BY MEGAN HYNDMAN
Megan Hyndman is a recent M.A. graduate from Johns Hopkins SAIS where she concentrated in Energy, Resources, and the Environment. Prior to SAIS, Megan worked as a Peace Corps volunteer in the Dominican Republic and most recently as an intern with the U.S. Trade and Development Agency and the World Bank. Her interests include sustainable development, infrastructure, and trade.
The efficiency and quality of urban transit plays a vital role in determining the competitiveness and livability of cities. An effective urban transport network fosters productivity by connecting residents with jobs and increasing their access to goods and services. It also provides important ancillary benefits such as reducing congestion, improving air quality, and increasing property values (Salon 2014). Despite the critical role of transit in shaping urban growth, municipal governments often neglect investments in transit infrastructure due to a lack of resources and capacity.
As demands on public funds have grown, governments have increasingly turned to a tool called value capture to help finance costly transportation infrastructure. Value capture strategies allow local governments to capitalize on rising property values due to public investments in transit. Specifically, value capture corrects for market externalities by ensuring that landowners help pay for the transit infrastructure that indirectly benefits them through increased property values.
WHY VALUE CAPTURE?
Value capture covers a diverse set of policy tools, each of which provides a unique set of trade-offs with regards to revenues generated, social impacts, and political feasibility. One common value capture instrument is the land value tax, which recoups the cost of transit projects by levying a new tax on the entire jurisdiction served by transit infrastructure. Development impact fees are another example of value capture, and entail charging a special fee only to new development projects undertaken in the zone covered by the transit service (Center for Transportation Studies 2009).
One of the major advantages in employing value capture strategies is that they provide cash-strapped municipal governments with a new source of revenue that can help offset the cost of building and maintaining expensive transit systems. In this way, municipal governments can increase their fiscal autonomy and pursue projects that otherwise would not have been financially viable. Moreover, many value capture strategies enhance the profitability of transport projects by fostering commercial and residential development around transit stations, leading to increased ridership and farebox revenues (Salon 2014). By increasing the usage rate and financial feasibility of transit projects, value capture tools enhance the appeal of such projects to the private sector and can enable the formation of public-private partnerships. In turn, the public sector can leverage PPPs to pass on the usage risks of large infrastructure projects to the private sector.
THE CASE OF WASHINGTON D.C.'S WMATA
Washington D.C.’s Washington Metropolitan Area Transit Authority (WMATA) is considered to be one of the most successful transit agencies in the world in terms of using value capture strategies (Fogarty, Eaton, Belzer, and Ohland 2008). In fact, as of 2010, WMATA had implemented a total of 33 value capture projects across its rail network with total revenues received exceeding $250 million (Mathur and Smith 2012). The key to WMATA’s success with value capture lies in its development of specialized in-house expertise in the legal, marketing, and real estate sectors (Mathur and Smith 2012).
WMATA’s development of the New York Avenue Metrorail (NoMa) Station Project in 2002 provides a useful case study. It was founded as a joint development project when local landowners offered to provide $25 million toward building a new Metrorail station in the area. This represented 28% of the total cost of the new station, with the local D.C. and federal governments covering the remaining 72% of required funds. While the project was successful in revitalizing an underdeveloped area of D.C., it also demonstrates the challenges in analyzing the true costs and benefits of value capture policies. It was soon discovered that the D.C. government and WMATA might have erred in hastily accepting the landowners’ offer to contribute $25 million to the project. Later, a government-sponsored economic study confirmed that the land-value gain from the project would be more than 100 times the cost paid by the landowners (Mathur and Smith 2013).
THE CASES OF BOGOTÁ AND SÃO PAULO
There are also many examples from the developing world that demonstrate the opportunities and challenges of using value capture tools. This is especially true in Latin America, where most countries have instituted a legal framework favorable to the use of value capture. In particular, Brazil and Colombia are recognized as taking a lead on value capture projects in the region. In Brazil, this is demonstrated by the sale of building rights to capture the benefits of increased housing demand in São Paulo. Building rights allow developers to invest in new building projects by increasing the total allowable floor area – including building height and width - with which new projects must comply. The sale of building rights allow developers to increase building size and density, drastically improving the profitability of new development (Sandroni 2011). Since developers benefit from urban infrastructure investments and changes in government zoning policies, the sale of building rights allows the government of São Paulo to capture part of the value of public investments in infrastructure. It 2012, the city of São Paulo was able to secure $420 million from the auction of building rights, adding this to its previous auction revenues of $2.5 billion (Smolka 2013).
Meanwhile, Colombian cities have championed the use of a value capture tool called the betterment levy, which allow them to charge fees to select groups of properties – usually businesses - that benefit directly from public works projects. These fees have allowed the cities of Bogotá and Manizales to finance public investments in large road and urban renewal projects. While these fees have encountered resistance in some Latin American countries due to controversy over how the charge is assessed and distributed among property owners, the betterment levy has gained a wide degree of legitimacy in Colombia. Bogotá alone has been able to make investments up to $1 billion due to the aid of betterment levies (Borrero Ochoa 2011).
CHALLENGES FACING VALUE CAPTURE
There are many reasons for which public officials in developing countries may be cautious about using value capture tools. First, value capture tools are complex and require municipal authorities to have specialized legal and technical skills as well as the ability to coordinate projects effectively with private sector partners. For instance, in-house expertise in the law, real estate, and urban planning sectors is vital in correctly assessing land value gains and ensuring that private developers do not take advantage of government inexperience with commercial projects (Salon 2014). Secondly, studies reveal that public officials often fail to use value capture tools due to uncertainty in the interpretation of relevant legislation and a lack of understanding of policy tradeoffs. In addition, municipal officials may be unable to implement value capture policies due to regulations that inadvertently preclude the use of these tools by limiting high-density development around transit stations. This reduces developer profits and undermines the financial feasibility of value capture projects.
In some cases the use of value capture may actually be harmful to municipal development. For example, the collection of value capture fees may be used to substitute for the collection of property taxes. In this sense, value capture can undermine the long-term sustainability of municipal finance by causing public officials to neglect the implementation of property taxes (Suzuki, Cervero and Luchi 2013).
Moreover, one especially problematic issue in implementing value capture tools in Latin America is the tendency to consider such policies as a way to achieve social outcomes rather than raise infrastructure finance. For instance, public officials may use the fees collected from betterment levies in wealthy neighborhoods to fund pet projects in low-income neighborhoods. As a consequence, urban planners may allocate transit projects to wealthy neighborhoods that can afford to pay value capture fees, while less well-off neighborhoods continue to suffer from a lack of access to efficient transit. While there are redistributive benefits of such projects, it is questionable whether this is better than providing transit access to poorer neighborhoods in the first place.
The use of value capture tools across the developing world has great potential to open up new options to finance costly urban infrastructure, and cities should capitalize on periods of strong economic and housing demand growth to experiment with value capture projects. The cases of D.C., Bogotá, and São Paulo prove that municipal governments stand to gain from increased adoption of such policies. However, policymakers must recognize that value capture tools cannot substitute for traditional forms of municipal finance; rather, they should supplement more stable forms of local finance such as property taxes and be used as a special tool to enable investment in infrastructure projects.
Borrero Ochoa, Oscar. “Betterment Levy in Colombia,” Land Lines, Lincoln Institute of Land Policy, April 2011, Pp. 14-19.
Smolka, Martim. Implementing Value Capture in Latin America: Policies and Tools for Urban Development (Cambridge: Lincoln Institute of Land Policy, 2013), accessed April 20, 2015, https://www.lincolninst.edu/pubs/2244_Implementing-Value-Capture-in-Latin-America
Salon, Deborah, “Location Value Capture Opportunities for Urban Public Transport Finance”(paper presented at the Transit Leadership Summit, London, England, May 2014).
Fogarty, Nadine, Eaton, Nancy, Belzer, Dena and Gloria Ohland. Capturing the Value of Transit. Center for Transit-Oriented Development, (Oakland, California: Center for Transit-Oriented Development, 2008), accessed April 20, 2015, http://www.reconnectingamerica.org/assets/Uploads/ctodvalcapture110508v2.pdf
Lari, Adeel, Levinson, David, Zhao, Zhirong, Iacono, Michael, Aultman, Sara, Das, Kirti, Junge, Jason, Larson, Kerstin, and Michael Scharenbroich. Value Capture for Transportation Finance: Technical Research Report, Minneapolis, Minnesota: University of Minnesota, Center for Transportation Studies, 2009), accessed April 20, 2015, http://www.cts.umn.edu/Publications/ResearchReports/reportdetail.html?id=1802
Mathur, Shishir, and Smith, Adam. A Decision-Support Framework for Using Value Capture to Fund Public Transit: Lessons From Project-Specific Analyses, (San Jose, California: Mineta Transportation Institute. 2012), accessed April 20, 2015, http://transweb.sjsu.edu/PDFs/research/1004-decision-support-framework-value-capture-public-transit-funding.pdf
Sandroni, Paulo Henrique. Recent Experience with Land Value Capture in São Paulo, Brazil. Land Lines, Lincoln Institute of Land Policy, July 2011, Pp. 14-19. Accessed May 3, 2015, http://www.lincolninst.edu/pubs/1924_Recent-Experience-with-Land-Value-Capture-in-São-Paulo--Brazil-
Suzuki, Hiroaki, Cervero, Robert, and Kanako Luchi. Transforming Cities with Transit: Transit and Land-Use for Sustainable Urban Development, (Washington, D.C.: The World Bank, Urban Development Series, 2013), accessed April 20, 2015, http://econ.worldbank.org/external/default/main?pagePK=64165259&theSitePK=469072&piPK=64165421&menuPK=64166093&entityID=000425962_20130109153314