VALUE CAPTURE SHORTER

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1 VALUE CAPTURE SHORTER Governments with limited resources do not have to forego or postpone development and infrastructure that will grow the local and regional economy. There is a common catch-22 that state and local officials can feel stuck in: a) lacking revenue to invest in development, but b) needing to spur development to raise revenue. If Connecticut and its municipalities choose to be paralyzed by this paradox, the economy will leave us behind. Or we can be like many places across the country using innovating financing approaches that bridge the gap between current needs and future revenue growth. Value capture is a term increasingly used in transit policy to describe a gamut of approaches governments can use to recoup public investment that creates and operates transit, and fosters development around stations. The core of this approach is acknowledging that publicly-funded transit and related infrastructure can create tremendous private-market value, by spurring new development and increasing the value of existing development. The new value would not exist without the public investment. Instead of simply creating a free windfall for private companies, value capture allows governments and residents/taxpayers to share the benefits of the value they create and even pay for the investments that make it all possible. Considering the experience of other states, Connecticut will likely have significant new value fueled by the New Haven-Springfield rail line and CTfastrak. Across the country transit proximity has resulted in zero extra property value to over 100% in increased value, and everything in between. There is no formula to determine how much value Connecticut TOD areas will see it depends on how well communities and the state capitalize on the opportunity. Determining factors include: properties proximity to stations; quality and compactness of development; connectivity that makes transit, walking, biking and parking convenient; and a complementary mix of housing, retail, services, offices and entertainment. As the additional value is created in TOD areas, state and local governments have an array of revenue tools available to harness that value to repay bonds that created the transit and TOD-supporting infrastructure, for transit operating costs, for affordable housing, or to spur additional transit service or surrounding development. Different tools will be used by state government, municipalities and quasipublic development authorities or business districts. There is no particular system to replicate the various tools need to be tailored to Connecticut s unique governance structures, market realities and community needs but the potential is enormous. These options are described in more detail in the Partnership for Strong Communities publication Transit Value Capture: Harnessing the Future to Create Healthy Transit Neighborhoods.

2 Transit Value Capture: Harnessing the Future to Create Healthy Transit Neighborhoods - LONGER Governments with limited resources do not have to forego or postpone development and infrastructure that will grow the local and regional economy. There is a common catch-22 that state and local officials can feel stuck in: a) lacking revenue to invest in development, but b) needing to spur development to raise revenue. If Connecticut and its municipalities choose to be paralyzed by this paradox, the economy will leave us behind. Or we can be like many places across the country using innovating financing approaches that bridge the gap between current needs and future revenue growth. Value capture is a term increasingly used in transit policy to describe a gamut of approaches governments can use to recoup public investment that creates and operates transit, and fosters development around stations. The core of this approach is acknowledging that publicly-funded transit and related infrastructure can create tremendous private-market value, by spurring new development and increasing the value of existing development. The new value would not exist without the public investment. Instead of simply creating a free windfall for private companies, value capture allows governments and residents/taxpayers to share the benefits of the value they create and even pay for the investments that make it all possible. SIDEBAR: Each place is different, but many across the country have seen significant property value increases: LIST SEVERAL PLACES WITH % VALUE INCREASES And considering the experience of other states, Connecticut will likely have significant new value fueled by the New Haven-Springfield rail line and CTfastrak. In most other places, proximity to solid transit service results in increased property values as compared to otherwise similar development away from transit ranging from XX% to YY%. Connecticut may be poised for even greater success than many other transit-served places: In many places, transit and/or surrounding development emerged incrementally over many years, or new transit was put into already fully-dense areas. These places have seen economic and fiscal benefits, but slower and less noticeable. Connecticut, on the other hand, will see significant service added within a short window of time, flowing through many stations with sizable development potential. Some transit stations are in suburban towns with room for new development, and others are in areas already-built but which could use redevelopment. There is tremendous pent up demand for housing. Connecticut has the 6 th highest rents in the U.S., driven by an undersupply of housing. Over the last decade Connecticut has ranged between 47 th and dead last in our rate of housing production per capita. Our undersupply is greatest in modestly-sized, modestly-priced apartments and smaller starter homes in walkable neighborhoods exactly the housing most conducive to transit oriented development. Even without transit, Connecticut needs tens of thousands of housing units built, and they would certainly be bought or rented because the demand is so great. Putting many of those nearly transit makes sense for a myriad of policy reasons, but also makes those units more valuable.

3 This dynamic not only makes housing development a sure thing, but those residents will also be customers and workers at local businesses. Housing will fuel additional development and economic activity. Value capture should be seen as a concept rather than a defined technique. There are many ways to do it, and even though we can look to experience elsewhere to ease our learning curve, every situation is different. With strong coordination, the state, municipalities and other entities, like development authorities or business improvement districts, work together to create value in the form of a robust transit system and high-quality mixed-use development around stations. Then, with a variety of taxes and fees, revenue is raised that goes back to those partners to pay back debt or support other needs. There is no cookie-cutter approach to value capture, and simply applying some other state s formula may miss the mark in Connecticut. The ideal approach will be one where all players share in the benefits of value capture, and are motivated to work together for success. Maximizing Value Value capture is dependent on creating value to draw revenue from. So successful value capture is not just a set of financing or revenue tools, it is a comprehensive approach to transit oriented development that will both maximize use of land and other resources, and the marketability of areas around stations. Zoning Transit works best when people can walk to stations to and from home, work, shopping, entertainment and other needs. Second best is when transit is convenient to and from these things with a very short shuttle, trolley or bike ride. To maximize overall value to capture, we need to do everything possible to maximize development in this prime space. Zone to allow density housing units per acre, or square footage per acre. Instead a maximum density allowed, consider a minimum density developers must build. Municipalities may maximize density because it s in their best interest, but the state should strongly consider making zoning density a required condition of receiving transit upgrades or funding from the state. Zone for mixed-income housing. This is discussed in more detail below. Minimize surface parking, using garages instead. Make public, shared garage parking available. Instead of minimum parking spaces required by housing or businesses, use a maximum parking spaces allowed. Minimizing parking further promotes transit, and leaves space for more intensive development. Encourage mixed-use development. One piece of this is making sure zoning regulations are suitable. As-of-right zoning and up-front planning that does not require special permits or approvals if a developments meets the clearly articulated zoning and other regulations. Towns should decide exactly what they want and build that into regulations. This way, development permitting goes quickly and with more predictability, making it easier for developers to build and create value.

4 Planning For TOD areas to thrive, they need to be coordinated, attractive, well-functioning places. This requires assertive, proactive planning that, a) sends clear signals to developers and what is allowed and encouraged, b) coordinates the activities of many partners (local/state/federal governments, RPOs, development agencies, financing entities, etc.), and c) involves the public in transparent planning that pulls together many perspectives and builds a shared vision that the public supports. Ensure walkability pedestrian safety, convenience, navigation Aesthetics landscaping, public art, signage, streetscaping, incorporate nature Complementary uses within TOD areas and among several TOD areas on a transit line. Foster a balance between housing, retail, offices, entertainment, shopping and other needs. Community vision processes like charrettes and crowdsourcing build support for development and harness their good ideas. Manage data and information sharing so everyone involved can make good decisions and know the consequences of choices state agencies, municipalities, developers, financers. What properties are available? What s the market demand? Who is doing what? For planning and development to occur quickly and with good results, everyone needs clarity and answers to their questions quickly and easily. Regulatory Streamlining Because time is money, developers need predictability and quickness in permitting process. It both reduces their costs and ensures the market for their product doesn t change during a years-long permitting process. Regulatory relief is often framed as a need for removing regulations, but that doesn t always need to be the case. Agencies can do their due diligence to protect safety, environment and other factors, but they do so in ways that are responsive to development needs. Simultaneous review by several agencies instead of one-by-one can save time. Pre-development reviews by local and state agencies can analyze particular properties or TOD areas based on what development is being planned. Obviously, some reviews must wait for proposed development to emerge. But for some factors, like environment or traffic impact, agencies can begin studying an area to determine want activity will or will not adhere to existing regulations, and then share that valuable information with developers. Coordination between agencies and governments. Interagency teams with several agency representatives in one room can more quickly coordinate the moving parts, and resolve conflicts between various regulations. Split-Rate Taxation Although this type of property tax can be adjusted to bring needed revenue, the main purpose is typically to encourage development instead of stagnation and speculation in weaker market areas. In places where it has been cheap and easy to sit on underused land, it motivates owners of vacant or underutilized properties to develop and improve them, or sell them to someone who will. Instead of a

5 property being subject to one tax rate, it would have a higher rate for the underlying land and a lower rate for the building upon it. The ultimate revenue generated may be the same as a single rate, but split-rate taxation causes two complementary effects: 1) higher tax on land makes it more expensive to own property that s not generating revenue, so there s incentive to develop or improve the property, to afford to pay taxes, and 2) because taxes are lowered on the actual building, it removes a disincentive to developing or improving a building, since it won t result in much tax impact on the owner. Split-rate taxation can be helpful in transit oriented development areas, where property owners know that land value will increase, and are sitting and waiting for a better future price. This taxation can speed up development, by ensuring empty or underused parcels don t drag down the surroundings. Creating Value Remember, the above suggestions are becoming accepted best-practice nationally in doing good transit oriented development but this is also how to create a market with strong value that results in public revenues. So it s not just about creating housing Connecticut desperately needs, in vibrant and economically-competitive communities this development can help pay for the transit and buffer Connecticut s reliance on federal funds. Capturing Value Value capture is based on the fact that private development sees increased value because of public investment it s cooperation between public and private. Private property owners can return the favor in a variety of ways, some in monetary payment in the form of taxes or fees, and some in more direct non-monetary ways. Tax Increment Financing (TIF) There will be tremendous value created from transit oriented development in future years, but Connecticut needs money now to build out the transit systems and invest in infrastructure, streets, planning, administration and much more that will support vibrant development. Tax Increment Financing (TIF) borrows money now, with the assurance it will be paid back from future tax gains. This is different from general obligation bonds or other regular borrowing, because the payback is pegged to particular revenue streams from a particular place. It gets around the legitimate concern about governments taking on too much debt, because in this case the debt period and means of paying it are assured. Like value capture generally, there are a variety of ways to do Tax Increment Financing. Options include: A state agency or quasi-public agency borrowing for the transit system itself, and even for municipal needs. A municipality issuing bonds for infrastructure, road, streetscapes, planning and other investments to make development successful. A development authority issuing bonds, in addition to handling other critical functions like land assembly and transfer, and acquiring critical parcels that will impact the success of surrounding

6 development. A development authority, in some cases, may draw revenue from selling valuable parcels to developers. Revenue methods for repaying the TIF borrowing will be discussed in a moment. Solid Planning / Leveraging Data There are nearly infinite reasons why proactive, coordinated, comprehensive land use planning is essential to ensuring quality transit oriented development. But related to value capture, the planning can: a) show lenders/bondholders a solid plan worth investing in, and demonstrates clearly how many actions by many players will come together to create future value, and b) having a deep understanding of the many interconnected moving parts in this process and converging data and numerical assumptions from those moving parts can result in credible estimates of future revenue, so policymakers can make reasonable decisions on how much to borrow, and bondholders and rating agencies can clearly see how payback will happen. Revenue Tools A variety of tools can be used, to customize Connecticut s approach to our unique governance structures. These tools used by the state, municipalities, development authorities and other entities should be seen as a coordinated package, based on: a) the amount of borrowing by the various players that needs to be repaid, b) how much revenue each entity should reasonably receive over time, to continue supporting the health of the transit system and TOD communities, and to recognize how much heavy lifting each entity has done, and c) to ensure that cumulatively the revenue extracted is not so much that suppresses market activity or overburdens certain households or businesses. Possibilities include: Property taxes, with predefined percentages used to repay debt or share among involved players, or with those amounts indexed to the transit-related increment, by comparing property values in TOD areas with similar local property away from transit. Impact fees apply best to areas where new or significantly increased development is taking place in a defined period of time. These are fees on property owners/developers that go directly toward particular investments from which they have clearly benefitted. Transportation utility fees charge various users in TOD areas based on averages of how many transit trips they likely generate. It could be as small as charging a fee on each single-family home or apartment. Or it could be much larger for retail or larger attractions that draw hundreds or thousands of transit riders. Special assessment districts or business improvement districts can be managed by municipalities or entities created for this purpose. They levy fees on local businesses and/or property owners to fund local needs in that TOD area, such as sidewalks, streetlights, signage and other improvements that make the area function well and attract visitors and residents. Leasing land can be facilitated by a development authority or government agency that is buying and selling properties to facilitate growth and development, or even by the state of Connecticut where the transit right-of-way is not fully used. These entities could buy property now at

7 relatively lower prices, which then generate long-term rents. The public entity could fully own and manage the properties, or it could just retain ownership of the underlying land while the building itself is owned separately. Air rights and joint development are ways to use transit stations and adjacent land, in partnership between a public entity and private developer. This often makes for good TOD as well, by offering a compact mix of uses. Air rights refers to the legal and financial structures related to building above station areas. Often in these arrangements, the public agency building or upgrading the station will jointly plan that work, and the resulting revenue, with the private developers. Housing impact fees are used by some places where development pressure is pushing housing prices upward and pricing out workers, young people, retirees and other important members of the community. Because land is finite, all development in TOD zones will create upward pressure on housing prices. A fee on commercial development can be earmarked for affordable housing subsidy, and could complement the mixed-income zoning described below. In quantifying the above revenue instruments, it will be important to recognize that typically the property value increases as one gets closer to the station. So within a larger TOD area, rates may have tiers or gradations based on proximity to the station. Another consideration with some tools is how large of a footprint will be designated to draw revenue from. This is a judgment call and political consideration, based on how much benefit various players receive from the transit access. Some argue that a larger footprint is ideal because different properties or blocks will vary in their success, so even if some are slow to develop, others in that district will thrive and generate the needed revenue. Ongoing Use of Revenue It should be noted that although repaying initial investments/debt is an import benefit of value capture, it can also fund ongoing needs, and policymakers may wish to earmark certain revenue streams for certain needs. Those needs could include: affordable housing subsidy, transit operating costs, station maintenance, maintenance of infrastructure in TOD areas, or various municipal functions like schools, public safety, road maintenance and the like. Non-Revenue Value Capture Tools There are additional ways to capture value without taxes or fees, by requiring property owners, developers or businesses to directly provide public benefits that governments typical pay for. Mixed-income zoning requires that a portion of housing units created in a given area must be kept affordable to lower-income households. For instance, in the state s HOMEConnecticut program, up to 80% of housing units in Incentive Housing Zones can be market-rate, but at least 20% of the units must be affordable to households earning less than 80% of Area Median Income (AMI). Other facets of the program, like greater allowed density and as-of-right zoning, offer added value to the housing developer and offset the required affordability.

8 HOMEConnecticut is an excellent template for zoning TOD areas, and the state may wish to make it a precondition for receiving various state TOD-related investments. In the case of TOD, because of the remarkable property value increases that typically occur, mixed-income zoning may be able to achieve even greater affordability than HOMEConnecticut s 80%/20% mix. With developers earning greater profits, they may afford to create more than 20% of the units as affordable, or make units affordable to households farther below 80% AMI. Affordable homeownership programs may not exact taxes or fees from private actors (although they could), but can be a way to advance economic security for lower-income households at little or no cost over time - it s free money in a sense. We know that in TOD areas property taxes will increase significantly. If programs assist lower-income households into homeownership soon, before the value increase, then a split-equity setup uses the resulting value to pay back the public subsidy and then leave increased equity with the homeowner. Private investment in infrastructure can be traded for abatement of future property tax or other taxes. This is sometimes done by a large developer or company about to do business in that area. This can work especially well for roads or other infrastructure adjacent to that business or that is critical to its success. Trade-Offs Because TOD areas will change rapidly with development, and because value capture can be a powerful tool, there are important policy considerations to balancing various needs and minimizing hardship. Balance Value Capture With Value Creation Development is the result of many decisions by many players, especially the developer. Everything has to work for developers, or else they won t build. A balance must be struck: capture enough value to pay for essential investments, but don t take so much that it discourages development (which then would mean there s no value to capture). A similar trade off applies to other property owners, businesses and residents in the TOD area. If taxes and various fees are too onerous, they ll avoid living or doing business in that zone. That could then suppress property values and property tax revenue. Housing Affordability is Critical Especially when considering increased revenue, there could be a temptation to allow escalating housing costs. It may be fine for a portion of the housing stock to be priced as high as the market will bear. But without maintaining housing for a variety of income levels, there could be harmful social and fiscal consequences: Lower-income households are the most dependable transit riders. Their need for transit will ensure the consistent ridership and farebox revenue the transit system needs.

9 Transit savings determine household budgets, and the economy. Households in transit-poor neighborhoods on average spend 19% of their income on transportation, but 9% transit-rich neighborhoods. If handled right, freeing up that 10% in the budgets of many thousands of Connecticut households could really help the economy. But that requires them affording housing in TOD areas. The point of transit is to get cars off the roads. If lower income people are priced out of TOD areas, they ll be driving. And they re least likely to afford newer energy-efficient cars. This would include people driving to transit stations to get to work, and the many retail and other workers employed in TOD zones. Road and parking capacity and air pollution can be saved by ensuring housing affordability. Economic and racial segregation which in Connecticut is worse than most other states can be reduced by fostering mixed-income neighborhoods near transit. That segregation could be exacerbated by creating more places where only higher-income households can afford to live. This segregation has policy consequences and costs the public money in education and health disparities and other consequences of concentrated poverty. Thus, as we capture value and consider TOD approaches that are most fiscally prudent, impact on segregation should be figured in. Conclusion There are no silver bullets, only an array of tools to be chosen and experimented with. It can be complex, but does not have to be overwhelming. Quality transit oriented development, and the fiscal tools related to it, involve cooperation and planning between several agencies, levels of government and other players. But other places are doing it, and finding ways to harness the economic engine of transit for public good. More information: RESOURCES ON VALUE CAPTURE APPENDIX CASE STUDIES