Common Ground OR-WA
Brief on Land Value Capture
Framework of a Transit Benefit District
April 2020
PROBLEM: A new source of funding is needed to support transit-oriented development in rail transit corridors that is fair to property owners and will not impose a burden on local taxpayers.
Value capture is commonly conceived as a mechanism by which all or a portion of the financial benefits to property owners generated by geographically targeted public capital investments are appropriated by a local public authority. If benefits are understood to accrue in the form of land value uplift attributable to a public asset, we must disregard taxing instruments that include building value. Hence, the ‘pure’ rendering of the term value capture should be limited to land value premiums (or ‘betterment’) resulting from specified public capital investments, usually within transit corridors. It is a distinctive application of a special assessment district. Land value capture is becoming widely recognized as the preferred tool for financing transit-oriented development. The World Bank proposes the use of “development-based land value capture” mechanisms to fund TOD. Coupled with supportive land use regulations, LVC helps “capture” property value increases due to transit investments.
A Transit Benefit District (TBD) is a special assessment district circumscribing a transit station area designed to capture land value gains that are attributed to public investments in transit improvements. Capturing land value increments has a dual purpose: (1) to finance public place-making capital improvements that support transit-oriented development (TOD); (2) to avert windfall gains and impede land speculation in station areas.
Revenue raised from the assessment of property owners in a TBD is to be used for public works projects that support TOD. Place-making improvements include right-of-way improvements, the enhancement of street connectivity and feeder transit connections, bicycle & pedestrian amenities, public art, parks and plazas. Revenue may also be used for gap financing of the development of replacement or additional below-market rate housing within the TBD. No authorization would be given to collect revenues for the construction of transit infrastructure or for operating expenses.
A TBD is similar to a local improvement district (LID), whereby a contiguous group of property owners share in the cost of installing new infrastructure. By state statute (ORS, Chap. 223), LIDs can only be utilized by cities which, after specifying the district boundaries, levy the affected property owners who directly benefit from the improvements.
There are, however, important features that distinguish a TBD from a local LID:
• The use of TBDs is specific to (i) the construction of new LRT lines or streetcar lines, and (ii) the designation of selected transit station areas for TOD, otherwise known as “transit communities.”
• TBDs circumscribe parcels located within a maximum ½ mile radius of a transit station; that is, they are limited to approximately one square mile in size.
• The levy base is limited to annual land value increments, specifically the growth in real market assessment that can be attributed to the presence of transit improvements.
• Normally, TBDs are designated at the time that a new rail transit line is officially announced; levies are collected annually, beginning at the completion of the base year and terminated at the end of a specified assessment period.
• Participation in a TBD betterment levy scheme is obligatory on the part of taxable property owners. As a practical measure, TBDs need to be mandatory because station areas designated for TOD are integrally linked to a region-wide transit system, where all property owners receive location benefits regardless of their level of interest in participating. The method by which direct benefit is measured and allocated across taxable properties should be uniform across all TBDs within a rail corridor (including multiple jurisdictions).
• Unlike a LID which is cost-driven, the TBD approach is market-driven. Assessments are recalculated and levied annually. The total levy amount collected from a TBD over the project period is not dependent upon projected costs of public improvements or other appropriations. The gross revenue derived is determined by the levy base – the elevation of land values that occurs over the project period.
• Revenues from annual property levies may be used to finance general obligation bonds within a district. Alternatively, if market projections conclude that redevelopment within a TOD is expected to lag, a local city council may decide to adopt a pay-as-you go approach to funding capital improvements. A typical bond-financing period for a medium to high performing district might be 15 years. A low performing district may remain in effect for longer period.
As is the case with the LID method, the TBD links each parcel’s betterment levy assessment with direct benefit derived. The methodology employed by a local TBD ordinance is two-phased: 1. The total annual levy amount for a single district is determined by the sum of all taxable parcels’ land value uplift. 2. Individual parcels are assessed a share of the total uplift in proportion to measurable benefit received. This quantitative measure may be in the form of current capitalized land value including the effect of additional zoned capacity resulting from the action of up-zoning to planned TOD densities. Essentially, each parcel’s direct benefit is linked to imputed income derived from the land portion of the property including the additional income achievable from redevelopment at zoned capacity.
If benefits accrue in the form of land value uplift attributable to a public asset, there must be a method to measure this derivative when undertaking a feasibility study. Here is a suggestion for one of two methods that can be applied using assessment data from the subject TBD and a comparable station area located elsewhere: (1) Compare these two median land value aggregations: taxable parcels within the TBD, and taxable parcels outside the TBD within the same vicinity; the comparison is made annually over the expected duration of the TBD by projecting forward the two median land values. The difference is the uplift attributable. (2) Compare two rates of land value growth – the average annual growth rate over a ten-year period prior to the date station locations are announced (this is the trend growth rate), and the expected rate of land value growth during a ten-year period following the announcement (this is the rapid growth rate). Apply the two growth rates to projected total land value assessments within the TBD; the difference is the uplift attributable.
Either by special TBD ordinance or amendment of a LID ordinance, a municipality specifies the rules that define and implement the TBD form of value capture to raise revenue to support TOD expenditures. The TBD rules should include the following provisions:
• The local city planning agency (Portland Bureau of Planning & Sustainability) will, in cooperation with the regional transit and government agencies (TriMet and Portland METRO), conduct a market feasibility study of the proposed rail transit corridor to determine which transit stations are suitable for development into transit communities (TOD).
• The local city planning agency will prepare a design plan for each designated TOD to include public works projects, other place-making improvements and amenities, as well as new housing and commercial projects. The plan will include itemized estimated costs and will assign priorities to all projects.
• City council having jurisdiction over the corridor section containing designated TODs may pass resolution describing the boundaries of each TBD circumscribing the properties that will be assessed.
• The resolution specifies the maximum number of years over which assessments will be levied in each district, subject to an evaluation of redevelopment progress. (If private construction activity has been slow and land values have not risen substantially, a council decision will be made to either extend the project period or suspend assessments until such time as the city determines that the demand market for TOD is sufficiently strong.) TBDs will be disbanded after the bonds are paid off or the planned public improvements are completed. Revenues may not be transferred across districts.
• The resolution describes the public improvements to be undertaken and their priority, according to a sub-area plan to be prepared by the city’s planning agency. A capital financing plan should be included.
QUALIFYING NOTES:
Value capture proceeds are not guaranteed to be available for up-front funding
Use of a market-based value capture strategy to fund needed infrastructure improvements can be challenging when up-front public investments are needed to stimulate transit-oriented development. If a TOD feasibility study finds that the real estate market in a station area is likely to lag, betterment levy revenues collected on an annual basis may not be sufficient to support a bond levy which would provide up-front funding. The ability to obtain bond financing is subject to a variety of conditions, most importantly the need for reasonable certainty that the district will generate enough revenue to pay the debt service. If insufficient revenues will preclude payment of debt service, a “pay as you go” method of funding TOD infrastructure improvements will be required, even if the improvements are slow in coming.
Here a dilemma ensues where some place-making improvements are needed to accelerate land values, generating an upward spiral of an escalating levy base yielding revenue for additional improvements; yet the local demand market may be slow to advance to a point when captured land value increments can pay for the improvements. Nevertheless, the “pure” land value capture method is most fair to landowners, which must be weighed against the advantage of more rapid completion of a TOD development plan. In the balance, tax fairness should prevail. This strengthens the legal case for a mandatory value capture instrument. A betterment levy is a quid pro quo in that it merely reclaims the uplift in site values ‘given’ through re-zoning, public infrastructure and service provision. Rather than an extra cost burden, value captured is an investment that will be returned to owners over future years in the form of enhanced land values.
Defining a value capture district that optimizes TBD’s effectiveness is a hard choice
TBD is designed to be implemented on a district basis, encompassing multiple properties within walking distance of a rail transit station (usually with a ¼ to ½ mile radius of a station). It is not intended that the special assessment district incorporate properties within the entire transit corridor.
The proposition to also include other nearby properties with rising property values and development potential is alluring. These properties could help generate revenue within the value capture area to fund improvements that benefit the entire district. However, experience reveals the preference to include in special assessment districts a limited number of parcels, anticipating resistance by either other taxing entities or nearby residents. This limits the potential revenue that can be generated from a TBD, but again, the greater weight should be given to tax fairness and minimizing undue burden.
Other existing development-inducing policies may complicate value capture
In some cases, jurisdictions have other existing policies intended to promote development in TODs. These may be at odds with TBD implementation. For example, Portland Metro’s Transit Oriented Development and Centers Program structured to provide grant funds for projects that may not be currently feasible due to slow market conditions and high infrastructure costs. Subsidies could complicate the TBD objective of capturing land value increments to prevent windfalls and fund private development at a pace that is in line with current market circumstances.
Urban renewal executed with TIF is another scheme to raise revenues to support TOD. Essentially it is not a duplicative taxing device because it comprises an increment of the regular property tax. It is not an additional levy; rather it is a diversion of tax revenues needed by other taxing districts. Moreover, revenue from maximum assessed value (MAV) levies on station area properties is highly likely to fall short of revenue that could have been realized from real market assessments (RMV) given Oregon’s Measure 50 constitutional limitation on property assessments. Urban renewal agencies may impose additional special levies subject to Measure 5 general government tax rates limits, however the amounts remain below annual increments. Compared to TBD, TIF appears to be an anemic taxing mechanism in transit station areas where real market land values are rising rapidly, and taxable values lag*.
* Financing TOD in Portland’s light rail corridors: A comparison of two value capture mechanisms, Tom Gihring, Common Ground-OR/WA, May 2020.
Delaying TBD designation triggers the need to apply value capture retroactively
Ideally a value capture mechanism should be implemented immediately upon the announcement of station designation. If annual betterment levies are not collected until the time that stations are under construction, time will pass during which land value increments attributed to station location benefits are accumulating but forfeited. This may delay the development of public place-making improvements important in stimulating TOD. Early execution of value capture instruments is crucial because it also helps prevent land speculation in transit station areas.
In cases where a TBD ordinance is not adopted until after station locations within a rail corridor are identified, a legal means should be available to retroactively enforce the ordinance. The appropriate value capture instrument for this purpose is a windfall gains tax provision within a TBD ordinance. This will capture a portion of the gain in land value that accrues during the period of ownership of a parcel from the date of station location announcement to the date of sale, when transferring ownership of the parcel occurs. The tax amount is determined on a sliding scale, whereby the tax rate increases as the accrual period decreases in duration. This clearly is designed to discourage speculation, that is, holding land out of production while accumulating an unearned land value increment. An unearned gain in land value becomes a windfall if a property identified in the TOD plan for redevelopment remains underdeveloped at the time of resale. Uncaptured windfalls merely pass on higher occupancy costs to subsequent owners and renters through higher purchase prices.
Thus, if a parcel when sold is developed to its zoned capacity it would not be subject to the windfall tax. The due-upon-sale provision avoids imposing a financial hardship upon an owner who has not yet realized a windfall gain.
ADDITIONAL CONSIDERATIONS:
In hardship cases the financial burden of capturing land value increments could be lightened by delaying annual levy payments, making them due at the point of sale. A deferral on TBD assessments until the property is sold might be an option available for single family owner-occupants, small businesses, and other owners whose property has been up-zoned, raising the value and property tax burden.
Kris Nelson, Chair
Common Ground – OR/WA
[email protected]
Tom Gihring, Research Director
Common Ground – OR/WA
[email protected]
