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Options for Funding Local Purchase of Development Rights (PDR) Programs
April 19, 2005 ‑ Augusta County Government Center Sponsored by the Shenandoah Resource Conservation and Development Council and the Valley Conservation Council
“Get Started: Why Investing in Local PDR Programs Makes Financial Sense” Mary Heinricht (Ag Prospects)
“We have all kinds of allowed development out there. We’ve said to them, “Yes, you can have houses even if they’re not related to agriculture.” Think of PDR as extinguishing those development rights [that we wouldn’t have wanted to have out there]. It is not a subsidy to farmers. It’s a correction of the tax code. We don’t say to homeowners that we’ll tax them according to what it could be [example: four-story apartment building].”
“Subdivision value is wasted equity for a farmer. He can’t go to the bank and borrow on it.” Have to base it on their business to be able to pay back the loan. That value can’t be captured until the land is sold. PDR captures that equity and gets it into the hands of farmers.
Research from one of the oldest PDR programs found that 80 to 90 % of the money was used for business expenses. They paid off loans, upgraded equipment, and expanded operations. The money immediately comes into circulation.
For $1 dollar used to for farmland preservation, the community gets $2? in return. Two benefits: first, the community doesn’t have to worry about that farm becoming a deficit-producing land use. Second, it helps sustain the farm business.
Issue of rental property. Farmers don’t own the bulk of the land they farm. When leasing land, they aren’t going to put in the investments. This makes it hard to meet environmental requirements.
Virginia Beach started the first PDR program in Virginia (population about 430,000). They decided to invest 1.5 cents of the property tax in the program. This would yield about $3.5 million, still less than the cost of their recent high school (and in 25 years, you’ll have to spend that much more again to rehab that high school). Each year offsets what would have had to pay in future services. “Virginia Beach didn’t make the decision based on loving farms, but on fiscal stability.” It also helped their bond rating.
In the General Assembly in the last six years, localities have gotten everything they need [to do PDR] except the funding. They got designation of important soils, FarmLink program (100 people registered so far), and understanding more about zoning and statutory stuff in place.
But Virginia has only 10 PDR programs so far and of those only 3 to 4 are funded. Until we have a critical mass of PDR programs adopted by local governments, we won’t see funding. Last year, a bill would have sent 50% of the recordation tax back to localities to dedicate to farmland preservation.
Need to ask your legislators to fund PDRs. Legislators need to hear directly from localities – boards of supervisors, SWCDs, Chambers of Commerce.
Nationwide, PDR funding comes 60% on average from states and 40% from local sources. Not something that can be done without the support of local government officials, and staff who can explain it.
Virginia Beach only had 30,000 acres of farmland left, but they have one of the best-rated programs by citizens. They love it. Explain that it’s an investment that will offset future increases.
Frederick County’s Fiscal Impact Model Patrick Barker (Ex. Dir., Winchester-Frederick County Economic Dev’t Commission) (powerpoint presentation)
Barker described Frederick County’s new fiscal impact model, which is replacing one that was archaic and people couldn’t understand (couldn’t tell what the formulas were, etc). Status: Hope the Board of Supervisors will adopt it in the end of May 2005.
Process: used a diverse group to design what they wanted and then put out an RFP. This group decided it wanted the model to cover Frederick County revenues, growth scenarios, and site specific evaluations. They mentioned social, environmental and transportation impacts, but these later were dropped as being too cost prohibitive. Chose Tischler as their consultant.
Best feature – the model is in Excel and Visual Basic. Can see the formula the consultant used. It’s all transparent. It’s not set up to do PDR, but could easily be adapted.
Tips: · Have stakeholders there at the start. · Clearly understand what outputs you want. · Have input information available (they found some it wasn’t; slowed them down) · Identify a single department to manage the model (control the inputs) For them, it’s the planning department. · Have a read-only site available to the public (they have a station at the planning department). · Review data annually. Have a meeting and decide the inputs.
Shenandoah County’s Fiscal Impact Model Rob Kinsley (Shenandoah County Planning Director)
Their impact model is brand new, only used on one site so far. They decided to have the consultant (Andersen and Associates, Middletown office) both develop and run it, since the county doesn’t have the capacity to maintain it. It shows impacts to both the County and the towns.
Now when a developer wants to propose a rezoning or a site development, the county can use the model to get an estimate of the costs of doing that. It’s the basis for discussing all sorts of new development, especially rezonings and cash proffers.
The county and the five towns have conditional zoning. The county has joint agreements concerning cash proffers with three of the towns and agreements are now being considered by the others.
Fiscal Impact Model includes · GIS component. Tax parcel, corporate limits, fire and rescue zones, school district, zoning, street names. · Costs for various capital projects over the last few years and those included in CIP · Average household sizes and school generation figures for various types of housing · Tax rates for real estate tax, personal property, business property, sale sand use, lodging and meals
Impacts are projected for various categories. Many services are noted ‘shared’ (with the towns). They worked with stakeholders to develop the models. Many meetings between county and town staff to work out the percent share for each category.
Example site near Edinburg. “I could not agree more with the first speaker [Heinricht] that there are all sorts of stuff in A-1 that you really would not want to be near a farm…. or near a residence.” We’ll be looking at that.
He went through the example, which was for a site near Edinburg. Even with a small business strip (positive benefit), the overall bottom line was a negative impact of about $4,066 per household.
Can’t give a general ‘impact per household’ number. It varies each time you run it. “PDR Funding in Virginia” John Hutchinson (Shenandoah Valley Battlefields Foundation)
Localities can do PDRs today, working through VOF or SWCDs. Don’t need an adopted ordinance. “The more time you wait in establishing a program, the more money you will have to spend to have an impact.”
About a dozen counties in Virginia have or are flirting with PDR programs. Clarke is the only one in the Valley that is up and running. Rockbridge’s is not funded but is very close to its first purchase. Five counties are funded: Albemarle, Clarke, Fauquier, James City County, and Virginia Beach. A sixth, Loudoun, began a program in 2000 (funded at $4 million per year) but ditched it in 2004.
Nearly $7 million was spent annually on PDRs in Virginia the last 3 fiscal years ($20 million total). Ranges from $385,000 spent in Clarke over 3 years to $11 million spent in Virginia Beach.
Sources of Funding (basically all come out of the locality’s general fund): · dedicate portions of the real property tax · transient occupancy taxes (lodging) · rollback taxes (as come out of land use taxation) · federal and state grants · environmental mitigating funds (ex: Fauquier compact with new power plant) · other general funds
No magic to it; just have to appropriate the money to make it work. County supervisors and city councilpersons will have to provide the backbone for PDR programs.
Description of individual programs: (See handout for details.)
A. Virginia Beach – estimated $57 million would be generated from using $0.015 of its real property tax rate to the Agricultural Reserve Program (about $2.7 million annually). The dedicated tax yielded more than anticipated, averaging $3.26 million. In ten years, through FY 2006, $35.34 million has been appropriated to the program from this tax. The program only spent $21.5 million. There was more than enough to purchase all that farmers wanted to sell. So in FY 2005, the city cut the tax from 1.5 cents to 1.0 cents. Virginia Beach uses installment purchase agreements (IPAs). (See handout for description.)
B. Albemarle County – In 1997, established a PDR committee; 3 years of study. Recommended $1 million annual funding. Wanted to do installment purchase agreement like Virginia Beach, but attorney said that would require a bond referendum. Decided instead to fund with transient occupancy tax and the rollover fund (general funds). Funding has ranged from $800,000 to $1 million annually over 6 years. The program has purchased 9 conservation easements (2,202 acres), averaging about $944 per acre.
C. James City County - Started in 1997. Initially not just farmland. Project Greenspace. In FY 2000 CIP the county set aside $0.01 per $100 value of the real estate tax annually to invest in open space. Purchased 215 acre farm near Jamestown. In FY 2002, the county funded $1 million for the first year of its PDR program, while continuing to fund Project Greenspace with $0.01 of the real property tax. Costs are high in such a densely populated area. Chairman of the Board of Supervisors quoted: “The future of PDR is looking at pre-funding with bonding so you can spread the cost into the future because that’s when citizens will be enjoying the assets.” James City got some funding from USDA Farm and Ranch Land Protection Program.
D. Loudoun County - Goal was to purchase 200 development rights each year. Estimate: $20,000 per acre. Did 12 purchases (2,535 acres) for $8.9 million (appraised value: $13.2 million; $4 million was donated value). One of the first things done by the new board coming in 2004 was to entirely defund the PDR program. See handout for supervisor quote comparing purchase price to negative of growth costs. Hutchinson cautions against using just the single argument for PDRs that it saves money by preventing homes being built that would cost more to serve.
D. Clarke County - Not as ambitious. Appropriated $400,000 in 4 years. Purchased a farm (140 acres). They theoretically commit any surplus from the previous year, plus the roll back, to the program.
E. Fauquier County – newest, took a long time to get going. Power plant agreement made a $1.5 million contribution designated to the PDR program (3 installments total of $1.5 m each). Easements must be within 5 mile radius of power plant. The county also adds 2 cents of the real property tax. In two years, appropriated about $3.2 million.
Federal and State Sources: 1. Virginia Land Conservation Fund – General Assembly allocated $12 million to be distributed in a competitive grant program in the fall. Four eligible categories: open space, historic, farmland and biological significance. Need to write an application. 2. Virginia Open Space Fund. Mainly for parks 3. Virginia Preservation Trust Fund – grants to landowners to offset the costs of doing an easement. 4. Division of Natural Heritage (bond revenue from last state ballot) – maybe a creative program could use this.
Federal sources (numerous, but none very big): 1. Transportation enhancements 2. Forest Legacy (USFS) 80 federal / 20 match 3. Federal Farm and Ranchland Protection – grant round each year. Last year, $1.6 million available and Virginia didn’t get in enough applications. Money to be had, but must have 25% cash match (non federal) on each property. Last year, there was no state match and localities did not pony up.
“Installment Purchase Agreements: Why They Make Sense for Local PDR Programs Daniel P. “Pat” O’Connell (President, Evergreen Capital Advisors, Inc.)
“Virginia is the next big place where land preservation will take place.” Everywhere north of here - Pennsylvania, Maryland, New Jersey – is going great guns purchasing farmland. His background is capital financing. He describes how borrowing is a reasonable way to do PDRs.
‘Pay as you go’ is a very strong idea in Virginia. It entails putting money aside in annual budget each year. Budget provides focus for rallying public support each year. Land preservation is popular in most places. Problem: not enough money for big projects. Doesn’t give you enough to buy more than a few farms, when need lots of money relatively quickly. PDR programs inevitably try borrowing.
Virginia Beach has done 55 easements. James City County less than 10 (but they are going to the voters in the fall for a bond referendum). It’s like buying a house. You’re going to have it for a long time, and so can finance expenses over the useful life. Debt to finance PDR is less expensive than debt to finance infrastructure. Easements on farmland will be enjoyed forever. It’s not unreasonable to ask future taxpayers to help pay for them. It is never going to be cheaper than now. Getting out there today and buying easements, even with borrowed money, is going to be a lot less expensive [than waiting].
Credit Ratings - debt for land preservation is pretty popular with credit ratings agencies. It concerns ratings agencies if counties do not have a handle on [future costs]. Planning for the future, sense of what the needs will be, [efforts to ensure that the community in the future will be] an attractive place. [Land preservation programs] are another way of demonstrating that you’re a well-managed government. Gives a sense that the county is getting a handle on their capital budget.
IRS ruling clarified that tax exempt borrowings can be used to acquire easements.
Problems of Sellers in PDR programs: The problem with using bonds exclusively is that a big sales price can trigger capital gains for the seller. For example, if they receive $450,000 in purchase price, they must pay 18% of that in tax. They’re already thinking they aren’t getting what the land is worth and then they see how much of it is left after taxes.
Solution – Defer receipt of the purchase price (and defer the tax). Installment sales treatment – 15, 20, even 30 year agreements. Seller gets a contract instead of a check. Payment is at the end. In the meantime the farmer is paid interest. Backed by full faith.
Vehicles County General Obligation – voter approval required. James City County is doing a referendum this fall. Nationwide the approval rate is extraordinarily high. But it takes time and money, and you could lose.
Subject to Approval Obligation – Will sellers accept an agreement in which they have to trust that the county will continue to appropriate funding each year?
Land Conservation Loan Fund – broadened to include farmland preservation. Loans at 1 to 2 %. Inexpensive way to fund. Virginia Resources Authority (VRA) – market rate loan programs. VRA signs agreements with land owners. Carries moral obligation of Virginia and county moral obligation. This is the way to go if don’t want to seek voter approval.
Balloon payments - Cover the future payments by buying US Treasury bonds on zero. Price today is 25 cents on the dollar. At maturity the Treasury bond will pay the balloon amount. In the meantime, program pays interest annually. Thus, instead of paying the full dollar now, would pay 25 cents on the dollar plus interest.
Option – borrow at low interest. Cover by investing. Ongoing obligation is only to pay back the loan. Thus can mesh installment purchase program with loan program.
Setting terms – Why would an old farmer want a long-term loan? Because it pushes his income tax off to their heirs. It guarantees an income stream (interest) for their life time.
Interest rate – higher of the floor rate or the yields of bonds purchased on the day of closing. Usually 5 to 6 percent. This rate is higher than what you pay to borrow the money.
Problems – not just money. Need staff to talk to the farms. Need to hit the right price. Take the example of a community trying to build a greenbelt. They know which 30 farms are needed. The program needs IPAs, all the tools. It is pennywise and pound foolish to go just on appraisal. The tax advantage (ability to defer capital gains and tax exempt interest from state and federal) is something the developer cannot offer. It helps you compete. Farmers often want to see farmland remain in farming. “Gives them a reason to say yes.” Quote: “It’s not what you get; it’s what you get to keep.”
IPA is a marketable instrument that can be sold - Seller can sell the IPA (Installment Purchase Agreement) to bond investors and cash out prior to maturity. About 200 have chosen to do this. So if you are in your 70s and need to liquidate, you can (or your heirs).
His role: to interface with county financial people. Pennsylvania Department of Agriculture did a template. Nice thing is you’re not being asked to reinvent the wheel.
Candidates for IPA Programs: · Large enough – identified properties, identified priorities, want IPA · County must be willing to take on debt · Under significant threat – high prices, under the gun · Willing to explain, emphasize IPA – need people out there to explain to landowners. Farmers need advice. Too often they are alone in the negotiations, without lawyers, accountants.
(see handout of power point program)
“How to Potentially Use VRA’s Pooled Financing Program or Their Revolving Loan Fund to Help Fund Local PDR Programs” Howard Estes (Virginia Resources Authority (VRA))
VRA was formed for wastewater and water. Since then have added stormwater, airports, and transportation, including parking garages. “If we can control development on open space, will force development on brownfield sites.” Expanded mission to work with individual citizens.
VRA is a conduit. It uses the state’s credit to access markets. They can offer the best market rates available in Virginia, without needing to go to referendum. Also has below market funds (ways to stretch dollars).
Eligible for VRA’s Pooled Financing Program (wastewater): open space preservation, stormwater, Ag BMPs (loans to individual farmers), brownfields
$500 K minimum – pool together to share costs. Much less cost than doing your own.
Virginia is leading the country in ways to finance local government. VRA can bond finance local match. For example, if a locality finds grant funds, it can come to VRA for local match.
Virginia Water Facilities Revolving Loan Fund – to borrow through this program, must have connection to preventing pollution of state water. Couch in terms that relate to preventing pollution. Ok to borrow from VRA below rate and invest at market rates.
DEQ solicits for the Land Conservation Fund.
Recommends: talk with Pat to do an IPA program talk with VRA to establish debt schedule To contact VRA - virginiaresources.org; Tom Gray, 804 644-3100 Application is on the web site. Staff is happy to talk to potential borrowers.
VRA wants to know what people need so that at the state we can find resources to fund those needs. VRA has grown from doing $25 million 6 years ago to doing $250-300 million last year.
(See handout of powerpoint presentation)
Question and Answer Session
Q: Belton (Page) – seems as if lots of programs are in wealthy counties. Anything on the horizon for Virginia [to put up money – like Maryland and Pennsylvania]?
A: Mary Heinricht – Linwood Lewis put in a bill last year for 50% of the recordation tax to be sent back to those counties that have programs. This year, it did not get heard (out of committee). There has to be lobbying by localities (and citizens). Top priority of new Secretary of Agriculture. Try to get it on statewide office agenda.
Ag Enterprise Act of 2005 – grants to individual farmers. Designed to overlay PDR areas.
“Richmond has not heard from you guys that this is important.” You’re going to get something when you let them know you want it.”
She noted that in Virginia Beach, half the committee was environmentalists and half were farmers. Include skeptics and multi-generations. Gather farmers.
PDR programs can have different purposes: ex: Greenbelt (Boulder, CO), Ag Districts in Culpeper and Pennsylvania
Biggest problem – get caught in the trap of [going only for the] lowest price per acre. Too scattershot. End up with lesser properties in terms of value.
Public education is one of the most important things. Loudoun forgot to involve newcomers. In comparison, Virginia Beach has had turnover of their board, but they didn’t dare touch PDR program because they knew the public supported it.
Heinricht: “I’ve found it’s not the public that resists PDRs; it’s the policymakers that resist it.” |