Value capture, in which the public sector recovers some of the value created by government actions like the construction of a transit line or a rezoning, has recently joined congestion pricing among the most discussed potential funding streams for New York City’s troubled subway system.
Building on the experience of the No. 7 subway line extension to the Hudson Yards redevelopment, Gov. Andrew Cuomo proposed the creation of “transportation improvement districts” around new transit stations elsewhere in New York City. Under the governor’s plan, value capture would only apply to transit projects that cost more than $100 million. Just recently, the Trump administration also included value capture as an additional potential source of revenue in its long-awaited national infrastructure plan.
To many, value capture makes sense because it is not just a way to find new revenues for much-needed infrastructure upgrades: It’s also fairer. When a government builds or improves a road or subway line, all of society benefits, but the people or businesses that own property nearby benefit most. Those landowners often see a massive increase in property values and can charge higher rents. In this view, it’s only right that these beneficiaries should cover much or at least some of the cost that would otherwise burden taxpayers.
Land-based financing can produce a range of outcomes, including parks and affordable housing, but the policy is often most closely associated with the creation and maintenance of public transit – just as Cuomo has zeroed in on.
Value capture has been used widely in conjunction with transit and other projects around the United States and beyond. At the Lincoln Institute of Land Policy, we’ve been tracking the use of value capture worldwide, and we have learned a few lessons for policymakers considering the use of this land-based financing mechanism.
It can be done
The concept of value capture goes back to the Roman Empire and the construction of far-flung aqueducts, and has continued through the 20th century in Latin America, Asia and Europe. The United Kingdom’s megaproject Crossrail was premised on some funding coming from private landowners and developers along the route, and similar funding mechanisms are envisioned for the next phase of the project. The $3.4 billion, 466-mile new rail link connecting Addis Ababa, Ethiopia, to Djibouti includes significant funding by China, but also a value capture component. Versions of value capture have been used at urban development and redevelopment sites across the U.S., typically anchored by a transit hub that becomes a destination unto itself; examples include Denver’s Union Station and the Transbay Transit Center in San Francisco. Mechanisms to use value capture for transit funding are also in the works in Illinois, Texas and Massachusetts. In Boston, local and state officials worked with New Balance to build the Boston Landing commuter rail station, funded through the bond financing Infrastructure Investment Incentive Program. While not in the purest sense value capture, the partnership was premised on future revenues generated by the development.
Increases in value
The implementation of value capture requires technical capacity at the local level, but nobody has to reinvent the wheel. There is a well-established science for measuring increases in value – known as the “land value increment” – triggered by the establishment of publicly funded transportation infrastructure. It’s a major area of study that includes looking at the impact of bus rapid transit lines on land prices in Mexico City or the way property values have already increased along the proposed route of the next phase of Crossrail in London. The dynamic is so documentable that a special purpose agency in Copenhagen, Denmark, in charge of developing waterfront property controlled by the city and the port requires land buyers to pay a supplement to the purchasing price if and when a metro station is established in close proximity to the property.
The power of zoning
Though value capture often relates to transit, it applies equally to land value generated by rezoning and other regulatory changes. New York City is already experimenting with such options in the rezoning of Brooklyn’s East New York neighborhood, where zoning changes are expected to support 6,000 new housing units. Property values increased as soon as the rezoning was announced. At least half of those units will be affordable, in part through a mandatory inclusionary housing requirement, a form of value capture. In our experience observing land use and development worldwide, when a government makes a zoning change for a given area – converting rural land to urban use, for example – the value of the land instantly spikes. Since upzoning often accompanies transit expansion, these policies can work hand in glove. In São Paulo, in areas targeted for redevelopment, the city auctioned off additional rights to build at greater density, generating billions of dollars of revenue for infrastructure and affordable housing.
Timing is important
Ten years ago, Massachusetts announced new stops for a planned light rail extension through Somerville, a city northwest of Boston. The project has yet to break ground and continues to face funding challenges, but property values within a half mile of the proposed stations have increased 20 percent faster than in Somerville as a whole, demonstrating that it is better to have the value capture mechanism in place before a major infrastructure project begins. However, it is possible to work with the private sector to support the pivotal role that transit plays in commercial districts. Working closely with the city of Cambridge, the Massachusetts Department of Transportation and others created a new mechanism and governance structure for supporting public transit to serve the booming Kendall Square neighborhood.
Done right, value capture offers a straightforward, powerful means of reclaiming value on behalf of the public – and ensures that cities can deliver on infrastructure projects their residents need.
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