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

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67 We already pay property taxes . . . Yes, property taxes are typi- cally levied on both the value of land and improvements. The property tax levied on the land qualifies as value return. Property tax rates, however, are typically only between 1 percent and 2 percent of value annually. Thus, the land tax embedded in traditional property taxes returns only a fraction of the benefit created by public infrastructure investment. Source: RISMedia If the revenue-generation ability is worthwhile and the legal parameters exist (or will exist) to enable use of land value return to fund transportation, then focus will turn to the considerations for implementation discussed in this section, including generating stakeholder support and the administrative and institutional requirements of employing land value return. How to Generate Stakeholder Support Today, landowners receive substantial benefits from any increase in the value of their land resulting from infrastructure and likely do not have a full appreciation of the government’s cost in providing that infrastructure. Obtaining support for land value return from stakeholders— not only landowners but also the general public and elected officials—will require a change in this understanding and in expectations regarding how transportation infrastructure is funded. In many instances, stakeholder support will be needed to obtain new legislative authority for value return methods as well as general concurrence with a new funding approach. Obtaining stakeholder support requires clear communication of both the benefits of land value return and the mounting need for additional funding for transportation investment. Key messages that can aid in communicating these messages and garnering stakeholder support could include the following: • Current funding for transportation investment falls substantially short of meeting needs for even just maintaining existing roadways and transit systems. • Land value return is an often overlooked but significant and justifiable source of transporta- tion funding. • Land value return also can assist in furthering development and land use–related goals, such as designated areas of increased density, job creation, and affordable housing. • For every $100 of land value created by government investment in transportation, land- owners typically only pay $1 to $2 annually in existing traditional property taxes. • Under land value return methods, landowners who benefit from transportation investments will pay taxes and fees in proportion to the benefits received. • Obtaining a fair return from landowners under land value return methods could ensure a more equitable distribution of tax burdens on households and businesses paying their fair share for infrastructure. • Land value return only returns to the government as much (or as little) of the land value ben- efit to landowners as a jurisdiction deems to be appropriate. Once the key messages are honed and a clear narrative of the advantages to be gained by implementing land value return methods is established, a communication strategy for outreach C H A P T E R 5 Making Land Value Return Successful

68 Guidebook to Funding Transportation Through Land Value Return and Recycling to stakeholders should be developed. A good communication strategy for reaching the complete array of stakeholders includes steps such as the following: • Identification of all stakeholders, including – Elected officials and staff, – State and local transportation agency management and staff, – Economic development agency management and staff, – Revenue collection department or agency management and staff, – Key landowners, – Chamber of Commerce representatives, – Developer community, – Real estate sales community, – Environmentalists, – Transportation system users, and – Taxpayers; • Enlistment of support from key persons or institutions influential with stakeholder groups; • Tailored presentations to specific constituencies and stakeholders; • One-on-one meetings and interviews with key stakeholders; • Identification of trusted, neutral conveners who can bring diverse stakeholder groups together and help obtain consensus; • Creation of task forces, commissions, and advisory groups comprised of stakeholder representatives; • Development of easy-to-understand materials with graphics and retold stories to explain technical information; • Website and social media outreach; • Development of content for newsletters or other publications read by key stakeholder groups; and • Development of educational videos for presentation on social media or at stakeholder meet- ings or gatherings. Stakeholder support does not mean stakeholder consensus. Complete landowner support might not be possible or necessary if there is sufficient support from other constituencies. Land- owner support for land value return methods is, however, more likely if landowners need the transportation infrastructure to be paid for with land value return revenues. Further, if land value return will significantly advance the timing of new infrastructure delivery or is essen- tial to the infrastructure moving forward, landowner support will likely be more forthcoming. Stakeholder support also will be more likely if land value return methods are established before infrastructure is created, expanded, or improved. While land value return methods do not entail takings, because they return to the public sector land value that was publicly created in the first place, late implementation could have the appearance and create the perception of a taking and be less agreeable to stakeholders (for additional information on takings, please refer to the sec- tion on the legal requirements for land value return in Chapter 4, “Funding Transportation with Land Value Return”). Stakeholder support was shown to be key in the establishment of transportation corporations in Florida, Missouri, and Texas. These entities can facilitate the implementation of land value return methods. Case Example 22, which discusses the Elgin–O’Hare Western Access Project, illustrates how stakeholder support for land value return options can run into numerous obsta- cles. A well-thought-out stakeholder and communications plan may aid in navigating some of these challenges, but the less-common land value return methods will undoubtedly face some failures. Table 5-1 summarizes stakeholder considerations.

Case example 22: Stakeholder Support Project: Elgin–O’Hare Western Access Project Location: Chicago Metropolitan Area, Illinois Value return was intensely reviewed during planning phases of the Elgin–O’Hare Western Access Project (part of the Illinois Tollway), but due to a lack of stakeholder support, the project was not implemented. In the project’s planning stages, the governor established an advisory council that examined value return funding options. The Illinois DOT analyzed a special service area (SSA)—a special assessment district authorized in Illinois—and found potential revenue-generating capacity of $80 million to $150 million. Despite this finding, the council did not reach consensus and stated that value return was “vigorously debated and analyzed,” with some members raising strong objections “on the grounds of economics, public policy, equitable and proportionate distribution of costs and benefits, and local control and decision-making.” If the council had opted to pursue an SSA, implementation would have required substantial stakeholder support. SSAs cannot be created if the majority of electors and owners sign a petition in opposition, as outlined in the following approval steps by the locality: 1. Adopts ordinance proposing SSA, including details such as boundary, purpose, annual maximum tax rate, number of years to be levied, and others. 2. Announces, schedules, advertises, gives property owners notice, and holds hearing. 3. Enters 60-day waiting period to allow for a potential blocking petition to prevent implementation for 2 years. Blocking petition requires signatures from at least 51 percent of electors and 51 percent of property owners in the SSA. 4. Adopts final ordinance establishing SSA if no blocking petition filed. For additional information and references, please see Appendix B. Land Value Return Method Stakeholder Considerations and Extent of Use Land value tax or split rate tax Requires political will and stakeholder support Limited implementation in United States and internationally Betterment levy Requires political will and stakeholder buy-in Not practiced in United States, practiced in very few places internationally Special assessment districts Requires political will and stakeholder buy-in Project specific, needs implementing action for each instance Implemented in United States and internationally Sale or lease of land or air rights, including joint development Practiced in United States and internationally Transparency and arms-length transactions can avoid conflicts (or perceived conflicts) of interest Transportation utility fee Requires political will and stakeholder buy-in Limited implementation; authority exists in some states, such as Oregon and Florida, and potentially others Tax increment financing Requires political will and stakeholder buy-in Politically expedient, as no extraordinary payment from landowners is required Project specific, needs implementing action for each instance Implemented in United States and internationally Development impact fee Very common across the United States Depending on the authorizing legislation, implementation might be accomplished legislatively (local ordinance) or administratively Stakeholder support can be enhanced with features such as transferable development rights and density bonuses where development is desired Exaction or proffer Very common across the United States Project specific, needs negotiated agreement for each instance Table 5-1. Summary of stakeholder considerations and each method’s extent of use.

70 Guidebook to Funding Transportation Through Land Value Return and Recycling How to Meet the Administrative and Institutional Requirements Implementing land value return methods potentially brings new administrative and insti- tutional requirements. In some instances, the knowledge and administrative capacity may already exist or may be easily adapted to accommodate land value return. In other cases, more significant changes may need to be implemented. The details of such changes depend on the existing circumstances of the jurisdiction that is implementing the land value return as well as the particular land value return method being considered. For example, although the benefit area of a special assessment district might be difficult to establish, a special assess- ment district is likely to be easy to administer once it is in place, as the knowledge and ability to assess the value of property and collect taxes already exists in most localities. On the other hand, a transportation utility fee based on the number of parking spaces will likely be more difficult to administer and collect revenues on, as parking spaces are not a common basis for taxation. The administrative and institutional feasibility of land value return is based on the relative difficulty of establishing, managing, and enforcing the method. The potential administrative and institutional requirements that may need to be considered when land value return is being implemented are as follows: • Staff capacity and expertise. In most governments, land value return will not comprise an area of responsibility substantial enough to justify dedicated staff. As a result, the duties associated with setting up land value return and its ongoing administration may fall to staff without specialized analytical or project management expertise and with other demands on their time. If a jurisdiction has assessors on staff, they are trained professionals who will be able to collect the data necessary to estimate the value of all property, land, and improve- ments for the implementation of land value return in the same manner as they do for the standard property tax. In addition, jurisdictions can call on a growing number of experts in land valuation methods, such as the International Association of Assessing Officers, the Lincoln Institute of Land Policy, and the Robert Schalkenbach Foundation. These resources can point jurisdictions to modern assessment practices and identify knowledgeable land economists. • Data requirements. To implement land value return methods, various data are needed related to assessments, determination of benefit areas, and setting of fees or tax levels. Iden- tifying, quantifying, and calculating the impacts of transportation investments on land value can be supported by data-driven tools and models. In most cases, establishing land values and benefit areas relies on good quality appraisal data detailing the extent, value, and owner- ship of land. Additional data needs could include demographics, economic and real estate market trends, and transportation network data such as traffic or ridership figures. Assess- ments should reflect market value and be based on data from arms-length sales transactions, which are typically readily available. Certain administrative issues will undoubtedly need to be addressed when a land value return method is being implemented. Some issues are common to all land value return methods and some are associated only with particular methods, as shown in Table 5-2. For example, accu- rate and uniform assessments are important for all the mechanisms that apply a tax or fee to assessed property values. Luckily, accurate and uniform assessments are required for the tradi- tional property tax that is applied almost universally. As these requirements for accuracy and uniformity are no different for land value return methods than for the traditional property tax, they are not listed as special requirements in Table 5-2.

Making Land Value Return Successful 71 How to Integrate Land Value Return into Transportation and Land Use Planning Aside from planning for local streets, transportation planning currently is conducted primar- ily by state departments of transportation (DOTs) and metropolitan planning organizations (MPOs), while the majority of land use planning is conducted at the local level and coordinated with regional entities such as MPOs in certain areas. As the concept of land value return high- lights, land use and transportation are inextricably linked. As a result, benefits from transporta- tion investments can be enhanced or diminished, depending on how compatible the resulting 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 ITE 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 revenues exceeding baseline must be established. Benefit area must be determined and must demonstrate nexus to investment. Tax revenues 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. Revenues 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 5-2. Institutional and administrative considerations of land value return methods

72 Guidebook to Funding Transportation Through Land Value Return and Recycling transportation infrastructure is with land use controls, other development regulations, and development incentives (or disincentives) embedded in the taxes and fees used to fund trans- portation infrastructure. As entities look to implement land value return, practices that bring together the land use and transportation planning processes will be important. A transportation investment decision influences land use and development in a variety of ways, including a parcel’s access to trans- portation, safety related to the transportation system, and mobility. In a similar manner, land use and development decisions influence the demand for and use of the transportation system. Practices that bring together these planning and decision-making processes could include the following: • Engaging transportation agencies in local land use planning, • Incorporating local land use goals in transportation project selection, • Leveraging local planning policies to support transportation investment, and • Making more efficient use of existing infrastructure by concentrating growth in existing urbanized areas (revitalizing central business districts) and at transportation nodes. This section describes how consideration of land value return could be integrated into existing state and regional planning and programming processes for transportation and land use. This includes an understanding of how land value return is a good complement to land use plan- ning and how transportation and land use planning can both benefit from land value return. Considerations related to federal planning requirements and the timing of land value return consideration in the planning process are discussed. Land value return methods, if well designed and well executed through transportation and land use planning, can help both transportation infrastructure and land use regulations achieve their intended results by creating more prosper- ous, equitable, sustainable, livable, and affordable communities. Transportation Planning To support effective implementation of land value return, the consideration of land value return funding approaches can be incorporated into the transportation planning processes of state DOTs, MPOs, and transit agencies. Transportation planning is a federally defined coop- erative, performance-driven process by which long- and short-range transportation investment priorities are determined. Figure 5-1 outlines the basic steps in the transportation planning process. Within the MPO and state DOT planning processes, local transportation providers are involved, including transit agencies, state and local highway departments, airport authorities, maritime operators, rail-freight operators, passenger rail operators, port operators, public trans- portation operators, and others. State DOTs and MPOs prepare and maintain 20-year plans and four-year programs. An MPO’s 20-year plan is a Metropolitan Transportation Plan (MTP), and the MPO’s four-year program is the Transportation Improvement Program (TIP). A state’s 20-year plan is a long-range statewide transportation plan, and a state’s four-year program is a Statewide Transportation Improvement Program (STIP). In the metropolitan areas of a state, the STIP incorporates the MPOs’ TIP. In program and project selection for such plans, revenue constraints are always a prominent consideration. As a basic principle and according to federal requirement, program and project investment choices should reflect practical revenue constraints; that is, they are limited to what is realistically achievable with the funds available. Applying such a constraint helps agencies both sharpen focus on critical choices and create opportunities to identify ways in which additional funding could produce greater benefits. A state or MPO’s investment program must be fiscally constrained, which means that the STIP and TIP include sufficient financial information to show that all proposed projects in the Figure 5-1. Basic steps in the transportation planning process.

Making Land Value Return Successful 73 first two years can be implemented using committed or available revenue sources and that the rest of the program funding is reasonably expected to be available. The requirement for fiscal constraint is met through the preparation of financial plans (required for MPOs and recom- mended for states), the regulations covering which are contained in the joint Federal Transit Administration and Federal Highway Administration regulations for Statewide and Metropoli- tan Transportation Planning (Title 23 CFR 450). Because under federal law the long-range statewide transportation plan is defined in part as a “strategic plan, that may, or may not, contain a listing of recommended projects,” a financial plan is optional, though strongly encouraged. The long-range statewide transportation plan may include some or all of the financial elements commonly found in a typical MTP financial plan, as the state finds appropriate or necessary. It does not need to demonstrate fiscal constraint. States and MPOs develop revenue forecasts to determine reasonably expected revenues. The period of time covered by such forecasts as well as the forecasting methodology varies across states and MPOs. Some states and MPOs forecast revenues for the full term of their long-range plan with quantitative rigor and multiple scenarios that assess factors such as demographics, changes in vehicle fleet and driving behavior, and new technologies. Other states and MPOs focus on the near-term forecast and apply simple trend analysis over the long-term. States and MPOs may consider new sources of revenue, such as land value return funding, in their planning and programming processes. Case Examples 23 and 24 show how two MPOs, the Chicago Metropolitan Agency for Planning (CMAP) and the Southern California Association of Governments (SCAG), are incorporating land value return into their planning processes. SCAG also is working to integrate land use planning into its transportation planning. The timing for consideration of land value return methods, however, is critical, as often significant lead time is needed to demonstrate that the funds are reasonably anticipated to be available. Land value return methods must be authorized, approved, in place, and have a valid revenue forecast before the project can be included in the TIP. Depending on the scale of the project or program of projects, therefore, planning for use of land value return should begin well in advance of inclu- sion in the TIP. Fiscal Constraint Demonstration of sufficient funds to implement pro- posed transportation system improvements and operate and maintain the entire system. Case example 23: Integration of Land Value Return with Transportation and Land Use Planning Project: Chicago Metropolitan Agency for Planning Location: Chicago, Illinois • The Chicago Metropolitan Agency for Planning (CMAP) began considering value return as part of the Go To 2040 long-range plan and will continue the practice with the On To 2050 long-range plan. • CMAP reviews major capital projects and determines which are suited for value return. • Value return is assessed at the project level in the long-range financial plan; the number or value of projects on the financially constrained list can be increased. • CMAP develops an implementation plan for major projects and works closely with implementing agencies to include value return in planning discussions, for example: – Blue Ribbon Advisory Council for Route 53/120: CMAP participated significantly in discussions and offered supporting analysis and materials. – Chicago Transit Authority (CTA) Red and Purple Line Modernization Program: CMAP provided an initial proof-of-concept analysis that gave CTA broad numbers with which to start the conversation. For additional information and references, please see Appendix B. Source: Interview with Elizabeth Schuh, Principal, Policy & Programming, CMAP, 2017.

74 Guidebook to Funding Transportation Through Land Value Return and Recycling The current approach to capital programming in most state DOTs has the potential to limit the applicability of land value return. As discussed in Chapter 4, “Funding Transportation with Land Value Return,” to move forward with land value return, a state DOT may need to consider changes in its project selection process to establish incentives at the local level to take necessary implementation actions. A state DOT could consider such changes in its plan- ning and programming processes to improve the potential for a land value return method to generate revenue. In addition, individual projects that require larger infusions of cash flows at specific points during the project development process could be viewed differently from programs. Some land value return methods are more suited to program support and others are more suited to specific projects. It may be important to develop a specific plan and program of investments for which addi- tional funding is needed and to demonstrate the benefits that are expected from the proposed investments, including the general economic benefits as well as potential for general and special land value benefits. Following that, it will be important to analyze the applicable methods and Case example 24: Integration of Land Value Return with Transportation and Land Use Planning Project: Southern California Association of Governments Location: Southern California Counties of Imperial, Los Angeles, Orange, Riverside, San Bernardino, and Ventura The 2016 Regional Transportation Plan (RTP) considers a variety of sources in the identification of “reasonably available” funding, including value return methods. The Southern California Association of Governments (SCAG) outlined the follow- ing as necessary to ensure “reasonable availability” of value return funds: • Pursue necessary approvals for special districts by 2020. • Work with private entities for joint development opportunities. • Recognize that benefit districts require majority approval by property owners and that community facilities districts need two-thirds approval. Further, encouraged by California’s Sustainable Communities and Climate Pro- tection Act, SCAG broadened regional goals to incorporate sustainability and improved quality of life. This action led to the integration of transportation and land use strategies in the 2016 RTP, which adopts the following land use policies: • Regional strategic areas for infill investment; • Three-tiered system of centers development; • Complete Communities; • Development of nodes on a corridor; • Plan for additional housing and jobs near transit; • Plan for changing demand in types of housing; • Protection of stable existing single-family areas; • Insurance of access to open space and preservation of habitat; and • Incorporation of local input and feedback on growth. For additional information and references, please see Appendix B.

Making Land Value Return Successful 75 assign intergovernmental roles as to who will execute the project and how the partnerships should proceed. Land Use Planning Key land use planning tools include comprehensive plans, zoning, land use ordinances, trans- fer of development rights, density requirements, and others. These land use planning tools, described below, are integral to functions performed by local governments and are important concepts that underlie the ability of land value return to be successful. • Zoning. When land becomes more desirable and accessible, the public sector can encourage higher-density development through changes in zoning. Higher-density development allows more people and businesses to share the costs and enjoy the benefits created by public infra- structure investments. In some cases, zoning requirements can lead to below-market returns and lower land values because of the restrictions placed on development. Zoning require- ments can affect the ability to implement land value return, as follows: – Inclusionary zoning refers to land use planning controls that require developers to incor- porate specific features on their site or pay a cash-in-lieu contribution for this obligation to be addressed offsite. In the context of housing, it often refers to the requirement for devel- opers to provide affordable housing as part of market-rate developments. These types of zoning requirements can affect the ability to implement certain land value return methods. – Up-zoning allows more development to occur on the same parcel of land. Assuming that there is latent demand for additional development at up-zoned locations, up-zoning increases the revenue potential of land by allowing more development. Increasing the revenue potential for specific sites, in turn, increases the value of land and can facilitate revenue generation from land value return methods. • Density bonuses or incentive zoning. Incentive zoning or a density bonus allows developers more density in exchange for community amenities. Increases in density or land use com- position (intensity) can compensate developers for providing affordable housing, publicly beneficial design elements, or other amenities that would not otherwise be created because their cost exceeds market returns. • Transfer of development rights. As a voluntary, incentive-based program, transfer of devel- opment rights allows landowners to sell development rights from their land in areas that want to reduce development activities and resell them in areas that local governments have identi- fied as appropriate for higher density. It is instructive, while talking about the interplay between land value return and land use regulation, to note that the land use impacts of land value return methods such as land value taxes can be dramatically different from those of land value return–like methods such as development impact fees. Land value return fees remain unchanged regardless of whether a property is developed or vacant, and therefore place no additional burden on development. Land value return–like fees, such as development impact fees, are often proportionate to the cost or size of the new building and therefore increase the cost of the development, which could in turn reduce the amount of built space constructed or inflate the sale or rental price of the development or both. Land value return methods can maximize development near new infrastructure, whereas land value return–like methods will push some of that development away. Both approaches might be appropriate, but under different circumstances. For example: • New transit station in downtown. Land value return can encourage transit-oriented devel- opment, whereas a land value return–like fee, such as a development impact fee, might reduce the amount of transit-oriented development or inflate its price.

76 Guidebook to Funding Transportation Through Land Value Return and Recycling • New housing development on farmland. Land value return would not generate much revenue (land values are low and would not increase much with the new development) and would not reduce the need to expand infrastructure to serve the development. Under a land value return–like fee such as a development impact fee, however, the cost of the development would increase, which could reduce the amount of development or even drive the development into urbanized areas with existing infrastructure. From a land use perspective, land value return is most appropriate where infrastructure capacity is robust and more development is desired. Land value return–like methods such as development impact fees and exactions are most appropriate where infrastructure capacity is lacking and development is not desired unless developers compensate the public for the invest- ment necessary to support and mitigate some of the increased infrastructure demands from the development.