Value Capture Implementation Manual

August 2019
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12 Address Regulatory Framework

Successful value capture implementation requires an effective enabling environment and supportive public policy at multiple levels. Changes to zoning and land use regulations can help to boost value capture incentives to entice developers. Other statutes, if well thought out, can allow jurisdictions to implement value capture projects and policies. On the other hand, regulations can disincentivize value capture. This chapter summarizes policies that can positively impact the effectiveness of value capture. 277

Municipalities and counties generally set zoning, land use, and property tax policy. 278 Value capture is most dependent on local initiatives, although some techniques, particularly those that are statewide initiatives or those that apply to a ROW that crosses multiple jurisdictions, require either State involvement or coordination between multiple government bodies. Regardless of whether initiatives are at the local or State level, a supportive State legal and regulatory framework can facilitate value capture funding and financing strategies. 279 Authorizing legislation and taxation/spending authority should facilitate cities' and counties' ability to use value capture fundraising and spending.

Given the number of Federal, State, Tribal, and municipal regulations that can impact the viability of a value capture project, one of the first steps in determining feasibility is to perform a detailed assessment of the regulatory environment. Table 14 lists key regulatory considerations when seeking to implement a value capture technique.

Table 14. State and Local Value Capture Regulatory Barriers
Level of Government Key Questions
Local Regulations, Planning and Zoning
  • What is local taxation and spending authority?
  • If more than one local government entity is involved, do any regulations allow cooperative projects?
  • What are the zoning regulations?
State Regulations
  • Are P3 regulations in place?
  • Has specific legislation enabling this type of value capture been passed?
  • If relevant legislation has been passed, are there any legal weaknesses?
  • Does the city/county have State authority to raise funds in this manner?
  • Are there restrictions in the use of taxes or fees within the State that could affect this project?
  • Does the State government have jurisdiction over this project?
  • Does this project clearly comply with all State regulations?

12.1 Local Regulations, Planning, and Zoning

Zoning policies are important for many value capture techniques. In the case of joint development, zoning changes could provide potential developers and landowners with a financial benefit, which could then be leveraged in exchange for contributions by the developer to the transportation project. The zoning policies listed in Sidebar 10 can allow developers to build higher revenue-producing projects with an optimal mix of property types. Such changes can increase a developer's potential cash flow and can therefore make land more valuable when an agency offers to sell or lease, such as in an air rights-based joint development project. This will increase the value captured by the agency.

Special assessment districts (SADs), tax increment financing (TIF), transportation reinvestment zones (TRZs), business improvement districts (BIDs), land value taxes, and at-grade joint development projects are somewhat less dependent on all of these zoning regulations than air rights projects, but they can still benefit greatly. In general, if fewer restrictions are placed on what developers can build, demand for land increases, as does value. This in turn increases the revenue that an agency can capture from value capture techniques.

  • Replace density maximums with density minimums.
  • Relax rules requiring land use segregation to encourage mixed-use developments.
  • Eliminate or reduce minimum parking requirements.
  • Replace setback lines with build-to lines.

As the Silver Line/Dulles Metrorail project near Washington, DC, describes (see Appendix Section VIII), the implementation of a SAD along that rail corridor was followed with new zoning regulations at certain portions that allowed for greater density, mixed uses, and reduced parking minimums.

As a caveat, in some areas where land is relatively inexpensive and there is a preference for space, density minimums may not be appropriate. Similarly in such areas, build-to lines and reduced parking availability may reduce the attractiveness of land to a developer. While Sidebar 10 is a general guide, it should be applied contextually and may not be appropriate for lower density suburban and rural areas. Furthermore, policymakers should be aware that even in environments where these policies are helpful from a standpoint of increasing land values, they may face pushback from homeowners and other interest groups opposed to dense land use.

Beyond the individual zoning recommendations, many municipalities seeking to benefit from value capture projects may benefit from systemic reform of zoning and local approval policies, particularly if they expect to implement multiple projects utilizing value capture techniques. Many jurisdictions are allowing greater deviations from density maximums, parking requirements, and other zoning rules for new development as "New Urbanist" principles become more mainstream throughout the United States. 280 These jurisdictions frequently create designated transportation districts in which traditional zoning codes are relaxed. Such laws can make the development of value capture projects more efficient, thereby increasing value capture transactions' attractiveness (see Example 20 ).

Example 20: Salt Lake City's Transit Zoning Incentives 281 282 283 284

Since 2010, Salt Lake City, UT, has had a special zoning process, known as the Transit Station Area review, in place for developers applying for construction permits near mass transit stations. The initial review process scoring system fast-tracked developments that were able to exceed 100 points according to the city's list of criteria. However, city officials and the Salt Lake City Planning Commission perceived that many developers were "gaming" the system and building developments that did not achieve the priorities that the scoring system was meant to incentivize, such as enhanced walkability, mixed land uses, or economic integration. As such, the city updated Transit Station Area guidelines throughout 2016 and 2017. Through this policy, Salt Lake City is seeking to promote the following:

  • The construction of compact developments that exceed minimum density requirements.
  • Vertical land usage.
  • Provision of affordable housing.
  • Provision of Americans with Disabilities Act-compliant housing.
  • Provision of key community amenities, such as community centers, daycare centers, clinics, fitness centers, and gardens.
  • Conversion of surface parking to structured parking or another land use.

Since its most recent policy updates, the city has re-weighted how points are allocated among priorities in order to limit gaming. Projects scoring above 125 points on the above criteria are designated as "Tier 2" projects, while those scoring below 125 points are designated as "Tier 1" projects. Tier 2 projects are approved through a fast-track process, while Tier 1 projects require a public hearing and several other intermediate steps. Therefore, Tier 1 projects are less likely to be approved and, if approved, their approval process is expected to take 3-6 months longer than Tier 2 projects.

12.2 State Regulations

For municipalities to implement value capture techniques, State governments must typically authorize their use. State regulations, particularly as they relate to fiscal authority to raise funds and restrict spending, can be a critical roadblock in value capture projects. The legality of some value capture techniques has sometimes come into question, as has the authority of a municipality to direct funds raised through value capture to particular uses. Further, a variety of interest groups may oppose the use of certain value capture techniques for a variety of reasons, often focusing on local taxes and how other public needs are being funded.

As can be seen in Appendix Section III, the developer community pushed back against impact fees in Bozeman, MT, and initially won some district court challenges. While the city ultimately prevailed, victory came at a high cost, as Bozeman lost several million dollars in revenue due to moratoria, lawsuits, and legal battles. Another example of judicial issues for value capture projects occurred in Texas, where county transportation reinvestment zones (TRZs) were deemed unconstitutional. As a result, some jurisdictions canceled their plans, but Hays County came up with an alternative (see Appendix Section VII). In Atlanta, GA, a lawsuit threw the legality of the tax allocation district (TAD) used to fund the Atlanta BeltLine into question, so that the BeltLine had to hold off on collection of TIF revenues for the project. This issue was ultimately resolved by a very close referendum in which voters approved the collection of school district funds in Georgia TADs, after which legislators amended the State constitution to permit this (see Appendix Section I). For all value capture techniques, practitioners are advised to consult with legal counsel familiar with the case law in their State.

Authority for value capture techniques varies from State to State, with authorization sometimes possible at the local level and other times only at the State level. 285 Washington State does not permit TIF, for instance. 286 Sidebar 11 highlights changes to local fiscal authority that are often required for value capture techniques to be implemented. However, it is often difficult to implement these legislative changes, and it may require years of deliberation. Therefore, practitioners may consider it advisable to weigh the risk of legal challenges carefully while working to secure full State authority to minimize those risks.

  • Allow use of desired value capture techniques to raise funds or give localities more expansive fundraising authority.
  • Allow localities to dedicate funds to specific transit/transportation purposes.
  • Promote regulations requiring dedication of funds raised through desired value capture methods to purposes and areas associated with the project.

12.3 Federal Regulations

Value capture initiatives that involve the National Highway System or utilize Federal funds must comply with Federal regulations. This includes not only Federal grant and trust fund monies, but also commonly used loan programs such as TIFIA and RRIF (see Example 21). For example, if a project includes Federal funding, it must undergo an environmental process mandated by the National Environmental Policy Act (NEPA) (42 U.S.C. 4321 et seq.). Additionally, some activities are prohibited before a NEPA review takes place, such as ROW acquisition. Section 12.3.2 describes the requirements as they relate to federally funded highway projects.

Example 21: Federal Government Involvement in Value Capture Projects

In the Ohio Cap project (see Appendix Section IV), the FHWA funded the original construction of the expressway. This proposed alternative use of an I-670 highway easement required FHWA authorization. Federal regulations required that the city of Columbus obtain a fair market value for the air rights it was leasing to a private developer. This requirement proved challenging because even without paying rent, the developer would need to charge above-market rates for retailers to fund the project's construction cost. Also, parking was severely limited, which reduced the attractiveness of the investment to the developer. Columbus worked through this requirement by negotiating an alternative arrangement whereby it would receive 10 percent of the annual profits of the development in lieu of rent.

Capitol Crossing in Washington, DC, (Appendix Section V) also highlights the impact of Federal involvement on value capture projects. Capitol Crossing required the acquisition of I-395 air rights and, therefore, extensive Federal reviews. These reviews included an environmental assessment prepared in compliance with NEPA, the Council on Environmental Quality Regulations, and the FHWA Environmental Impact and Related Procedures. The project was also reviewed under Section 106 of the National Historic Preservation Act, and the environmental assessment included a Section 106 Effects Assessment.

12.3.1 Uniform Act and Property Management Requirements

Federal requirements related to real estate can be found in the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970 (49 CFR part 24), known as the Uniform Act, and property management requirements are found in 23 CFR 710. These requirements are triggered whenever there is Federal funding involved in a project, or if there is a goal of maintaining Federal eligibility. Several of the value capture mechanisms need to consider Federal requirements, including, but not limited to, joint development projects.

The Uniform Act will be triggered if there is Federal funding in any phase of a project, or if there will be Federal funding incorporated into a project at a later date. Not following the requirements of the Uniform Act can put Federal funding for the entire project in jeopardy. The Uniform Act established protections for anyone affected by federally funded programs or projects designed to benefit the public. Projects often require the acquisition of private property in order to be developed. This potentially results in the displacement of individuals from their homes, businesses, or farms. The Uniform Act ensures owners and tenants are treated fairly and equitably and receive relocation assistance if they are displaced.

The property management requirements found in 23 CFR 710 arise when there are real property interests alongside a roadway that must be acquired to construct or complete construction of a transportation project. This property is generally referred to as the ROW or real property interests. To minimize the disruptive impacts individuals may face when their property is being acquired, the 23 CFR 710 regulations govern the acquisition, management, and disposal of real property interests acquired on transportation programs or projects that receive Title 23 U.S.C. financial support from FHWA. Any value capture mechanism that uses or impacts the ROW will have to consider the requirements of 23 CFR 710.

Explore in Detail

Real Estate and Public Agencies
Federal Highway Administration Office of Planning and Environment, March 2016.

12.3.2 Environmental Review

Environmental review is integrated with the preliminary planning and design process described in Section 10.3, and both processes are closely intertwined. NEPA requires Federal agencies to assess the environmental effects of their proposed actions prior to making decisions. Transportation decision-making typically involves a triple bottom line to consider the social, environmental, and economic effects of proposed projects during development to align them as closely as possible with the "best overall public interest." 287 Joint development projects involving ROW use on interstates must comply with NEPA.

Based on the initial results of the environmental review process, an agency will be required to prepare an environmental assessment, at minimum, or a more detailed environmental impact statement if environmental effects are found to be significant. NEPA stipulates that the Federal Government must review the environmental impacts of proposed infrastructure projects that it has determined as "significant power" or "control of," particularly those requiring significant Federal funding and/or financing. Additionally, many States have adopted environmental review processes that apply to local transportation projects, so a thorough environmental review is often required even when a project has little or no Federal Government funding attached.

The environmental review process can influence infrastructure projects regardless of whether they are funded and financed through value capture or more conventional funding and financing approaches. However, environmental review considerations may benefit certain types of value capture projects more than conventionally delivered projects. For example, the California Environmental Quality Act requires that municipalities assess the greenhouse gas emissions created by major new construction and develop a greenhouse gas mitigation plan. The State has refused to grant construction permits to projects with insufficient greenhouse gas accounting or mitigation planning. As joint development projects typically have lower greenhouse gas emissions due to their frequent orientation toward increased density, fewer cars, bicycle usage, and walkability, they are likely to perform better in environmental assessments. 288

Explore in Detail

Environmental Assessment
Federal Highway Administration Office of Planning and Environment, March 2016.

Footnotes

277 Page et al., Guide to Value Capture Financing for Public Transportation Projects.

278 "Value Capture," United States Department of Transportation, Federal Transit Administration, April 27, 2018, www.transit.dot.gov/valuecapture.

279 Federal Transit Administration, "Value Capture."

280 "CNU: Congress for the New Urbanism," Congress for the New Urbanism, www.cnu.org.

281 Isaac Riddle, "City Council Considers Changes to Zoning in Transit Areas," Building Salt Lake, March 8, 2017, www.buildingsaltlake.com/city-council-considers-changes-zoning-transit-areas/.

282 Salt Lake City, Utah, Transit Station Area Development Guidelines, June 2017, www.slcdocs.com/Planning/Applications/TSADesignGuidelines.pdf.

283 Isaac Riddle, "Council Votes to Update TSA Zoning," Building Salt Lake, June 16, 2016, www.buildingsaltlake.com/council-votes-update-tsa-zoning/.

284 Isaac Riddle, "Revived Project Giving More of the Same on 400 South," Building Salt Lake, May 17, 2016, www.buildingsaltlake.com/revived-project-giving-more-of-the-same-on-400-south/.

285 Page et al., Guide to Value Capture Financing for Public Transportation Projects.

286 "Tax Increment Financing (TIF) in Washington," Municipal Research and Services Center (MRSC) of Washington, May 23, 2018, mrsc.org/Home/Explore-Topics/Economic-Development/Financing-Economic-Development/Tax-Increment-Financing.aspx.

287 Standards, 23 U.S.C. 109(h) (2018).

288 Renne et al., "Transit-Oriented Development."

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