Real Estate Value Capture: The Future of Transportation Infrastructure Financing in Minnesota
A new research study commissioned by the Minnesota Department of Transportation (MnDOT) suggests that the agency may be laying the groundwork for seeking new ways of funding state transportation infrastructure improvements by targeting property owners and developers along state highway corridors to pay for significant portions of these improvements through special assessments, impact fees or other funding mechanisms. This funding strategy is called “real estate value capture” and asserts that owners and developers of property in close proximity to highways are “non-user beneficiaries who enjoy benefits because of their enhanced location advantages.” According to the study, because these landowners and developers “benefit from transport value creation, they are the targeted contributors of value capture.” Owners and developers of property on MnDOT-controlled corridors should be aware that they are targets of this emerging value capture strategy.
The MnDOT-commissioned study, dated January 2014 and entitled “Value Increase and Value Capture: The Case of TH-610 in Maple, Grove, Minnesota,” attempted to isolate and quantify any increase in property values based on proximity to partially-completed Trunk Highway 610 in Maple Grove. MnDOT commissioned a researcher from the University of Minnesota, Humphrey School of Public Affairs for the work. The researcher designed and conducted, not an appraisal of property values, but a statistical analysis of property values in the TH-610 corridor, focusing specifically on “locational factors.” The researcher explains:
[W]e make a strong assumption that property values are determined only by locational factors, because the purpose is to assess the impact of locational factors on property values, not to predict property values. If the purpose is to predict property values, additional variables such as lot size, land use category, and property values of adjacent parcels would be included. Additional independent variables are affected by specific parcel locations and, therefore, not included to avoid underestimating the true impact of locational factors.
Clearly, the methodology is far from traditional appraisal theory. The study concludes that parcels adjacent to highway exits tend to have much higher assessed property values than parcels farther away from highway exits and puts the “Highway Premium” at $45,080 per acre for land and $20,370 per acre for buildings. The researcher extrapolates that the completion of TH-610 with two additional exits will lead to approximately $12 million in increased land value and approximately $5.4 million in building value. The study proposes that this real estate value can be captured through a variety of funding mechanisms that would require the benefited property owners and developers to pay through one or a combination of several funding mechanisms. The recommended funding mechanisms are: (a) special assessments, (b) impact fees, (c) tax-increment financing levies on future property value growth, or (d) “joint developments” where the owner/developer pays or makes a “financial contribution” to offset costs for adjacent transportation facilities.
Any of the proposed funding mechanisms would require legislative authority that does not exist now. Special assessment authority is granted by state law to cities and counties—not to MnDOT. Special assessments are predicated on the theory that a public improvement bestows a special benefit on a property owner. Established case law in Minnesota holds that any enhancement in the value of property resulting from the proximity of a freeway and interchanges is a general benefit to the general public and not a special benefit bestowed upon any particular property owner. State, by Mattson v. Colon, et al., 194 N.W.2d 574 (Minn. 1972).
Similarly, impact fees are narrowly circumscribed under Minnesota law and current law does not extend the reach necessary to enable such fees to be legally levied upon property owners and developers supposedly benefited from regional transportation improvements.
Separate and apart from the current absence of legal authority is the questionable conclusion of this single research study focusing on a single highway project and employing unorthodox valuation techniques about the impact of highways on adjacent property values. Because transportation improvements provide benefit to the general public and to the users, funding for such public improvements has been appropriately limited to general tax-base financing and to taxes and user fees levied on vehicle operators. The statistical analysis used to justify burdening certain property owners and developers with the expense of regional transportation improvements is fraught with assumptions and limitations that run counter to accepted appraisal theory. It is inadequate to provide a basis for the seismic cost-shifting that it purports to justify. Moreover, these property owners would be subject to double-taxation: first, by being forced to pay for a substantial share of the transportation improvements, and second, by paying higher property taxes resulting from increases in their assessed property values that would inevitably follow.
Finally, thought should be given to whether such financing schemes will serve to deter the very development that the study assumes will proliferate on account of transportation infrastructure improvement. The study suggests that funding the remainder of the TH-610 highway improvements through impact fees could generate over $32 million in revenue under the following scenario:
For Development Impact Fees, we assume that the 544.4 acres of [nearby undeveloped] land could be developed into 1633 residential units (each with one third acre of land) after it’s fully developed in the future. If we assume a $20,000 Development Impact Fee on each newly developed residential unit, the total revenue of Development Impact Fees would be about $32,662,234.
If property owners and developers were required to pay $20,000 per unit for the “benefit” of an improved highway nearby, it is a fair question to ask whether any of those units would ever be built.
The study’s statistical analysis claims to show increased property values on account of a “Highway Premium.” But the legal test of the legitimacy of any levies assessed would require the showing of a special benefit conferred upon certain properties based on valuations determined in accordance with accepted appraisal techniques—not broad-based statistical analysis. Regional transportation improvements are general benefit improvements, but MnDOT’s study lays the groundwork for recasting such improvements as special benefits to provide justification for tapping property owners and developers for funding.