As the country faces the "subprime crisis" and its effect on the availability of financing, we know local real estate markets have seen brighter days. Fortunately, we also know this crisis will pass.
If you are a real estate developer or land-use professional, there will be many opportunities ahead. However, it is important to consider that the regulatory landscape in Indiana relative to land-use development will not be the same as the one you knew prior to the current market.
Indiana's recently enacted property tax reform will drastically alter the real estate market. The legislation known as House Enrolled Act 1001, or HEA 1001, fundamentally changes the funding of local governments and, in so doing, will impact land-development policies and practices.
Land-use food chain
HEA 1001 places caps on the percentage of a property's assessed value which may be paid in property taxes. The caps, beginning in 2009, are 1.5 percent for residential property (1 percent in 2010), 2.5 percent for agricultural or residential property other than homesteads (2 percent in 2010) and 3.5 percent for all other real property, including business properties (3 percent in 2010).
While providing meaningful property tax relief, the system of caps creates a land-use hierarchy, whereby business uses will receive a favored status because these uses will yield more in property tax revenue than residential uses.
Historically, plan commissions and legislative bodies could simply analyze a project's estimated assessed value apart from the project's use classification. All assessed value, from whatever source, was essentially equal. Under HEA 1001, the analysis will become more complex and require developers to explain the economic benefits of a proposed use, compared with another proposed use that may have an equal, higher or lower tax cap.
This tax-cap structure will likely perpetuate more mixed-use development concepts, allowing communities to maximize property tax revenues while adhering to comprehensive plan goals. It appears municipal fiscal advisors will play an even more central role in land-use cases under this new system.
Expanded impact fees
With the enactment of HEA 1001, many communities will be looking to enact new impact fees and utility charges in order to fund essential services and desired amenities like streets, storm water management, parks and pathways.
Increased pressure in the General Assembly may occur to legislatively expand the universe of impact fees to include, for example, police and fire services, schools, and libraries. These fees will vary from community to community and will impact land values, project pro formas and developer returns.
HEA 1001 effectively places spending controls on local government. While some have argued that government reform should have come first and tax relief second, the tax relief will itself spur on reform.
Local governments will be challenged to become more efficient, and they will meet this challenge through the use of interlocal agreements, the use of public/private partnerships, elimination of governmental layers, and jurisdictional expansions for achieving economies of scale, adding tax base and expanding planning areas.
While many of these tools have been in use for years, HEA 1001 will accelerate and increase their use across the state.
Variations on new urbanism
Cities and towns, seeking to ascertain a development proposal's true fiscal impact, will look beyond a project's assessed values, amenities and architecture, and intensify the review of a project's impact on demands for municipal services
Analyzed in this light, more compact development may be preferred where it can be shown to be less expensive to protect, maintain and service because of reduced street mileage, smaller geographic area and shorter utility spans. As a result, developers will produce a new brand of "low impact" development. This new style will build on the principles of new urbanism, resulting in more compact, walkable, mixed-use developments.
HEA 1001 is good for Indiana. Local governments will adapt; taxpayers will receive needed relief, and Indiana will be poised for new investment. Oh, and yes, real estate developers will prosper.
Price is a partner at locally based law firm Bingham McHale where he concentrates in business and real estate transactions. Views expressed here are the writer's.