TABLE OF CONTENTS
LIST OF FIGURES
LIST OF TABLES
As mentioned in Section 3.5, there are seven key metrics to consider in the qualitative assessment when making the business/economic (B/E) case for value capture (VC):
Yield/Revenue Potential
Equity
Efficiency
Administrative Ease
Transparency
Political/Legal Feasibility
Macro-policy Goals
Taken together, the above criteria help to determine the overall effectiveness of VC techniques and provide the basis of making apples-to-apples comparisons among different VC techniques. This section provides general assessments of common VC techniques with respect to these criteria in the context of major highway interchange projects.12 It is beneficial to perform more detailed assessments when selecting VC techniques in specific project contexts.
Substantial but not necessarily predictable; depends on value dynamics of properties within a given TIF district as well as prioritization and share of the yield across competing demands and jurisdictions
Sensitive to (a) pace of development, (b) tax base appreciation, (c) wider real estate market conditions; generally vulnerable to economic downturn
Capable of providing larger revenue streams (assuming that the assessed values always remain below market values14)
Existing developments (as opposed to new developments) carry relatively greater burden than other VC mechanisms
Potential diversion of tax increments for other competing special purposes
May compete with similar developments (existing) that did not receive TIF cost-cutting benefits
May create incentives for existing developments to move instead of creating new developments
Able to undertake coordinated planning of transportation improvements with an urban redevelopment plan
Can facilitate high density developments (e.g., TODs)
When used for major highway interchanges, provides opportunity to coordinate transportation and land use planning to improve efficiency of resources dedicated for transportation purposes
Most local governments have experience with TIF compared to other VC mechanisms (other than special assessment districts [SADs], which are also common).
Requires technically skilled staff and tends to be procedure-laden with added administrative burden
Relies on consultants if internal expertise is lacking, adding to administrative costs
Often criticized for being too complicated for most people to understand
Given that the tax rate remains the same, less likely to be opposed when compared to other VC techniques involving new tax assessments
Opposition sometimes is related to the likelihood that taxes will not keep pace with the intended funding for proposed public improvements
Gentrification concerns for urban redevelopment projects.
Opposition may come from similar developments that do not receive TIF benefits.
Beyond direct monetization of value appreciation, VC tools can serve larger policy goals (e.g., more jobs, more housing, smart growth based on TODs) by virtue of facilitating real estate development projects that trigger growth and serve as an economic impetus (see Section 3.1)
Compared to other VC techniques such as SAD and DIF, TIF can better address economic development goals for blighted areas, which was its originally intended purpose
Revenue risk is much lower because fixed assessments are due according to a fixed schedule regardless of the real estate market or overall economic condition
District formation and planning processes are designed to ensure revenue needs are met
Revenue can be raised as needed and approved by residents/tenants
Perception and expectation of equity (as well as receiving "special" benefits) are necessary conditions for organizing a district
District formation is a signal of expected net efficiency gains based on expectation that collective action and decision-making will result in an improvement of group welfare
Time, effort, and resources are needed to organize, maintain, and administer districts
Requires technically skilled staff and tends to be procedure-laden with added administrative burden
Relies on consultants if internal expertise is lacking, adding to administrative costs
Poses inherent risk associated with the payment collection time frame–i.e., short timeframe creates hardship while long timeframe creates risk of involving staff unfamiliar with the district purpose and formation process
District functions are transparent to district members but less transparent to the general public
Requires local ordinances covering district formation
Given organizational efforts and decision-making costs, districts tend to include a limited number of members and functions tend to focus on small-scale commitments
Districts can also be organized around larger projects if potential gains are substantial, apparent, and there is an equitable means to assign liability
Beyond direct monetization of value appreciation, VC tools can generally serve larger policy goals (e.g., more jobs, more housing, smart growth based on TODs) by virtue of facilitating real estate development projects that trigger growth and serve as an economic impetus (see Section 3.1)
Because special taxes are often confined (per applicable SAD regulations established within a given State) to benefits that are "unique, measurable, and direct" to the assessment district itself, serving broad policy goals (other than those offered by the development projects themselves) is difficult
Depends on rate of development
Revenue potential is sufficient because fees are generally enacted to cover the costs of public improvements
Easy to predict revenues generated; predictability may vary with methodology used to calculate fees
Yield tends to be routinely lower than amount needed to fully offset the development impacts on transportation infrastructure
Can support pay-as-you-go, but upfront debt financing can be secured (backed by future yield) if major transportation improvements must be in place prior to development
Typically one-time payments
Main challenge is to ensure equity between existing and new developments
Tends to favor existing developments at the expense of future developments15 (e.g., windfall gain for existing owners from property value increase with infrastructure improvements)
Value capitalization may disproportionally impact lower income households by making housing less affordable, particularly for renters
Problems arise if fees are set below the marginal cost of providing infrastructure to new developments
If impact fees are to be used for new developments but the improvements also benefit existing properties, efficiency is lost due to the breakdown of the basic premise that all those who benefit should pay (i.e., "free rider" issue)
In general, efficiency losses tend to be less when compared to other VC tools
Administering impact fees can become very complicated with complex formula; requires skilled staff and time
Trade-off between simplicity and accuracy in choice of methodology; often based on average trip generation by land use (e.g., residential, commercial)
Distinguishing features in methodology: (a) trip basis of fee (i.e., how trips are accounted), (b) cost basis of fee (i.e., what is included in the cost), (c) disposition of expenditure (i.e., how funds are spent), and (d) credits and discounts (what project elements reduce cost of fees)
If fees are directly related to trip generation estimates, administrative costs can be lower
Can be facilitated through coordination with the development review process
Transparency is improved when there is a straightforward relationship between the fees and trip generation
Complex methodologies reduce transparency but can improve efficiency and equity
In general, impact fees are among the most transparent VC tools
Courts have generally upheld the right to change impact fees as long as the essential nexus and rough proportionality tests16 can be passed
Legal and quantitative basis for fees can be enhanced by nexus and fee studies
Residents generally support the basic premise of DIF, i.e., developments should pay their own way; developers also generally support DIF due to the predictability of their financial obligations and assurance of sufficient infrastructure capacity that support their development projects
Beyond direct monetization of value appreciation, VC tools can generally serve larger policy goals (e.g., more jobs, more housing, smart growth based on TODs) by virtue of facilitating real estate development projects that trigger growth and serve as an economic impetus (see Section 3.1)
When impact fees are legislated into local ordinance, the DIF program can be incorporated into the local planning process and capital improvement program to help achieve long-term land use and economic growth plans and objectives
Some impact fees, such as linkage fees, are specifically designed to address affordable housing policy goals
Difficult to predict; vary significantly from case to case
Because each case is negotiated separately, there is a strong potential to assure sufficient revenues to cover needed improvements
Financial obligations and risks that fall on developers (and other stakeholders) help to defray risks to government
In the case of lease arrangements, revenue streams can be ongoing
Can be considered equitable because the intent of the process is to hold developers and other stakeholders responsible to enhance equity compared to a do-nothing situation
Inequity may occur if earlier developers use spare capacity and subsequent developers are held accountable; can use "zone of benefit" concept to mitigate (i.e., recovery of offsite improvement costs that benefit others)
Generally efficient due to correspondence between cost obligation and benefits received
Generally, encourages development designs that minimize transportation impacts and cost of mitigating impacts
Efficiency issues can arise if the need for mitigation influences development location decisions
Can require significant administrative resources for negotiations; more suited for large-scale developments where real estate values are relatively high
May be difficult and costly to administer
Each case negotiated separately; less predictable
Highly trained and experienced staff may be required
Although each process can be clearly defined and established, cannot expect uniform, consistent outcome
Potential for manipulation on either side of negotiation
Varies from jurisdiction to jurisdiction
Beyond direct monetization of value appreciation, VC tools can serve larger policy goals (e.g., more jobs, more housing, smart growth based on TODs) by virtue of facilitating real estate development projects that trigger growth and serve as an economic impetus (see Section 3.1)
Especially for JDAs and DAs, because they are based on negotiated contracts, significant leeway exists to achieve local policy goals with broader community benefits as part of the contracts, such as local hiring, living wages, job training, community/recreational facilities (child care, senior and youth centers, etc.), open space and parks, etc.
12 Refer to Strathman and Simmons (2010) for additional details pertaining to the assessments of specific VC techniques used in the State of Oregon.
13 TIF assessments shown are for improvements within the TIF district and local jurisdictions. For projects outside the jurisdictions, such as a major highway or transit corridor, there needs to be buy-in from local governments to contribute the TIF revenues to the corridor project on "but-for" grounds–the recognition that real estate developments, and the resulting substantial increase in local tax revenues, would not be possible but for the core infrastructure project (see Chapter 5 and 6 for additional discussions).
14 If assessed values are higher, property owners could be forced to pay taxes that are above their properties' worth in the marketplace, potentially making the collection of taxes more difficult and politically challenging.
15 DIFs are generally associated with new developments where existing developments do not participate in the fee payment. Where DIF improvements benefit other, later developments that follow, reimbursement mechanisms are sometimes available (e.g., cost reimbursement district in California).
16 Based on rulings from Nollan/Dolan Supreme Court cases, essential nexus and rough proportionality tests are required to impose development impact fees. They involve, respectively: (1) establishing a direct cause-effect relationship between the proposed project and the fees imposed on developers and (2) proving the need for the fee amount from developers to be roughly proportional to the impact created by the project. Nollan v. California Coastal Commission, 483 U.S. 825 (1987), https://supreme.justia.com/cases/federal/us/483/825/. Dolan v. City of Tigard, 512 U.S. 374 (1994), https://supreme.justia.com/cases/federal/us/512/374/.
