Financial Incentives

for Developers Initiating Smart Growth Projects

 September 2003  

Summary

Background

Smart Growth Loan Programs in New England

Risk Considerations

Recommendations

Appendix One: January 2003 meeting on financing smart developments

Appendix Two: smart growth/community preservation criteria

 

Summary  

Among the findings of the New England Environmental Finance Center's 2002 work program was the need for loan and grant programs designed to stimulate smart growth projects by covering up-front design studies, impact analyses, and other pre-development expenses. This study examines several such programs, assesses their strengths and weaknesses in promoting smart growth, and suggests ways the New England states may adapt and expand them to more fully address the obstacles to smart growth. 

There are a variety of such programs in places across New England. They vary in terms of administering agency, applicant eligibility, and program purpose. Most are directed toward the creation of affordable housing rather than smart growth. Most are limited to non-profit development organizations, though some are expanding beyond that limitation. None has explicit smart growth criteria by which all projects are evaluated, although the New Hampshire Downtown Initiative program is explicitly directed toward downtown renovations that include both affordable housing and commercial rehabilitation. 

Interviews with developers indicate that, while smart growth projects often do involve extensive pre-development expenses, programs to cover those expenses would not necessarily address the major obstacles to smart growth. An assessment of smart growth projects indicates four distinct types of risk: regulatory risk to the developer, both for-profit and non-profit; political risk; infrastructure recovery risk; and profitability risk. Programs designed to cover regulatory risk will not, in themselves, bring forth more smart growth projects if the other forms of risk are left unaddressed. State efforts to promote smart growth must be more comprehensive and more coordinated; in particular, states should: 

1. Adopt a formal set of smart growth criteria and use them to endorse specific projects and to guide development assistance programs. 

2. Establish a cabinet-level, inter-agency structure to coordinate the various elements of state involvement in the development process. (In some states such a structure may already exist that could be charged with this task, such as the Land and Water Resources Council in Maine.)

3. Expand the eligibility of existing pre-development feasibility loan funds to include smart growth projects and for-profit developers. 

4. Establish a long-run capital subsidy (analogous to tax credits for affordable housing) to offset the accumulated effects of the hidden subsidies and market forces favoring sprawl.

Background 

Throughout 2002, the New England Environmental Finance Center held a series of workshops, one in each of the New England states. The purpose of these sessions was to identify innovative approaches to land conservation, habitat preservation and growth guidance that move beyond public regulation to include financial incentives and partnerships between the public, non-profit, and private sectors. To continue work begun in these workshops, the Center contracted with Dr. Charles Lawton of Planning Decisions, Inc. (PDI), a public policy research firm based in South Portland, Maine, to examine existing state loan programs in New England and identify practical ways they might be modified or expanded to provide up-front financial assistance to developers willing to undertake smart growth projects.  

To complete this work, the Center convened, in January 2003, a meeting of developers interested in smart growth and state officials responsible for loan programs that might help finance such projects. Based on the ideas generated at this meeting, Planning Decisions, Inc. researched a number of loan programs throughout New England and interviewed a wide range of developers and state officials. This paper presents findings and recommendations from that work. 

Smart growth Loan Programs in New England

 

Following the January brainstorming session, Planning Decisions, Inc. sought to identify existing loan programs in New England that seem to hold promise for addressing the needs identified at the January 2003 meeting. PDI researched the various programs and interviewed both developers and state agency officials. An assessment of these programs is listed below.

 

1. Smart growth/Community Preservation in Maine 

a. The Maine State Housing Pre-Development Loan Fund 

The MSHA Predevelopment Loan Program makes available up to $60,000 per project at 0% interest for up to 30 months.[1] Eligible uses include option or earnest payments, engineering, legal, architectural, appraisal or project management services. Amounts expended are rolled into permanent financing upon completion of the project. 

In theory, this program meets just those up-front costs identified by developers as an obstacle to smart growth projects. In practice, however, it meets these needs only for those smart growth projects that include an affordable housing component and, because it is available only to non-profit housing organizations, only for those private developers working with such a non-profit agency. In short, it serves smart growth only indirectly and only in a limited way. It does, nonetheless, provide a model of an existing program that could be modified to serve the broader needs of smart growth and community preservation more directly.  

b. The Great American Neighborhood Partnership Grant Program 

Recognizing that smart growth projects often require developers and communities to work in more cooperative ways than has traditionally been the case in the development process, the Maine State Planning Office (SPO) established a program designed not merely to promote smart growth, but also to encourage collaborative efforts on the parts of Towns, the State and private developers. The SPO made grants of between $2,500 and $5,000 available to Towns interested in exploring feasibility of Great American Neighborhood projects. Funds were made available to Towns and were matched dollar for dollar by the Town and the developer. They were used for whatever purpose the partners felt was most important to the project. In one town, they were used for a traffic analysis; in another for a community planning charrette; in another for architectural renderings of buildings located more densely on a site than neighbors were accustomed to; and in another for a home-buyer survey designed to identify how many households would prefer to live in a Great American Neighborhood. 

This program was successful both in the sense that the projects that received funding are still alive and proceeding through the development process and, more importantly, in the sense that the towns and developers have had the opportunity to work in a non-adversarial way. 

To integrate aspects of these two programs and expand them to address the need for funds to cover the up-front costs of smart growth developments, they would have to be combined with two of the other critical elements of an effective smart growth/community preservation strategy-an inter-agency coordinating structure and a set of smart growth criteria. Each of these is considered below. 

c. Great American Neighborhood Sewer Extension Loan Program 

The State of Maine is initiating a pilot program to assist Maine cities and towns that wish to encourage neighborhood development in residential growth areas. The Program is a cooperative effort of the Maine Municipal Bond Bank, the Maine Departments of Environmental Protection and Economic and Community Development, the State Planning Office, and the U.S. Environmental Protection Agency. $3 million is available through the program to provide low-interest rate loans covering the cost of sewer or sewer extensions to eligible areas with a graduated or "patient" payback provision that keeps payments low at the start of the project. Interest rates and loan terms are intended to be attractive enough that the program represents a significant incentive for communities and developers to create new or add to existing Great American Neighborhoods. More information and application materials can be found at: http://www.state.me.us/spo/landuse/finassist/sewer.php.

 d. The Community Preservation Advisory Committee (CPAC) 

In 2001, the 120th Maine Legislature established the CPAC to advise the Governor, the Legislature, state agencies, and other entities on matters relating to community preservation. Specifically, the Committee is directed to: 

·         Provide assessment, advice and recommendations on emerging policy concerns or on adjustments to existing programs related to growth management;  

·         Review and make recommendations on the State's fiscal, transportation, education funding, school-siting and land use policies that affect service center communities, rural lands and development sprawl;  

·         Review tax policy as it affects land use decisions;  

·         Provide assessment, advice and recommendations on the role of state office buildings in the continued viability of downtown service centers within the State and the impact of growth-related capital investments and location decisions by the State;  

·         Provide assessment, advice and recommendations on the coordination of state and local urban transportation planning and streamlining of local and state land-use rules and regulations to permit and encourage efficient neighborhood and economic development in growth areas; and

·         Review and make recommendations regarding options for establishing a state transferable development rights bank.

The Committee was given a five-year mandate to fulfill its mission and has introduced legislation to implement its goals. It has given priority to encouraging regionalism, affordable housing (particularly through the creation of tax increment financing mechanisms), the preservation and development of Service Center communities and integrating transportation and land-use planning. It is the natural entity to receive recommendations regarding a smart growth predevelopment loan fund.[2] 

e. Smart Growth/Community Preservation Criteria 

As part of the Planning and Land Use Regulation Act (Title 30-A, Chapter 187), Maine adopted ten state goals to provide overall direction and consistency to the planning and regulatory actions of all state and municipal agencies affecting natural resource management, land use and development (http://janus.state.me.us/legis/statutes/30-a/title30-Asec4312.html). Numerous other states have created community preservation/smart growth evaluation tools. See Appendix Two for a listing of several.[3]  

Of particular importance in this regard is the issue of transportation planning. One of the most emphatically emphasized problems cited by developers at the January 2003 meeting was the critical nature of coordination with the State DOT. Recently passed legislation requires the Department of Transportation to adopt a major substantive rule that establishes linkage between the Sensible Transportation Policy Act and the Planning and Land Use Regulation Act. The rule must also promote investment incentives for communities that adopt and implement land use plans that minimize over-reliance on the state highway network.[4] At the same time, Maine's DOT will be updating its Twenty Year Transportation Plan. Both of these mandates provide the perfect opportunity for creation of a pilot program to fund smart growth/community preservation development and to utilize a smart growth/community preservation scorecard to evaluate projects submitted for funding. 

The CPAC proposed legislation to this effect in 2002: LD 1084, sponsored by Representative Ted Koffman, "An Act to Provide Incentives for Affordable Neighborhood Developments."  Although focused on affordable housing, the drive of this bill was to create incentives for Great American Neighborhood smart growth developments with an affordable housing component. The bill would have established the State Affordable Neighborhood Development Review Board within the Maine State Housing Authority under which a municipality may voluntarily agree to the creation of an affordable neighborhood development. The bill also proposed establishing standards for affordable neighborhood developments and established incentives for municipalities to participate. The bill, which unfortunately did not pass, also would have created the Affordable Neighborhood Development Fund. 

2. Smart growth/Community Preservation in Vermont 

a. the Vermont Housing and Conservation Board Project Feasibility Fund 

The Vermont Housing and Conservation Board (VHCB) is an independent, state-supported funding agency providing grants, loans and technical assistance to nonprofit organizations, municipalities and state agencies for the development of perpetually affordable housing and for the conservation of important agricultural land, recreational land, natural areas and historic properties in Vermont. 

VHCB administers a Project Feasibility Fund whose purpose is to provide applicants with a source of funding ($8,000 to $15,000) to cover predevelopment project costs in order to answer the question "is the project feasible?" VHCB staff members evaluate requests on an ongoing basis. There are no application deadlines. Funds may be used for appraisals, financial planning/evaluation, site design and land use planning, specialized studies approved by VHCB staff, percolation and other septic suitability tests, tests for toxic or hazardous wastes or other environmental analyses, water quality tests, market studies, options or purchase and sales contracts up to $3,000 per parcel and energy analyses. 

Like the MSHA Pre-Development Loan Fund, this fund is limited to non-profit entities. It therefore serves the needs of developers as identified during the January 2003 meeting only indirectly. 

b. the Vermont Housing Finance Agency Predevelopment and Bridge Loan 

Vermont Housing Ventures is a $650,000 revolving loan fund created by the Vermont Housing Finance Agency (VHFA) to promote and assist nonprofit housing development. It provides predevelopment working capital and bridge financing at a low cost to eligible nonprofit housing developers quickly and flexibly. All mortgageable project-based pre-development costs are eligible including: architectural and engineering services, financial packaging, development consultants, legal services, appraisals, environmental and/or historical certifications, financing and permit fees and option agreements (which must be refundable). 

The VHFA has recently created a similar program available to for-profit developers who commit to make 51% of the units in a development affordable (according to VHFA standards) to households earning less than 150% of t he area's median household income. This represents a significant extra step in the effort to more fully engage private developers in the smart growth process. 

3. Smart growth/Community Preservation in New Hampshire 

The most significant smart growth related finance program in New Hampshire is The Downtown Initiative. This is a joint program of: 

·         the NH Community Development Finance Authority (CDFA),

·         the NH Housing Finance Authority (NHHFA),

·         the NH Office of State Planning (OSP), and

·         the NH Department of Resources and Economic Development (DRED)

It is a three-year initiative to encourage downtown redevelopment by providing financial support and incentives to encourage reinvestment into New Hampshire's downtowns through extensive renovations to multi-use structures that contain commercial or retail spaces on the ground floor and residential units on the upper floors. The Downtown Initiative focuses on renovation of underutilized properties that are integral to a community's downtown commercial center. The Downtown Initiative is targeted at communities throughout the state that have a plan for their downtowns. The goal is to create new housing units across the housing market in the form of market-rate rental units, affordable first home condominiums and subsidized rental units. A second goal is to enhance the economic vitality of downtowns by allowing funds to be used for retail and commercial development on the first and second floors of buildings that include housing units on upper floors. In this way, the program is directly addressing the smart growth goal of promoting mixed-use development. 

The participating agencies have set aside $21 million in funds spread over the next three years for projects. The goal is to accept up to three projects totaling 24 to 30 housing units a year for the next three years. Projects must have both market rate and subsidized housing units. 

The Community Development Finance Authority will: 

·         Make available a set aside of $100,000 of its own resources in each of the next three years to support projects of this type.  

·         Additionally, for selected projects willing to sell CDFA tax credits, it will reserve an additional $500,000 in tax credit financing in each of the next three years. 

The Office of State Planning will make available $500,000 of its Community Development Block Grant financing in each of the next three years. 

The NH Housing Finance Authority will: 

·         Reserve a total of $60,000 for the performance of feasibility studies on three selected projects in each of the next three years. 

·         Will arrange for long-term financing for units that meet its specifications up to a maximum of $6,000,000 in 4% tax credit financing in each of the next three years.  

The Department of Resources and Economic Development will promote the importance of these projects to businesses in the host communities as a source of new worker housing and promote the concept within the development community to attempt to attract for-profit partners to the program. 

Like the programs in Maine and Vermont, the New Hampshire Downtown Initiative does not completely address the needs developers cited in the January 2003 meeting. It does, however, illustrate several key elements of the "ideal" smart growth/community preservation program, namely inter-agency cooperation, long-term financial commitment, and support of mixed-use activities. The program's limitations are its exclusive focus on downtown rehabilitation and its exclusion of private developers from eligible applicants.  

4. Smart growth/Community Preservation in Massachusetts

The most significant smart growth related finance program in Massachusetts is The Massachusetts Housing Partnership (MHP). MHP is the state's primary source of early technical assistance and pre-development funding and support. It offers three types of support both to non-profit organizations and to for-profit developers:

 ·         The Technical Assistance Program

This program provides development advice and pays for professional services to provide quick answers during the early stages of development. Awards customarily range from $3,000 to $10,000. 

• The Technical Assistance Fund

This program is designed to assist affordable housing developers to quickly test project feasibility and answer predevelopment technical questions. The TA Fund will engage third party professionals, such as architects, engineers, and development consultants, on behalf of a community or developer. The purpose of the program is to further the production and preservation of low and moderate income housing throughout Massachusetts. Eligible applicants include local housing partnerships, municipalities, nonprofit organizations, and for-profit entities.  

• The Intensive Community Support Team

This program provides sustained, in-depth assistance from all angles - from developer to city and town officials. It provides communities a dedicated resource "on the ground" to facilitate the development of affordable housing. The program's focus is on new production. The team helps the local advocates conceptualize a project and get to a construction start. Through the multiple stages of the development process, the team helps to keep the project on track by bringing experience and sharing lessons from other parts of the state. The team can also advise developers on how to finance the affordable component of a project.  

As with the other state programs described here, the Massachusetts Housing Partnership does not completely address the needs developers cited in the January 2003 meeting. It does, however, illustrate a way for a state agency to become involved in smart growth projects, serving as an advocate for the project. By working with both communities and developers this program's support team can help address the sense of isolation cited by developers in the January 2003 meeting. The limitation of the MHP program is its exclusive focus on affordable housing. 

Risk Considerations

Based on review of the programs described above and interviews with state officials involved with development and land use as well as with private developers, it is clear that the major obstacle to smart growth development is not so much an identifiable list of laws and regulations as the uncertain length (and therefore high risk) of the approval process. Real estate development is a partnership. State and local governments make the rules. Private developers gauge market demand, find the land and build the properties. If they guess right, both about what the rules will allow and about what the market wants, they make money. If they don't, they lose money. Land use patterns we have today did not proceed from grand design. They are simply the unplanned result of what the rules allowed, the subsidies encouraged and the market wanted. 

In gauging whether to make an investment, real estate developers face four types of risk: regulatory risk; political risk; infrastructure recovery risk; and profitability risk. 

1.       Regulatory risk revolves around the agencies with some degree of control over a potential project. It demands that the developer answer the following questions. 

a.       Who needs to approve a project, meaning both, "What governmental agencies?" and "Which specific people?"

b.       What do I need to do to get approval?

c.       How long will it take? 

2.       Political risk revolves around the broader community in which a project will be located. It demands that the developer answer these questions. 

a.       What interest groups will support this project?

b.       What interest groups will oppose this project?

c.       What will I have to do to overcome opposition?

d.       How long will it take?

e.       How will political accommodations affect other risks? 

3.       Infrastructure recovery risk involves financial and time calculations. It demands that the developer answer a different set of questions. 

a.       How much money do I have to invest up front?

                                                   i.      For design?

                                                 ii.      For land?

                                                iii.      For roads, water/sewer, power, drainage and other common facilities separate from units to be sold or leased?

b.       How many units do I have to sell to cover these costs?

c.       For each week, month, year of delay, how much do interest costs add to unit costs? 

4.       Profitability risk revolves around the accuracy of assessing market demand. It depends on how well a developer knows the market and demands that he/she answer these questions. 

a.       What is the mix of units in the development?

b.       What is the relative profitability of each?

c.       How will changes in the mix affect overall profitability?

d.       What flexibility do I have to change the mix in response to other risks involved? 

In considering any investment, developers are wise to answer all the above questions and estimate their joint interaction. In many ways, smart growth projects, by their very nature, are more complicated (and therefore higher risk) than other projects:  

• being in built-up areas, they affect more abutters;
• being mixed-use, they don't fit standard zoning regulations;
• being higher density, they challenge the preconceptions of many neighbors and local regulators;
• requiring new highway construction to mitigate impact, they run counter to the existing DOT principle of "First repair what we have, then build new;" and
• being all of these things, they require more permits and approvals by more agencies.

Therefore, any effort to encourage smart growth projects must recognize not merely the nature of existing land use rules, but also the nature of the risk analysis developers must constantly assess and the inherent complexity of smart growth projects. 

Based on the review presented above, no existing state program addresses all of these forms of risk for smart growth projects. No program addressing one level of risk, no matter how well it covers that risk, will make the difference in pushing a project into the "Do it!" column if one or more of the other risks are not covered to the developer's satisfaction. 

Some developers say that smart growth projects are just too risky, that no reasonable amount of up-front feasibility money can cover the regulatory and political risks. Their opinion is that some governmental authority must say "We want  X , and we want it here, send us your proposals for how to do it." In short, they are saying that neither market forces alone nor financial incentives can overcome their assessment of current regulatory and political risks.

 Other developers say that more basic societal commitments must be made to accomplish smart growth, i.e., something similar to allocation of federal income tax credits to enable the creation of affordable housing. If, they say, renovation costs $100 per square foot and rents are $35 per square foot, no amount of up-front feasibility money will make that renovation happen. In this case, the profitability risk militates against smart growth.

Recommendations

Based on this assessment of development risks and the analysis of existing state smart growth programs noted above, it is clear that any state program hoping to encourage smart growth development must include at least four characteristics:

 

• It must include a set of smart-growth criteria by which the state can identify and endorse specific projects and provide accelerated support from needed state agencies thus speeding smart growth projects through the permitting process;
• It must include some form of inter-agency structure to coordinate the various elements of state involvement in the development process;
• It must include an upfront grant, loan or other equity infusion to compensate for the greater regulatory and political risks inherent in smart growth projects; and
• It must include some form of long-run capital subsidy (analogous to tax credits for affordable housing) to offset accumulated effects of hidden subsidies and market forces favoring sprawl.

The recommendations listed below are intended to constitute a model smart growth program that could be adopted in each of the New England states. 

1. States should adopt a formal set of smart growth criteria. 

Review of the Community Preservation/smart growth literature and of the various criteria developed to rate projects with respect to the principles listed in that literature reveals four central characteristics by which any given development may be evaluated: Location and Land Use; Scale and Design; Diversity of Choice; and Public Involvement in the Development Process. To stimulate creation of a community preservation/smart growth scorecard in New England, we suggest the following criteria for evaluating development projects. 

A.      Location and Land Use 

1.       How many units (housing or commercial) per acre? (For this and the subsequent items, note that ranges of answers will likely be necessary to determine whether the criteria have been met, given the diversity of contexts in which developments are proposed.)

2.       How many different sized lots in the proposed development?

3.       How far is the proposed development from existing development?

                                                   i.      Water/sewer?

                                                 ii.      Public transportation?

                                                iii.      Schools?

                                                iv.      Shopping?

v. Fire, police, library, parks, other cultural services? 

4.       Is the proposed project on land physically suited for development?

5.       Does the proposed project use farm, forest or open space land?

6.       Does the proposed project involve reuse of a brownfield area? 

B.      Scale and Design 

1. Does the proposed project involve rehabilitation of existing buildings?

2. Does the proposed project involve demolition of existing buildings?

3. Is the proposed project consistent with existing historic design?

4. Does the proposed project use building materials similar to those of other buildings in the area?

5. Does the scale of the proposed project significantly larger than neighboring buildings?

6. Does the proposed project provide interconnecting streets, sidewalks, benches, parks or other amenities designed to promote social interaction?

7. Does the proposed project provide parking areas that do not visually dominate the development?

C.      Diversity of Choice 

1. Does the proposed project increase the type and price range of housing units in the community?

2. Does the proposed project increase the variety of employment and shopping opportunities within walking distance of existing residential units (roughly the distance covered in 5 minutes, or about 1,500 feet)?

3. Does the proposed project provide a variety of transportation opportunities to existing residential units, commercial establishments and municipal and cultural service locations (recognizing that there is no standard level of diversity of transportation options to strive for, but that increasing options is desirable)?

D.      Public Participation

1.       Is the proposed development consistent with the municipality's Comprehensive Plan?

2.       Does the proposed project involve any community partners:

                                                               i.      Local housing authority, economic development corporation, land trust?

                                                             ii.      Municipal government?

                                                            iii.      Local churches, senior organizations or other civic entity?

3.       Has the developer of the proposed project met with abutters and community stakeholders?

4.       Is the proposed project endorsed by any local stakeholder or civic organization?

Establishing smart growth criteria is not to say that states will or should support only projects that are perfect, or achieve a given score. The purpose is educational as much as anything. If state governments promote these criteria and use them in allocating state funds, smart growth principles will become part of the regulatory and political climate. Their use will become more common, less out of the ordinary. Over time, they will reduce the regulatory and political risk now associated with smart growth projects. In short, few if any projects meet all smart growth criteria, but their promotion will help make all projects "smarter." 

2. States should establish some form of cabinet-level, inter-agency structure to coordinate the various elements of state involvement in the development process. 

Real estate development is a partnership. State and local governments make the rules. Private developers gauge the demand, find the land and build the properties. Based on the interviews conducted as part of this project, the primary feeling of developers who have presented smart growth projects has been isolation. They have been essentially alone before the various neighborhood committees, planning boards and city councils they had to address. If New England states are serious about countering the effects of sprawl, they must take a more active position. They must say exactly what a smart growth project is and follow up with support for the projects that meet those criteria, both in simple endorsement before local regulatory boards that must approve any development and in the more direct operations of its programs that can either help or hinder a development.  

The goal is not to impose smart growth, but to encourage it. If communities and developers become more familiar with the concepts of smart growth, they will become increasingly willing to enter into the collaborative arrangements necessary for their success. State governments should be prepared to bring all of their resources to bear when other pieces of the puzzle are present. The best arrangement would be a Cabinet-level committee charged with monitoring smart growth projects in a state and providing state resources for individual projects as the need arises. The New Hampshire Downtown Initiative offers the best example of inter-agency commitments to a specific smart growth concept. Broadening the responsibilities of this group to the full range of smart growth projects would be a model that could be adopted in other New England states. 

3. States should expand the eligibility of existing pre-development feasibility loan funds to include smart growth projects. 

It is undoubtedly true, as numerous developers have repeated, that no amount of pre-development money can overcome certain levels of regulatory and political risk. Nonetheless, the growth of the various existing pre-development loan and grant programs across New England noted in Part Three above indicates that they do have a role to play. Their problem with respect to smart growth is that they are often limited to affordable housing projects and often to non-profit developers. 

As a supplement to the broad efforts of recommendations one and two above, we recommend that each state create a pre-development loan fund explicitly dedicated to smart growth. Following the example of the New Hampshire Downtown Initiative program, such funds should be capitalized by commitments from existing programs such as municipal planning assistance funds, affordable housing bond proceeds, DOT Transportation Improvement Funds (TIP), Community Development Block Grant (CDBG) funds and Land and Water Conservation funds.[5] 

The program should be administered by whichever agency the inter-agency committee created under recommendation two above feels is most appropriate. Eligible recipients should be municipalities, non-profit community development corporations and for-profit private developers. Eligible uses should be engineering, legal, architectural, appraisal or project management services, including traffic, environmental, fiscal, school or other impact studies that may be required throughout the approval process. Terms should be 0% for up to 30 months with repayment to be obtained through permanent financing. 

Awards should be made on an as-needed basis rather than through a competitive grant process. They should encourage municipal-developer collaboration and utilize the officially adopted set of smart growth evaluation criteria as the basis for allocating available funds. 

4. States should establish a long-run capital subsidy (analogous to tax credits for affordable housing) to offset the accumulated effects of the hidden subsidies and market forces favoring sprawl. 

Finally, states and municipalities must recognize that some forms of smart growth cannot be achieved by broad public education, inter-agency coordination and pre-development loans. In the case of affordable housing, the federal government has decided that there is sufficient public benefit to justify creating income tax credits as a way of subsiding construction of units that the market alone would not create. A similar case can be made with respect to smart growth. The costs of sprawl, like the costs of pollution, are small, incremental changes external to the market forces driving development. They are borne by society as a whole.  

• Pressure on working rural activities (farming, forestry, hunting);
• Loss of open space;
• Loss of wildlife habitat;
• Pollution from automobiles and run-off;
• Depletion of ground water;
• Pressure to develop rural roads;
• Greater congestion, wear and tear on feeder roads;
• High cost of housing due to land and road costs;
• High cost of school transportation and municipal fire and police;
• Failure to utilize existing water/sewer infrastructure fully;
• Increased competition for town resources between downtown and suburban locations.

While states cannot eliminate all these costs, they should acknowledge them and make some effort to address them. Income tax credits won't solve the need for affordable housing, but they help. In the same way, a state bond whose proceeds were dedicated to some of the most important smart growth issues could help. By making some long-term capital available for smart growth projects, New England states could establish their top priorities for smart growth and induce more developers to consider altering their long-standing patterns of operation.