Apr 10, 2014

Value Capture

In my last post, I tried to spike some interest in a rather dry subject, financing infrastructure.  Even for someone like me who struggled with math in school, learning new ways to finance and seeing the results is one of the most rewarding aspects of our work. In this posting I want to write more about the concept of value capture, which capitalizes on the increased value of land near public investment, like transit lines.

The time is ripe to consider new ways of financing infrastructure. The building boom is happening now, the services are needed, and if we are to capture some of the value the public investment creates, we need to move forward without delay.  

The following graphics and tables highlight the revenue potential of the LRT line I mentioned in my last post, called the Purple Line (which just received a federal match to the state contribution, the critical piece to ensuring the construction after years of debate).

The scenarios were based upon the state ceding some of its tax revenues from properties located along a quarter-mile on each side of the new transit line. In Maryland, state taxes cover: 

  • land title taxes
  • state property tax
  • fuel tax
  • vehicle registration fees 
  • state property tax
  • road tolls, if applicable

The idea was to combine state taxes with the property tax increases the county would collect. The county also collects: 

  • property tax
  • business tax
  • land transfer fees
  • development levies
  • building permit fees
  • development application fees
  • any special tax revenue

The increases in business tax, property tax, development levies and building permit fees that could result from the public investment in transit also are available to us in Calgary. And they offer real potential. They are not new taxes, but are the same as would be applied when development occurs anyway.

The route for the proposed new LRT (Purple Line) in suburban
Washington DC links two legs of the D.C. subway system.
It recently received a federal match to the state funding. The
State DOT looked at what value in taxes and levies might result
from development that would occur as a result of a new
Light Rail line.

The following table presents scenarios for revenue collection. The first column, TIF Revenue (Tax Increment Financing), refers to the increased tax revenue above the existing levels that the state would capture at different percentages (33-100 percent).  The column titled Special Assessment Revenues are levies placed on new development.  In Case A, the levy would be based on the increased land value for both residential and commercial properties. In the third column, the numbers represent varying levies on each new residential unit and for commercial, a value based on the new square footage.

This table shows different scenarios where the state of MD might dedicate different levels of the state taxes predicted to be created around the LRT stations, coupled with the typical charges a city might levy, a special tax for example on new residential and commercial property valuation as well as development impact fees (DIF), which are very common in Canada.

In Case D, keeping in mind these numbers apply to the increase in revenue, not what is already coming into local and state coffers, value capture might include 70 percent of the increased revenue share going to the Maryland Department of Transportation, coupled with a special tax the county would levy of 5 cents for every $100 increase in residential property tax; 10 cents in non residential assessment; $1,595 levy on every new dwelling unit; and $10.00 for each new square foot of commercial floor space.

The following table shows the projected revenue that Case D is projected to generate.  The present value of the TIF revenue of $906 million could generate municipal bonds worth $697 million to help pay operating costs or pay down the construction debt.  Similarly, for both the special assessment and development impact fee, a further $185 million (bonding value of $142 million) and the impact fees $35 million (bonding value $27 million) might be realized.

The values in the table represent the new revenue projected to be generated by new development resulting from the LRT investment within close proximity to the proposed LRT line. The potential increases in land value are real as has been the case for many transit lines around North America.

A terrific example of transit investment generating increment in land values and resulting taxes is happening up on Crowchild Trail at the Brentwood LRT station.  There is interest in more development like this, and with the north LRT possibly expanding along Edmonton Trail or Centre Avenue, there is real potential for future value capture if we have the right tools. And the economic potential is real.

The Brentwood Station Development is a direct result of public
 investment in transit infrastructure. Considering a different
approach to financing infrastructure like transit, utilities or
social services through value capture is a proven tool in other cities that could benefit the city.

The community reinvestment levy (CRL) for East Village is our best example of how this can work. and we can apply special taxes or as Edmonton does, dedicate general revenue to specific community investment efforts.

9th Ave SW in Inglewood is a good example of one of the busiest pedestrian
corridor retail areas badly needing investment in pedestrian infrastructure. As
development occurs, the need to improve the corridor increases. Using value
capture could provide the funding, as could the Edmonton strategy of targeting
specific areas for investment in pedestrian areas and using general revenue to improve them.  This type of investment pays dividends as property values go up.

Another good example is the Centre City levy, which raises funds to improve pedestrian areas.  The improvements to the  underpass at 1st St SW (downtown & beltline improvement fund in exchange for density) will a beneficiary of this strategy.  Consider that the downtown generates a huge amount of the city tax revenue. Finding a way to finance an enhancement of the public areas would be reinvesting in our business, the business of creating a great city.  To make this type of investment happen, we need to think bigger. Could we use a portion of the existing tax revenue to improve our pedestrian areas? Could we try value capture?

The 1st St. SW underpass improvements are a result of a levy on density in
the downtown and beltline where the both the developers and the pedestrians
benefit from the enhancement. Scheduled to start  in the summer, the
improvements should be complete in early 2015.

My next blog post will expand on how we fund things like affordable housing, historic preservation, social services and the arts. As a teaser, we will cover tax credits, voter referendums, more on tax increment financing, inclusionary zoning and tax abatement.  All really exciting stuff if you are interested in city building.  While we all like to talk about TOD (transit oriented development) and how we want great urban design, real city building happens with the actions that make these happen.  “Show me the Money”.

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