Existing built environment

Mobilization of tax debts
Description

Use of local tax debts (particularly land tax ) to pay for corresponding land or properties.

Advantages

Allows public authorities to turn assets whose recoverability is questionable (unclaimed assets, without owners, joint tenancies…) into cash.

Drawbacks and precautions

Financing restricted to goods for which tax debt applies and to the amount of the tax debt (plus any possible accrued interests; penalties and fees). 

Prerequisites

Suitable regulatory framework.

Tax Increment Financing
Description

Process aiming at anticipating increase in the real estate tax revenues that can be caused by several factors: the development of new activities; the arrival of new inhabitants on degraded lands as a result of the area rehabilitation through public investment. The tax base on this area is frozen when TIF is introduced, and every additional tax revenues are allocated to investments on the area or to repaying loans (taken out to finance local projects). 

Advantages

Helps mobilize future tax revenues to finance urban rehabilitation programs, particularly for underprivileged city centers. 

Drawbacks and precautions

Expensive type of financing because of the provision for the risk of creditors increasing tax revenues on lands; high level of risk for borrowers related to the non-achievement of forecasts. 

Prerequisites

Suitable regulatory framework. Requires local governments to have access to credit/bond issues and for the investors to be interested in this type of financing scheme.

Success factors

Realistic project based on reasonable expectations, taking into account the potential for revitalization and land valuation on the territory, promising real estate market.

Operation

Institution benefiting from land taxes and loans; project manager for public investment, new real estate local owners.

Real estate taxation
Description

Taxation based on land and property values located on the local government’s territories. Its goal is to gain from the provision of local urban services and from real estate value increase. The tax is based on the current or rental value, but can also depend on real estate characteristics (surface area, use, number of windows…). The tax rate can be adapted to different uses, for instance to put a heavier tax burden on the least dense urban projects (Use –value tax assessment), or in order to apply different tax rates to land and build-up areas (split-rate tax). 

Advantages

Continuity/ Consistentcy, relative stability (depending on the actualization quality, which, if efficient, follows real estate market trends). Social justice, because this tax is paid recurrently and is proportional to the capital gains. Tax modulation theoretically allows public authorities to promote certain uses over others, to fight against land speculation and to reduce the amount of vacant buildings. Land taxation based on the constructive potential incites owners fully use of this potential.  

Drawbacks and precautions

Increases management complexity, especially when looking at revaluation methods and changes in land value. High implementation and management costs. Tax is made visible which makes it very unpopular, especially since it affects all the landlords and that its proceeds are not redeployed. In practice, it tends to privilege individual over collective housing and residential over business properties.

Prerequisites

Some form of registry already in place, choice of a method for land valuation. Precise criteria to define differentiated areas when modulating tax rates. 

Success factors

Exhaustive, up to date and reliable registry.

Operation

Land owners, public players that benefit from this tax.

Capital gains tax on land and property
Description

Taxation of the difference between land or property value before and after execution of a public work, a legislative change, or general price developments on the real estate market. The calculation can become increasingly complex depending on the circumstances.

Advantages

If the tax is levied on sales, it can capture part of capital gains on traded goods, on a precise basis (purchase or selling price), that does not require detailed data bases. Easy to implement politically. Theoretically, this tax can be a good way to tackle land speculation. If the tax is levied at the time of the public action which supposedly will result in capital gains, it can capture a significant part of those capital gains

Drawbacks and precautions

It is difficult to consensually evaluate the amount of capital gains realized, and its territorial boundaries. Strong opposition from land owners, with the poorest experiencing payment difficulties. It is hard to capture capital gains that are only virtual if taxation happens at the same time that the investments adding value to the land take place. When capital gains are captured at the time of the transfer, it results in tax revenues that are difficult to collect and to directly redeploy to other investments. Furthermore, this tax can impede land and property transfers, thus contributing to market inflexibility, decline in supply and upward pricing pressure.  

Prerequisites

Definition of precise criteria to allow proper land valuation (before/after) for effective taxation (excluding transactions). 

Business/ Community Improvement District
Description

Voluntary contribution (whole or partly) by land owners (or at least with a majority ownership) to investments and public services development.

Advantages

Private financing of investments through a consensual mecanism, with the possibility for the mecanism to become binding for all parties above a majority treshold (ex: 2/3 majoirty in California to create districts).

Drawbacks and precautions

This mechanism leads to territorial inequalities, as richer territories are able to finance greater investments, and are reluctant to implement offset mechanisms, such as tax equalization. 

Success factors

Depends on the owners' ability to mobilize and structure themselves.

Operation

Land owners of the concerned areas, institution responsible for the financing (in most of the case, the municipality).

Betterment levies / special assessment
Description

Land owners pay a predifined contribution to cover (in whole or in part) for the repairing or construction of infrastructures, or to provide services on this territory. The amount is drawn down as a single transaction or through multiple payments over the years, thus being used as a loan garantee to finance investment. 

Advantages

Mechanism where land owners support parts of or the full investment cost in the city where their lands are located, without having to wait for the sale of real estate properties, as opposed to the tax on capital gains on land value. Financing can even occur before any operation. 

Drawbacks and precautions

It is difficult to evaluate the investment impact on properties (in terms of capital gains and relative quality-of-life benefits), and thus the distribution of costs among land owners as well as the area boundaries within which landlords have to contribute financially. This can lead to strong opposition from landlords, which can be reduced by providing greater visibility to the investment and by unraveling the relationship between taxation and investment. There is the issue of poor land owners unable to pay the tax, which can be addressed through means-tested tax exemptions. 

Success factors

Detailed and consensual data bases on land and property prices, if cost distribution depends on this valuation. Existing local tax system (land tax generally) that reduces collection costs. 

Operation

Land owners of the concerned areas, institution responsible for the financing (in most of the case, the municipality).