Yesterday’s post, the first in our week-long series on land value capture, discussed the concept of land value capture and three specific LVC strategies. With this foundation, today’s post will discuss fundamental requirements for value capture to be used successfully. 

Land value capture’s success as a funding tool requires an environment with a smart mix of uses, density, accessibility and market demand.

• Regulatory Framework. Local zoning ordinances that allow for a mix of uses – residential, commercial and recreational – must be in place for LVC to be effective, as mixed-use development near transit stations tend to generate more value than single-use development.  If areas near transit are zoned only for a single use, cities may need to re-write zoning ordinances to include mixed-use zoning, or develop a TOD overlay district.
• Density. Development near transit should be sufficiently dense in order to capture the greatest value possible through LVC strategies. Since LVC funds transit projects through a proportional relationship with property values, dense development that creates more value per built square foot is more desirable than comparably less valuable sprawling, suburban style development.
• Reforming Property Taxes. In addition to zoning, reforming general property tax formulas to include a land value tax (LVT) component can be an effective method to promote TOD and raise revenue to finance public transit. LVT as a reform measure results in placing a higher tax rate on land than on buildings, which provides incentives to develop property by making it more costly to hold onto vacant or underutilized sites. Additionally, placing a lower tax rate on improvement assessments could encourage owners to upgrade or replace obsolete buildings.

Recently, a land value taxation pilot program was passed by Connecticut’s General Assembly. The pilot program allows up to three municipalities to participate, with the hope that raising taxes on land and lowering them for buildings will encourage smart development while also providing municipalities with the same amount of net revenue. New London Mayor Daryl Justin Finizio has shown support for this program, which will incentivize revitalization in downtown New London, an area served by Amtrak and Shore Line East commuter rail, as well as Southeast Area Transit (SEAT) bus, Greyhound and the Cross Sound Ferry to Long Island.

• Accessibility. In addition to the presence of transit, walkable and bikeable communities not only improve mobility and accessibility, but also have a tremendous impact on land values. A study that evaluated the impact of walkability on land value using Walkscore shows that properties in walkable areas increase property values by $4,000 to $34,000.
• Market Demand. Even with the above policies in place, a value capture strategy centered around a transit hub will only succeed when there is sufficient market demand for real estate. Developers will be keenly concerned with filling vacancies when they commit to funding transit through LVC strategies like TIFs and SADs. If developers can be fairly certain their projects will attract eager tenants (who have been shown to pay premiums to live near transit), they will be more likely to commit to participate in an LVC strategy. On the other hand, if a project is highly speculative with uncertain demand for new residential or commercial space, it will be more difficult for local governments to persuade the private sector to help fund transit through LVC.

Tomorrow’s Mobilizing the Region will investigate the relationship between the real estate market and tax revenues received by the MTA and also look into how communities can apply land value capture equitably to benefit existing residents.