ADDENDUM TO VALUE CAPTURE FRAMEWORK & TOOLKIT. Additional options for land value capture methods

Transcription

1 ADDENDUM TO VALUE CAPTURE FRAMEWORK & TOOLKIT Additional options for land value capture methods Issue 1 April 2018

2 1.0 INTRODUCTION In July 2017 AMION Consulting, Cushman and Wakefield and DWF produced a report for the Urban Growth Company (UGC) on the potential for development of a comprehensive framework and mechanism for value capture ( Infrastructure Investment and Value Capture ). Based on the results of the study, the West Midlands Combined Authority s (WMCA) Value Capture Framework and Toolkit was developed and published in September While the Value Capture Framework was developed for the WMCA, with a particular initial focus on investments in the UK Central Hub area, it offered a response to the challenges of assessing value capture in relation to any major infrastructure investment project or programme across the UK. It comprised primarily mechanisms that are pragmatic and deliverable within existing legislative parameters (although it did include some reference to options that might require primary legislation). AMION has subsequently been asked to review what some more radical options might comprise. This Addendum Paper has been prepared to present the results of that additional work. It comprises a brief review of background followed by a summary assessment of the approaches that have been identified. 2 ADDENDUM TO WMCA VALUE CAPTURE FRAMEWORK AND TOOLKIT ADDITIONAL OPTIONS FOR LAND VALUE CAPTURE METHODS

3 2.0 BACKGROUND Major infrastructure improvements have the potential to generate a wide range of benefits. In many cases these benefits will include financial benefits for land/property owners, developers and occupiers. However, such benefits are unearned and arise only due to the public sector s investment in infrastructure. There is therefore a strong rationale for the public sector to capture at least some of the unearned increases in income or value that is created by new infrastructure. There are however various issues that need to be addressed if efficient and equitable value capture mechanisms are to be established. These include for example: Identification of the groups from which value should be captured; The scale and nature of the increase in value; The proportion of value increase that it is reasonable to capture, while still incentivising development activity; The ability of beneficiaries to pay. There is no agreed or consistent approach to capturing value. Although there are several UK and international examples where value capture techniques have been successfully applied (for example, Crossrail), the current methods are often limited in scope and applied in a piecemeal manner. The WMCA framework and toolkit identified 27 types of value capture mechanisms and assessed them based on their strategic fit, achievability, acceptability and affordability. They included: Commercial mechanisms including the use of legal/ development agreements, public sector assets, ransom strips, ground rents/service charges, and joint venture arrangements; Planning and highway legislation mechanisms planning and highway obligations (including Section 106 and Section 278 agreements) and Community Infrastructure Levy (CIL) contributions; Voluntary business contributions such as through Business Improvement Districts; User charges; Fiscal mechanism the use and application of existing or new/amended mechanisms to capture additional tax receipts, including in some cases (such as Stamp Duty Land Tax) the proposed local retention (or hypothecation) of a proportion of the additional tax income. The mechanisms identified comprised both new and amended methods. The new methods considered were predominantly fiscal. Six were recommended for inclusion: Stamp Duty Land Tax (SDLT) retention; Land and property related Capital Gains Tax (CGT) and Corporation Tax Chargeable Gains retention; Air Passenger Duty retention; New Capital allowances/tax relief schemes to support infrastructure investment by the private sector; Tourism/hotel and other sales taxes; Gambling Duties retention. The methods not recommended for inclusion were: Corporation Tax more broadly (levied on businesses in the area of benefit) rejected due to it not being land and property based and possible difficulties of attribution of trading (i.e. profit) benefits; Employee Taxes (levied on incomes of employees of companies in the area of benefit) rejected due to lack of a clear link between incomes and any value uplift; Development Rights Auction rejected at present as would rely on the existence of high demand in the area. Subject to a Greater London Authority (GLA) pilot at present; Land Value Tax (levied on land owners in the area of benefit) rejected at present due to potential administrative complexities. A further review of mechanisms for value capture including international approaches has been undertaken to inform this addendum paper. The remaining sections provide a summary assessment of more radical options including the two identified above for further review (i.e. Development Rights Auction and Land Value Tax). There are other radical options that could be considered such as the application of a development charge/tax or betterment levy on all development and/or more widespread provisions for the public sector to acquire land at current use value. The former would be similar to previous legislation such as The Land Commission Act 1967 and the Development Land Tax Act 1976 and the latter The Community Land Act However, development returns are taxed through existing fiscal mechanisms such as Corporation Tax and the public sector already has compulsory purchase powers. In addition, there is a significant risk that such approaches deter development, are complex and can be difficult to apply in practice. The Land Value Tax approach (see Section 6), while raising various concerns, would at least in part address these issues and provide a potential mechanism to capture value increases due to new infrastructure investments in a comprehensive way. ADDENDUM TO WMCA VALUE CAPTURE FRAMEWORK AND TOOLKIT ADDITIONAL OPTIONS FOR LAND VALUE CAPTURE METHODS 3

4 3.0 DEVELOPMENT RIGHTS This approach uses a land auction approach to capture added value within areas defined as benefiting from new infrastructure. Two variants have been identified: 3.1 DEVELOPMENT RIGHTS AUCTION MODEL The Development Rights Auction Model (DRAM) is to be trialled in London as a mechanism for capturing some of the increased real estate value generated as a result of new infrastructure. The key initial stages in implementation of the DRAM model include: Identification of the areas which will benefit from the new infrastructure investment such as sites where the potential for development is high around new station locations on a new rail project; Preparation of a development plan for the areas setting out the desired uses and densities for developable sites that will maximise land value creation and regeneration from the improvement in transport accessibility; Determination by the planning authority of what alternative development (use and density) would be permitted on the site in the absence of the transport scheme; Calculation of the market values of land across the zone based on this no scheme principle. Landowners within the areas are then offered three options by the planning authority: Join an authority-led development rights auctioning scheme, under which development rights on their land are pooled with those of other participating landowners and auctioned (say on an annual basis) as assembled packages. The auction sets a reserve price equal to the no scheme market value of land. If the auctioned value is greater than this, landowners simply share the gain with the authority. The approach does not seek to capture all of the value uplift sufficient gain needs to be left with the landowner as an incentive to participate; Develop the land themselves, subject to payment of a zonal Community Infrastructure Levy (CIL) or similar charge. CIL rates would be set so that revenues across the masterplanning zone are broadly equivalent to what the authority would expect to receive through the auction and to what is needed to cover infrastructure needs; Continue as they are, retaining the ability to make minor changes provided they do not change the density or use of the land and (where appropriate) they are in line with pre-existing planning consents. DRAM potentially has significant attractions for both landowners and developers. For example, it provides a simple route for landowners who are not developers to monetise the uplifted value of their land. All the relevant consents are already in place as is a competitive field of developers to price pooled packages of development. Moreover, land pooling through the auction creates opportunities for marriage value from bringing together larger land parcels. The model also enables developers who are not landowners to secure new development opportunities without the need to take upfront planning stage risks or undertake speculative land purchases. Outline planning consents are in place and any obligations specified in advance. For landowners who are developers, and wish to self-develop but believe the zonal CIL charge is too high, the auction provides a transparent, market-based mechanism to test development viability. From a public authority s perspective, the DRAM would also appear to have significant advantages. It enables the capture of value without (usually) the need for (and expense of) acquisition or valuation. Land can transfer directly from the landowner to the developer at the end of a successful auction. It also has the potential to accelerate receipts from new development thus helping to offset the upfront costs of providing infrastructure. However, there may be other process issues and complexities that emerge following the model s trialling in London. In addition, its appropriateness and applicability is likely to be constrained in areas where there is limited development pressure and consequential difficulties in establishing a genuine market for development rights. 3.2 CONSTRUCTION POTENTIAL BONDS Additional construction potential bonds are similar to the DRAM model and can provide a market-based mechanism for capturing value via the competitive auction of building rights in designated development areas. The bonds entitle the developers to build at greater densities than would normally be allowed. Revenue from the bond sales are invested back into other infrastructure in the same redevelopment zone. They enable upfront funding for infrastructure investments (or other socially useful investments) that will raise land values but without any increase in public debt. They provide developers with the confirmation that the necessary infrastructure investment is in place. The approach has been extensively used to help fund urban redevelopment projects in Brazil where building rights have been securitised and issued as market-traded bonds (known as CEPACs certificados de potencial adicional de construção ). Over the past 10 years, 4 ADDENDUM TO WMCA VALUE CAPTURE FRAMEWORK AND TOOLKIT ADDITIONAL OPTIONS FOR LAND VALUE CAPTURE METHODS

5 some $3.8 billion has been acquired by the municipal governments of São Paulo, Rio de Janeiro and Curitiba by issuing more than 10 million such bonds. Master planning for a development area is used to determine the total additional floor space for residential and non-residential uses that will be allowed for by the extra or re-modelled infrastructure. Licenses to build above standard or pre-existing densities are bought with the bonds. The total amount of the issue corresponds to the total extra square metres permitted by the master plan. Ratios for the conversion of a CEPAC into the extra building allowances may vary by sub area or use type. The issue is regulated by a financial institution. The CEPAC approach can therefore provide an upfront value capture mechanism enabling initial investments in infrastructure in a development area (as well as other socially useful expenditures). It would tend however to be most effective in areas where there is already development pressure although the use of variable ratios for building allowance conversions can enhance the developer appeal of less attractive sub-areas. 4.0 INTEGRATED SERVICE PROVISION & PROPERTY DEVELOPMENT Integrating service expansion with property development can help make public services more financially selfreliant while also promoting sustainable growth. Such an approach involves a service provider utilizing controls over development (e.g. land ownership) to secure revenues. Perhaps the best example of this approach is the Rail Plus Property (R+P) model used to fund Hong Kong s metro organisation (MTR). The R+P model enables the whole metro system to operate on a self-sustaining basis, without the need for direct taxpayer subsidies. Under the R+P model the government provides MTR with land development rights on land alongside a new rail route. To convert these development rights to land, MTR pays the government a land premium based on the land s market value without the railway. MTR then builds the new rail line and partners with private developers (chosen through competitive tender) to build properties. Once the railway infrastructure is finished, land and property value increase significantly. MTR profits by the land value enhancement as it receives lease payments from developers. These are then used to fund new projects and to subsidise operations and maintenance. In particular by: Being a dense urban district oriented around public transport with limited land accessibility and high values; Having an organizational environment that facilitates close working between infrastructure and service provider(s) (in Hong Kong s case this is one organization MTR) and government/statutory bodies in order to assist land assembly and planning; The government, by virtue of owning all the land, being able to grant exclusive rights over new development. Nevertheless, there are strong arguments for allowing transport systems to capture some of the value of land and property along their routes. Profit-sharing deals with developers, partial ownership of new developments and on-site property rentals can all yield revenue to help pay for new investments and ease the financial strain on the public purse while creating better places to live and work. The R+P model (and its variants) can bring significant benefits in terms of, for example, the integration of development and infrastructure planning, savings to the public purse and certainty for developers. However, in the case of Hong Kong, it also benefits from a number of characteristics not all of which apply to the same degree in West Midlands. ADDENDUM TO WMCA VALUE CAPTURE FRAMEWORK AND TOOLKIT ADDITIONAL OPTIONS FOR LAND VALUE CAPTURE METHODS 5

6 5.0 SPECIAL ASSESSMENT DISTRICTS Superficially, special assessment districts (SADs) are similar in concept to Business Improvement Districts (BIDs) insofar as an additional local taxation levy is paid within areas defined as benefitting from new, enhanced or additional service delivery or infrastructure provision. However, they are much more ambitious in scope. While BIDs are usually used to fund relatively marginal service enhancements, SADs have been used to help fund major infrastructure investments. Crucially, BIDs are essentially voluntary mechanisms led by local businesses and requiring a ballot in order to be established. Although a majority of owners must agree to the designation and to subsequent payments involved in a SAD, they are authority designated areas. Within a SAD, an additional tax on the value of a property is assessed, usually paid by property owners within the area defined as benefitting from specific public improvement(s). Payments are levied as a property tax but this usually only applies to types of property that might be expected to benefit from the improvement for which charges are being levied. SADs have been relatively widely used in the USA for a range of project expenditures associated with improvements to local infrastructure e.g. new dams, parking facilities in commercial areas, roads and public transportation infrastructure. For example, in the Washington DC metro region, a $6 billion extension of the region s Metrorail system, will ultimately receive up to $1 billion via special assessments. Much of the impetus for the improvements and establishment of the SAD came from property owners using a Virginia law that permits them to appeal to tax themselves to pay for transportation upgrades. The mechanism used is an additional tax levy on the assessed value of commercial properties close to the corridor. Although most existing residential property is excluded from the levy, new residential property will be taxed. While the support and contribution of relevant public bodies is fundamental to the success of SADs, the critical success factor is the broad inclusion and support of private owners and occupiers. To be successful they require relatively buoyant economic and property market conditions. They can also involve high transaction costs in both designation and administration. Consequently, implementation tends to be easier when the majority of property within the designated area is held by a few landowners thus making it easier to negotiate any required agreements. 6.0 LAND VALUE TAX A Land Value Tax (LVT) is a tax based on the market value of land. A proposal to review its possible introduction was included in the 2017 Labour Party general election manifesto as part of the reform of local government finance including council tax and business rates. The idea of using LVT as a means of generating income to help pay for infrastructure (or indeed other public service) improvements has a long history. The value of any given piece of land is largely determined by its proximity to various amenities (both public and private) and its use or potential use. For example, new transport facilities or road infrastructure will increase values. With a Land Value Tax, even if the rate of taxation does not change, the tax revenue generated from properties which benefit will increase through higher land values and increased development. The effectiveness of value capture through LVT depends however on a smoothly functioning property or land valuation system with regularly updated assessments. Objections to such a scheme in the past frequently centred on the practicalities of establishing such a system which was efficient, equitable and cost-effective. However, the ready availability of market-based data and the development of geographic information systems and statistical techniques based around multi-variate analysis now ensure that valuations are easier and less contentious. Land Value Tax would appear therefore to have considerable potential as a means for capturing part of the increased value generated through public investment. It would rely on an accurate system of before and after valuations and is probably only viable as part of a wholesale reform of property (and local government) taxation. There are however a number of potential limitations to its use as a value capture mechanism to fund or part-fund specific interventions: Unless a capability was put in place to tax at marginal rates, an LVT system s capacity to generate contributions to, say, the costs of new infrastructure would be constrained by the overall prevailing tax rate; Some method would be required to apportion attribution of the increases in value to specific interventions/investments; Recouping of investment would usually be post hoc i.e. after the benefits had begun to become manifest in property and land values. However, forecast future receipts could be used as a basis for borrowing (i.e. a Tax Increment Finance (TIF) type approach). 6 ADDENDUM TO WMCA VALUE CAPTURE FRAMEWORK AND TOOLKIT ADDITIONAL OPTIONS FOR LAND VALUE CAPTURE METHODS

7 7.0 BESPOKE ARRANGEMENTS Finally, it is worth emphasising, as noted in the WMCA Framework, that individual approaches should not be seen in isolation. Within an overall development scheme, the opportunities for value capture and the requirements for income and therefore the instruments used will often vary by project stage and type. Combining value capture instruments can be used to provide ongoing sources of income. An example of such a combined approach is provided by Ørestad which was, in the early 1990s, a largely undeveloped district some 5km south of the central Copenhagen. A development plan was formulated based upon a new metro link to unlock the area s development potential with a special purpose vehicle being set up in The development and operation of the metro system was to be financed from the sale of land to developers thus capitalising on the raised interest (and value) generated by the improved accessibility. An escrow account of the special purpose vehicle was set up to hold the resulting revenues. The specific mechanisms used included transfer tax payments on the sale of land packages (10% of the value of the land sale), yearly property taxes (10% of all property tax revenues) and 30% of the operating profits from the metro. The income generated has been used to service payments by the public sector on the 2.3 billion debt incurred during the development process thus paying for the metro construction which comprises two lines with 22 stations accommodating some 55 million passengers per annum. The leveraged development includes 192,100m 2 of office space, 71,400m 2 for educational use and 65,000m 2 of retail use. Value capture techniques deployed need not therefore be limited to a solitary tax or charge. While different project stages can present different needs for funding support from necessary upfront infrastructure and other enabling investment through to revenue support for service provision each stage can also afford different opportunities for generating income. Approaches need to be tailored to the characteristics and stage of development of each project. 8.0 SUMMARY ASSESSMENT Table 1 provides a headline summary assessment of each of the potential value capture mechanisms discussed in this addendum. TABLE 1: HEADLINE SUMMARY ASSESSMENT Development rights Integrated services and development Special Assessment District Land Value Tax ADVANTAGES Can provide some upfront funding support Uses a predominantly market-based mechanism for valuation purposes Can provide a continuing funding stream Integration of development and infrastructure planning Can provide a continuing funding stream Applies to both new and some existing development Comprehensive mechanism Equitable clear relationship with changing values Would provide continuing revenue Applies to both new and existing development DISADVANTAGES Requires buoyant market conditions Revenue would usually be a one-off payment Only applies to new development Requires effective control over development usually via land ownership Capacity of infrastructure/service provider and administrative burden Would require some mechanism to secure owners/occupiers assent Potentially high administrative burden Potential displacement/spillover effects Revenues would be post hoc Requires primary legislation Potential difficulties of attribution and therefore allocation of increased revenues Introducing the system may well lead to equity issues due to price adjustments Revenues would be post hoc ADDENDUM TO WMCA VALUE CAPTURE FRAMEWORK AND TOOLKIT ADDITIONAL OPTIONS FOR LAND VALUE CAPTURE METHODS 7

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