The Economic Impact of Proximity to Open Space on Single-Family Home Values in Washington County, Minnesota

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1 The Economic Impact of Proximity to Open Space on Single-Family Home Values in Washington County, Minnesota A report on the findings of a study commissioned by Embrace Open Space May 2007

2 An Embrace Open Space Report The Economic Impact of Proximity to Open Space on Single-Family Home Values in Washington County, Minnesota May 2007 A report on the findings of a study commissioned by Embrace Open Space Conducted by Edward Moscovitch Cape Ann Economics 40 River Road Annisquam Village Gloucester, MA Report published by Embrace Open Space St. Paul, Minnesota Embrace Open Space is a collaborative serving as a catalyst for greater citizen and elected leadership to conserve and steward natural areas and parks, lakes and rivers in the eleven-county Twin Cities area.

3 Acknowledgments This study was commissioned by Embrace Open Space, a collaborative serving as a catalyst for greater citizen and elected leadership to conserve and steward natural areas and parks, lakes and rivers in the eleven-county Twin Cities area. Funding for this study was provided in part by the McKnight Foundation and Northern Environmental Support Trust (NEST). For additional information, contact: Jenna Fletcher Program Coordinator The Trust for Public Land 2610 University Avenue, Suite 300 St. Paul, Minnesota jenna.fletcher@tpl.org Copyright 2007 by The Trust for Public Land Printed on recycled paper Printed on recycled paper with...(add detail) with...(add detail) Cert no. SW-COC-2059 The study was conducted by Edward Moscovitch, Ph.D., president of Cape Ann Economics, located in Gloucester, Massachusetts. Dr. Moscovitch maintains an extensive practice in the fields of regional economics, public policy and education finance. An author and frequent lecturer, Dr. Moscovitch holds a Ph.D. in economics from the Massachusetts Institute of Technology. Bill Dakai (Spatial Strategy) performed the GIS calculations to determine which properties were touching or within 200 feet of open space, calculated property distances to downtown St. Paul and calculated property size from the MetroGIS Regional Parcel dataset (April 2006) maintained by the Metropolitan Council. Allen Burns (Constructive Technologies) served as the local eyes and ears of the project, helping clarify gaps in the Metropolitan Council s 2005 Generalized Land Use map for the Twin Cities Metropolitan Area dataset, talking with Washington County assessors and visiting sites to help determine which properties qualified as open space and which gdid not. y visiting sites to help de which properties quali space and which did n Individuals who assisted with locating and obtaining data included: Rick Gelbmann, Metropolitan Council Randy Johnson, Metropolitan Council, MetroGIS coordinator Doug Matzek, Washington County GIS Kent Treichel, Minnesota Department of Revenue Jenna Fletcher of The Trust for Public Land coordinated partner advisory input and review of the study and the report. Advisors and reviewers included: David Bengston, USDA Forest Service Jon Commers, Donjek, Inc. Debra Detrick, Metropolitan Council Jim Erkel, Minnesota Center for Environmental Advocacy Todd Graham, Metropolitan Council Peter Harnik, The Trust for Public Land Jane Harper, Washington County Calder Hibbard, Minnesota Forest Resources Council Marc Mattice, Wright County Parks Cover photo Regents of the University of Minnesota. Used with permission of the Metropolitan Design Center. Cover illustration by Gina Bonsignore. Cordelia Pierson, The Trust for Public Land Michael Pressman, Minnehaha Creek Watershed District Cover photo Regents of the University of Minnesota. Used with permission of the Metropolitan Design Center. Cover illustration by Gina Bonsignore.

4 Contents Executive Summary 1 Introduction 3 Rationale for the study Initiating the study Background 4 Defining open space Defining near Isolating the value of proximity to open space Limitations of the study Methodology for the Study 6 Identifying open spaces in Washington County Datasets utilized Regression analysis Regression variables Study Findings 9 Value of the open space premium Density makes a difference The value of an additional water premium Additional factors The open space premium: Implications for Washington County Additional Findings 13 Linking lot size and lot value Implications for local land use planning: An example Study Findings: What Might They Suggest?...16 Footnotes...17 Appendix: Regression Coefficient Results...19

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6 Executive Summary The analysis in this study included 67,768 residential single-family properties in Washington County. Almost 19,000 of these properties were sold between January 2002 and March It is these properties that provided the data for this study. Findings In this Washington County development located in Stillwater, Minnesota, the market values of the residential single-family properties directly adjacent to or within 200 feet of the wooded area of Lily Lake Park have been found to include an open space premium averaging $16,750. Regents of the University of Minnesota. Used with permission of the Metropolitan Design Center. Rationale Embrace Open Space commissioned this study of home values in suburban Washington County, Minnesota, to quantify the economic impact of proximity to preserved open spaces on the value of surrounding single-family homes. As communities in the Minneapolis- St. Paul metropolitan area begin to plan now for one million new residents coming to the region by 2030, such results can help communities better understand how decisions to conserve open space might affect overall property tax revenues. Is there a quantifiable enhanced value or value increment to residential singlefamily properties that are located near open space? Specifically, this study addresses the following question: Is there a quantifiable enhanced value or value increment to residential single-family properties that are located near open space? In other words, is there an open space premium for properties adjacent to or near open space in Washington County? And, if so, what is the value of that open space premium? The open space premium After taking into account the impact of other key factors, residential single-family properties near the 1,536 identified parcels of open space in Washington County are worth an average of $16,750 more than those that are not. This enhanced value, referred to as the open space premium, applies to residential single-family properties one acre or less in size that are either directly adjacent to or within 200 feet of open space. A total of 8,844 residential properties in Washington County more than 13% of all residential properties meet this definition of proximity and therefore have market values that reflect this open space premium. 1

7 Impact on property valuation and tax revenues Applying the $16,750 open space premium to these 8,844 qualifying properties results in an enhanced countywide property valuation of more than $148 million. Based on a tax rate of $10.55 per $1,000 of property valuation, this open space premium generates more than $1.56 million in additional tax revenues each year for Washington County. The link between lot size and lot value Limitations of the study The economic impact of preserved open space on countywide property values may, for several reasons, be even higher than indicated by the results of this study. This study does not measure the economic impact of open space proximity on sales of other residential property, such as condominiums, townhomes, multi-family dwellings and undeveloped residential land. This economic analysis addresses only the increase in home sale value; it does not quantify other community benefits, such as protecting water quality, providing wildlife habitat, supporting recreational opportunities and preserving natural heritage. These results do, however, provide a better understanding of the economic impact of open space on residential single-family property values, which is important information for homebuyers, policymakers and open space planners. One of the key determinants of the value of any given real estate property is the size of the lot. The relationship between lot size and lot value, however, is not a linear one, in which the impact of each additional quarter-acre would be the same, regardless of lot size. Instead, the value of additional land declines as lot size increases. As a result, grouping multiple smaller lots together on a development can substantially increase the overall value of the land (and the amount of property tax revenues) even taking into account a substantial portion of the property being preserved open space compared to use of that same development divided into relatively few large lots. Residential single-family properties near the 1,536 identified parcels of open space in Washington County are worth an average of $16,750 more than those that are not, resulting in an enhanced countywide property valuation of more than $148 million. Based on a tax rate of $10.55 per $1,000 of property valuation, this open space premium generates more than $1.56 million in additional tax revenues each year for Washington County. 2

8 Introduction Rationale for the study One of the concerns frequently expressed by local officials considering the acquisition and preservation of open land is the long-term impact on local finances. Their concern is that, in acquiring land and maintaining it as open space, local government is sacrificing tax revenues that would otherwise be generated if the land were developed. The foregone tax revenues could be made up, in part, if taxable properties adjacent to or near any preserved open space were enhanced in value because of their proximity to that open space. Minneapolis St. Paul WISCONSIN Washington County Washington County is a suburban county located just east of Ramsey County and the city of St. Paul, Minnesota. It extends 8-10 miles east to the St. Croix River and the Wisconsin border and measures about 35 miles from north to south. The population of Washington County was 217,000 in Knowing in general terms, however, that proximity to open space may increase real estate value is not the same as actually quantifying this impact. Through this study, Embrace Open Space sought to identify and quantify whether such an impact might be applicable to properties in Washington County, Minnesota. Initiating the study The Embrace Open Space collaborative was formed in 2001 to provide a framework for its member organizations to work together on issues related to preserving open space in the Minneapolis- St. Paul metropolitan area. Embrace Open Space commissioned this study and published this report to quantify the impact of open space proximity on residential single-family properties in Washington County, Minnesota. 1 This report follows an earlier economic report commissioned by Embrace Open Space. Published in October 2005, the report is titled The Economic Value of Open Space: Implications for Land Use Decisions. This study was commissioned to answer the following question: Is there a quantifiable enhanced value to residential single-family properties that are located near open space? In other words, is there an open space premium for properties adjacent to or near open space in Washington County? And, if so, what is the value of that open space premium? 3

9 Background Defining open space Open space can be either land or water; it can be publicly owned or privately owned. Terrestrial open spaces can include parks, golf courses, greenways and parkways, greenbelts and preserves, undeveloped land and woodlands, as well as conservation easements* on large residential developments. The focus of this study was preserved open space. Preserved open space is primarily publicly owned (such as parks), but it also includes land held by charitable institutions; privately held land preserved in an open state because development rights have been deeded to a public agency or nonprofit trust; common open space associated with residential developments that group smaller lots together; privately owned woodlands; and golf courses. Defining near What matters in determining the impact of proximity to the 1,536 parcels of open space in Washington County is the distance from the residential property in question to the nearest open space that is, the distance to the closest boundary of the nearby open space. * A conservation easement is a legal agreement in which a landowner voluntarily limits future activities on the land (usually development) to protect its conservation values. 4 The impact of open space proximity cannot be observed directly. Instead, it is one of the factors and, typically, not the largest in determining the selling price of a particular real estate property. The impact of nearby open space can be inferred, however, by a systematic comparison of the values of properties that are and are not close to protected open space. The easiest way for current GIS software to make this calculation is to determine whether any portion of the residential property falls within a buffer zone of a given width drawn around the nearby open space. This study looked at four different groups of residential properties: those directly adjacent to and those within 100, 200 and 500 feet of the nearest open space. Isolating the value of proximity to open space The impact of open space proximity cannot be observed directly. Instead, it is one of the factors and, typically, not the largest in determining the selling price of a particular real estate property. The impact of nearby open space can be inferred, however, by a systematic comparison of the values of properties that are and are not close to preserved open space. The general methodology is to find a way to hold constant the impact of all of the other major factors in determining the market value of a real estate property, including size of the property, use of the property, size and age of any buildings, proximity to downtown, and the general desirability of the neighborhood. With these other factors held constant, it is possible to specifically isolate the value of proximity to parks or other open space. The analysis in this study is limited to the county s 67,768 single-family residential properties. 2 Almost 19,000 of these properties were sold between January 2002 and March It is these properties that provided the data for this study.

10 As policymakers and open space planners consider possible future development approaches for such areas as this portion of May Township near Bass Lake in Washington County, Minnesota, these study results can provide an understanding of the economic impact of open space on residential property values and property tax revenues. Regents of the University of Minnesota. Used with permission of the Metropolitan Design Center. Limitations of the study The total economic impact of preserved open space on countywide property values may, for several reasons, be even higher than indicated by the results of this study. This study does not measure the economic impact of open space proximity on sales of other types of residential property, such as condominiums, townhomes, multifamily dwellings and undeveloped residential land. This economic analysis addresses only the increase in home sale value; it does not quantify other community benefits, such as protecting water quality, providing wildlife habitat, supporting recreational opportunities and preserving natural heritage. These results do, however, provide a better understanding of the economic impact of open space on residential property values, which is important information for homebuyers, policymakers and open space planners. These results provide a better understanding of the economic impact of open space on residential property values, which is important information for homebuyers, policymakers and open space planners. 5

11 Methodology for the Study The study findings are based on regression analysis performed on nearly 19,000 single-family residential properties in Washington County that sold between January 2002 and March The properties were obtained from the MetroGIS Regional Parcel dataset (April 2006) maintained by the Metropolitan Council and made available to Embrace Open Space for purposes of this study. The first step in the analysis was to determine the distance of each of these nearly 19,000 properties from the nearest open space. 4 To do so, it was first necessary to identify which areas in Washington County constitute open space for purposes of this study. Identifying open spaces in Washington County Initial information sources No definite source of information exists to identify which parcels constitute open space in Washington County. The best starting point for this study, however, was data from the Washington County Assessor s Office, which contains extensive information about each parcel. 5 In some cases, this information identifies sets of parcels that are clearly open space, including parcels listed by the county as parks, golf courses and woodlands. Because many known open spaces and other open spaces in the county were not included in the list of properties in these assessment classes, the study used supplementary sources of information, such as the Metropolitan Council s dataset titled 2005 Generalized Land Use for the Twin Cities Metropolitan Area. By matching the land use areas on the Metropolitan Council s land use dataset to the county assessor s parcel dataset, it was possible to identify a land use for each parcel. Further examination, discussion and onsite visits Further analysis focused on parcels in these two datasets that looked like they might be open space (for example, publicly owned land with no buildings on it). Representative parcels were examined in more detail by discussing the nature of the parcels with the Washington County Assessor s Office and, in some cases, actually visiting the parcels. Parcels owned by charitable organizations, as well as those listed as state-acquired or otherwise in public ownership (federal property or state property), were included as preserved open space as long as they 1) were listed on the land use map as parks, golf courses, water, or undeveloped; and 2) had no buildings on them (parcels listed as having no assessed value for buildings, as reported by the county assessor). In several instances, a particular property was categorized by the assessor as residential, with a building on it, but appeared in a zone listed as open space on the land use map. After reviewing a few of these apparent inconsistencies, it was determined that the Washington County assessor s map was more precise the Metropolitan Council s land use map was developed from aerial photographs and therefore those properties were not listed as open space for purposes of this study. The challenge of identifying conservation easements Conservation easements (legal agreements in which a landowner voluntarily limits future activities on the land) are an important category of open space, particularly when these easements are an integral part of a development project grouping smaller lots together. Many of the properties in such developments back onto preserved open space and therefore command higher prices. If this study were to omit conservation easements as open space, the findings of the study would be compromised. The challenge of accurately identifying these conservation easements, however, is that conservation easements cannot generally be recognized from the assessor s dataset. In most cases, the land is privately owned. In addition, the conservation easement may not apply to the entire parcel. 6

12 to his son or daughter for a nominal amount. For this reason, the analysis was limited to sales with a selling price of at least $10,000. Where necessary, the data included in the Metropolitan Council dataset was augmented with additional information on each property received directly from the Washington County assessor. Conservation easements are an important category of open space, particularly when such easements are an integral part of developments grouping smaller lots together, such as this development located in Marine on St. Croix in Washington County, Minnesota. Many properties in such developments back onto preserved open space, therefore commanding higher prices. Regents of the University of Minnesota. Used with permission of the Metropolitan Design Center. For example, a family owning a 10-acre lot can donate a conservation easement on nine of those acres to the county government, the Department of Natural Resources, or a charitable organization dedicated to land preservation. In such cases, the parcel as a whole is not tax exempt due to the one remaining acre that is not included in the easement and will appear to be developed on the assessor s map. The study sought information on conservation easements from groups that hold such easements and included as many as possible in the study list of open space parcels. Ultimately, the study identified 174 parcels with easements in Washington County. Because of additional conservation easements that exist but could not accurately be identified and included in this study, the true value of the open space premium for Washington County is likely higher than that reported in the study results. Datasets utilized The central data source for the study was the Metropolitan Council s MetroGIS Regional Parcel dataset (April 2006). It contains parcel boundary files, which were used to calculate property areas and distances to downtown St. Paul. They were also used to locate each property within its appropriate census block. This dataset also contains information on each property from the Washington County assessor, including the property s use (residential, commercial, open), ownership (public, private), tax-exempt status, and assessed valuation (separately for buildings and land). The dataset also includes the date of the property s last sale and the selling price. The data provided did not include a variable indicating whether each sale was an arms-length transaction between buyer and seller as opposed to, for example, a sale by a father The study also used the Metropolitan Council s most recent land use layer (2005 Generalized Land Use for the Twin Cities Metropolitan Area). Using GIS software, it was possible to link the land use layer with the parcel dataset and, in particular, to determine the land use type associated with each parcel. The two map layers were sometimes in conflict; in such cases, the study relied on the assessor s data. Information on neighborhood densities and income levels was taken at the block group level from the 2000 census. Regression analysis While open space proximity affects the value of a residential property, it is not the most important factor. What can be observed is the selling price of the property as a whole house and lot together. For this reason, the most important single factor is the size of the house, as measured by the number of square feet of finished floor space. Other important factors include the size of the lot, the age of the house, the distance from downtown, proximity to water, and the income level in the neighborhood. 7

13 It is not possible to assess accurately the impact of any one of these factors unless all of them are considered together. Regression analysis is a useful technique because the various determinants of the value of a particular real estate property interact with each other; for example, people who live in upscale neighborhoods tend to live in larger homes. These interactions make it very difficult to estimate the impact of open space proximity without first taking into account as many of the other factors as possible that influence price. To address this challenge of multiple causation, the study s analysis was conducted using multi-variate regression, a statistical procedure that isolates the impact of each explanatory variable, holding all other factors constant. Regression analysis effectively compares homes of equal size with each other so that it can isolate the impact of other factors, such as open space proximity. Regression variables The analysis in this study is based on the following factors (regression variables): Size of home: Measured in square feet of finished living space, as reported by the county assessor. All other factors being equal, the price of a home rises by $80 for each additional square foot. Age of home: In years, based on the year the home was built, as reported by the county assessor. Older homes are worth slightly less. All other factors being equal, every extra year of age lowers home value by $240. Size of lot: Calculated by GIS software based on boundary files included in the Metropolitan Council dataset. The impact of each additional 1,000 square feet of lot size is not proportional; it depends on how large the lot is. (See also Additional Findings, page 13.) Months since last sale: Variable used to reflect the fact that the dataset included homes sold between the winter of 2002 and early 2006 and that home prices were rising rapidly during these four years. All other factors being equal, home sale prices rose during this period by $1,800 per month, or more than $20,000 per year roughly 7.5% of the average sale price of $280,000. Proximity to water is one of the factors (regression variables) analyzed in this study. Photo by Cordelia Pierson, The Trust for Public Land Neighborhood income: Average household income in 1999 for the census block group in which the house is located, as reported by the 2000 census. People pay more to live in more affluent neighborhoods. All other factors being equal, each increment of $1,000 in average neighborhood household income increases home value by $1,000. In all likelihood, this neighborhood income factor is also correlated with school quality. While this study did not explicitly include school quality variables, numerous studies confirm that school quality is highly correlated with average family income in a school district, which is included in this study. Townhome: A variable to indicate whether the house is a townhome (as opposed to a detached home). All other factors being equal, a townhome sells for $12,500 less than a detached home of similar size. Proximity to water: Whether the property is directly adjacent to or near a body of water, calculated by GIS software from the parcel boundary files and map layers for water (such as lakes and rivers). Distance to downtown St. Paul: Calculated by GIS software taking the straight-line distance from downtown to the center of the property. Properties closer to downtown St. Paul command a premium; all other factors being equal, each additional mile from the center of St. Paul decreases property value by $1,250. Proximity to open space: Measured from the property to the closest boundary of the nearby open space. For a detailed listing of the resulting values of these regression variables, see the Appendix. 8

14 Study Findings The coefficient of $16,750 for open space proximity can be interpreted as follows: All other factors being equal, a property located up to 200 feet from preserved open space will be worth an estimated $16,750 more than an otherwise similar property not located near open space. According to the findings of this study, a total of 8,844 residential properties in Washington County reflect this enhanced value. In this Washington County housing development on the Oak Marsh Golf Course in Oakdale, Minnesota, every residential property is designed to be directly adjacent to open space, resulting in an open space premium for each of the properties. Regents of the University of Minnesota. Used with permission of the Metropolitan Design Center. Value of the open space premium After taking into account the impact of other key factors, this analysis finds that residential single-family properties near open space are worth $16,750 more than those that are not. This enhanced value the open space premium applies to residential properties that are one acre or less in size, and that are either directly adjacent to or within 200 feet of open space. Residential properties greater than one acre in size, even if they are close to open spaces, were not found to be subject to the open space premium. It is likely that people living on large lots have so much of their own open space surrounding their homes that they are already paying extra to live next to or within an open space. The study looked at four different groups of residential properties: those directly adjacent to and those within 100, 200 and 500 feet of the nearest open space. While there are minor differences in the exact value of the open space premium for properties actually touching open space compared to properties within 100 feet or 200 feet, the open space premium (enhanced value) is essentially the same for the first three groups of properties (up to 200 feet). No premium was found to exist for properties between 201 and 500 feet of an open space. This analysis finds that residential singlefamily properties near open space are worth $16,750 more than those that are not. This enhanced value the open space premium applies to residential properties that are one acre or less in size, and that are either directly adjacent to or within 200 feet of open space. 9

15 Density makes a difference Additional factors The open space premium is influenced by the density of residential neighborhoods (as measured by the number of people per square mile in each census block). In more densely settled areas of Washington County, there is no open space premium beyond 100 feet. 6 In less densely settled areas, however, the open space premium extends to homes within 200 feet of open space. For the sake of simplicity, references in this report to the impact on properties within 200 feet of open space will be meant to include properties within 200 feet in less densely settled parts of Washington County and within 100 feet in more densely settled areas. It is possible that the attraction of open space proximity is primarily visual: You can see it from your windows. No enhanced value exists for properties farther than 200 feet from the nearest open space, even if they are within 500 feet. Depending on the width of streets and the depth of lots, homes within 100 feet of open space are most likely across the street from the open space. The value of an additional water premium Properties that command a view of bodies of water (such as those facing the St. Croix River in Stillwater or those looking out on the Mississippi River) have higher market values. Properties that command a view of bodies of water have higher market values. In this study, the water premium is factored separately from and in addition to the open space premium. Photo by Cordelia Pierson, The Trust for Public Land In this study, proximity to lakes and rivers is factored separately into the analysis of market values. Thus, the open space premium reported is the extra value of a particular property because it is near preserved open space. Properties actually touching water were found to be worth an extra $111,000, while the extra value for those within 200 feet of water (but not actually touching it) was found to be $61,000. Thus, the value of $16,750 for open space proximity is the extra value related to proximity to open space alone. If that open space is in the form of a lake, river or other water view, then adjacent or nearby properties may expect an additional water premium of $61,000 or $111,000 over and above the $16,750 open space premium. It is possible that people s willingness to pay extra to live near open space may also depend on the value of their home or the general wealth of the neighborhood. In the analysis done for this study, these two possibilities were both explored, and neither was found to be statistically significant. Thus, the open space premium applies regardless of the size or value of the home or the wealth of the neighborhood. The open space premium: Implications for Washington County How many properties reflect this open space premium? Of Washington County s 67,768 residential properties, a total of 10,572 residential properties of all sizes are near open space, representing 15.6% of properties countywide. (See Table 1.) The values of a number of these properties, however, do not include an open space premium because they are larger than one acre in size. Even though 1,728 of the county s larger residential properties (13.5%) are near open space, the study found that they do not have an enhanced value reflecting proximity to open space. (See Table 2.) 10

16 Residential properties one acre or less in size do reflect this open space premium if they are near open space. A total of 8,844 residential properties in Washington County are one acre or less in size and are located adjacent to or within 200 feet of open space, thus benefiting from an open space premium. These open space premium properties represent 16.1% of county residential properties that are one acre or less in size. (See Table 3.) According to this study, the 8,844 properties near open space and one acre or less in size represent 13.1% of all 67,768 Washington County single-family residences more than one property in eight countywide. (See Table 4.) The 8,844 properties near open space and one acre or less in size represent 13.1% of all 67,768 Washington County single-family residences more than one property in eight countywide. Table 1: All Washington County Residential Single-Family Properties (residential properties of all sizes countywide, including properties of all sizes near open space) Number of properties Percentage of total Not near open space 57, % Near open space 10, % Total (countywide) 67, % Table 2: Washington County Residential Single-Family Properties Larger Than One Acre in Size (because of their size, the open space premium does not apply to these properties, even if they are near open space) Number of properties Percentage of total Not near open space 11, % Near open space 1, % Total (countywide) 12, % Table 3: Washington County Residential Single-Family Properties One Acre or Less in Size (because of their size, the open space premium does apply to these properties that are near open space) Number of properties Percentage of total Not near open space 46, % Near open space 8, % Total (countywide) 54, % Table 4: Open Space Premium Properties as a Percentage of Total Residential Properties in Washington County Number of properties Percentage of total Total countywide 67,768 Near open space and 8, % 1 acre or less in size 11

17 Estimated impact on total county property valuations The countywide increase in property valuation as a result of the open space premium is estimated to be more than $148 million. (See Table 5.) Estimated impact on county tax revenues The residential property tax rate in Washington County is approximately $10.55 of tax per $1,000 of property value. 7 Applying the $10.55 tax rate to the $148 million in enhanced valuation from the open space premium results in increased tax revenues of $1.56 million just under 1% (0.85%, to be exact) of the $184 million in total residential property taxes paid in Washington County. (See Table 6.) Table 5: Impact of Open Space Premium on Washington County Property Valuations Number of residential properties reflecting 8,844 the open space premium (less than one acre in size and within 200 feet of open space) Open space premium per property $16,750 Total increase in county property valuation as a result of the open space premium Table 6: Impact of Open Space Premium on Washington County Residential Property Taxes Total increase in county property valuation as a result of the open space premium $148 million $148 million Application of tax rate of $10.55 per $1,000 $1.56 million to reflect additional tax revenues attributable to the open space premium Divided by $184 million to reflect percentage 0.85% of total residential property taxes in Washington County attributable to the open space premium The countywide increase in property valuation as a result of the open space premium is estimated to be more than $148 million. Applying the $10.55 tax rate to the $148 million in enhanced value from the open space premium results in increased tax revenues of $1.56 million. 12

18 Additional Findings Linking lot size and lot value One of the key determinants of the value of any given real estate property is the size of the lot. The relationship between lot size and lot value, however, is not a linear one, in which the impact of each additional quarter-acre would be the same, regardless of lot size. Instead, the value of additional land declines as lot size increases. This fact has significant implications for land use policy related to open spaces and the financial impacts of the open space premium. Here s how the relationship works (see also Tables 7 and 8): All other factors being equal, the land value of a lot sized at 1/10 of an acre in Washington County (a little more than 4,300 square feet, or a lot 43 feet wide and 100 feet deep) is $63,900. An additional 1/10 of an acre doubles the lot size and increases the land value by $9,500. Each additional 1/10 acre up to 1/2 acre also adds $9,500 in value. Beginning at 1/2 acre, the value of each additional 1/10 acre is reduced from $9,500 to $1,500. Above two acres, the value of each additional 1/10 acre is reduced to $1,000; for lots greater than five acres, the value of each additional 1/10 acre is $400. In basic terms, the primary value of a lot is in having a place on which to build a house. As the lot size increases, its value rises but not by very much. Put another way, buyers in the market don t place great value on large lot sizes per se. People do pay more for larger houses, and very large homes are not typically built on very small lots. However, holding home size constant, a house on a two-acre lot will be worth only $15,000 more than a house on a one-acre lot. 8 The value of additional land declines as lot size increases. This fact has significant implications for land use policy related to open spaces and the financial impacts of the open space premium. Table 7: Incremental Values for Lots Increasing in Size Lot size Increased valuation per 1/10 acre 1/10 acre $63,900 1/10 to 1/2 acre $9,500 1/2 acre to 2 acres $1,500 2 acres to 5 acres $1,000 > 5 acres $400 Table 8: Total estimated value of various lot sizes (based on incremental values in Table 7) Lot size Total valuation 1/10 acre $63,900 2/10 acre $73,400 1/4 acre $78,150 1/2 acre $101,900 1 acre $109,400 2 acres $124,400 5 acres $154,400 6 acres $158,400 13

19 Table 9: Land Use Planning and the Impact of the Open Space Premium Option Description Total value Increased valuation of development compared to Option 1 Option homes on 2-acre lots $12.5 million Traditional development No open space Option homes on 1/4 acre lots $15.6 million $3.1 million more Grouping homes together 150 acres open space (nearly 25% increase) on smaller lots (before taking into account due to doubling of any open space premium) the number of homes built Option 3 Grouping homes together 200 homes on 1/4 acre lots $18.98 million $6.48 million more on smaller lots in proximity 150 acres open space (52% increase) due to open space Proximity to open space to open space premium Implications for local land use planning: An example Consider the implications of the phenomenon of diminishing value of larger lots and the open space premium in a specific local land use decision. If a municipality and developer are considering development on a 200-acre property, many options exist for considering the inclusion of preserved open space to optimize benefits for natural resource protection, as well as long-term property valuation. This example offers three possible options for designing the development, including the impact of the open space premium on the total value of each option. (See Table 9.) Option 1: Traditional development Build 100 homes on the site, each on a two-acre lot. (For the sake of simplicity, land for roads is excluded. 9 ) The land value for each two-acre lot is $124,400 (see Table 8); the total value is nearly $12.5 million ($124,400 x 100). (See Figure 1.) Option 2: Grouping homes together on smaller lots Build 200 homes on quarter-acre lots. These 200 lots would occupy 50 acres of land, leaving 150 acres of preserved open space. The value of each quarter-acre lot is about $78,150 (see Table 8); the total value of 200 such lots is more than $15.6 million. This amount is an estimated $3.1 million more than for Option 1, representing a nearly 25% increase in total land value as a result of increasing the number of homes from 100 to 200 even before taking into account any impact from the proximity of some or all of these homes to the 150 acres of preserved open space. (See Figure 2.) Option 3: Grouping homes together on smaller lots in proximity to open space Design and build the 200 quarteracre lots so that they are all either directly adjacent to or within 200 feet of open space. The premium for being near open space ($16,750) increases the value of each lot to $94,900 ($78,150 + $16,750), raising the total value of the development to $18.98 million. This amount an estimated $6.48 million more than for Option 1 represents an increase of 52% in total land value as a result of the open space premium on all 200 lots. The bottom line? Preserving open space by grouping homes together on smaller lots (Option 3) preserves 75% of available land (150 of 200 acres), doubles the number of homes built (from 100 to 200), and increases total land value from $12.5 million to $18.98 million an increase of more than 50%. (See Figures 3 and 4.) 14

20 Figure 1: Option 1 represents building 100 homes on a 200-acre development, each on a two-acre lot. The land value for each two-acre lot is $124,400; the total value is nearly $12.5 million ($124,400 x 100). Figure 2: Option 2 represents building 200 homes on quarter-acre lots. These 200 lots occupy 50 acres of land, leaving 150 acres of preserved open space. The value of each quarter-acre lot is about $78,150; the total value of 200 such lots is more than $15.6 million. Figures 3 and 4: Option 3 represents grouping 200 homes on smaller lots in proximity to open space. Figures 3 and 4 demonstrate two ways to design and build 200 quarter-acre lots so that they are all directly adjacent to open space. Figure 3 represents how lots could be configured around a natural area, such as an intact forest or a wetland. Figure 4 represents how lots could be designed to provide a wide corridor to accommodate a stream or ridgeline. The premium for being adjacent to (or within 200 feet of) open space is $16,750, which increases the value of each lot to $94,900 ($78,150 + $16,750), raising the total value of the development to $18.98 million. Note: For the sake of simplicity, land for roads and other infrastructure is excluded from these conceptual illustrations. Illustrations by Gina Bonsignore 15

21 Study Findings: What Might They Suggest? The findings of this study suggest important implications for long-term development planning. Local officials wishing to recoup some of the tax revenues lost because newly acquired open space is not taxable should consider the impacts of future zoning decisions, in light of the findings of this study, to determine whether there might be zoning approaches that could help further their communities growth strategies and help recoup some of the lost revenue. The findings of the study provide the foundation for discussion in a number of areas related to the concept of the open space premium, including such considerations as the following: 1. An opportunity to maintain home values: For municipalities and counties, a commitment to acquiring and maintaining preserved open spaces (both public and private) as part of future land use planning and zoning should be viewed as an opportunity to maintain property values and not entirely as a loss in tax base. Creative land use planning and zoning, including setting aside preserved open spaces, can help increase the value of adjacent and nearby residential properties, resulting in higher tax revenues from those properties. 2. A variety of designs for new developments: Consideration of a variety of designs for new residential developments may result in higher property valuations for the development, increased tax revenues for the county or municipality, the potential for increased demand for such properties with open space proximity, and enhanced quality of life for property owners with proximity to open spaces. 3. A more visually pleasing and inviting community atmosphere: Preserved open spaces including parks and community walking paths can result in a more visually pleasing and inviting community atmosphere, which may translate into potential new residents recognizing a higher premium on the value of any property in the area. 4. Grouping homes together on smaller lots: Results of this study suggest opportunities to secure significant financial benefits from developments focused on grouping smaller residential lots together (less than one acre) adjacent to open spaces, rather than larger lots that do not benefit from the open space premium. 5. Optimum lot size to maximize lot value: Awareness that larger lots do not increase in value proportional to their increased size suggests that communities may wish to analyze what optimum lot size would maximize the value of a lot (or the total value of multiple lots in a development). 6. Future design of parks and other open space areas: Recognition of the open space premium could influence the future design of parks, golf courses and other public/ private areas. If the goal were solely to maximize the total open space premium, the design could maximize the length of the outer perimeter of the open space, thus providing greater opportunity for a larger number of residential properties to benefit from proximity to the open space and resulting in increased property tax revenues. Such decisions, however, should be based on a number of considerations, including accessibility to the open space, impact of the design on wildlife habitat, and other important factors. To assist land use decisions that balance multiple considerations, a value analysis framework is described in the Embrace Open Space report titled The Economic Value of Open Space: Implications for Land Use Decisions (2005). 16

22 Preserved open spaces including parks and community walking paths can result in a more visually pleasing and inviting community atmosphere, which may translate into potential new residents recognizing a higher premium on the value of any property in the area. Photo by Cordelia Pierson, The Trust for Public Land Footnotes 1. For additional studies that have analyzed the open space premium, see The Impact of Parks and Open Space on Property Values and the Property Tax Base, by John L. Crompton, National Parks and Recreation Association, The study is based on residential properties reported for Washington County in the Metropolitan Council parcel dataset, as made available to the project in the summer of The study is limited to singlefamily residential properties, because there is no easy way to quantify the difference between, say, commercial and industrial properties or, for that matter, among various categories of commercial use, such as hotels, grocery stores, gas stations or barbershops. 3. Because of reporting delays, relatively few sales in 2006 were included in the data for this study. 4. As explained in Defining near (page 4), the study determined whether each residential property was either directly adjacent to open space or within 100, 200 or 500 feet of the nearest open space. 5. This information was obtained from the Metropolitan Council, which collects information from county assessors in the Minneapolis- St. Paul metropolitan area and combines it in a single dataset. 6. The average density of the neighborhoods in which these homes are located is 1,791 persons per square mile. 7. The Washington County Assessor s Office performed a series of sample tax calculations, showing taxes paid on several typical properties, both at current values and at the higher value for open space proximity. Comparing these two tax payments and dividing by the increased value results in an average rate of $ This coefficient is very much in line with similar studies conducted by Ed Moscovitch for areas of Massachusetts and Florida. 9. The total frontage under the two plans is roughly similar, so the total cost and land use needed for roads is also similar but considerably less on a per-household basis in the second alternative. 17

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24 Appendix: Regression Coefficient Results The coefficient values for each of the regression variables are shown in Table 10. The adjusted R-squared for the overall regression is 44.4%. 1 The sales price and each individual coefficient are quoted in thousands of dollars. For example, with all other factors being equal, the first coefficient states that land up to the first 1/10 acre adds $63,900 in value. Similarly, each additional 1,000 square feet of finished floor space adds $82,800 to the overall property sales price, and each additional mile from downtown St. Paul subtracts $1,270 from the property sales price. The absolute size of the T-statistic positive or negative expresses the relative explanatory power of each variable. While all variables are statistically significant, the most important factor in determining selling price is the size of the house (finished square feet), with a T-statistic of 58. The next most important factors (with roughly equal impact) are the number of months since the sale and the average income in the neighborhood (with T-statistics of 28 and + 25, respectively). 1 The R-squared is a measure of the regression s explanatory power; this indicates that the statistical predictors explain 44% of the variation in sales. The T-statistic for each coefficient measures the likelihood that the impact of the factor is statistically different than zero that is, that the factor in question really does impact home value. A T-statistic with absolute value greater than 1.96 is significant at the 95% level. Table 10: Regression Coefficient Results Regression for the sales price (in thousands of dollars) of single-family residential properties in Washington County, Minnesota Coefficient* Explanatory variable description T-statistic $34.92 Constant (in thousands of dollars) $63.9 first 1/10 acre of lot size $9.54 per 1/10 acre > 1/10 and up to 1/2 acre $1.54 per 1/10 acre > 1/2 acre and up to 2 acres $0.968 per 1/10 acre > 2 acres and up to 5 acres $0.429 per 1/10 acre > 5 acres $82.8 per 1,000 square feet of finished area $0.24 per year for age in years 6.67 $1.81 per month between sale date and October $12.57 dummy variable for townhome 3.21 (1 = townhome; 0 = detached home) + $0.99 per $1,000 in household income in census block $1.27 per mile distance to downtown St. Paul $111.4 dummy variable for lot touching body of water (1 = lot touches water; 0 = does not touch) + $60.7 dummy variable for lot within 200 feet of water (but not touching) + $16.74 dummy variable for house within 100 feet of open space (200 feet in less dense census blocks) and house on lot less than 1 acre *in thousands of dollars 19