TABLE OF CONTENTS
LIST OF FIGURES
LIST OF TABLES
In the overall value capture (VC) typology, developer-based VC techniques represent one of the most prevalent VC categories, which are based on various forms of exactions or contributions directly involving the developer community. Other more prevalent VC categories are (1) tax increment financing (TIF) (based on existing ad valorem tax involving general taxpayers with no new taxes) and (2) special assessment district (SAD) financing (based on new non-ad valorem tax assessments involving property/business owners and tenants).
Several developer-based VC techniques are considered–either voluntary contributions (e.g., land dedication, in-kind facility or service) or involuntary exactions (e.g., impact or linkage fees). There are others that are based on regulatory incentives designed to help induce developer exactions (e.g., density bonus, transfer of development right or TDR). Relative to TIF and SAD, value capture from developer-based techniques can be more challenging and uncertain because (1) it is often contested, especially when involuntary, and (2) depending on the local economic conditions and political climate, local governments may choose to settle only for incremental tax revenues anticipated from the development projects (i.e., sales, transient occupancy, and/or property tax) and not seek any additional exactions from the developers.
In general, developer-based VC techniques are directly or indirectly linked to development rights and land use entitlements. The potential magnitude of VC revenues can thus vary significantly depending on local economic conditions and the specific properties under consideration. For example, in rural growth-hungry areas, the potential for developer exactions is often minimal, whereas, in fast-growing, high-demand areas, it can be very high.2 Because the primary financial burden falls on developers (and their landowner partners), depending on the prevailing real estate market condition, developers normally pass on some or all of their VC financial burden to the ultimate property owners (buyers) or tenants if the projects can be completed.
The legal and constitutional basis for exactions is found in local governments' exercise of their police power that permits restrictions on private activities in order to protect public health, safety, and welfare. When properly applied, exactions are considered to engender a legitimate public interest. Although not mandated by law to the extent that property taxes and special assessments are, most developer exactions are generally construed as involuntary and mandated.
Historically, exactions have faced constitutional challenges in that they constitute a taking of property without just compensation, which may occur:
Because developer exactions are often contested, local governments' ability to collect them can sometimes be challenging. Through three landmark cases,3 court rulings have thus established the need for two basic tests before exactions can be imposed:
To impose developer impact fees, therefore, local governments often commission nexus and fee studies to satisfy these tests and establish a quantitative and legal basis for the fees. In some cases, to avoid legal disputes, local governments can also choose to offer a compromise by creating new special assessment districts to generate additional revenues to supplement developer exactions to help pay for the necessary public improvements.
Most evolved among the developer-based VC techniques is the development agreement (DA). The DA is a technique based on a negotiated contract that provides a more flexible and less litigious solution to involuntary exactions. First introduced in California in the 1970s, the DA is a voluntary, but legally binding, contract between one or more developers and a local government (Barclay and Gray 2020). In a DA, developers provide upfront contributions for public improvements and other public benefits and, in exchange, the local government grants them the vested development rights in which local zoning and land use entitlements that apply to developers' projects remain unchanged for the duration of the contract.
By locking the entitlements for a longer period than otherwise possible, DAs make it easier for developers to secure the upfront financing and protect their investments from the risk of project cancellation in the mid-stream. DAs are also generally exempt from the essential nexus and rough proportionality tests and allow local governments to negotiate larger concessions from developers that exceed what they would have obtained otherwise.
Because of their potentially significant benefits, the use of DAs has been increasing significantly in recent years. This Primer provides information and practical details on what a DA is, its background and history, basic processes needed for its implementation, and representative case examples. While highlighting the key advantages compared to other developer-based VC techniques, this Primer also addresses some of DA's emerging challenges even as its uses are gaining ground.
In addition to the DA, this Primer covers other contract-based VC techniques; most notably community benefits agreements (CBAs). Introduced in the late 1990s, CBAs are other contract-based VC techniques that are voluntary and negotiated between local community groups and developers, which can be initiated by either or both parties. Under CBA, developers provide certain social amenities (e.g., local and minority hiring goals, funding for community centers, affordable housing provisions) that benefit the local communities in exchange for their support for the proposed project.
DAs and CBAs are often used in conjunction with each other to increase both the DA's overall transparency and the CBA's enforceability. Along with DAs, CBAs can also make it easier for developers to secure their financing because CBAs in essence help reduce the possibility that the project may not be approved due to lack of local support. CBAs may also be helpful in obtaining government grants and support.
Joint development agreement (JDA) is another common form of contract-based VC techniques. JDAs are an arrangement in which local government is directly involved in the private developer's development project. This is different from DA, which deals with the need for the public improvement necessitated by private development projects. In JDAs, local agencies often commit development rights above, below, or adjacent to public rights-of-way (ROWs) (e.g., air rights above railroad tracks/stations or expressway turnpikes) as an integral part of the development project in exchange for various cost and/or revenue sharing arrangements.
Finally, there are various use agreements for public assets, public ROWs, as well as development rights above, below, or adjacent to public ROWs. These use arrangements can be a subset of a larger JDA, as mentioned above, or they can constitute a separate stand-alone agreement. Stand-alone use agreements can take various forms and involve a wide variety of public assets. They can range from relatively simple naming rights on a public building or advertising rights in various public spaces to more complex third-party franchise agreements involving, for example, solar panel installations on public real estate with various energy and revenue sharing arrangements.
This Primer also provides practical information about CBA, JDA, and public asset use agreements. In addition to detailed overviews of these techniques, this Primer presents their effectiveness in providing key VC opportunities and challenges as well as real-world case examples of when and how best they can be used.
In real estate, four common categories of "development agreements" (as used generically) involve developers and local governments driven by developer projects. These are (1) public improvement development agreements concerning provisions of infrastructure, public spaces, and amenities linked to the development project; (2) disposition development agreements involving the sale of public-owned land to the developer; (3) lease disposition development agreements involving the lease of public-owned land or property to the developer; and (4) owner participation development agreements (private) that allow development of property owned by an entity other than the local government, generally the property owner and/or developer. This Primer is focused primarily on (1) above.
More important distinction when dealing with transportation infrastructure, however, is between the term "Development Agreement" in the context of value capture from the term "Comprehensive Development Agreement" in a capital project delivery context–especially as it pertains to public-private partnership (P3) project delivery models.
"Development agreement" (DA) in a value capture context is about identifying revenue funding sources for necessary public improvements4 linked to major development projects. DA is between the local government and real estate developer(s) responsible for the development projects. From a financial perspective, a DA solely addresses the "revenue" side of the public improvements, not the method used to deliver the improvements.
In contrast, the basic contract underlying a P3 delivery model is a long-term concession agreement between a private "concessionaire" (also referred to as the project proponent or project "developer") and a public sponsor. Such a concession agreement is often labelled as "Comprehensive Development Agreement (CDA)." CDAs are based on whole-life, performance-based capital project delivery plans. These plans come with a private sector project financing package over the project lifecycle. CDA is not directly related to value capture and thus is not covered in detail this Primer. Value capture DA (as separate and distinct from P3 project delivery CDA), however, can play a role in increasing the financial viability of P3 projects.
In general, securing P3 project financing upfront by the private sector is based on reasonable assumptions about an anticipated future funding (i.e., revenue) stream. Typically, P3 is delivered using either revenue-risk (RR) (also referred to as demand-risk) P3 model or availability payment (AP) P3 model (see Table 1). Under RR P3, most of the anticipated funding (revenue) generally comes from third-party user charges with the private sector taking on the revenue (or demand) risk. Under AP P3, the more prevalent of the two models, the anticipated funding (revenue) comes from the public sponsor where the private sector is paid pre-established annual payments (albeit contingent on performance) for the life of the contract, in part for securing the upfront financing. In short, under AP P3, the long-term P3 financial liability lies on the public sponsor's shoulders.
Parameter |
P3 Model |
|
|---|---|---|
Revenue-Risk (RR) P3 |
Availability Payment (AP) P3 |
|
Primary Revenue Source |
User Charges |
Annual Payments from Public Sponsor |
Type of Risk |
User Demand (i.e., Revenues from Users) |
Public Sponsor Fiscal Status |
Risk Bearer |
P3 Private Concessionaire |
Public Sponsor |
When a P3 project is based on the AP P3 model with a significant real estate development component (within its scope or with direct benefits to adjacent major development project(s) outside its scope), having a separate VC-based DA in place can contribute to the P3 success. This is especially true if the DA is able to establish an integrated value capture strategy and identify clear additional future revenue streams for the public sponsor.
This Primer is organized as follows. Chapter 2 provides a detailed overview of DA, its basic components and implementing processes, its opportunities and limitations as an effective VC technique, and relevant case examples. The subsequent two chapters cover the other contract-based VC techniques–CBA (Chapter 3) and JDA and Use Agreements (Chapter 4)–each with an overview and background of the technique, key implementation issues, opportunities and limitations associated with each technique, and representative case examples. Chapter 5 presents how a contract-based vehicle such as a DA or JDA can be used as a basis for developing an integrated VC strategy (i.e., phased and risk-adjusted involving multiple VC techniques) to allocate both VC-related benefits and costs equitably across multiple stakeholders. Finally, sample agreements representing each contract-based technique are provided in the appendices at the end of this Primer.
2 For example, the City of San Francisco was able to capture close to $250 million in VC revenues from developer impact fees alone in FY2015-2016 (Germán and Bernstein 2020).
3 The three landmark cases, often referred to as Nollan/Dolan and Koontz, that resulted in the need for the two basic tests are (1) Nollan v. California Coastal Commission (1987), (2) Dolan v. City of Tigard (1994), and (3) Koontz v. St. John River Management District (2013) (Barclay and Gray 2020).
4 As will be further explained later, public improvements included in a DA are primarily infrastructure but can also include other public benefits, such as open space and social programs.
