What is Land Value Capture?
Public infrastructure investment in quality highways and transit can increase adjacent land values. Studies have shown that buyers are willing to pay a premium for property (both commercial and residential) in high-density, mixed-use, walkable and infrastructure accessible areas. When businesses locate close to transit, the potential labor pool of employees and customers grows, and overhead costs, like opportunities for cost recovery are much higher. Capturing a portion of such land value increases can lead to new ways of funding public infrastructure (highways and transit that connect key destinations and origins), operations and maintenance.
Land value capture (LVC) is a land-based financing (LBF) method of funding infrastructure improvements that is aimed at recovering all or some of the increase in property/land value generated by public infrastructure investment. LVC can help mitigate the challenges cities face in obtaining public funding, while also providing benefits to private sector partners. The set of tools in this beneficiary category differs from direct user charges like tolls and weight distance fees. LVC mechanisms include Developer impact fees, Air rights, Joint development, Tax increment finance, Sales tax districts, Land value tax, Special assessments to offset highway and/or transit capital costs, and Transportation utility fees to offset pavement maintenance and preservation costs.
In UK, some of these LVC tools are known as betterment charges or fees. Each of these tools has pros and cons, but all of them require significant planning and stakeholder support. Moreover, LVC calls for a significant role for municipal government finance, a guiding policy, and a legal framework for implementation in most countries.
Transportation Reinvestment Zone (TRZ) as a Value Capture Tool
In the United States, a variety of value capture tools are often utilized as transportation funding mechanisms for cost recovery or for recouping the gains that accrue to transportation beneficiaries. In Texas, an innovative value capture tool has been in use since 2007, when the Texas Legislature provided the guiding framework for a transportation reinvestment zone (TRZ). This tool can be used by local entities to advance transportation projects. The local governing body designates a zone in which it will promote a transportation project. Once the zone is created, a base year is established and the incremental increase in property tax revenue collected inside the zone is used to finance a project in the zone. As such, the TRZ is an innovative institutional mechanism to facilitate voluntary sharing/contributions of a portion of property tax increments by the municipal government body within a defined boundary area serving a transport project to be used to fund transport infrastructure.
The original law was devoted primarily for highways, but now the legislation allows highways, transit and was recently extended to include navigation facilities as well. While in principle several theoretical issues have yet to be resolved, the practice domain is seeing its application in successfully funding and financing many projects. It works very much like tax-increment-finance, but is limited to the local entity?s share of the increment and is much simpler organizationally than traditional increment finance. TRZs are typically established at the municipal and/or county level as they are independent taxing entities in the United States. In Texas, three TRZ?s have been established and more are taking shape. Ideally, TRZs and other LVC mechanisms should be considered within longer term transportation plans instead of being used in a piecemeal fashion for individual projects.
The steps for establishing a TRZ are:
1. Identification of project/needs
2. Research for zone formation
3. Definition of boundaries
4. Public hearing
5. Passage of ordinance or order
6. Establishment of base year for tax collection
7. Determination of tax increment through feasibility study for financing portion of project
8. Establishment of the funding mechanism
The conceptual TRZ types are shown in Exhibit 1. TRZ?s imply a flow of funds that must be laid out explicitly as shown in Exhibit 2.
Value Capture across the World and in India
The LVC and LBF tools are becoming increasingly popular in China, Latin America, the UK, and New Zealand. They are also being included in the funding portfolios of many countries facing rapid population growth.
Singapore, Hong Kong and Tokyo have all funded mass transit projects with private dollars based on the expected increases in property values. China?s land leasing programs, more so than those in Singapore, have paved the way for major infrastructure investment. In India, the value capture concept is just beginning to take hold. Sanyal and Deuskar (2012) suggested a value capture plan in Ahmedabad, Gujarat through a land pooling approach or a town planning scheme (TPS) of agricultural land. In such schemes, the government purchases agricultural plots on the city?s periphery, constructs infrastructure, then sells the now richer land back to the former owner.
The farmer gives a portion of the new value, as a betterment fee, then keeps or sells the remainder. TPS, originated from an old colonial plan, began in 47 spots across the city in 1999. Conceptually, this approach is could be a win-win for both parties and offers a way to uplift the urban poor. Bergen (2013) points out to several realities that question the strength of the win-win proposition including mismatch between expected beneficiaries, actual beneficiaries, and the valuation of land. Sanyal and Deuskar write: ?In a rapidly growing city such as Ahmedabad, simply legalizing construction on peripheral land is bound to increase its value. It is unclear at this stage how much of this increase in value is attributable to the infrastructure and amenities built by the government as part of a TPS, and how much is simply a consequence of zoning conversion that brings new fringe land into the urban land mark.?
In another instance, according to Walters (2012), the Greater Hyderabad Municipal Corporation is noted to have employed a value capture based on cost recoupment via a betterment levy or special assessment like tools for funding infrastructure needs to the extent of $115 million. Nearly 800 ?peripheral neighborhoods? were identified with deficient or inadequate infrastructure funded via loans to be backed by 5% property tax increment that would be imposed after the completion of construction. Peterson (2009) offers two more examples of land sales: 1) An auction of 13 hectares of land in Mumbai?s financial center generating $1.2 billion (US) to fund and finance projects in the metropolitan transportation plan via issue of municipal bonds, and 2) Bangalore?s sale of excess land generating $500 million as a part of a traditional public-private-partnership (PPP) to fund and finance an access highway linking the city to the new airport.
The United Nation?s State of the World Cities Report 2012/2013 has ranked Delhi, the Indian capital, 58 and Mumbai, the commercial capital, at 52 out of 95 cities. There are known contradictions in India?s road infrastructure. In 2011, the network of 4,320,000 kilometers was ranked as the world?s third largest, and according to the World Bank, had a network-land density of 125 kilometers of roads per 100 square kilometers of land area. This is double that of the United States (67), higher than Brazil (20), China (39), and many other countries. However, the road density in relation to population is noted to be less than 4 kilometers for every 1000 people. Infrastructure 2013, an Ernst and Young report, notes that global forces impact infrastructure funding. However, in an era of shortfalls in transportation funding across the world, decentralization policies have transferred service delivery responsibilities downward to states and local governments, and it is within that framework that the relative importance of innovative funding strategies like land value capture is increasing. India relies heavily on roads to move freight due to its archaic railway network and waterborne commerce system. This roadway network is often of poor condition and highly congested, dramatically slowing the work commute and reducing safety for India?s populace, slowing freight deliveries and reducing competitiveness. A joint study by the Federation of Indian Chambers of Commerce and Industry and the research firm Ernst and Young has concluded that poor infrastructure is also acting as a bottleneck for further private investment and hampering prosperity of cities.
What does the Future Hold for Land Related Value Capture Tools?
Infrastructure is the life blood of the economy and provides for a significant part of the underlying foundation upon which the continued growth of a region and community hinges. Across the globe, countries in all stages of development are looking for funding solutions to address transport bottlenecks and upgrade aging crumbling infrastructure. Deloitte?s Funding the Infrastructure Investment Gap (2013) notes that while infrastructure development has always been a top priority for India, the current global economic dynamics as well as domestic growth imperatives point to renewed emphasis on infrastructure funding as a major trigger to influence the economic growth trajectory. LVC is not to be considered as the only panacea for infrastructure funding, but rather as a short to medium term funding tool in a toolbox of measures. Peterson and Thewakar (2013 World Bank Report) highlight the huge potential for utilizing government ?surplus? landholdings (rail, roadway right-of-way) and monetizing them. Some of the LVC tools noted in this text, such as air rights and joint development, provide significant potential for monetizing government land and providing upfront revenues to jump start a project. Propositions like this are part of the solution packet suggested by Ernst and Young in their recent report Accelerating Public Private Partnerships in India. In addition, LVC tools can become a part of funding and financing strategies where more than one mechanism can be combined to provide distinctly different revenue streams, particularly useful when considering finance for large scale projects. Increment finance tools like TRZs which do not accompany tax hikes are unexplored funding sources offer a continuous stream of revenue to provide the basis for backing debt over a longer time horizon (typically 20-30 year time frames) or to combine with other revenue sources and funding mechanisms to deliver much needed critical infrastructure projects that are so vital to people and freight movement.
In theory, LVC tools can be economically efficient, less risky non-commercial PPP mechanisms. When deployed in the right conditions, they have immense potential to create density, combat sprawl, and fund very important mobility projects without the pitfalls of traditional privatization schemes and regular PPPs. In practice, they are not perfect, and often suffer from lack of transparency and could be prone to abuse. Yet, when undertaken in a transparent manner with an appropriate guiding framework and accompanied by effective monitoring, these methods provide a huge untapped resource for developing countries, and India in particular. Value capture funding and finance may have the greatest innovative potential in emerging countries like Latin American and India, where property markets are less rigid, the real estate markets are very lucrative and can sustain robust density and ridership/facility usage.
Sharada R. Vadali
Associate Research Scientist- Mobility Analysis
Texas A&M Transportation Institute
Senior Research Scientist – Research and Implementation
Texas A&M Transportation Institute
Division Head – System Reliability Division
Texas A&M Transportation Institute