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

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41 This chapter addresses two broad questions that are important to consider in the determina- tion of whether land value return could be a viable funding source for transportation investments: • Can land value return generate sufficient revenue? • How can land value return methods satisfy constitutional, statutory, and regulatory requirements? What Is the Revenue-Generating Ability of Land Value Return Methods? 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 land use or development-related goals alone, interest in land value return is often tied to the ability to generate revenue to pay for transportation investment. To this end, generation of revenue through land value return is most effective if it is implemented early in the planning stages of a potential investment or, if applicable, jurisdiction-wide for a broader investment program. Before the potential amount of revenue is assessed, it is important to determine whether gen- eration of revenue from land value return will be possible in a particular context (Figure 4-1). The answers to the following two questions establish the ability to put land value return into practice for the transportation investment under consideration: • Can the benefits of the infrastructure be identified and defined? • Can the benefits of the infrastructure be returned? If the answer to either question is no, there are fundamental aspects of either the investment or situational circumstances that will prohibit or limit the ability to generate revenue from land value return. The following two subsections discuss how to answer these questions. A third sub- section, “Estimate Revenue Potential,” describes how to approach estimating the amount, tim- ing, and stability of land value return revenue, assuming the benefits can be identified, defined, and returned. Identify and Define Benefits of Transportation Investment A transportation investment under consideration for construction should be able to demon- strate that its benefits exceed any disadvantages, harm, and costs. The specifics of these benefits determine whether land value return is an appropriate funding approach. Notably, economic benefits from the transportation investment will occur at different time periods relative to the investment (immediately at completion of construction or gradually, over time) and accrue to different user and nonuser groups. Further, if, how, and when those benefits will result in C H A P T E R 4 Funding Transportation with Land Value Return

42 Guidebook to Funding Transportation Through Land Value Return and Recycling increased land value also will vary on the basis of a variety of factors such as the type of invest- ment, the real estate market, and the general economy of the area in question. Through answering the following questions, transportation investment benefits and resulting increases in land values can be more clearly defined: • What are the key benefits? • Who are the beneficiaries? • What is the geographic extent of benefits? • When do the benefits occur? The approach to answering each of these questions for a particular transportation investment or program of investments is described below. What Are the Key Benefits? Transportation investments can create several benefits, depending on the type and magnitude of the investment. Land values are manifestations of some of these direct performance benefits of transportation. Potential benefits to consider can include the following, among others: • Accessibility, • Mobility, • Reliability, • Safety, • Life-cycle cost reduction, • Environmental benefits, and • Support for desired development. Many transportation projects result in unique benefits to specific parcels of land. In these situa- tions, the implementation of land value return can be the most successful, but its use does not need to be limited to such circumstances. As an example, the robust benefits of the Reno Rail Transporta- tion Access Corridor project led to the implementation of a special assessment district that reflected amenity value from the project in safety and environmental benefits (see Case Example 12). Case example 12: Project Benefits Project: Reno Rail Transportation Access Corridor Location: Reno, Nevada The Reno Rail Transportation Access Corridor (ReTRAC) trenched a 2.25-mile freight rail corridor that eliminated 10 at-grade crossings in downtown Reno. A special assessment district covering 175 acres in downtown was specially zoned to allow greater density and concentrate hotels, casinos, and supporting commercial uses. Project benefits include the following: • Elimination of train, car, and pedestrian accidents, • Improved traffic flow, • Enhanced emergency vehicle access, • Increased adjacent property values, • 120 acres of developable real estate, and • Various environmental benefits. For additional information and references, please see Appendix B. Figure 4-1. Assessment of potential for revenue from land value return. Determine if Returnable Estimate Revenue Identify and Define Benefits

Funding Transportation with Land Value Return 43 Transportation investments also can result in harm as well as benefits. It is important to rec- ognize that positive outcomes from transportation investments may occur along with negative effects such as environmental degradation or by drawing economic gains from neighboring regions or states. For instance, access and mobility benefits may enhance land values, but nega- tive externalities may reduce the improvement value and the net effect on property values may be unclear. In all cases, it is important to consider the full context of the investment’s benefits as well as its negative effects. First, identify the benefits of the investment over the existing sys- tem. Then, identify whether any benefits of the existing system are reduced or canceled by the investment. Evaluations of proposed investments must account for both anticipated benefits and harm, including who receives the benefits, who bears the harm, and where the benefits and harm will occur. Benefit cost analysis and economic impact analysis can help in providing an understanding of the benefits. Who Are the Beneficiaries? Two general categories of potential beneficiaries exist: the users and nonusers of the invest- ment. Within these categories, however, there are finer distinctions with regard to the level of benefit received. Nonuser beneficiaries could include users of a competing mode. For example, drivers could benefit from enhanced transit if some drivers choose to take the new transit service and thereby reduce roadway congestion for the remaining drivers. Other nonuser beneficiaries might be owners of property that is well-served by the transportation system. These property owners benefit from their ability to charge premium rents to residents or businesses that need access to enhanced transportation services or facilities. The mix of funding sources utilized for Greater London’s contribution to Crossrail demonstrates how a variety of beneficiaries can contribute to transportation investments in manners commensurate with the benefits received (Case Example 13). Another example, the Vienna Metro in Austria, charges a per employee fee to employers as a proxy of the businesses’ use of the transit system. Case example 13: Variety of Beneficiaries Project: Crossrail Location: London Crossrail, a new railway, will link with existing rail networks and London’s transit system. The £14.8 billion project will bring an extra 1.5 million people to within 45 minutes of central London and serve 200 million annual passengers. A com- mercial property agency found that 41 percent of the developers of new devel- opment within 1 kilometer of a station cited the railway as a reason for their development. Crossrail is funded by the National Government (40 percent) and Greater London (60 percent). Greater London’s funding includes the following: 1. Business rate supplement. Structured like a jurisdiction-wide special assessment district, a supplemental tax on nonresidential properties in Greater London. 2. Mayor’s Community Infrastructure Levy. A betterment levy on new floor space for retail, hotel, and office use in central London, the northern part of the Isle of Dogs, and other areas of London within 1 kilometer of stations. 3. Developer contributions. Private beneficiaries provided contributions includ- ing dedications to specific project components (stations), exactions, and joint development fees. For additional information and references, please see Appendix B.

44 Guidebook to Funding Transportation Through Land Value Return and Recycling For landowners, the primary differentiating factor will be proximity to the investment, but there could be other factors, such as what is known as the “network effect,” in which an investment in infrastructure at one location creates value at distant locations. For example, a new highway inter- change can create value near other interchanges that now have access to the new interchange’s location. A new transit station can enhance land value near some or all of the transit system’s exist- ing stations, or a freight investment in rail or at a port can stimulate value elsewhere in the state or nation. An investment that creates a bypass could have positive economic benefits regionally, including enabling employees to get to work faster and goods to market quicker, but also could negatively affect the local community that is bypassed by reducing retail sales, for example. To the greatest extent practicable, when the use of land value return is being evaluated, a list of beneficia- ries should be developed and then grouped on the basis of the estimated level of benefit received. Tools such as traffic analysis, travel demand models, ridership models, cost–benefit analyses, and economic impact analyses can assist in this task. Understanding these factors will provide guidance as to which land value return method is appropriate—one that is location specific or one that is more applicable for jurisdiction-wide or multijurisdictional implementation. In the process of determining who the beneficiaries are, it is important to appreciate the interplay between the benefits that accrue to users and nonusers as well as the potential for interplay between different revenue-generating mechanisms. For example, if a community eliminates a toll on a bridge that connects a neighborhood to its employment center, it would be natural to assume that the primary beneficiaries would be the neighborhood residents who use the bridge. As described in Winston Churchill’s speech to the House of Commons on May 4, 1909, however, when a bridge toll was eliminated in London, rents in the low-income neighborhood soon rose by the amount of the foregone toll. As a result, most bridge users did not benefit from the removal of the toll and, in fact, residents who didn’t use the bridge were worse off because they received no benefit from the elimi- nation of the toll and their rents increased. In this example, public tax dollars that were intended to help the bridge users enriched the landlords instead. As this example illustrates, where transporta- tion benefits are localized, low user fees will enhance land values and enhance the opportunity for land value return and recycling. On the other hand, high user fees will diminish increases in land values and diminish the opportunity for land value return and recycling. What Is the Geographic Extent of Benefits? Transportation facilities and services can create benefits and increases in related land value at any specified geographic level, such as the immediate vicinity surrounding an interchange, a specific neighborhood, or a business district. Network effects lead to benefits that accrue city- wide or across a multicity or multistate region. Every location that benefits will not benefit to the same extent, and, therefore, an identifiable impact on land value may differ from one location to another. The concept of land value return can be applied to individual projects or across programs of projects at the geographic level of specificity appropriate for the project or program of investments. This level could be a specific geographic area within a jurisdiction, jurisdiction-wide, multijurisdictional, or multistate, depending on the scope, scale, and location of transportation benefits. Benefits could extend broadly through generalized amenity benefits or productivity gains, or be more location specific. For example, reducing congestion along a stretch of highway or rail cor- ridor could reduce shipping costs for all of the companies that transport goods in that corridor and thereby yield broad, national, or even global economic benefits. However, any generalized cost savings would depend on the ability and inclination of the transportation service providers to pass these cost savings through to their customers rather than keep them as profits or use them to invest in more equipment or labor or to expand their market reach. In contrast, a new turn lane from a minor arterial to a business park will have more localized benefits for the employers and employees as well as some incidental benefits of reduced congestion for other users of the roadway.

Funding Transportation with Land Value Return 45 If a transportation investment benefits all taxpayers equally, regardless of their location, such an investment is generally not suitable for land value return. Land value return typically requires that significant benefits accrue to an identifiable and defined area, regardless of its geographic size. In location-specific situations, identifying a benefit area can be accomplished by using the expertise of both transportation and real estate professionals (including asses- sors and appraisers) with relevant knowledge to understand how access to a new or improved transportation facility or service would create a special benefit for identifiable properties. If the defined benefit area is smaller than a political jurisdiction, planners, economists, legal counsel, and other professionals may be necessary to ensure that the benefit area boundaries are ratio- nal, fair, and compliant with legal requirements for the creation of such districts. If the benefit area is larger than a single political jurisdiction or entails small identifiable benefit areas within multiple jurisdictions, attorneys and policy makers also may be required to create interjuris- dictional compacts or agreements. Many states authorize the creation of special taxing districts by localities (see Case Example 14 regarding the authority provided to Michigan localities). If the boundaries of a defined ben- efit area are the same as the boundaries of a single political jurisdiction, the administrative process is simplified because the creation of a special district is avoided. Once one or more benefit areas are identified and defined, the magnitude of the benefit should be determined. The magnitude of the benefit has direct implications for the significance of the revenue that can be generated by land value return. The process for estimating revenue potential is discussed later in this chapter. Case example 14: Creation of Special Taxing District by a Locality Project: Authority for locality levy of special assessments Location: State of Michigan Public Act 188 of 1954 provides localities in the State of Michigan with the power to levy special assessments against any property that benefits from certain improvements. Eligible improvements include a range of infrastructure including streets, roads, bicycle, and pedestrian pathways. Localities also are authorized to issue bonds to finance the improvement and repay the debt with the special assessments. For additional information and references, please see Appendix B. The following are potential guidelines and methods for determination of a benefit area by using land value as a metric for measuring at least some of the transportation investment benefits: • Studies of similar projects. The simplest approach relies on a synthesis of studies of similar investments to obtain an understanding of their catchment area and influence parameters. • Local studies. Alternatively, studies of the area or nearby areas that have experienced similar investments may be conducted to see how land values responded. Under this approach, more context-appropriate information may be obtained by comparing similar areas, with and with- out the investment, to determine the likely benefit area. • Simulation. Simulation also could be performed to determine the spatial extent of the invest- ment’s effect. Simulation requires spatially disaggregated data, together with other variables that might have influence on value. The most typical data sources are appraisal districts.

46 Guidebook to Funding Transportation Through Land Value Return and Recycling Simulations can be conducted in many different ways depending on resources available, including the following: – Integrated transportation–land use models. Land use models integrated with travel demand models reflect the interactions between the transportation system and land use development. There are several integrated transportation–land use models in use across the country, and some states have developed their own. These models, however, can be complex and require extensive local calibration. If available for an area encompassed by a transportation investment, such a model may be helpful in establishing the benefit area. – Price modeling. Hedonic price modeling is based on the simple principle that the price is determined by the internal and external attributes that affect the property. These models take data on several properties and analyze the correlation of price to characteristics such as square footage, acreage, access to the city center, access to a transportation facility (where access is defined by time, convenience, and price), and other case-specific attributes. Geo- graphic information system metrics also can be incorporated to help identify the benefit area of a transportation investment. Land value maps can be graphically displayed as topo- graphical maps that show peaks where land values are high and valleys where land values are low. If a transportation facility creates identifiable benefits, the land value map will show peaks where access to the facility is best and valleys at more remote locations. The contours of these peaks and valleys establish price patterns and can help identify and define legally defensible benefit district boundaries. In most cases, price modeling will be most practical for simulation, unless there exists an integrated transportation–land use model that is already calibrated and available for the state or region being analyzed. Although estimating changes in land value at the parcel level is a time- and data-intensive process, it is the best method, as data needs are typically easier to obtain at the parcel level. The geographic area in which land value effects from transportation investments are observed is unique to the specific context. Transportation facilities are rarely isolated, stand-alone projects but rather are part of larger networks that have impacts at distant points. That said, on the basis of prior studies of changes in land value resulting from transportation investments, the following observations can be made: • Typically, positive effects are seen beyond 0.25 miles and are limited to no more than 2 miles from a highway investment. For a transit station, the highest positive effects are within 0.5 miles and benefits are seen up to 2 miles. • Properties immediately adjacent to roadways and rail lines may experience negative effects from noise and emissions, especially when the adjacent uses are residential. This is true for those within 0.25 miles, particularly in urban areas as compared with rural areas. • Measures of access to the facility (time, convenience, and price) should be used in combina- tion with access to other regional destinations and activity centers. • Different project types (new interchange, bridge, increased capacity, transit station) differ significantly in their effects. Some project types show general trends in either enhancing or reducing nearby land values. Yet, seemingly identical projects might enhance land values in some instances but not in others. • Project area economic conditions result in different land value effects. Figure 4-2 shows a hypothetical benefit area established around a new bus station. Benefit areas come in all shapes and sizes with boundaries determined by the property lines of the par- cels that benefit from transportation investments. When Do the Benefits Occur? Depending on the type of transportation investment and the real estate market in the vicinity, the impacts of the investment and resulting changes in land value could be prolonged or sudden.

Funding Transportation with Land Value Return 47 Some changes in land value might appear only after a project has matured (long after comple- tion of construction), while others might be observed upon the announcement of the planned transportation investment. If the generation of benefits is prolonged or if the benefits only arise long after the project matures, future benefits will be subject to a variety of risks related to the project and the general economy. Further, benefits and increases in land value may occur at vari- ous time periods for different user and nonuser groups of beneficiaries. These factors highlight the importance of establishing value return methods even prior to project consideration and planning. As transportation projects often produce value over long periods of time, however, it is almost never too late to establish a value return funding mechanism. The timing of benefits and changes in land value determines the cash flow from value return methods. Depending on the nature of the cash flow, the revenue could pay for the investment responsible for the benefits (on a pay-as-you-go basis or leveraged with debt) or would be more appropriate for future investments. Determine Whether Transportation Investment Benefits Can Be Returned Whether or not the value created by a well-performing transportation investment can be returned is linked to the governance of the area where the benefits occur. In many instances, Figure 4-2. Benefit areas reflect property lines of parcels that benefit from transportation investment.

48 Guidebook to Funding Transportation Through Land Value Return and Recycling multiple levels of government, a diversity of agencies, and, increasingly, private entities are involved in funding and delivering transportation investment. Answering the following ques- tions can help determine whether and how value created by improved service or performance of the transportation system or facility can be returned: • 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? • In what jurisdiction(s) is the transportation investment located? • In what jurisdiction(s) is the property or properties that will benefit from the transportation investment? • What land value return and recycling 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 the jurisdictions or agencies that are collecting the revenue? Implementing land value return is likely to result in new relationships and partnerships between state and local governments, neighboring jurisdictions, and public and private enti- ties. While sometimes a single governmental entity funds a transportation investment, in many instances, transportation investments are paid for with a combination of federal, state, and local funds. Federal and state funds are the primary funding sources for most major transportation investments. Many of the benefits of these investments, however, accrue to property taxed and regulated by local jurisdictions, and the capitalization of these benefits into land values is dependent on local regulations relating to permissible property use, den- sity, and zoning. Development outcomes also may be dependent on public investment in complementary services such as water and sewer, sanitation, police and fire protection, and education. As a result, most implementation of land value return to date has occurred at the local govern- ment level. Notably, however, states have the authority to implement many land value return methods independently. The use of land value return to fund state projects, in most instances, necessitates state and local government partnering whereby the locally controlled revenue flows to the state under the terms of intergovernmental agreements. When benefits accrue across mul- tiple jurisdictions, local–local partnerships may be warranted. In the instance of regional projects, interstate partnering also may be needed. Depending on the project, public–private partnerships also may be constructive. Some potential partnering arrangements are described below with case examples to illustrate a few scenarios. If a process of developing intergovernmental agreements already exists, then partnering required for land value return is made easier. When they do not exist, intergovernmental agreements should be established. These may involve interlocal agree- ments or a memorandum of understanding between agencies. An interlocal agreement is a type of contract public bodies enter into when signing agreements with other agencies, including local governments. State–Local and Other Public–Public Partnering Land value return depends largely on increased economic opportunity in proximity to transportation improvements. One approach to realizing economic opportunity is to increase permissible development density or intensity supportable by the new transportation invest- ment. This can be met by resistance at the local level, depending on the community’s vision and goals. Absent clear incentives for local governments to generate revenue through land value return, it is unlikely that local governments will overcome this resistance and therefore likely that they will forego opportunities for value creation and land value return. As part of the transportation policy-making, planning, and programming process, states may wish to

Funding Transportation with Land Value Return 49 consider creating or enhancing incentives for local governments to generate revenue from development opportunities created through transportation investment. On the other hand, local governments could spur economic development through investments in transporta- tion and land value return could be a suitable source of funding for the investments. Often transportation investments and their benefits span multiple jurisdictions, and coordination as well as formal agreements will be needed to implement land value return in such situ- ations. Notably, the intent of land value return is not simply to move economic develop- ment across jurisdictions but to facilitate the public recovery of the increase in land values attributable to the transportation investment, regardless of location. Accomplishing this will entail public–public partnering related to who pays for the investment, where the benefits accrue, and which jurisdictions receive land value return revenue. Public–public partnering can be accomplished through multijurisdictional benefit areas or other intergovernmental agreements. To share transportation investment benefits among those who pay for them, those who benefit from them, and those whose regulations determine the degree to which the benefit is realized, state and local partnerships are commonly needed. Typically, a state must authorize county and municipal governments to employ land value return fees or taxes. Additionally, a state and its municipalities might negotiate agreed-upon terms and responsibilities in a memorandum of understanding regarding the return of some land value return proceeds to the state. States have options to advance the use of local financial contributions in transportation proj- ects that yield concentrated local benefits. Many of these options are consistent with a goal of promoting land value return in the state. Some options could include the following: • Facilitating nontraditional funding and financing in locally sponsored, locally funded projects; • Incentivizing local contributions in state-funded or state-sponsored projects; • Requiring local contributions in state-funded or state-sponsored projects; and • State-level implementation of land value return methods. Facilitating. A state could facilitate the use of nontraditional funding and financing, including land value return techniques, for locally sponsored, locally funded projects. With this approach, a state might offer local jurisdictions the following: • A technical resource center in which the state could answer questions, provide capacity- building opportunities such as training to manage and implement value return methods, or offer resources on the topic; • Developing guidance and planning grants to study the use of land value return techniques and related funding and financing on a project; and • Loans or other financing programs with flexible repayment terms or subsidized interest rates conditioned upon the implementation of land value return methods. Examples of state facilitation of land value return methods include the Boston Redevelop- ment Authority’s Civic Vision, which provides land use guidance related to the development of parcels along the Massachusetts Turnpike, and the Virginia Office of Public–Private Part- nerships, which provides screening tools for the selection of projects suitable for air rights sale or lease. Incentivizing. Another option would be for the state to encourage local contributions in traditionally state-funded projects. This approach would increase the state’s return on invest- ment by leveraging state dollars. To motivate local governments to partake in this approach, states could devise a policy under which local funding contributions could increase the priority

50 Guidebook to Funding Transportation Through Land Value Return and Recycling status of local projects. Local governments would have the option to use general funds, land value return tools, or other sources of revenue for the local contribution. A state might allow local jurisdictions to defer their financial contribution until property value increases were real- ized or at least over some set time period. Attributes of this approach could include • Bringing additional revenue into the state’s coffers for transportation over time, • Collecting only a portion of the net increase in value (i.e., allowing local jurisdictions to share in the upside so they can fund increased needs in other public services), • Limiting the time frame over which the state receives revenue (e.g., 30 years), and • Offering flexible repayment terms so that the local jurisdiction’s payment to the state would never result in the local jurisdiction receiving less revenue than it would without the project (i.e., holding harmless). Requiring. In lieu of merely providing an incentive, a state could require local financial con- tributions in state-sponsored projects that are deemed to have concentrated local benefits. Under either the voluntary (incentivized) or mandatory (required) approach, states would develop a more formalized state project evaluation process that defines the degree to which local financial contributions could influence project prioritization. State-Level Implementation. A state could implement land value return tools at the state level. This option will likely require enabling legislation. While many options are possible, some examples of land value return methods that could be implemented at the state level include the following: • Special assessments: The state charges landowners a fee if they are located within a state- designated transportation benefit district. • Transportation utility fees: The state charges households and businesses a yearly amount based on their actual or estimated transportation system usage. • Development impact fees: The state charges a fee for new development that would cause the need for additional state transportation investments. State–Local Partnering. Most land value return and return–like methods require state– local partnering. If state and local partnerships for land value return are desired or required, the parties will need to establish all agreed-upon terms and responsibilities in a memorandum of understanding or other agreement. Such a document is critical in ensuring all parties understand the arrangement and agreed-upon terms. Further, because land value return will likely span mul- tiple years, the agreement will explain to future personnel and decision makers the underlying fundamentals of the partnership. Each local entity can examine these within its own financial constraints and due consideration of revenue sources. Public–Private Partnering Land value return success also can be the result of cooperation between the public sector and the private sector. Such cooperation can extend beyond the support of the private sector dis- cussed in the section on how to generate stakeholder support in Chapter 5, “Making Land Value Return Successful,” to include private sector–driven advocacy and initiatives for the use of land value return methods to accomplish desired infrastructure investment, as illustrated by the NoMa–Gallaudet Metrorail Station (Case Example 15) and the State Route 28 project (see Case Example 3 in Chapter 3, “How Value Return Works”). In these instances, private entities recognize the benefits that they will receive from an invest- ment and are willing to contribute funding as well as institutional resources to implement the investment. The role of the public sector is first to ensure that the desired investment aligns with their overall economic, development, and policy goals and then to negotiate contributions that reflect an appropriate share of the benefit that the private sector will receive.

Funding Transportation with Land Value Return 51 The Hong Kong rail system land leasing approach to land value return also is a notable exam- ple of public–private partnering (see Case Example 16). In this example, it is important to note that Hong Kong owns all land in the city. Although this governmental ownership of land estab- lishes certain controls over the real estate market, applicability to the United States remains limited. Both the Hong Kong and Washington, D.C., case examples also benefit from strong real estate markets. Estimate Revenue Potential Land value return could be implemented to achieve land use, development, or environmental goals. Unsurprisingly, however, interest in land value return is largely because of the ability to generate revenue to pay for transportation infrastructure. The revenue potential of land value return is determined by the unique circumstances of the particular transportation investment, economy, and real estate market conditions in the jurisdiction in which the increase in land value is anticipated. Further, different land value return methods can yield different results. For these reasons, estimating the revenue potential is a difficult but essential task. Case example 15: Private-Sector Advocacy for Land Value Return Project: NoMa–Gallaudet Metrorail Station, Washington Metropolitan Area Transit Authority Location: Washington, D.C. In the mid-1990s, owners of mostly vacant commercial land just to the north of Union Station in Washington, D.C., wanted to develop their properties. Building permits were denied, however, due to nearby street congestion. If the proposed buildings had access to a Metrorail station, permits could be granted. The land- owners approached the Government about a new station. Understanding that a new station in this vicinity would likely substantially increase land value, the Gov- ernment required a landowner contribution. In addition, the District had recently worked with businesses and community groups to develop an economic development strategy, the Economic Resurgence of Washington, D.C.: Citizens Plan for Prosperity in the 21st Century. One action item (No. 29) called for this Metrorail station. Commercial landowners partnered with community organizations and incorporated as the Action 29 Corporation. The commercial landowners agreed to contribute $25 million. Real estate appraisers and brokers advised that most of the transit-created value would accrue to commercial land in close proximity to the new station. A special assess- ment district was established on commercial land near the station, and the rev- enue was dedicated to repay a $25 million city bond. Pursuant to the enabling legislation, the annual debt service on the bond was divided by the total assessed value of the commercial properties to create a rate. The rate was applied to each property’s existing assessment until the bond was fully repaid. The U.S. Congress, which had been funding Metrorail construction, agreed to match the $25 million contribution. For additional information and references, please see Appendix B.

52 Guidebook to Funding Transportation Through Land Value Return and Recycling Calculating Potential Land Value Return Revenue Revenue potential is an estimate of the possible level of revenue that could result from imple- menting a particular option. The two key elements of calculating revenue potential are • Increase in land value created by the investment and • Form and level of the tax or fee imposed. Determining the revenue potential for land value return is related to understanding the sig- nificance and location of land value increases created by particular transportation investments. Select examples of revenue generation from land value return or land value return–like methods are given in Box 4-1. There is no general association between project costs and increases in land value, but increases can offset part of the construction costs. The actual impact on land value can be big, small, or even negative. Property sales data or assessment data can be used to benchmark comparable properties prior to construction of an infrastructure investment. Once construction is completed, the Case example 16: Land Leasing Project: Hong Kong Rail System Location: Hong Kong MTR, Hong Kong’s principal rail operator, applies a land leasing approach. The government owns all land in the City. MTR purchases development rights for land above and adjacent to a future station from the government at a “prerail” price. MTR resells the development rights to a developer at a higher “with rail” price, which accounts for the location being more valuable after a station improves accessibility. The price difference generates the funds to build the station, and MTR negotiates to receive a share of the development profits. This process is similar to the birth of transcontinental railroads in the United States. Railroad companies were given land rights along their routes and developed stations and towns, obtaining economic returns from increased land values resulting from the railroad presence. About half of MTR’s 87 stations were built under this approach. An older study showed that between 1970 and 1991, 39 percent of the MTR-created increases in land values were returned to MTR and that other land- related revenues funded 79 percent of MTR’s infrastructure investments. In 2014, MTR generated a profit of $1.5 billion and paid $590 million in dividends to the government. In addition to funding infrastructure costs, the development generates additional economic activity and benefits such as • Increased land values and ridership from integrating stations into a mixed-use surrounding, • Additional development revenues through integrating retail into station environments, and • Moderation of land speculation through public control of land and ensuring the public’s share of the benefits. The government grants land rights to developers in long-term (50-year) leases including the right to develop, use, transfer, inherit, and benefit from improvements. Hong Kong’s dense population and transit reliance results in a valuable real estate market and profitable leases. Some believe MTR’s land leasing increases prop- erty prices and the government’s strong role in the property market leads to imperfect market conditions. The efficacy of land leasing as a land value return method depends on having a good understanding of the real estate market and establishing lease rates reflective of fair market value. For additional information and references, please see Appendix B.

Funding Transportation with Land Value Return 53 Box 4-1. Revenue Generation Potential Case example 7: Joint Development and Air Rights Lease Project: High Street Cap development Location: Columbus, Ohio Ten percent of ongoing retail development lease revenues was provided to the City of Columbus (20-year lease with eight 5-year renewal options) in exchange for air rights. If the development is sold, the city receives 10 percent of the sale price. Case example 17: Special Assessment District Project: Potomac Yard Metrorail Station, Washington Metropolitan Area Transit Authority Location: Alexandria, Virginia An estimated cost of $320 million (2020 planned opening) is to be 100 percent funded by net new tax revenues generated by development, two special assessment districts, and developer contributions. Case example 18: Tax Increment Financing Project: Denver Union Station Location: Denver, Colorado A total of $38.4 million in property sales and repayment of $300 million in federal loans from tax increment financing revenues funded 68 percent of the $500 million project cost. Case example 19: Tax Increment Financing Project: Illinois Route 53/120 Location: Lake County, Illinois Estimated tax increment financing revenue of between $81 million and $108 million from 25 percent of increment on residential properties would fund up to 5 percent of more than $2 billion of the planned project’s cost. Case example 20: Joint Development Project: Washington Metropolitan Area Transit Authority Location: Washington, D.C. The Washington Metropolitan Area Transit Authority (WMATA) has a longstanding successful joint develop- ment program: • National leader in joint development, completing projects since the 1970s. • FY 2018 proposed budget estimates joint development revenues will fund $8 million in operating costs. • Board policy dictates that revenue from new joint development must be allocated to capital costs. • Completed 18 joint development projects (four ground leases, 13 property sales, and one combination sale–lease) between 2002 and 2016. • Adopted policies establish specific goals, criteria, and requirements for development adjacent to or above its station on land or air rights. • Through an extensive request-for-proposal and negotiations process, WMATA seeks to maximize the price received from developers and requires developers to commit to achieving development requirements. For additional information and references, please see Appendix B.

54 Guidebook to Funding Transportation Through Land Value Return and Recycling divergence (if any) in rents, sales prices, and assessments for these benchmarked properties can be tracked. Such historical data, accompanied by suitable methods for isolating causality, can be useful in understanding increases in land value as a result of transportation invest- ments. For example, as the Washington, D.C., Metrorail system began to open in phases in 1976, it became apparent that residential and commercial rents near the stations rose higher than comparable space not accessible to Metrorail. Furthermore, the prominent featuring of accessibility to Metrorail in property advertisements demonstrated its importance as an attribute of value. Data on property rents and sales prices confirmed the importance of acces- sibility to Metrorail. While historical data can be informative, it does not necessarily predict the future. Good judg- ment must be used to understand the differences between past and present circumstances along with the risks associated with future development or the lack thereof. One can never be certain that past experiences will be repeated, but it can be helpful to engage private landowners who will benefit from new or improved infrastructure and to explore their willingness to contribute funding. This is particularly true if the landowners are requesting the infrastructure investments. Private landowners are in the business of making judgments about what investments will yield a return, and if they are not willing to pay for at least a portion of the cost, then perhaps the public’s investment in the infrastructure warrants reconsideration. For example, in the case of the NoMa–Gallaudet Metrorail Station, landowners approached the Washington, D.C., government about building a new Metrorail station and contributed $25 million to the cost (Case Example 15). Some landowners stated that once the project was complete, their property assessments would rise, which would increase their regular property tax bills and thereby cause them to pay for the station twice. They requested that their spe- cial assessment payments be treated as a credit against any future increase in regular property tax payments. An economist was hired who, after looking at low-, medium-, and high-growth scenarios, concluded that the value of the Metrorail station to commercial property owners was 12 times the value of their special assessment payments. The landowners were not being double-billed and, in fact, the special assessment payments did not come close to reflecting the station’s benefits. While the specific approach to projecting revenue potential differs on the basis of the selected land value return method, there are some commonalities. For example, projecting revenue from land value taxes, special assessment district fees, and tax increment financing requires a forecast of the land value (and, potentially, the improvement value) in the benefit area. Transportation utility fees, on the other hand, can be based on a range of determinants of transportation system use, such as the number of employees, number of parking spaces, and length of roadway frontage, among others. Projecting this revenue, therefore, depends on an understanding of the basis for the fee and any projected changes such as growth in employees. In contrast, development impact fees, exactions or proffers, and the sale of land or air rights are one-time payments based on existing conditions negotiated up front and do not require forecasts to estimate revenue. If joint development results in a lease arrangement of land or air rights, the terms of the lease will determine the revenue potential. The Washington Metropolitan Area Transit Authority’s joint development program has demonstrated success since the 1970s and resulted in a steady and reliable source of revenue. Timing of Land Value Return Revenue The timing of when the government can expect revenue from land value return is an impor- tant component of revenue estimation. Revenue from land value return is received either as one

Funding Transportation with Land Value Return 55 up-front payment or in ongoing payments (quarterly or annual, in most cases). Up-front pay- ments and ongoing payments are associated with specific land value return methods, as shown in Table 4-1. The timing of revenue has a direct correlation with how it can be used to fund transporta- tion investment. One-time up-front payments are often used as a funding source for the spe- cific transportation investment in question. In contrast, revenue received over time will not be immediately available to fund substantial front-loaded capital costs of the project in question. In these instances, the revenue may be used as a repayment source of a debt instrument that will provide the up-front capital for the investment. Alternatively, the revenue stream could provide funding for future transportation costs, such as ongoing maintenance on the project in ques- tion, or potentially for other transportation investments, depending on the authorized uses for the revenue collected. Revenue received on an ongoing basis also may not materialize immediately. All land value return and land value return–like methods based on property value depend on at least main- taining or increasing property valuation. Because land value is dependent on market factors, increases in value may take years to occur or, in some cases, may not materialize at all, or at least not at the levels projected. The timing of implementation of land value return methods will be a key factor in the timing of revenue. Having the method in place well in advance of the project will help ensure return of a greater percentage of publicly created land value, as increases in land value often occur at the earliest news of a planned investment. An example of considering the timing of a revenue source as being reasonably available is the Southern California Association of Governments’ consideration of specific land value return–like methods authorized by the state in its long-range plan. Stability of Land Value Return Revenue An assessment of the stability (or volatility) and certainty of the revenue from land value return methods that are ongoing sources is essential when revenue is being estimated. The sta- bility of the revenue stream also is a key factor in determining the ability to utilize the revenue as a repayment source for debt issuance such as bonds or loans (discussed below). Owing to its basis in the valuation of land and property and the broad range of interrelated factors that affect those valuations, land value return revenue can be difficult to forecast. Over time, as land value return methods develop a collection history, stability may increase or trends will be more understood. Stability is related both to the degree to which expected benefits resulting from the transportation investment are realized and to the strength of the real estate market and the local or regional economy. Economic cycles and trends, therefore, influence the degree of stability of land value return revenue. This is true for revenue from many other taxes and fees as well. One-Time Payment Ongoing Payments Development impact fee Proffer or exaction (typically in-kind) Betterment levy Sale of public land or air rights Joint development fee and interface fee Land value taxes and split rate taxes Special assessment district fees* Tax increment financing* Transportation utility fees Lease of public land or air rights Joint development fees and interface fees *Duration is typically limited to the period of time required to generate the required funding for the investment. Table 4-1. Timing of receipt of land value return revenue by land value return method.

56 Guidebook to Funding Transportation Through Land Value Return and Recycling Leveraging Revenue Through Financing In most cases, land value return methods generate a stream of revenue over time. Given that transportation investments often require large, up-front funding, leveraging land value return revenue streams through financing mechanisms such as debt is often desired. In addition, many transportation infrastructure assets such as roads and transit lines have long useful lives. It is deemed fair, therefore, to have future users and beneficiaries of such assets contribute to their cost. Although financing can be an equitable approach to paying for infrastructure investments, it is important to remember that financing will limit flexibility in the use of future revenue because that revenue will be dedicated to debt repayment and not available for other uses. For additional explanatory information on the difference between funding and financing, please refer to Figure 4-3. Land value return methods that generate ongoing revenue can be used to repay debt such as loans or bonds. This leveraging of revenue brings forward or capitalizes the future revenue stream to provide up-front financing for the capital cost of a transportation investment. The lender, of course, has a strong interest in being repaid (and with interest). The lender’s desire to be repaid will mean that the forecast of the land value return revenue is intensely scrutinized. It is often the case that land value return revenue is speculative in nature and dependent on uncertain future increases in land value. This uncertainty reduces the credit quality of the debt, in that the lender will have a lower expectation of being repaid in full in a timely manner. Therefore, the credit rating of debt backed by land value return can sometimes be considered risky. As a result, the lender may demand higher interest payments to compensate for this risk or may decline to lend the funds at all. In many circumstances, the borrower can offer an additional source of repayment for the debt, known as a backstop. The credit rating potential can improve with a more established system or with stable real estate market conditions. The backstop, such as the general revenue of the government, would be drawn if the land value return revenue was not able to meet the repayment schedule. There are numerous variations of how such debt can be structured. Case Example 21, which discusses the Silver Line Metrorail Extension, and Case Example 3, which discusses the State Route 28 improvements (see Chapter 3) illustrate the use of revenue from a special assessment district to repay financing. A potential homeowner has some income and receives a mortgage from a bank to pay the remaining balance for a home, and can move into a new home. Over time the mortgage is paid back to the bank with interest. The terms “funding” and “financing” are often used interchangeably, but the difference is important. For a governmental entity, funding is the revenue received from taxes or fees, grants, and resulting cash balances. Financing is the leveraging of future funding flows through the use of mechanisms such as loans or bonds. Financing does not provide new revenue. Financing requires a stream of funding or revenue to repay an upfront source of capital such as a loan or bond issuance. The most familiar form of financing is the home mortgage, in which a bank loans cash to an individual in order for that individual to purchase a home. Over time, the individual repays the bank for the loan from his or her income. The loan is a financing mechanism. The homeowner’s income is the funding. Figure 4-3. Difference between funding and financing.

Funding Transportation with Land Value Return 57 Case example 21: Special Assessment Debt Financing Project: Silver Line Metrorail Extension, Washington Metropolitan Area Transit Authority Location: Fairfax and Loudoun Counties, Virginia The Silver Line is a 23-mile extension to the Washington, D.C., Metrorail system. The $5.8 billion project is funded jointly by the federal government, Virginia, the Northern Virginia Transportation Authority, Fairfax County, Loudoun County, and aviation funds and toll revenues from the Metropolitan Washington Airports Authority (MWAA). Fairfax and Loudoun Counties are using revenues from spe- cial assessment districts to fund part of their shares. Both counties are leveraging these revenues with debt issuance. Fairfax County Fairfax County implemented three special assessment districts to generate rev- enue for its $918 million share (Phase 1 District, Phase 2 District, and a county- wide District). The Phase 1 and Phase 2 Districts, which encompass property along the corridor and, in particular, around the stations, levied a supplemental tax, which initially was set at $0.22 per $100 of assessed value but could range up to $0.40 under statute, on commercial and industrial properties. An additional $0.11 per $100 of assessed value was levied on commercial and industrial properties countywide. Fairfax County leveraged the revenues through a loan from the U.S. Department of Transportation’s Transportation Infrastructure Finance and Inno- vation Act (TIFIA) program and other county debt. Several factors contributed to Fairfax County’s ability to obtain quality credit ratings and issue debt backed by these revenues: • Fairfax County is rated AAA, which provides an underlying confidence to debt supported by tax districts. • The tax base of the districts is strong—for example, the commercial and indus- trial property assessed value of the Phase 1 District was more than $12 billion in FY 2010. • Collection rates in the county exceed 99 percent. • The Phase 1 District was established in 2005 and history has demonstrated strong debt service coverage. Loudoun County Loudoun County implemented special assessment districts, known as Metrorail Service Districts, in 2013 in anticipation of Phase 2 to fund its $274 million share of project costs and ongoing service costs. A maximum additional tax of $0.20 per $100 assessed value may be levied in the districts, which are located in the areas surrounding Loudoun County’s three stations. Loudoun County leveraged revenues from the districts through a TIFIA loan and other county debt. Loudoun County also is rated AAA, which provides an underlying confidence to debt sup- port by the tax districts. For additional information and references, please see Appendix B.

58 Guidebook to Funding Transportation Through Land Value Return and Recycling What Are the Legal Requirements for Land Value Return? This section outlines the legal and regulatory context for land value return. Although the Guidebook does not present a comprehensive analysis of the legal and regulatory context of each state and locality for implementing land value return, this section describes key regula- tory and legal issues and provides references to sample authorizing legislation and constitu- tional law cases. In addition, Appendix D provides examples of existing legislation as well as a sample letter to a state attorney general for inquiring about legal authority to implement a specific fee or tax. Key Legal Issues The key legal issues that must be considered when evaluating the potential to implement a land value return method include the following: • Jurisdictional authority. Does a jurisdiction have the authority to impose and collect a particular tax or fee? • Due process. If jurisdictional authority exists, is the proposed fee or tax compliant with procedural and substantive due process requirements? – Procedural due process. People who must pay a proposed tax or fee are provided an oppor- tunity to know about it in advance and offer testimony to oppose, endorse, or improve the imposition of this tax or fee. � Tax rates or fee rates can be publicly supported or opposed prior to being established. � Administrative determinations of the tax base (such as a property assessment or a trip gen- eration rate) can be appealed on grounds of inaccuracy or lack of fairness (uniformity). – Substantive due process. Does the tax or fee confiscate (“take”) private property? If so, is it for a public purpose and does it provide fair compensation to the owner? • Equal protection or uniformity. Does a proposed tax or fee treat similarly situated people and property the same? The following questions should be considered when these issues are being reviewed: • Does a proposed tax or fee advance a legitimate public purpose(s)? • Is the tax or fee reasonably related to and proportional to the benefits people receive from the public sector or to the costs that they impose upon it? Each key legal issue is discussed below. Jurisdictional Authority State Powers. Pursuant to Article 10 of the U.S. Constitution, “powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Thus, states enjoy relatively broad powers that nonetheless are constrained by • The U.S. Constitution’s delegation of powers to the federal government, • Due process and takings clauses, • State constitutions, and • State statutes and regulations. Many states have constitutional or statutory limits on revenue, spending, or both. Regard- ing property taxes, limits might be placed on the rates that can be charged, the assessments of property value, or both. Each state has a department in charge of finance and revenue that can provide relevant information. For a national overview, the National Conference of State

Funding Transportation with Land Value Return 59 Legislatures, the National Governors Association, and the Tax Foundation’s Center for State Tax Policy can be resources. Powers of Counties, Townships, Cities, and Other Political Subdivisions. Counties and cities may only exercise governmental powers that have been delegated by their respective state governments. There are two different types of state delegation. In strict Dillon Rule states, coun- ties and cities can only exercise very narrowly construed powers delegated by the state. Typically, any new exercise of local power must be explicitly authorized by state legislation. At the other end of the delegation continuum are Home Rule states, where broad powers are delegated to counties and cities. In reality, each state occupies a unique position along the delegation continuum. In some states, delegation might be broad with respect to certain powers (e.g., zoning) but narrow with respect to other powers (e.g., taxes and fees). Only four states—Connecticut, Hawaii, New Hampshire, and Vermont—do not limit prop- erty taxes. Each of the remaining states has at least one of the following three common limita- tions in place:1 • Limitations on revenue, • Limitations on rates, and • Limitations on increases in the assessed value of taxable properties. Regarding counties, 42 states impose limits on counties’ property tax authority and 37 states grant counties the authority to create and/or manage special-purpose tax districts to fund spe- cific services. In 22 of the 37 states, counties must first obtain voter approval (National Associa- tion of Counties. Doing More with Less, Nov 2016. www.naco.org). Due Process Procedural Due Process. Procedural due process requires the governing body to provide notice and opportunity to be heard prior to denying a citizen property interest. Does the imple- menting body follow all the required procedures associated with enacting and implementing such measures? Due process procedures, at a minimum, typically include providing public notice and an opportunity for public comment prior to enactment of legislation or implementation of regulations. They also include procedures to appeal proposed administrative determinations such as property value assessments. Substantive Due Process (Takings and Givings). Substantive due process provides citizens freedom from arbitrary or unreasonable governmental action. With regard to property, eminent domain (taking) is permitted only under very limited circumstances. The key question, there- fore, is does land value return constitute a taking? Takings. A primary limitation on government power is the takings clause contained in the Fifth Amendment to the Constitution, which states “No person shall be . . . deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.” Private property may be taken, but only for a public purpose and only if just compensation is provided to the owner. Typically, takings are the use of eminent domain to acquire private property for transportation infrastructure or other public facilities. 1See the following sources: Anderson, N. B. Property Tax Limitations: An Interpretative Review. National Tax Journal, Vol. 59, No. 3, 2006, pp. 685–694. https://www.ntanet.org/NTJ/59/3/ntj-v59n03p685-94-property-tax-limitations-interpretative.html. National Association of State Budget Officers. Budget Processes in the States. Washington, D.C., 2015. https://www.nasbo.org/ reports-data/budget-processes-in-the-states. Tax Policy Center. Tax Policy Center Briefing Book. Urban Institute and Brookings Institution, Washington, D.C., 2016. http:// www.taxpolicycenter.org/briefing-book/what-are-tax-and-expenditure-limits.

60 Guidebook to Funding Transportation Through Land Value Return and Recycling Takings also can include some regulatory or revenue-raising activities if they are not properly structured. Determining whether a land value return (or land value return–like) method under consideration would constitute a taking within the meaning of the Constitution is a key compo- nent of determining the legality of the approach. Jurisdictions routinely enact zoning ordinances that regulate the use, height, and density of development. The legality of zoning grew out of nuisance law, whereby one person’s use of pri- vate property destroys or significantly impairs the property of another, thereby interfering with another person’s ability to use or enjoy his or her property. Additionally, jurisdictions make prop- erty development subject to public permitting (to ensure conformity with zoning, building codes and other legal development requirements). If jurisdictions avoid zoning pitfalls that violate the Equal Protection Clause or the First Amendment, and if the granting of permits follows due process requirements and is based on publicly identified criteria that advance a legitimate public interest, the courts will uphold a jurisdiction’s right to condition private development upon the receipt of such permits [see Village of Euclid, Ohio, v. Ambler Realty Co, 272 U.S. 365 (1926)]. Of the land value return methods discussed in this Guidebook, exactions and development impact fees are two governmental procedures related to development permitting. The applica- tion of takings jurisprudence to impact fees and exactions is discussed below, where the legal implications of each funding mechanism are reviewed individually. Givings. As mentioned above, exactions and development impact fees, if properly enacted and implemented within Constitutional constraints, are not considered takings, although they impose burdens on property owners for the right to develop. The Fifth Amendment to the Con- stitution emphasizes takings, and there are many judicial cases dealing with the interpretation of this requirement as it applies to statutes and regulations. Yet, as previously mentioned in the Guidebook, there are many instances where public action generates large increases in the value of affected private land (e.g., increasing permissible development density or the creation of trans- portation facilities and services). The Constitution is silent regarding these givings. Many state and local jurisdictions have recognized givings in concept. These jurisdictions recognize that some public works projects confer a direct and unique benefit upon specific parcels of land. Therefore, these jurisdictions permit the creation of special assessment districts on the basis that it would be unfair and unjust to collect funds from all taxpayers for a project that would primarily benefit only a few. In such cases, and pursuant to due process provisions, jurisdictions may establish special assessment districts consisting of only those properties that receive a direct and unique benefit from such projects. The cost of such a project (or an identi- fied percentage of that cost) is divided among the properties located within the district, and each property pays its share of the cost in installments that are added to each property’s property tax bill until the special assessment fee is paid off. A special assessment fee, therefore, is not a “taking” of private property. If properly established, a special assessment fee is actually private compensation for a publicly provided benefit (a “giving”). The difference between a “tax” and a “fee” is also relevant in this context. Taxes are general payments made for general benefits that are available to all or most people. Fees are payments made in exchange for a particular publicly provided benefit to specific, identifiable persons or properties. Alternatively, a fee may compensate the public for a privately imposed cost. Special assessments, therefore, are fees and not taxes. Equal Protection/Uniformity The Fourteenth Amendment to the U.S. Constitution provides that no state shall “deny to any person within its jurisdiction the equal protection of the laws.” This provision simply means that laws applied to one person or thing shall apply to other persons or things that are similarly situated

Funding Transportation with Land Value Return 61 or which are in the same class. Similarly, most state constitutions have a requirement that taxes and fees be “uniform,” that is, that people or property that are similarly situated be treated similarly. Legal Issues of Individual Land Value Return Methods This section discusses legal considerations for each method. It is important to know these issues and to focus on your state context. Property Taxes Land value return and recycling methods that are deemed property taxes for the purposes of legal consideration include the • Land value tax or split rate tax, • Special assessment district, and • Betterment levy. These forms of land value return and recycling all share the following legal considerations as well as those noted in the individual discussions that follow. As of 2016, all states levied a prop- erty tax on real property. Tax rates vary from state to state. The property tax liability is deter- mined by multiplying the property tax rate by the assessed value of property subject to the tax. This seemingly simple process can be complicated by assessment practices. Some states assess properties on the basis of market value. Other states assess properties at a fraction of market value, which can make assessments less transparent and complicate their fairness. In addition to the state property tax, it is common for counties, cities, school districts, and other special taxing districts to levy a property tax. As mentioned elsewhere in the Guidebook, total assessed value of real property consists of pri- vately created building values and publicly created land values. Only the portion of the property tax levied against publicly created land value constitutes land value return. As such, it is more like a fee than a tax because there is a strong relationship between a property’s benefit from public goods and services and its land value. The portion of the property tax levied against privately created building values constitutes value transfer. It is more like a tax than a fee because there is a weak relationship between building value and the amount of benefit received from public goods and services. Key legal issues for all property tax related funding mechanisms include the following: state constitutional or statutory limits regarding uniformity, state constitutional or statutory limits on tax rates or assessments, property assessment accuracy and uniformity, and property assess- ment appeals. State Constitutional or Statutory Limits Regarding Uniformity. Does state law prohibit the application of different tax rates for land values and building values? Some states recognize that land and buildings are (or could be) different classes of property and therefore may be taxed at different rates without violating uniformity or equal protection requirements. For example, in Maryland, the state constitutional law governing property tax assessments and rates is Article 15 of the Declaration of Rights, which states: That the levying of taxes by the poll is grievous and oppressive, and ought to be prohibited; that paupers ought not to be assessed for the support of the government; that the General Assembly shall, by uniform rules, provide for the separate assessment, classification and sub-classification of land, improvements on land and personal property, as it may deem proper; and all taxes thereafter provided to be levied by the State for the support of the general State Government, and by the Counties and by the City of Baltimore for their respective purposes, shall be uniform within each class or sub-class of land, improvements on land and personal property which the respective taxing powers may have directed to be subjected to the tax levy; yet fines, duties or taxes may properly and justly be imposed, or laid with a political view for the good government and benefit of the community (amended by Chapter 390, Acts of 1914, ratified Nov. 2, 1915; Chapter 64, Acts of 1960, ratified Nov. 8, 1960).

62 Guidebook to Funding Transportation Through Land Value Return and Recycling In Maryland, this means that “land” and “improvements on land” are (or could be) separate classes of property. It also indicates that tax rates must be uniform, but only within each property class or subclass. Therefore, the Maryland Declaration of Rights permits different rates of taxa- tion to be applied to privately created building values and publicly created land values. A Mary- land statute, however, states that counties and municipalities may impose only a single property tax rate for all real property subject to property taxation, except that this does not apply to a special rate prevailing in a taxing district or part of a jurisdiction. [See Maryland Tax–Property Code Ann. § 6-302–§ 6-303 (2014).] Most states that have uniformity clauses employ language similar to the following: “All taxes shall be uniform upon the same class of subjects, within the territorial limits of the authority levy- ing the tax.” It is worth noting that this uniformity clause language comes from Pennsylvania, where between 15 and 20 jurisdictions tax publicly created land values more heavily than privately created building values (e.g., Pennsylvania Constitution, Article VIII, §1). If the law is not favor- able to land value return, it is possible for the law to be changed. Amending a state constitution is more difficult than amending, repealing, or replacing a state statute. State Constitutional or Statutory Limits on Tax Rates or Assessments. Some state laws limit changes in tax rates or assessments or both. For example, in 1978, Proposition 13 amended the California Constitution and rolled back property assessments to their 1976 level and restricted future assessment increases to no more than 2 percent per year unless and until the property was sold. Upon sale, the property could be assessed at market value, with future assessment increases again limited to 2 percent annually. Prior to Proposition 13, property taxes were levied by the state and various local taxing jurisdictions. After Proposition 13, only the state has levied the property tax, and the state is responsible for allocating revenue between the state and the various localities. Any state measure to increase state revenue requires a two-thirds majority vote in both houses of the state legislature. Any taxes raised by local governments for a designated or special purpose must be approved by two-thirds of the voters in that jurisdiction (see California Tax Data, What is Proposition 13, https://www.californiataxdata.com/pdf/Prop13.pdf). Several states and other jurisdictions adopted legislation similar to Proposition 13 during the 1980s and 1990s. Property Assessment Accuracy and Uniformity. The assessed value of property, whether assessed at full fair market value or at a percentage of market value, is an estimate of value. Assessments do not need to be accurate to be fair. If the law requires that property be assessed at full fair market value and it is assessed at 80 percent of market value, the assessment is inaccu- rate. If all other properties also are assessed at 80 percent of market value, then the assessments, while inaccurate, are fair and meet legal requirements of “uniformity.” All properties are being treated the same. If most other property is assessed at 60 percent of value, the property assessed at 80 percent of value is underassessed compared with market value but overassessed with regard to uniformity. Indeed, if other properties are assessed at 60 percent of value, the owner of a property assessed at 80 percent of value should be able to appeal on the grounds of being overassessed in the context of the requirement for uniformity. Property Assessment Appeals. Jurisdictions that assess property for tax purposes have an appeals process to meet due process legal requirements. Regulations governing appeals usually state that the proposed assessed value for a particular tax year must deviate from the legislated standard by no more than a certain percentage. For example, if the legislated standard is 50 percent of fair market value, an assessment could be deemed accurate if it is within 10 percent of the target. Any assess- ment between 45 percent and 55 percent of market value would be deemed accurate. Additionally, although many jurisdictions provide a separate assessment for both land and improvements (build- ings), most jurisdictions do not allow an appeal of the apportionment of value as long as the total value is correct. After all, in most jurisdictions, the tax rate applied to land value and building value

Funding Transportation with Land Value Return 63 is the same, and changing the apportionment would have no impact on tax liability. In a jurisdic- tion that imposes separate rates of taxation on land and buildings, however, appealing the appor- tionment could yield a material difference in tax liability, even if the total value is not contested. Thus, jurisdictions that impose a land value tax, a split rate tax, betterment levies, or special assessment districts that levy a tax only against land values, should create an appeals process that allows property owners to appeal the apportionment of total value between a property’s land value and building value components—even if the owner does not contest the total assessment. Table 4-2 highlights the key legislative and legal issues associated with each land value return method. The remain sections of this chapter discuss the legal considerations for each land value return method. Land Value Tax or Split Rate Tax The traditional property tax imposes a tax on both the value of buildings and the value of land. Thus, every state is utilizing a land value tax, at least to a minimal degree. A land value tax per se 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 4-2. Legislative and legal considerations of land value return methods.

64 Guidebook to Funding Transportation Through Land Value Return and Recycling would, therefore, tax only land values and not building values. Although Altoona, Pennsylvania, tried this briefly from 2011 through 2016, the authors of this Guidebook are unaware of any other jurisdiction that applies a tax rate of zero to building values. About 15 to 20 Pennsylvania jurisdic- tions employ a split rate tax whereby building values are taxed at a lower rate than land values. This approach to property taxation was authorized for Pittsburgh and Scranton in Pennsyl- vania in 1913. [See Act of May 15, 1913, § l, 1913 Pa. Laws 209, 211 (codified as amended at PA. STAT. ANN. tit. 53, § 25894) (West 1998) requiring second-class cities to tax land at twice the rate of buildings and PA. STAT. ANN. tit. 53, § 101 (West 1997): “Those [cities] containing a population of two hundred and fifty thousand and under one million shall constitute the second class.”] In 1951, authorization for a split-rate property tax was expanded to third class cities. If neither the state constitution nor state statutes prohibit land and buildings from being consid- ered as separate classes of property, a state can levy or authorize local governments and special taxing districts to levy (or both) land value or split rate taxes. Betterment Levy Betterment levies have not been implemented in the United States. Legislation authorizing and implementing betterment levies has been enacted in Europe and South America. Better- ment levies have been accepted in limited cases, as in Bogotá, Colombia, but are often conten- tious and have resulted in extensive litigation because of the following factors: • Burdensome one-time fees. As one-time fees, betterment levies can pose a significant burden on property owners because improved infrastructure can enhance land value substantially. • No established method to allocate land value to investment. Techniques for allocating a portion of land value to a particular infrastructure improvement have not been universally adopted or accepted. • Timing of land value realization varies. For some infrastructure projects, the lion’s share of new land value is created shortly after the project is announced. For other projects, land value is created more slowly over time as consumers get acquainted with the new infrastructure and begin to value it, as evidenced by paying premium prices or rents to locate near it. Special Assessment District State-level authorizing legislation is required to implement special assessment districts. In some cases, a majority of landowners within the district (as determined by their number or by the value of their holdings) must consent to the creation of a district. Some states have developed provisions for the development of special assessments to support transportation funding. The districts go by different names in different states, but Virginia’s Transportation Improve- ment Districts and Illinois’ Special Service Areas provide examples of laws developed by states to support special assessment districts. In addition, a few states have provisions specifically for rural areas such as the Montana State Statute, Title 7, Chapter 12, Part 21, which authorizes counties to create Rural Improvement Districts. Many states (e.g., Kansas, Ohio, Missouri, and New Jersey) have laws that establish transportation development districts, which are a form of special assessment district, to implement one or more land value return method such as impact fees for transportation. Sale or Lease of Public Land or Air Rights, Including Joint Development From a legal standpoint, the sale or lease of public land or air rights (as well as joint develop- ment contract arrangements) are permitted as part of the property management and disposition powers of a state or municipal government. Any land purchased with federal transportation funding must comply with federal regulations found in Title 23 Code of Federal Regulations (CFR) 710 and Title 23 CFR 620 that require the assets be used for Title 23 purposes.

Funding Transportation with Land Value Return 65 Transportation Utility Fee Transportation utility fees are currently authorized by state law in Oregon, Florida, and Montana. The legal requirements for imposing transportation utility fees are similar to the requirements for exactions and development impact fees: • Rational nexus between the fee and the transportation operating and maintenance costs being funded and • Dedication of revenue to transportation operations and maintenance. Tax Increment Financing Many states have legislation authorizing local governments to utilize tax increment financing, and tax increment financing is implemented by several localities for a variety of infrastructure costs. Few states, however, have tax increment financing specifically for transportation infra- structure. Only Texas authorizes tax increment financing–like laws for state transportation projects. The Texas law developed a new institutional mechanism, the transportation reinvest- ment zone (see Box 4-2 and Case Example 9 in Chapter 3). Assuming a state has authorized tax increment financing, a local jurisdiction would implement it by approving the following steps through its local governing body: • Define the benefit area. • Benchmark one or more revenue sources within the benefit area. • Deposit revenue collected above the benchmarked amount (the tax increment) in a special account dedicated to the infrastructure project(s). Development Impact Fee Development impact fees are determined according to their authorizing legislation. Typically, the amount of the fee establishes a relationship between the size, character, or cost of private development and the cost of public infrastructure requirements for roads, schools, etc., that are required to service the proposed new development. Development impact fees, therefore, relate to the cost of public infrastructure rather than to the value that they create. Development impact fees internalize some infrastructure externalities associated with new development where Box 4-2. Texas Transportation Reinvestment Zones In 2007, Senate Bill 1266 amended Chapter 222 of the Texas Transportation Code (Sections 222.105–107) to provide legal context for transportation reinvestment zones (TRZs) to address funding shortcomings for transportation projects throughout the state. Since then, TRZ legislation has evolved to remedy some technical issues related to project definition, boundary changes (limits), and the ability to rescind pledges. The legislation also was expanded to be applicable to rail, transit, parking lots, ferries, airports, and port and navigation projects. TRZs can be established at the municipal level only. An amendment to the Texas State Constitution was passed to exempt municipalities from the constitutional requirement for equal and uniform property taxation with regard to tax increment finance. No similar provision was made to exempt counties. For additional information and references, please see Case Example 9, Chapter 3.

66 Guidebook to Funding Transportation Through Land Value Return and Recycling infrastructure capacity for new development is lacking. To impose development impact fees, the following conditions must be met: • Proposed development generates an identifiable need for new or improved public infra- structure, • Cost of new or improved infrastructure need has been identified, and • Fee imposed is proportional to the public-sector cost of new or improved infrastructure for the development. The following constitutional law cases govern development impact fees in relation to takings: • Koontz v. St. Johns River Water Management District, 570 U.S. 133 S. Ct. 2586 (2013). • Contractors and Builders Association of Pinellas County et al. v. City of Dunedin, 329 So. 2d 314 (1976). State-level legislation authorizing the imposition of exactions, proffers or impact fees must be enacted prior to implementation. As of 2016, 29 states have enacted authorizing legislation (Mullen 2016). For example, Oregon legislation authorizes local governments to impose fees for capital infrastructure expenses necessitated by new development and Maryland legislation authorizes counties to impose development impact fees: • Transportation System Development Charges, Oregon Statutes § 223.297–§ 223.314. • Adequate Public Facilities Law, Maryland Land Use Code, § 9-1902 (2013). Exaction or Proffer Exactions and proffers must meet legal requirements related to due process. Additionally, to avoid a violation of the takings clause, exactions must be related to and proportional to the anticipated public infrastructure needs associated with and required by new development. To impose exactions or proffers, the following conditions must be met: • Proposed development must generate an identifiable need for new or improved public infrastructure. • Burden of the exaction on the proposed development must be proportional to the burden of the infrastructure needs created by the proposed development that would otherwise be borne by the general public. The following constitutional law cases govern exactions or proffers in relation to takings: • Nollan v. California Coastal Commission, 483 U.S. 825 (1987). • Dolan v. City of Tigard, 512 U.S. 374 (1994).