Land Value (Re)Capture Nico Calavita Professor Emeritus Graduate Program in City Planning San Diego State University April 11, San Diego

Mill Valley 2040 Housing Element 9. Affordable Housing Overlay An Affordable Housing Overlay is a zoning tool which offers a package of incentives on designated sites designed to make the development of affordable housing more feasible. It is an “overlay” because it layers on top of base zoning regulations, leaving in place the option for property owners to develop under the base zone, or to utilize the voluntary incentives for the provision of affordable units. Overlay incentives are distinct from incentives offered through State density bonus law in that they provide more certainty by providing the full set of incentives up front and establish local commitments to encourage specific types of housing1. The Affordable Housing Overlay will be applied to the following development site in Mill Valley: The Redwoods Addition: This continuing care retirement community is situated on a large ten‐acre lot, and is currently undergoing a comprehensive $45 million renovation. The non‐profit owners plan to initiate a capital campaign in 2013 to raise funds to offset the costs of developing 49 additional independent living units for lower income seniors, planned for the current parking lot which fronts on Miller Avenue. The Redwoods’ goal is to increase the number of affordable units for lower income seniors beyond the current 60 Section 8 subsidized units. To help reduce development costs and enhance affordability on the new units, the Affordable Housing Overlay will provide the following incentives: Increased building height allowance the finished floor rather than natural grade to account for floodplain requirements Reduced parking requirement of one parking space per unit Development fee waiver By‐right allowance for 49 additional independent living units conditioned upon units being provided at levels affordable to lower income seniors.

Land Value Capture Government actions (value creation) Increases in land value Community benefits (value capture)

Government actions that increase land values include (Value creation): 1) Construction of infrastructure and public facilities Value capture: Special Assessment Districts

Example: Infrastructure and Public Facilities: Golden Triangle

Why “Golden” Triangle? Freeways construction I – Tremendous increases In the value of the land Who paid the hundreds of billions of dollars for the freeways?

Example of Land Value Recapture through Special Assessment Districts: Mass Transit Los Angeles County Metropolitan Transportation Authority (LACMTA) Two assessment districts were created in 1985 Challenged in court, upheld by the CA Supreme Court Helped finance the first 4.4-mile segment of the Los Angeles Red Line for $130 million (9 percent)

New book Innovation in Public Transport Finance: Property Value Capture Ashgate Publishing LTD Dr. Shishir Mathur Associate Professor Urban and Regional Planning Department San Jose State University

Building infrastructure is the first public action that increases the value of the land The second is another public action that is related to the planning and zoning powers of local governments, including: Plan changes or upzonings that increase densities or change land uses to more profitable uses We are going to emphasize this form of land value increases and land value recapture

Example Costa Verde

So, how do we capture, at least a portion, of this increase? At the time of a plan change (the approval of a community plan, for example) or, upzoning, the locality negotiates/requires: public/community benefits Such as…

Possible community benefits (Santa Monica)  Affordable/workforce housing  Transportation Demand Management  Historic Preservation – TDRs  Social Services/Creative Arts  Enhanced open space and streetscape  Quality pedestrian and biking connections  Shared parking solutions The community benefits, the land owner benefits (not as much), the developer benefits

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 community benefits 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)

How would Land Value Recapture work? There are two basic types: 1)Negotiation based (development agreements) Disadvantages-- Possible lack of expertise of planners Transparency & accountability problems with locality/developers negotiations Advantages-- Flexibility – You can get more Palmer (Costa-Hawkins does not apply)

Example: Vancouver (negotiation) Site specific rezoning The land “lift” is largely recaptured (rule of thumb is 80%) Community Amenity Contribution or CAC is determined by negotiation based on project pro-forma Responsive and flexible system that ensures … Maximizes potential extraction Expert staff

Santa Monica Land Use and Circulation Element (LUCE) - Adopted in 2010 Fundamental goal : Additional development and increased densities must contribute to, not detract, from the community Focus development on the boulevards to maximize high frequency transit and proximity of residents and workers to daily needs In exchange for allowing incremental increases (two tiers above a base height of 32 feet) the developer must provide community benefits

How “much” ($) community benefits? Every project is required to produce an economic analysis of the “enhanced value” the project is creating as a result of greater height and FAR The developer prepares the economic analysis. Peer reviewed by city’s consultants

23 development agreements – Most projects located downtown and the Bergamotte (former industrial) area The “enhanced value” analyses become the basis for the determination of the appropriate level of community benefits Largely based on five priority areas and extensive community participation process

2) Plan based – Specific Plans/Community Plans, etc. Advantages – Transparency & accountability Faster processing of projects Areawide EIRs? Disadvantages— Minimizes potential extraction Palmer applies

Plan-based Land Value Recapture The Eastern Neighborhoods Plan in San Francisco

San Francisco The Eastern Neighborhood Plan ties increased allowable intensities of development to higher fees: 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 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

San Francisco A 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)

IH is often justified by compensating developers for the additional costs of providing IH Incentives = Public costs – Is there a better way? Land Value Recapture and Inclusionary Housing

Are incentives necessary?

Incentives and cost-offsets displace costs onto the public, either directly or indirectly Financial incentives Fee waivers, reductions or deferrals Fast-tract permit approvals Density bonuses

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

Alternative: IH as a land value recapture mechanism through rezonings or land use changes, taking into account that planning is a dynamic process Possible two-tier IH system Now IH is superimposed on an existing framework – Cost-offsets and incentives implicitly assume a static view of urban planning

IH land value recapture in the US: A beginning at the state level State of Washington HB 2984 of 2006 It specifically authorizes IH where it is linked to upzonings In a commentary, the Housing Partnership stated that the justification for the IH requirement “is that the property owner has been given increased land value by virtue of the upzone, and that increased value is the equivalent of an incentive under a voluntary program.”

Where does the idea of Land Value Recapture come from? 19 th Century ideas from the US and England

Henry George Most famous work: Progress and Poverty Cause of poverty: Land Rent Proponent of Land Value Taxation (Single tax) John Stuart Mill (Unearned increments in land value) World wide success

Difficult to implement in this country We don’t use terms such as: “Value Recapture” Or “Betterment”? Or “Planning Gain” (In Spanish: “Plusvalias”, in Italian “Plusvalore”) Moral aspects of “Unearned Increments” But, we do have an American version of LVR

Incentive Zoning or Density Bonus Is an example of what was defined by Jerold S. Kayden in 1992 “Market-based Regulatory Approaches,” defined as: “the movement from command-and-control to market- based regulatory strategies”

It happens when more density (and possibly other incentives) is exchanged for community benefits –It has to work for both the city and the developer For the city the challenge is to establish the right “price” for the benefits –As Kayden (1992 :570) points out: “The ‘price’ is too low when the city could have obtained more amenity for the same incentive or dispensed less incentive for the same amenity” – Need for independent financial analysis

So…. Plan changes and upzonings increase land values With LVR, localities can recapture some of those increases for community benefits With incentive zoning, if preceded by downzoning, or the existing zoning is low, there is also the possibility of land value recapture BUT, for both incentive zoning and LVR what is essential is NOT to change plans/upzone WITHOUT benefits

Case Study Downtown San Diego Community Plan 2005 Draft plan is released Increases of 2 FARs over the earlier (1992) were proposed in the majority of downtown, also; Proposed system of FAR incentives and TDR to provide parks, inclusionary units on site, and preserve historic sites Remember previous slide??

Enter C Plan Base Maximum Density maintained when the 2006 Downtown Plan was approved Density Bonus Program established: Increase in FAR possible if developers provides benefits that include: Urban Open Space, Affordable Housing, Three bedroom Units, Eco-Roofs and Employment Uses

FARs for sale In 2007 the city adopted a: FAR Payment Bonus Program In certain areas of downtown, developers could choose to purchase between 1 or 2 FARs, depending on location. For how much? From economically justifiable $30 to $ 15 a square foot

2011 End of Redevelopment In 2012 the FAR for sale is expanded (where, and by 50 percent) to help implement the open space and park system downtown All the Maximum FARs in the center City PDOs can be exceeded through the use of the state affordable housing density bonus.

State Density Bonus Program All the Maximum FARs in downtown can be exceeded through the use of the state affordable housing density bonus Possible highest FAR in downtown is 26.1; With 10 as a base density, 14 through the payment and community benefits bonus program, and 2.1 through the density bonus law

And to finish, the Housing Element Conundrum