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Contract-based value capture (VC) techniques–such as development agreement (DA), community benefits agreement (CBA), and joint development agreement (JDA)–are among the most evolved VC techniques available today. They provide more flexible and less litigious solutions to generating new revenues. They also offer an effective means to implement integrated VC strategy by enabling multiple VC techniques to be engaged over the project lifecycle. This helps to spread out both the VC benefits and costs as equitably and as widely as possible across the key VC stakeholders involved.
This Primer provides practical information for implementing DA, CBA, JDA, and other contract-based VC techniques (such as public right of way [ROW] use agreements). It includes overviews of these techniques, processes involved in implementing them, their role in key VC opportunities and challenges, as well as real-world case examples of when and how best they can be used.
Developer-based VC is the third-most prevalent technique category after tax increment financing (TIF) (based on existing ad valorem tax base) and special assessment districts (SAD) financing (based on new non ad valorem tax surcharge). Relative to TIF and SAD, however, 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 often settle for incremental tax revenues anticipated from the development projects and not seek any additional exactions from the developers. Because developer exactions are often contested, court rulings have established the need for two basic tests before exactions can be imposed: (1) essential nexus test to establish a direct cause-effect relationship between the proposed project and the exaction imposed, and (2) rough proportionality test to establish the exaction amount is roughly proportional to the impact created by the project.
Most evolved among the developer-based VC techniques is the development agreement (DA). It is a voluntary, but legally binding, contract between one or more developers and a local government. In a DA, developers provide upfront contributions for public improvements and, in exchange, the local government grants them the vested development rights, where 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 potential cancellation in project 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.
For transportation infrastructure, DA in the context of value capture should not be confused with "comprehensive development agreement" (CDA), a term often used to refer to a public-private partnership (P3) concession agreement. DA as covered in this Primer is between the local government and real estate developer(s) and solely addresses the "revenue" side of the public improvements needed to support the development projects. P3 CDA, on the other hand, is between the local government and a private concessionaire based on whole-life performance-based capital project delivery plans. These plans come with a private sector project financing package over the project lifecycle.
The most important legal aspect of a DA is a "vested right," which is the property owner's irrevocable right to develop his or her property that cannot be changed by future growth restrictions or other regulatory reversals. In exchange for large-scale public benefit provisions, DAs make it easier for developers to obtain the vested rights that reduce developer risk and increase investor/lender confidence. In general, DAs adhere to all State and Federal environmental requirements and conform to local general plans (GP). They are often processed concurrently with GP amendments and accompanied by specific plans (SP) that establish a special set of development and zoning standards for the project. From the local government perspective, DAs can (1) facilitate the general planning process to help achieve long-range planning goals, (2) help to secure commitments for public improvements, (3) provide public benefits not otherwise obtainable under the regulatory takings doctrine, and (4) help to avoid administrative and litigation expenses. In contrast, the popularity of DAs in the developer community suggests that developers value the certainty afforded by vested rights highly and are willing to pay a high price to acquire this certainty.
Although they vary from project to project, the key DA provisions typically include:
During the DA negotiation and implementation phase, it is important for local planning staff to work closely with their land use attorney to answer key questions on (1) the purpose of the DA, (2) whether the benefits to the community are balanced with those to the developer, (3) whether the requirements are consistent for similar developments, (4) the specific people to be involved in the DA process, and (5) how DA would be maintained throughout the life of the agreement.
In general, the key DA implementation steps would include:
DAs have three defining characteristics: (1) They allow greater latitude than other methods of approval to advance local land use policies in sometimes new and creative ways, (2) they allow public agencies greater flexibility in imposing conditions and requirements on proposed projects, and (3) they afford project proponents greater assurance that once approved, their projects will be built. Although these characteristics can be advantageous and offer significant VC opportunities, they can also present important challenges. In advancing local land use policies, while DAs provide ability to better implement innovative planning policies, they can also promote bad planning. In imposing greater developer requirements for public benefit, while DAs make it easier to circumvent particularly restrictive legal constraints, they can also create unrealistic expectations to make the project infeasible. Finally, in ensuring that the project will be built once approved, DAs offer fewer surprises after the project approval, which can also result in the relinquishing of the local agency's regulatory control when needed or limiting developers' options if there are significant market shifts.
DAs have a wide range of applications in terms of project type, size, location, and the extent to which public improvements are covered. Because DAs can be used to advance overall land use planning policies, they can be most effective for large-scale master planned level development projects involving multiple developers and implemented in multiple phases over a long time. As such, DAs have been particularly popular in rapidly growing areas where significant changes in land uses have taken place. Especially for large projects requiring significant infrastructure improvements, DAs are now used not only to obtain developer exactions but also as a means to engage other VC techniques (such as TIF and SAD) to ensure future funding sources are clearly delineated at the project outset (case example: the City of Inglewood and Hollywood Parkland Co.).
In most cases, DAs are driven by major real estate development projects initiated by developers and include provisions for additional infrastructure capacity needed for their projects. These provisions could include (for both capital and operations and maintenance spending), for example, new access roads, street widening and other improvements, intelligent transportation systems (ITS) at intersections, and other public services (e.g., fire, police, traffic, telecommunication). In terms of direct linkage to core transportation projects, DAs can be a useful technique in capturing and monetizing anticipated property value increases from new developments along planned major highway or transit corridors.
In addition to the DA, the community benefits agreement (CBA) is the second contract-based VC technique whose use has proliferated significantly in recent years. Introduced in the late 1990s, CBA is a voluntary contract negotiated between local community groups and developers, where developers provide certain community benefits in exchange for the community's support for the proposed project. DAs and CBAs are often used in conjunction to increase both the DA's overall transparency and the CBA's enforceability. When combined, they can also make it easier for developers to secure the upfront project financing because they help reduce the possibility that the project may be denied altogether.
In negotiating a CBA, the three most critical issues that need to be addressed are (1) the legal entity that is representing the community coalition, (2) the specific benefits the community receives, and (3) the enforcement and monitoring mechanisms for CBA commitments. In particular, the CBA community benefits in the past have variously included:
In general, it has been found that the real bottom line for CBAs lies in their unintended effect of coalescing marginalized communities to influence policies and resources beyond those tied directly to development projects. An effective CBA is grounded in four core principles:
There are numerous examples of CBAs, most of which are linked to major real estate development projects. Relatively speaking, CBAs associated with dedicated transportation projects are less common. This Primer presents three CBA case examples: two based on transit-oriented developments (TODs) (linked to Denver light rail and Atlanta BeltLine) and one based on an airport (Los Angeles International Airport).
Joint development agreements (JDA) are the third common contract-based VC technique where local government agencies directly partake in the development projects alongside developers by committing public assets in one form or another. In addition to publicly owned land and rights-of-way (ROWs), public assets can include development rights above, below, or adjacent to public ROWs (e.g., air rights above railroad tracks/stations or expressway turnpikes). Public assets are generally committed to private development projects in exchange for various revenue sharing arrangements and other public benefits such as improved transit access.
As an international example, JDA has been used most successfully in Hong Kong as part of building the public rail transit system. In the United States, transit-related use of JDA has been more limited in comparison.1 A few notable examples include joint developments by Los Angeles County Metropolitan Transportation Authority (LACMTA) and in-fill station joint developments linked to corporate headquarters by MassDOT and MARTA. More common in the United States is the commitment of public rights as part of a JDA–the best-known large-scale case example being Hudson Yards developments in New York City, New York.
Other contract-based VC techniques include various use agreements for public assets. These use arrangements can be a subset of a larger JDA (most of which pertain to air rights) or they can represent separate stand-alone agreements. Stand-alone use agreements can take various forms and involve a wide variety of public assets, which could range from naming rights, advertising, and corporate sponsorships to more complex third-party franchise agreements (e.g., renewable energy assets on public real estate with various energy and revenue sharing arrangements).
In general, it would be helpful to establish an integrated VC policy framework at the outset, which is designed to both help pay for major infrastructure projects directly and continue to support major real-estate development projects that require additional public improvement capacity. Such a policy framework would be multi-layered and risk-adjusted with the goal of ensuring that both benefits and costs linked to VC implementations are equitably distributed across key VC stakeholders. It would also help ensure transparency and accountability from the project outset to help local governments best manage VC stakeholder expectations.
Once the integrated policy framework is in place, contract-based vehicles such as DAs and JDAs can serve to implement integrated VC strategies for different projects. At a single project level, DAs can help engage multiple VC techniques (both developer-based and publicly sponsored) to ensure sufficient funding is available throughout the project lifecycle. DAs (together with JDAs) can also be very effective in multiple project context (e.g., when there is strong co-dependency between large scale real-estate development and core transportation corridor projects). By casting as wide a net as possible for VC opportunity areas, sufficient new funding sources can be generated to support both the real estate and core infrastructure projects. Ultimately, having the integrated VC policy framework would facilitate the development of lifecycle VC strategies at project levels and streamline the VC implementation process.
As the examples in this Primer illustrate, an effective VC strategy is ultimately about starting early when there is a general recognition of a project's potential value and before it is given away without a full assessment of its monetization potential based on benefits and costs to each major stakeholder involved. At a strategic level over the long run, the basic VC approach could be multi-layered, starting with those techniques that have the least new impact on stakeholders (real or perceived) (e.g., TIF with no new taxes) and proceeding with those involving new charges (e.g., SAD and, as needed, developer exactions) in a manner that is phased and risk-adjusted so that the stakeholders can bear the VC financial burden when best able.
Contract-based VC models–such as DA, CBA and JDA–are among the most evolved VC techniques available today, providing more flexible and less litigious solutions to generating new revenues. They offer an effective means to implement integrated VC strategies by enabling multiple VC techniques to be engaged over the project lifecycle to spread out both the VC benefits and costs as equitably and as widely as possible for the key stakeholders involved.
1 For public transit-related joint developments in the United States, guidance developed by the Federal Transit Administration (FTA) is available at: https://www.transit.dot.gov/sites/fta.dot.gov/files/2020-08/Joint-Development-Circular-C-7050-1B.pdf.
