceptable degree. While land value return could be implemented to achieve goals related to land use or development alone, interest in land value return is often tied to the ability to generate revenue to pay for transportation investment. The answer to this question is associated with three factors that are important for determining revenue feasibility: – Merits and benefits of the project itself and whether it specifically makes one geo- graphic area more valuable with the transport investment than without. The beneficia- ries then are dependent on the merits of the project itself and the location of benefits. The number and nature of land-based beneficiaries is a vital determinant of revenue feasibility. Chapter 4 discusses various methods for identifying benefits. – Timing of benefits relative to the timing of the phasing in of the method itself. Recur- ring revenue-returning methods such as land value fees, assessment district fees, and tax increment finance are all better phased in earlier in the planning phases so that their revenue streams can be anticipated. Timing of benefits helps to determine whether cash flows from recurring methods can generate sufficient revenue to help fund and then finance transportation investments. Land value return methods that provide a one- time infusion of cash, such as the sale of public land or air rights, can provide additional revenue streams before construction. – Level of fees. • The ability of land value return methods to satisfy constitutional, statutory, and regula- tory requirements is important in defining whether the benefits received can be returned and recycled. The answer to this question is dependent on the answers to some of the following questions: – Who paid or will pay for the capital cost of the transportation investment? – Who owns the transportation investment? – Who directs and pays for the operation and maintenance of the transportation investment?

4 Guidebook to Funding Transportation Through Land Value Return and Recycling – In what jurisdiction(s) is the transportation investment located? – In what jurisdiction(s) is the property or properties that will benefit from the transpor- tation investment? – What land value return (or land value return–like) methods are authorized? Can others be authorized? – What agreements exist between the jurisdictions or agencies that are paying for the investment and those that are collecting the revenue? Sharing transportation investment benefits between those who pay for them, those who benefit, and those whose regulations determine the degree to which that benefit is realized depends on partnering between state and local entities. A state must typically authorize county and municipal governments to employ land value return fees or taxes. Addition- ally, a state and its municipalities and jurisdictions might negotiate agreed-upon terms and responsibilities in a memorandum of understanding regarding the return of some of the proceeds of land value return to the state. States have options to advance the use of local financial contributions in transportation projects that yield concentrated benefits for one or more jurisdictions. Many of these options are consistent with a goal of promoting land value return in the state. Some options could include the following: • Facilitation of nontraditional funding and financing in locally sponsored, locally funded projects, • Incentivization of local contributions in state-funded or -sponsored projects, • Requirement of local contributions in state-funded or -sponsored projects, and • State-level implementation of land value return methods. The two factors of revenue feasibility and the ability of land value return methods to satisfy constitutional, statutory, and regulatory requirements jointly determine whether a method can be considered to be reasonably available as a funding source. Public–private partnering, as in the case of joint development and for stakeholder involvement, as seen in several case examples, is also vital to ensure success of such methods. Chapter 4 also discusses how to estimate the potential for revenue generation and the informational and capacity requirements to support the assessment of revenue generation requirements. Some of these assessments can be done in house by state departments of transportation and other agencies, such as metropolitan planning organizations, or by con- sultants in consultation with assessors. Local jurisdictions, in turn, may support specific methods on the basis of their analysis of their own funding sources. Finally, Chapter 4 discusses how to leverage revenue streams to facilitate financing. It distinguishes funding from financing. A detailed examination of the legal and regulatory requirements is also outlined for the various methods. These are summarized in Table S-1. Chapter 5 addresses a variety of aspects of implementation and notes that addressing legal and legislative requirements is only one step of the process. Stakeholder support and awareness of administrative and institutional aspects ensure the successful deploy- ment of such methods. Integration of transportation planning and land use planning can further ensure both consistency in the use of such methods and the success of such methods. Chapter 5 presents key stakeholder considerations for all methods as well as communication strategies that can help advance the use of one or more such methods. Informational needs and staffing capacity are presented as key administrative and insti- tutional factors. These factors are summarized in Table S-2. Chapter 5 also presents the role of land use planning and regulations in facilitating and ensuring the success of land value return methods.

Summary 5 Land Value Return Method Legislative and Legal Considerations Land value tax or split rate tax Land value return is embedded within the traditional property tax. Some state constitutions or statutes explicitly prohibit taxing land and buildings at different rates. All like property must be taxed uniformly; most states permit different rates to be applied to different classes of property, and land and improvements can be shown to be different classes of property. Applicable statutory and regulatory requirements or prohibitions must be understood, complied with, or changed. Legislative action is needed if not already in place. Betterment levy Requires authorizing legislation combined with local implementing legislation. Special assessment district Authorizing legislation is required. Implementing legislation typically requires approval by majority of affected landowners. Type of property expected to benefit from infrastructure investment must be specified. There must be a demonstrable relationship (nexus) between infrastructure improvement and enhanced value for land within the defined special assessment district. Geographic area must be defined and justified. Fee must be proportional to benefit received. Sale or lease of land or air rights, including joint development Typically, legislation is not required as long as jurisdiction has the authority to own, manage, and dispose of real property. Sales, leases, and joint development agreements are legally binding contracts. There are various requirements regarding transparency and conflicts of interest. Transportation utility fee Legislation must refer to studies that demonstrate nexus between type and intensity of property utilization and transportation benefits received or costs imposed. Legislation requires owners or occupants to pay a fee. Fee must be proportional to the benefits received or costs imposed. Tax increment financing State authorizing legislation required. Implementing legislation must identify geographic area and taxes or fees to be benchmarked in relation to a particular infrastructure project. Implementing legislation must designate a dedicated account into which the increments are deposited; dedicated account can only be used to fund the infrastructure for which the tax increment financing is established. Development impact fee Must demonstrate nexus between a proposed private development and an additional cost burden on the public sector for infrastructure. Legislation must refer to studies that demonstrate nexus and specify formula used to derive the fee. Fee must be proportional to costs imposed on public sector by new development. Legislation must be enacted prior to implementation. Exaction or proffer Must demonstrate nexus between a proposed private development and an additional cost burden on the public sector for infrastructure. Legislation must refer to studies that demonstrate nexus. Exaction or proffer burden on a developer (for land, in-kind infrastructure, or a fee) must be proportional to costs that would otherwise be imposed on public sector by new development. Table S-1. Legislative and legal considerations of land value return methods. In summary, this Guidebook presents several ways state departments of transportation can consider land value return methods. States can • Authorize land value return and recycling techniques (if they are not already permitted) and become aware of the pros and cons and the administrative and institutional consid- erations of each method; • Facilitate, create, and incentivize partnerships with local governments and private parties to implement such techniques as one way to resolve infrastructure needs; • Adopt a more active role in transportation planning to identify which projects can support land value return–type methods; at least two examples of agencies considering such integration are presented in the Guidebook;

6 Guidebook to Funding Transportation Through Land Value Return and Recycling • Consider transportation planning proactively alongside land use aspects and land use planning; • Develop champions and communication strategies for specific methods they choose to authorize; and • Recognize the factors that influence revenue generation, including benefits, location and size of benefits, beneficiaries, market conditions, and level of fees. Land Value Return Method Institutional and Administrative Considerations Land value tax or split rate tax Ability to use existing property assessment and taxation systems. Separate valuation of land and improvements for each property. Basis for tax rate must be determined. Entire jurisdiction is often determined as benefit area. Valuation appeals procedures must allow property owners to appeal the land and improvement components separately. Betterment levy Accurate estimate of total anticipated land value increases as a result of transportation investment; prospective estimation may be difficult. Alternatively, levy may be determined or collected after value increase is observed. Benefit area must be determined and must demonstrate nexus to investment. Special assessment district Can piggyback on existing collection and enforcement processes; levied similarly to regular property tax, as additional line item. Benefit area must be determined and must demonstrate nexus to investment. Expertise of local real estate experts (e.g., public assessors, private appraisers, real estate brokers, lenders) may be needed. Specified property types to be included must be determined. Basis for fee level must be determined. Sale or lease of land or air rights, including joint development Long-term lease arrangements require detailed agreements that outline terms including payments and responsibilities related to the transportation investment and real estate development as well as operation and maintenance. Joint development likely to require external financial and legal advisors. Specific expertise needed to value air rights and connections between private property and transportation investments. Accurate current valuations of land and improvements may require special research; owing to data collection and review time requirements, most official property assessments are based on sales data that are one or two years old. There are requirements regarding transparency and avoidance of conflicts of interest. Site-specific, and so may need policy framework to implement consistently jurisdiction-wide. Transportation utility fee Data needs and collection processes depend on basis for measuring intensity of transportation investment use; can rely on the Institute for Traffic Engineers Trip Generation Manual. Formula-based fees must be calculated and billed to each property according to the implementing legislation. Entire jurisdiction is often determined as benefit area but can be levied in a specific benefit area only. Tax increment financing Can piggyback on existing collection and enforcement processes; no change in tax rate imposed. Baseline revenue yields of chosen taxes or fees must be established. Method for separately accounting for revenue exceeding baseline must be established. Benefit area must be determined and must demonstrate nexus to investment. Tax revenue must be identified; can include property, sales, income, payroll, hotel and occupancy, meals, and other taxes. Development impact fee Policy framework may be needed to implement fee consistently jurisdiction-wide. Cost-reimbursement formula specified in implementing legislation must be applied in each instance. Revenue must compensate public sector only for additional cost burden of new development. Studies of demand of new development on infrastructure may be needed to demonstrate nexus. Proportionality of fee to demand generated by development must be demonstrated. Exaction or proffer Policy framework may be needed to implement consistently jurisdiction-wide. Must be demonstrated that otherwise would be required of government. Must be demonstrated that only needed to meet needs of development in question. Table S-2. Institutional and administrative considerations of land value return methods.

Summary 7 The Guidebook includes eight appendices that document and elucidate specific topics: • Appendix A provides a list of acronyms used in the Guidebook and a glossary of terms. • Appendix B presents further details on all case examples. • Appendix C answers some of the common questions asked in the context of land value return and recycling. • Appendix D provides useful legislative resources. • Appendix E discusses the theory behind land value return and recycling. • Appendix F documents some of the research reports and other material useful to agencies considering implementation of land value return and recycling. • Appendix G contains the project report for the NCHRP study that served as the basis for the Guidebook. [Appendix G is not printed herein but can be downloaded from the TRB website (trb.org) by searching for “NCHRP Research Report 873.”] • Appendix H presents steps an agency may take to facilitate both dissemination and appli- cation of land value return and recycling.