Value-capture finance

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A Value Capture Model Created by Michael Iacono et al. (University of Minnesota Center for Transportation Studies, 2009)


New transit capital projects produce a great deal of value. Some of this value is captured by the agency, some by riders, other value is captured by drivers who may experience congestion reduction. Considerable value is captured by owners of property near transit facilities. The accessibility of these properties increases virtually overnight, and as firms and households are willing to pay more in rent or purchase price for nearby spaces, the value of these buildings increases. Value-capture finance attempts to divert some of this value back to the public or transit agency, which is responsible for financing the facility. Such a model can increase the cost-effectiveness of transit delivery.


Land value tax

Split role taxation with separate rates for improvements and land. Typically, land and improvements are valued separately, but taxed with a single rate. In split-role taxation, land is taxed using a separate (and often higher) rate than improvements. Such a tax structure creates market incentives to maximize a property’s use (redevelop low density parcels and parking lots), especially when assessments of land value are based on the “highest-and-best use,” which captures value from an increase in accessibility (due to the transit line) and an increase in potential activity (due to zoning/density).

Land value tax is not widely used outside of Pennsylvania. Using a land value tax to fund a fixed-route transit line or stations can create political pressure to increase density and land values, which can increase available square footage near transit but also cause gentrification pressures. Land value taxation may be unlikely or illegal in California due to proposition 13 limits on tax increases.

Tax increment financing

Tax Increment Financing is one of the most common forms of value capture finance, and has typically used to finance redevelopment. With TIF, a property’s overall tax rate doesn’t change because of the TIF district, but taxes on increases in assessment value are diverted from conventional uses to finance the redevelopment. Redevelopment projects can lead to significant increases in property values if they are transformative for a neighborhood.

Special assessment districts

Special assessments are fees charged to property owners that are used for a public improvement that benefits the property. Special assessments have been used to finance streetlight operations and maintenance, streetcars, and other infrastructure.

In California, a special assessment must provide special benefits defined as "a particular and distinct benefit over and above general benefits conferred on real property located in the district or the public at large. General enhancement of property value does not constitute 'special benefit.'"[1] Additionally, the assessment area must be confined to those properties that will receive the special benefit, and the amount of the assessment must be based on a factor other than property value. Assessments meeting these and other requirements are eligible for a one-half voter approval threshold. Assessments not meeting these definitions are considered special taxes, which require the approval of 2/3rds of voters.

Infrastructure Financing Districts are a specific form of special assessment districts under the consideration of the State legislature.

The timing of benefits and tax assessments does not always align. When used to finance fixed guideway transit capital projects, a special assessment must be considered in advance of receiving a full funding agreement from the Federal Transit Administration. In this case, the revenues from the special assessment would be part of a local funding package that would be leveraged with federal funds. Because the special assessment must be approved before an area commits to a transit line, this leaves several years between when the assessment begins and when the benefits of the transit line are realized.

Special Assessments were considered to partially fund stations for the Los Angeles Red Line, but ultimately were not used [2] Assessments can not be based on property value, but rather some other attribute such as street frontage, floor area, distance from improvement, land area.

Development impact fees

Development impact fees (or mitigation fees) are charges assessed to new developments to finance new infrastructure needed for developments or to mitigate some of the negative effects a new development may have on the community. Development impact fees could be assessed regionally, subregionally, or locally to fund new transit infrastructure, or could be assessed in areas within walking distance of fixed route transit stations. Developers are unlikely to oppose such fees if they see direct benefit from the improvement projects, or if the fees are small compared to their total budgets. Additionally, developers of new projects can bundle these fees into their “cost of doing business,” and these fees might be more popular than assessments which apply to existing buildings.

Where increases in assessment value are capped (as in California), TIF redistributions can lead to real reductions in property tax revenue for conventional uses. In California, the property value increases spurred by a catalytic project (e.g., a fixed-rail transit line) would only be realized on sale when properties are re-assessed to current market values. This can delay realization of funds, which reduces total funds available for bonding at project initialization.

The San Francisco County Transportation Authority (SFCTA) is considering a Transportation Sustainability Program that harmonizes California Environmental Quality Act implementation with the calculation of development impact fees. The Program administers a Transportation Sustainability Fee based on a square foot of developments anticipated impacts to the automobile, bicycle, pedestrian, and transit networks.[3] One attribute of the program that the SFCTA values as fairer than current impact mitigation methods is that, rather than requiring a single project in an area mitigate the cumulative impacts of all prior projects, the fee spreads mitigation funding over all new projects.

Negotiated exactions

Negotiated exactions are similar to development impact fees, but negotiated on a case-by-case basis rather than set as a policy and determined through a formula.

Wilshire Western joint development in Los Angeles

Joint development

Joint development is real estate development on publicly-owned property in conjunction with a fixed-route transit facility. Some of the proceeds from the joint development project are used to finance the transit facility. This strategy can be especially effective in raising money for transit for several reasons. First, new developments can capture significant funds relatively quickly if a property is developed and sold within a few years of a transit facilities opening. This increases bonding capacity by bringing revenues forward versus other assessment mechanisms. Second, joint-developments can be well-integrated with the transit system, potentially with portals that open directly into the developments. Third, public entities often accumulate property adjacent to transit facility construction for staging and other purposes. By increasing density of these properties and orienting the property to the transit facility, the public can capture value far in excess of any other financing mechanism. Joint development is widely utilized by MTR Hong Kong to minimize public subsidy required for new transit facilities.

Air rights

Air rights are a valuable asset to transit agencies building in dense urban centers. Transit agencies can realize value from their air rights through transfers, sales, or leases. An air right transfer involves transferring rights to develop in the air directly above an underutilized parcel to an adjacent or nearby parcel which seeks entitlements to build higher or denser than currently allowed by the planning code. This process often transfers development rights from a public parcel that may be open space, a historic structure, museum, library, or other building where entitlements to build additional density will not be used in the future. Air rights directly above a transit facility can be sold or leased to a private entity to create a development in the air space above the transit facility. In the case of transit, air rights might be transferred above tunneled rights-of-ways, station boxes, or storage and maintenance facilities. Air rights above station boxes can be sold to private developers and used for transit-oriented developments. When a public entity transfers air rights, it typically has less involvement in the development process than under a joint development scenario.


Additional reading

University of Minnesota Center for Transportation Studies. "Value Capture Finance for Transportation Finance." 2009.

The Minnesota legislature commissioned this 2009 study of value-capture financing strategies for transit. The report not only contains an overview of the strategies, but also includes commentary on the political and social viability of each strategy and recommends legislative changes needed for Minnesota to pursue each the strategies.

Victoria Transportation Policy Institute. Jeffrey Smith and Thomas Gihring. "Financing Transit Systems Through Value Capture: An Annotated Bibliography." 2011.

This review of various studies about how transit creates new value to the communities it serves provides a brief introduction to the subject and references some case studies where this value has been captured to aid in funding transit capital and operations expenses. This report is a useful starting point for the individual who is looking for specifics and is willing to search the document to find studies that might relate. From the Victoria Transport Policy Institute.

Fogarty, Nadine, Nancy Eaton, Dena Belzer, and Gloriah Ohland. Center for Transit-Oriented Development. "Capturing the Value of Transit." 2008.

Reconnecting America's Center for Transit Oriented-Development Development produced this report to guide agencies through value measurement and capture. The report begins with an overview of methods used to measure the value created by new transit service. Then, the authors discuss the benefits and drawbacks of capturing value from both existing and new developments within an area. The authors then present details on four commonly-employed strategies: assessment districts, tax-increment financing, joint development, and development impact fees.

Los Angeles County Metropolitan Transportation Authority. Value Capture Finance - Transit Investment Dividends.

A Staff Report on best practices for value capture finance.