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 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 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 [1] 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 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 can bundle these fees into their “cost of doing business,” and these fees might be more popular than fees 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.
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.
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 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.
Notes
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.