Equitable Adaptation Legal & Policy Toolkit

 

Tax Credits, Tax Increment Financing & Land Value Capture

In recent years, the federal government has created a series of programs that use tax credits to incentivize investments in low-income communities including, in particular, the New Market Tax Credit (NMTC) Program and the Opportunity Zone Program.See footnote 1 Although the programs do not specifically target resiliency measures for these communities, they can support them. “The NMTC Program attracts private capital into low-income communities by permitting individual and corporate investors to receive a tax credit against their federal income tax in exchange for making equity investments in specialized financial intermediaries called Community Development Entities (CDEs).”See footnote 2 These CDEs, in turn, are mandated to fund initiatives in low-income communities, including resilience initiatives.

The Opportunity Zone Program similarly employs tax incentives to promote investments in designated low-income zones (currently more than 8,700 designated census tracts). Investors in these zones gain benefits, from capital gain tax deferral, partial forgiveness of tax on capital gains, and forgiveness of additional gains on investments.See footnote 3 The Program was created to drive capital into areas with low-income communities, but concerns that the Program could support projects that are not wanted by, and could even harm, these communities compelled the identification of ‘guardrails’ to ensure that investments respond to community needs. The Kresge Foundation, for example, has detailed a set of underwriting covenants that create a level of transparency, accountability, and disclosure for Opportunity Zone-related measures.See footnote 4

Some states, including, for example, Massachusetts and Maryland, have created state-specific tax credit programs similar to the NMTC. The Dudley Street Neighborhood Initiative, described below, is one example.

Tax Increment Financing & Land Value Capture

“Tax Increment Financing (TIF) is a method of financing a project or development in a designated geographic area based on the anticipated increase in property tax that will be generated by the project.”See footnote 5 It can be a source of equitable adaptation financing only to the extent increased property costs are not borne by low-income residents or property owners and improvements do not displace local businesses and residents.

The revenue generated by a TIF is the property tax assessed on the increase in property value of a designated district following a development project, compared to the baseline property value prior to the development project. Tax increment financing originally developed as a means of financing the redevelopment of “blighted” areas, but is now used for a broad range of infrastructure improvements.See footnote 6

Green infrastructure, and other adaptation measures, can be important to TIF development because such measures can increase property values.

Local governments can use tax increment financing for large capital projects (such as green infrastructure installation) or incremental, longer-term spending. A local government could issue municipal or private bonds to raise capital for a large-scale green infrastructure project, and use the TIF revenue to service bond payments. Alternatively, a local government could use TIF revenue incrementally—as the revenue is collected—to pay for smaller-scale green infrastructure projects or, in many jurisdictions, to provide a sustainable revenue source to pay for operations and maintenance of green infrastructure installations.See footnote 7

Land Value Capture

The Land Value Capture (LCV) approach “allows communities to recover and reinvest land value increases resulting from public investment and other government actions.”See footnote 8 When, for example, property owners and developers secure financial benefits from government action, such as new roads, subway lines, among other measures, an LCV approach requires these owners and developers to share their windfall. An LCV approach could be used to secure capital for climate-resilient infrastructure — such as bridges and storm walls that provide benefits for developers. In this scenario, the benefitting developers would pay a fee that could, in turn, be used to pay off the bond issued to finance the infrastructure development. To date, however, the LCV approach has not been used significantly for resilience efforts.See footnote 9

Considerations of Tax Credits, Tax Increment Financing and Land Value Capture

Economic

  • The economic benefits of investments related to climate-related LVC approaches currently are less explicit than other tax-related approaches, but opportunities are promising.

Environmental

  • These approaches to financing do not have the same attention to environmental benefits that other approaches, e.g., impact bonds, do.

Social/Equity

  • These tax-and-land-related approaches can consider ‘guardrails’ developed to ensure that investments respond to community needs and don’t unduly financially burden low-income communities.

Administrative

  • State-specific approaches, as compared to federal approaches, are more tailored to state-specific needs, and more likely to provide effective resiliency benefits.

Legal

  • In light of concerns that tax and land-related government programs don’t always benefit disadvantaged communities, investors and public entities wanting to have a meaningful social impact should do their due diligence before pursuing such programs.

Lessons Learned

  • Tax credit programs, tax increment financing, and land value capture approaches do not necessarily benefit disadvantaged communities. Efforts should be considered to ensure that they do.
  • Similarly, funds from these efforts are not always used to finance climate resilience measures. Commitments to use funds this way should be evaluated before these programs are implemented.

 

Related Resources

 
The Kresge Foundation Equitable Guidelines for Opportunity Zone Investment

The Opportunity Zones (OZ) program, created by the federal Opportunity Act as a part of the 2017 U.S. Internal Revenue Code - Tax Act, delegates to the U.S. Treasury the authority to set requirements for investment under the act’s tax credit system. An Opportunity Zone as defined by the Opportunity Act is a population census tract that is a low-income community, that is then designated as a qualified opportunity zone. The Kresge Foundation, seeing that Treasury requirements were first delayed and ultimately bare, set out to create its own set of guidelines. Kresge provides capitalization to projects in OZs to attract investment, and through covenants with its partners attempts to ensure that such investments are based in a framework of equity.  Within a specific OZ, these covenants include stringent reporting requirements, the creation of a community advisory board explicitly containing members of the OZ’s community, and active promotion of OZ programs to OZ residents. Additionally, Kresge set out minimum standards for both real estate and business investments. Covenants for real estate investments include specifics such as: adopting an “anti-displacement” strategy for all housing investments, shifting focus to projects that create jobs for low-income communities, and mandating that at least 50% of all multifamily housing investments serve residents with incomes under 120% of the OZ’s average median income. For business investments, covenants include requirements that at least 50% of investments create living-wage jobs, and prohibitions on investments in industries that could be harmful to disadvantaged communities (e.g. oil, mining, firearms).

Chicago, Illinois Central Loop Tax Increment Financing

Chicago, Illinois has established more than 120 Tax Increment Financing (TIF) districts and has leveraged its public investment to attract $6 billion in private capital investments in these districts. Revenue from Chicago’s Central Loop TIF has been used to fund the city’s Green Roof Improvement Fund, which incentivizes and provides partial reimbursement to commercial buildings that install green roofs to manage stormwater.  More information about this TIF can be found in GCC’s Green Infrastructure Toolkit. Note, however, that some experts have expressed concerns about how TIF funds in Chicago have been used and issued a call to better ‘democratize’ use of these funds to ensure that they are not diverted for non-public purposes.

Dudley Street Neighborhood Initiative, Boston, Massachusetts

The Dudley Street Neighborhood Initiative (DSNI) in the Dudley Triangle neighborhood of Boston, Massachusetts is one of the first examples of a city-land trust partnership designed to address a range of community challenges including housing affordability, and racial and economic inequality. In the 1980s, DSNI created the community land trust, Dudley Neighbors, Inc. (DNI) to combat blight in the Dudley Triangle neighborhood, which as a result of disinvestment had numerous vacant properties and had become a frequent site for dumping and arson. The goal of the land trust was to facilitate redevelopment of the neighborhood without displacing existing residents and to empower community control over future development. DNI acquired 60 acres of land and currently stewards 225 units of affordable housing, an urban farm, a greenhouse, a charter school, parks, and a town common. The DSNI is also notable because of the unique partnership with the City of Boston. The City granted the land trust eminent domain authority to condemn lands in the Dudley Triangle neighborhood and provided the land trust significant financial resources to support the development of affordable housing and other community projects in the neighborhood. DSNI’s work has helped to enhance the resilience of the community by preventing displacement in the face of rapid gentrification in the city, enhancing food security for residents, creating and stewarding green space that helps to reduce urban heat islands, and by increasing social cohesion in the neighborhood through community activities and a community-led governing Board. DSNI shows how innovative public-partnerships between land trusts and cities can be fostered to address climate resilience and other community stressors, such as the lack of affordable housing, blight, and disinvestment.

  Insurance-Related Finance Other Public-Private Partnerships