Land Value Capture

Nico Calavita, Professor EmeritusSan Diego State University

Crafting the New NormalDecember 7 – 2012 -- San Diego

Land Value Capture

Government actions (value creation)

Increases in land value

Community benefits (value capture)

Government activities that increase land values include (value creation):

1) Construction of infrastructure and public facilities

2) Plan changes/upzonings

Golden Triangle

Costa Verde

Seattle’s Manifesto

Seattle is a very attractive place for new commercial and housing development. Rezoning or upzoning can provide significant economic benefit to property owners and developers and the public should share in those benefits. As sound public policy, an appropriate portion of this benefit should be captured for public reinvestment.

Where did this idea come from?

Henry George 1839-1897

Most famous work: Progress and Poverty

Cause of poverty: Land Rent

Proponent of Land Value Taxation (Single tax)

World wide success

Lincoln Institute of Land Policy founded by Cleveland industrialist John C. Lincoln (1866-1959) in 1947

Programs:• Valuation and Taxation• Planning and Urban Form• International Studies

Schalkenbach Foundation established in 1925 – New York

CA & San Diego Roots

• Former City of San Diego Councilman

Floyd Morrow• Common Ground

& Basic Economic Education

Implementation of land value taxation has not been easy

Mechanics of recapture have been troublesome

One example: Great Britain – Tortured history

End of 19th century: Concerns about “Unearned increments”

1909 first planning legislation: Tax “Betterment value”

It was the start of attempts over 70 years to tackle what proved to be an extraordinarily intractable problem

Great Britain (continued)

• 1970s –Planning agreements & “planning gain”

• 1980s – Affordable housing added to the package of benefits through informal negotiations

Sect. 106 of the 1990 Town and Country Act: General right of localities to require financial contributions toward the mitigation of the costs of development, plus affordable housing

Shift from a tax on land to the extraction of the profits of development

Who pays?

“S106 aims to ensure the transfer of planning gain, or betterment, from the landowner to the local authority via the developer.” (Sarah Monk. 2010. “Affordable housing through the planning system: The role of Section 106,” in Inclusionary Housing in International Perspective)

• The price of the land is enhanced by the planning permission• But reduced by the S106 commitment• The landowner still receives a higher price for the land

“Different councils adopt differing policies as to what percentage of social housing may be required, the level of development which triggers such provision and the method of calculating financial contributions. As inevitably, it falls to the landowner to fund these provisions, by reduction of the sale price, there is often lengthy and sometimes acrimonious discussion as to the need for and the amount of the provision.” (page 3)

Negotiation-based – Criticisms in UK

• “Negotiated bribery corrupting the planning system”

• “Much of the planning gain that is obtained is bad practice, violating the fundamental principle that planning permissions cannot be bought or sold”

Result (still UK)

• Recent enactment of legislation that mandates fixed-standard charges locally mandated by the planning authority namely, the Community Infrastructure Levy. (Similar to US Development Impact Fees?)

• Negotiations allowed only for affordable housing and site specific contributions

Greater transparency, simplicity, predictability, fairness and efficiency??

Negotiation-based: Vancouver (It works?!?!?)

• Most development is a site-specific zoning

• Resulting land value increases (the land “lift”) is largely recaptured (the rule of thumb is 80%) in the form of Community Amenity Contributions (CACs) – Voluntary, kind of

• The CACs are determined through negotiation, based on a project pro forma

Vancouver

Responsible and flexible

Presumably:• It does not discourage development, while• Maximizing potential extraction

Key to its success: An experienced and sophisticated staff

Other countries?

• Europe – Similarly to G.B., move from attempts at direct taxation to recapture of land values “through the planning system”

• South America. In some countries, such as Brasil and Columbia, zoning is for sale

US“We actually do a lot of value capture in the

U.S., we just don’t use the term” Gregory K. Ingram, president of the Lincoln Land Institute (quoted in Mark Bergen’s “Money Grab: How Can Cities Recapture Investment in Public Infrastructure?” In Forefront, published by Next American City on line)

How? Development Impact Fees, Commercial (Job-housing) Linkage Fees, Inclusionary Housing, etc.

Why we don’t use the term?

Who pays the cost of development Impact Fees, Commercial Linkage Fees, Inclusionary Housing ?

Incidence Controversy

How are they different from the British/Vancouver experience in terms of development process timing?

Fees not paid at the time of rezoning. Developers pay them at the time of subdivision processing (or even later)

They have paid the rezoned value for the land

• The result is immense opposition from the development industry and the business community

• In the case of Commercial Linkage Fees it is the fear of losing economic competitiveness by raising the cost of commercial development that makes commercial linkage fees so politically difficult to enact

• Vitriolic opposition of residential developers to IH, and that leads to incentives, such as…

Fee waivers, reductions or deferralsFast-tract permit approvals

Ad hoc density bonusesFinancial incentives

But these incentives have public costs

Incentives and cost-offsets displace costs onto the public, either directly or indirectly

Density bonuses

When superimposed on existing planning framework, they raise three major areas of concern:

1) They undermine the planning process and existing regulations

2) They may lower the level of service of public facilities and infrastructure

3) They frustrate citizen participation in the planning process

What if?Alternative: IH as a land value recapture mechanism

through rezonings or land use changes, taking into account that planning is a dynamic process

Now IH is superimposed on an existing framework Cost-offsets and incentives implicitly assume a

static and rigid view of urban planning

The same thing for job-housing/commercial linkage fees

• Apply them at the time of a rezoning (negotiation-based) or a land use change; when a specific plan, community plan or a general plan is approved

Intermission

Plan-based Land Value Recapture

The Eastern Neighborhoods Plan in San Francisco

San FranciscoA culture of planning exactions/linkages (based on a

very strong market):

• Commercial Linkage Fee ($20 Office, $18 Entertainment, $15 Hotel, $18 Retail, etc.)

• Transit Impact Fee (non residential, $10)• Child Care Fees ($1)• Open Space Fees• Arts fees (1 percent of construction costs)• Inclusionary requirements (15 to 20 percent;

$380,000 in-lieu-fee)

Appendix: Public Benefits Incentive Zoning (excerpt)

“The purpose of Public Benefits Incentive Zoning is to ensure that any increased development potential resulting from a rezoning of the Mission District helps to develop a diverse, balanced, and healthy neighborhood. Where the rezoning allows an increase in density or buildable square footage, it not only confers greater development potential, but also creates greater land value for property owners and sales or rental value for developers. Increased private value is thereby conferred by a public act, but without gaining advantages for the local community. This program creates a mechanism to capture a portion of this increased land value in the form of Public Benefits that will mitigate the impact of the additional development rather than allow it to become windfall profit to the landowner. Public Benefits may take the form of affordable family and senior housing units above the required inclusionary zoning, community serving spaces, publicly accessible open space, and light industrial space where appropriate. For the purpose of this program, “rezoning” includes increases in height, bulk, buildable square footage, or density, or major changes in allowed uses.”

How can we explain such sophistication?

Origins: Rapid Gentrification/Displacement in the SOMA area

• Dot-com boom of the late 1990s• Super-gentrification in traditional working class

neighborhoods• Wholesale displacement of families and businesses,• Aided by city policies that exempted “live-work”

spaces in warehouses and industrial structures from processing and fee requirements

Existing infrastructure of community-based organizations to build on

Ten year campaign: Whose city?

• Struggle for residents and workers to remain in their neighborhood

• Establishment of the Mission Anti-Displacement Coalition (MAC)

• We don’t want to react to a city’s prepared plan• Strategy: From trying to stop what the

neighborhood did not want to “What we want” and “How do we get it”

The People’s Plan for Jobs, Housing, and Community

• Now what? (The People’s Plan meets the Official Plan—Collaboration between the City and MAC):

The 2008 Eastern Neighborhood Plan

Appropriate political juncture (Willie Brown-District Elections)Planning Department staff in charge sympathetic

San Francisco Eastern Neighborhoods Plan

Eastern NeighborhoodsThe EN Plan ties increased allowable intensities of development to higher fees

Three tiers:

• Tier 1: Increase in height of eight feet or less • Tier 2: Increase in height of nine to 28 feet• Tier 3: Increase in height of 29 feet or more

Fee levels

Tier Residential Non-residential• 1 $8/gsf $6/gsf• 2 $12/gsf $10/gsf• 3 $16/gsf $14/gsf

In formerly industrial zones the use change to different types of mixed use requires higher IH requirements

Land use changes (value creation) generate community benefits (value capture), through the

planning system (in addition to existing exactions)

• This approach is now applied throughout San Francisco when Area Plans or Specific Plans are updated

• It reflects a more interventionist city to guarantee more equitable outcomes and offset the social and environmental costs of development

Does it work always and everywhere?

No, it needs places and times with a healthy market

• But how do cities, land owners and developers know what level of value capture is feasible?

• “Community benefits cannot be calculated or negotiated without using development economics and real estate analysis, and the question is not whether but how” (Cameron Gray, former Director of Vancouver Housing Center)

• Mathur, Shishir. Under contract. Property Value Capture to Fund Public Transportation in the USA. Surrey, U.K: Ashgate.