Value-capture finance

Introduction

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.

Strategies

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 illegalin 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.

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.

Special assessments

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. The idea of a special assessment is that each property owner derives a greater monetary benefit from the improvement than they are assessed in additional taxes. Thus, through mutual self-interest, a majority of area property owners can agree to tax themselves to fund local projects. However, the timing of benefits and tax assessments does not always align.

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