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List of Tables
State and local governments face increasing challenges in mobilizing funding for their transportation networks, prompting an interest in alternative funding techniques to meet policy objectives related to mobility, safety, and reliable access.
A consensus exists among practitioners that eroding infrastructure diminishes mobility, public safety, and quality of life. Nevertheless, State and local governments often struggle to mobilize all funds to maintain, rebuild, and expand their local transportation networks.
State or local infrastructure plans typically cite the capital and maintenance needs required to support growth and replace aging transportation assets. Although planned projects may advance through the initial planning stages - securing preliminary designs, feasibility studies, and even committed Federal and State funds - they often face hurdles related to funding. Revenues at the Federal or State level may be insufficient, 1 delays in the project timeline may result in cost increases that require alternative sources of funding, or debt ceilings may prevent local authorities from issuing bonds to finance capital costs. Funding and financing challenges may result in projects being delayed for years, if not indefinitely, leaving important safety, economic development, and mobility objectives unmet.
Value capture may allow State and local governments to close funding and financing gaps by capturing a portion of the value generated by an infrastructure investment to fund either part of that investment or future projects.
Value capture is a set of techniques that generally take advantage of the increase in property values, new transportation-related real estate opportunities, and/or the benefits of new transportation facilities to fund infrastructure improvements. Property values can change as a result of a combination of the following: demographics, including population growth or changes in living or mobility patterns; regulations, including changes in zoning laws; and infrastructure investments, such as in road networks, sewerage, or electricity systems. The latter may include investments by public agencies, by private developers, or projects delivered via public-private partnerships (P3s). Infrastructure investments increase the attractiveness of certain areas, raising demand and property values. Many value capture techniques are designed to capture some of this increase in property values or related values. Sidebar 1 explains how an infrastructure investment creates direct and indirect benefits that enable value capture.
When a government funds new infrastructure, individuals, commercial businesses, and landowners in the area directly and indirectly benefit, without having directly contributed to the cost of the investment. Infrastructure investments may allow individuals to more easily or quickly access jobs and other services, commercial businesses to attract more customers and make greater profit, and landowners to expand the uses of their land due to changes in zoning regulations. The area surrounding the investment often increases in attractiveness, and demand for residential and commercial properties increases, resulting in increased property and land values. Value capture aims to capture some of the value created as a result of a new infrastructure investment and return it to the community by using it to fund the investment itself or future projects in the same area.
The benefits of value capture techniques can go beyond meeting a funding shortfall, as they can also help advance equity objectives and build community support.
Value capture techniques can promote equity 2 and economic efficiency 3 through the "beneficiary-pays" principle (those who benefit most from infrastructure investments pay more). When the government funds public infrastructure investments through conventional revenue sources, the costs are borne by all taxpayers. With value capture, however, those who benefit from a new investment pay for some of the costs. 4 Beneficiaries can include property owners and developers, who benefit from increases in property values due to proximity to new infrastructure, as well as business owners, as investments in services and infrastructure make areas more accessible.
In addition, the beneficiary-pays principle can encourage community members to become more involved in a project. It requires engaging diverse stakeholders and bringing them together around a common goal of maximizing a project's value. This support can then often be leveraged to secure State and Federal funds for the project. 5
Finally, value capture can advance social equity, sustainability, and quality of life objectives. Revenues collected through value capture are sometimes used to fund affordable housing and community service facilities or to revitalize distressed neighborhoods. By involving communities, value capture can also create opportunities for open space and recreational facilities, streetscapes or environmentally sustainable designs, reconnection of divided neighborhoods, business districts and parks, and other improvements to quality of life and economic development. These objectives can only be achieved with careful planning and early stakeholder involvement.
While value capture techniques present an opportunity to close funding and financing gaps, they are not a panacea. This section provides an overview of the opportunities and limitations of value capture.
Although value capture techniques can generate significant revenues, they are a complement to, rather than a substitute for, traditional funding sources.
Value capture techniques differ from many other funding and financing mechanisms in their ability to generate revenues. Some techniques 6 can raise substantial and reliable revenues that may be pledged toward bond repayment used to finance project capital costs. Other techniques 7 generate smaller revenue streams or are less reliable and serve to "plug" a funding gap. Both technique types are relevant as part of the range of project funding options. Value capture should therefore be seen as a complement to traditional funding sources, 8 not a substitute. Value capture is unlikely to provide enough revenue to fund most projects' capital costs, and so securing traditional funding continues to be critical.
Although value capture can speed project delivery, it does not change the economic rationale for a project and therefore should not change project priorities.
By closing a funding gap that may otherwise delay project implementation, value capture techniques can help accelerate project delivery. However, value capture cannot change a project's economic and social rationale. State and local governments should identify priority projects irrespective of whether they present an opportunity for value capture. The decision of whether to use value capture should be taken once practitioners have identified a priority project based on wider policy objectives. Maximizing opportunities for value capture, however, may require changes to the initial scope of the project to allow for optimal integration of land use, transportation, and other infrastructure. As such, the decision to apply value capture should ideally be taken at a point during the planning process when the technical scope can still be altered to some extent.
Value capture techniques will not be appropriate for all infrastructure projects.
Value capture techniques should be assessed and considered on a case-by-case basis. In some cases, the transaction costs of using value capture may exceed the expected revenue potential. In other cases, community members may have valid reasons to oppose the use of a specific value capture technique. Value capture will therefore not be an appropriate funding source for all infrastructure projects.
Value capture techniques can provide opportunities to fund both capital investments and operations and maintenance (O&M) costs.
Value capture techniques differ in the timing of their respective revenue streams. While some techniques can provide an ongoing revenue stream to support O&M, others are more appropriate to fund or finance the capital investment. 9
The use of value capture techniques can encourage smarter land use.
Landowners are more likely to develop, instead of speculating on, land when they are assessed a fee for being located near well-performing transportation infrastructure through the application of certain value capture techniques, such as land value taxes. 10
Although value capture has great potential to fund highway and road projects, it has been used more often for transit.
Value capture has well-known applicability to transit, 11 with extensive literature dedicated to the subject. Its applicability to highways, however, is less well known. This presents both a challenge and an opportunity. Practitioners have an opportunity to apply lessons learned from other modes and devise innovative approaches to applying value capture techniques to highways and roads. One such innovation example is the creation of transportation reinvestment zones in Texas, a mechanism based on the principles of tax increment financing (TIF) but created to meet the needs of highways and roads.
The use of value capture techniques may require a cultural and organizational change within organizations and strong leadership.
Value capture is not a new practice. TIF originated in the 1950s and 1960s as an urban renewal tool. Impact fees, a form of developer contributions, have also been used since the 1950s in the water and sewerage sector. Joint development has been common to U.S. railroads since the 19th century. The application of value capture techniques to other surface transportation modes, however, is more recent. As such, value capture techniques are still widely regarded as "innovative," as opposed to "traditional" funding sources such as State or Federal funds, tolls, or farebox revenues. Due to their innovative nature, value capture techniques may not always appear in the available "toolbox" of funding options. Even if they do, practitioners may lack the leadership support to apply them. Integrating value capture into projects may therefore require entrepreneurship on behalf of government practitioners, strong leadership, and/or an organizational or cultural shift from doing business "as usual" to trying something new to "make a project happen."
The successful use of value capture techniques requires several enabling conditions.
These enabling conditions include a supportive real estate market; accommodative zoning and land use regulations; statutory authority; articulation of a compelling business case to public partners, private developers, and stakeholders; and development of context-specific financing and implementation strategies. The Manual helps describe how to foster these conditions.
The integration of value capture techniques can be challenging, involving administrative and regulatory complexity.
In contrast to traditional funding sources that are generally well understood by the public, value capture techniques can be complex and require education. Careful design is required to ensure that the right beneficiaries are charged an amount consistent with the benefit received and that charges do not distort development or economic activity. Value capture techniques can add administrative costs, which should be carefully weighed against the technique's revenue potential. These transaction costs may also include the organization of educational campaigns to increase awareness and stakeholder support. Finally, real estate risks might result in lower-than-expected revenues, which should be carefully assessed, particularly when revenue streams are pledged toward the repayment of bonds.
Even if use of a value capture technique is not the correct fit for a transportation project, by considering the application of a technique, value acknowledgement can result.
Transportation investments are among the most important decisions a region will make, but there is little understanding of how these investments stimulate the economy, improve quality of life, and add value. The act of assessing the use of value capture techniques can result in improving the understanding of the economic impact of transportation improvements.
The Manual is intended to fill knowledge gaps, providing best practices for identifying opportunities for value capture and integrating value capture into priority projects.
The concept of value capture and its application can be unclear to practitioners and stakeholders alike and sometimes subject to controversy. 12 The Manual intends to clearly define value capture and its opportunities and limitations in order to fill these knowledge gaps and address any misunderstandings about its use and application.
Key questions that the Manual aims to address include:
The intended audience of the Manual includes practitioners and partners across all levels of government, not-for-profit organizations, and private developers.
The Manual is primarily intended to provide practitioners and partners across all levels of government with effective practices for integrating value capture within their projects. Government partners include State, Tribal, regional, county, and local officials. The Manual may also serve as an educational tool for neighborhood and community stakeholders, not-for-profit organizations, and the general public. Finally, developers may also find the Manual useful to better understand how governments may approach the use of value capture.
This Manual is intended to provide information on the use of value capture for a specific project; it is not intended to advise on developing value capture policies.
This Manual is implementation oriented, intended to help government practitioners use value capture techniques in their priority projects. Although it encourages State and local governments to establish clear public policies related to value capture, it is not intended to provide guidance on drafting public policies to promote the use of value capture at a State or local level, on establishing program-wide value capture objectives, or on applying value capture techniques to master infrastructure plans.
In addition to providing information on best practices and decision-making tools, this Manual provides case studies of successful value capture implementation.
The Manual provides information on implementation-related considerations, as well as checklists and tools to facilitate decision-making. Case studies are used to highlight successful examples of value capture. Although the Manual is intended to address the use of value capture in highways and roads, case studies of transit projects have also been provided where appropriate to highlight specific lessons learned.
Mini case studies are embedded throughout the Manual in textboxes to illustrate specific examples or lessons learned. More detailed case studies - which discuss the context, funding plans, and implementation challenges for 10 projects that used value capture - are provided in the Appendix. A summary of the detailed case studies is also found in Table 4 and Table 5.
The Manual's structure follows the planning and implementation process for a typical project. Chapter 2 provides best practices for developing a project funding and financing plan, including identifying traditional funding sources and determining where value capture may fill a gap. Chapter 3 provides an overview of relevant value capture techniques. Chapters 4 through 9 provide information on specific value capture techniques, including selecting the appropriate technique based on political, legal, economic, market, and implementation considerations, including the timing and magnitude of the revenue stream. Chapter 10 provides best practices for developing a business case for integrating value capture into a project, including building stakeholder support. Chapters 11 and 12 discuss real estate and regulatory considerations. Finally, Chapter 13 provides funding and financing plan implementation information. Figure 1 shows an overview of the structure of the Manual.
1 The revenues accruing to the Federal Highway Trust Fund - a primary funding source for States - are increasingly falling short of covering the cost of maintaining and improving the U.S. highway network. In addition, only about a quarter of public roads are eligible for Federal aid.
2 The Manual refers to "equity" as promoting fairness among users and taxpayers.
3 The Manual refers to "efficiency" as the efficient use of resources.
4 This is different from farebox revenues where beneficiaries pay for use of the system, which helps fund operations and maintenance (O&M) costs, but they do not contribute to the capital costs of the infrastructure.
5 Typically, State and local governments must provide at least 20% of the funding for projects benefiting from Federal aid. Value capture techniques can help reach the 20% local funding match to allow governments to access Federal funds. Source: "Federal-aid Fund Management Tools," Federal Highway Administration, Center for Innovative Finance Support, www.fhwa.dot.gov/ipd/finance/tools_programs/federal_aid/.
6 Examples of value capture techniques that may be able to back bond financing include special assessment districts and sales tax districts.
7 Examples of value capture techniques that are typically not able to back bond financing include developer contributions and transportation mobility fees.
8 This Manual refers to Federal and State funds, farebox revenues, and tolls as more traditional sources of funding for infrastructure projects.
9 This Manual refers to "funding" whenever a source of revenues will directly pay for a stream of costs, whether capital or O&M. The Manual refers to "financing" whenever a stream of revenues is pledged for the repayment of a bond issuance used to pay for the capital costs of the investment.
10 Sharada Vadali, et al., Guidebook to Funding Transportation through Land Value Return and Recycling (National Academies Press, 2018), www.nap.edu/catalog/25110.
11 Transit-oriented development is a type of transit-influenced development that typically combines multi-modal infrastructure improvements, such as pedestrian and bicycle amenities, with mixed-use development in proximity to transit projects.
12 When the concept of value capture is not clearly explained, stakeholders or the general public may assume that it is simply a disguised form of additional taxation.
