List of Tables
There are a wide range of value capture techniques available. Some techniques are better suited for certain applications or geographies. The list below in Table 3, organized by funding strategy, describes the major categories and techniques available. Subsequent sections of this quick start guide provide information and guidance on how to select the best options for your funding needs.
With careful upfront planning, research, and stakeholder engagement, value capture implementation can be straightforward. The initial questions and processes that must be considered while pursing value capture are:
In addition to the general funding considerations listed above, any successful value capture proposal will also need to consider the public and private sector perspectives to ensure it has stakeholder support. Also, to be considered is whether economic conditions will support the proposed technique. When evaluating the interaction between economic conditions and a given value capture technique, the important factors are: (1) Does the value capture technique change the amount of development that will occur (and is this the desired result?), and (2) Who bears the cost of the value capture, landowners, and developers? Or consumers, in the form of increased property rents and sale prices?
The following section describes the requirements, challenges, and opportunities for each value capture technique.
Revenue basis: Future development
Overview: Developers are assessed cash charge to compensate the cost of area-wide infrastructure upgrades made necessary by new development. It is a one-time charge applied routinely by a local jurisdiction to proposed real estate development projects in the area benefitting from infrastructure upgrades. Impact fee revenues pay for a portion of the cost of facilities upgrades. Impact fees are assessed using formulas that consider benefit allocation, intensity of land use, distance to the upgraded infrastructure, and other factors related to benefits received and impacts.
Key Requirements: (1) State and local level enabling legislation; (2) Strong planning and analytical capacity at local level is necessary to determine infrastructure needs, costs, and allocation of benefits across different locations or projects; (3) Strong capital planning element and execution of public investment plans; (4) A transparent, consistent formula for impact fee calculation, allowing developers to reasonably estimate impact fees in development financial pro forma.
Challenges: Impact fees can hinder or slow development activity as it increases the cost of development. It may become a disincentive to develop land to its highest and best use. It can be applied incorrectly if infrastructure benefits are distributed unevenly, or there are imperfections in apportioning off-site costs. May not be suitable for infrastructure items where short-term impacts are less tangible and more difficult to value or monetize (e.g., resilience enhancement, “green” infrastructure). Significant institutional capacity is required to design, implement, and charge impact fees. A robust nexus study helps defend the fees from legal challenges.
Opportunities: Relatively straightforward two-way transaction with minimal negative fiscal impacts. Efficient tool to allocate costs of development-enabling infrastructure, which avoids overburdening of first comers and free-riding of followers. Works best for hard and basic infrastructure that has direct and quantifiable impact, such as transit, sewer, or water upgrades.
Example: The Regional Transportation Commission (RTC) of Washoe County, Nevada utilizes impact fees as a value capture mechanism through the Regional Road Impact Fee Program. The program, implemented in 1995, is used to fund and construct transportation improvements featured in the Capital Improvement Plans in two service areas within the county. The impact fees are calculated based on expected travel growth as measured in vehicle miles traveled, expected change in housing and employment, and land use category for future developments. The program has generated $300 million toward funding capacity improvement projects necessitated by growth in developments in the region.
Revenue basis: Future development
Overview: In-kind (land, improvement) or cash contribution by a developer to foster infrastructure upgrades related to a proposed real estate project. Exactions are similar in principle to Impact Fees but are not schedule-based. Exactions are often used to pay for infrastructure made necessary by zoning changes (higher land use, density, or eased construction norms) or other forms of development-enabling certifications. In contrast to Impact Fees, that are applied systemwide on a formula basis, exactions are typically determined on a case by case through a negotiated transaction.
Key Requirements: (1) Clear land use, zoning, city planning regulations and construction norms to establish baseline conditions. (2) Local government capacity in planning and implementation to be able to fulfill infrastructure obligations. (3) Well-defined approval and public outreach processes to explain the permitting processes and zoning variances which can be traded for exactions to fund infrastructure to accommodate future growth.
Challenges: When exactions are negotiated on a case-by-case basis, impacts to private sector development decisions are less predictable. Granting zoning variances for exactions may fail to generate enough public good outside of a project itself if highly localized or if the project scale is small. Exactions are highly variable in nature due to market conditions and are often one-time or short-term investments. This results in a revenue stream that can be unpredictable, or largely in the form of land or right-of-way acquisition, and likely unsuited as a capital funding source.
Opportunities: Straightforward two-way transaction, minimal fiscal impact, minimum framework regulatory arrangements needed, and transactions can be fully structured with ad hoc deal terms.
Example: The City of Chesapeake, Virginia uses negotiated exactions—called “proffers” in Virginia—to fund infrastructure that meets the transportation needs of new development in rapidly growing areas. Proffer has been formally enabled by Virginia law since 1973 and is practiced whereby developers extend an offer of value - often in the form of land, cash, or agreement to adhere to design standards - to a jurisdiction in exchange for approval of a rezoning for development. Virginia’s proffer system is enabled by State-level conditional zoning, which allows “reasonable conditions governing the use of such property, such conditions being in addition to, or modification or the regulations provided for a particular zoning district or zone by the overall zoning ordinance.”8 The City of Chesapeake is using proffered right of way and cash contributions from developers of new residential developments along Elbow road to fund a widening project that addresses the incremental traffic impacts of these developments. Developments along Elbow Road have contributed $500,000 cash for the widening project, reserved more than 11 acres or right-of-way for the future four-lane Southeast Expressway, and constructed some portions of the widening.
Revenue basis: Current and future land values
Overview: This tax instrument assesses value of unimproved land separately from buildings and structures, in contrast to conventional property tax which taxes the value of land and improvements together. This approach aims to differentiate tax burden to landowners based on “windfall” benefits of unimproved land—location, physical characteristics, and neighboring uses. It incentivizes improvement of underused urban sites by making idle land and land speculation in prime locations a burdensome option for landowners.
Key Requirements: (1) Robust land cadaster, land assessment and regular reassessment practice; (2) Effective tax administration capacity at the local level; and (3) Strong local real estate market that naturally differentiates values of undeveloped land based purely on location quality and development potential.
Challenges: Separating or accounting for land value increases the complexities of tax administration. It requires technical capacity at the municipal level for maintaining a more detailed property tax database and land reassessment systems. To better target valuable urban properties and avoid applying the tax to outlying areas (which would encourage development in those areas), taxation powers may need to be devolved from the county level to municipalities.
Opportunities: Incentivizes development of unimproved or underutilized land in prime urban locations, or it can be an effective tool to spur revitalization in areas affected by natural hazards. Jurisdictions can leverage property tax assessment systems already in place, and if adequately structured and implemented it can increase tax revenue providing additional funds for public works.
Example: The City of Altoona, Pennsylvania adopted the land value tax in 2002 as part of a broader strategy to diversify the local economy. The land value tax, to which the city transitioned from taxing buildings, was originally designed to function as an incentive for owners of vacant land to develop on their parcels or sell. It was also designed to incentivize owners of residential and commercial properties to make improvements to the buildings without concern of getting taxed. Land value assessments in the city are currently based on frontage and location. Altoona, the only municipality in the U.S. to rely solely on land value taxes, has experienced notable increases in median income, land values, and property values since the implementation of the land value tax, however, it is unclear if these are a direct effect of the tax.9
Revenue Basis: Current and future property Values; for Community Improvement District, revenue is based on current and future sales or other revenues
Overview: An assessment such as additional tax or special rate levied on property owners within a defined geographic area representing the main concentration of beneficiaries of publicly funded infrastructure improvements. Special Assessments Districts (SAD) are also called Community Improvement Districts (CID), Local Improvement District, etc. Application of Special Assessment levy can be targeted to specific types of users or owners within the defined geographic area, such as businesses, owners of existing commercial buildings, or developers seeking construction permits. Rate and length of time of the levy depends on when and how funding requirement is fulfilled. In contrast to Tax Increment Financing (TIF), a Special Assessment is applied to a property’s full assessed value rather than the incremental increase in property value.
Key Requirements: Establishing a SAD requires enabling legislation and voter support. Usually, State-level enabling legislation and a local SAD authorizing ordinance constitute the legal environment. Systemwide fiscal regulations should allow special tax assessment and collection at the municipal level. A robust property appraisal system is required.
Challenges: Setting up a SAD can be legally complex and time-consuming, and administration of such tax may be costly if existing collection and assessment systems or processes are not adequate. SADs require adoption of special fiscal regulations that are out of control of municipality, requiring State support. Significant institutional capacity may be required to garner community support at the time of SAD formation. Delineation of special assessment area often follows jurisdictional borders which causes imperfection in allocation of cost to actual beneficiaries.
Opportunities: Generally, SADs raise money without increasing city-wide property taxes. Aligning the costs of public improvements with those businesses and property owners who will benefit the most from such improvements. SADs can be engineered to be a recurring and reliable source of municipal revenue for infrastructure. Less complex than TIF and a cost-effective alternative to municipal borrowing. SAD revenues are highly stable and can be used to offset risk associated with TIF (e.g., a conditional SAD is formed if TIF revenues fall short of expectations). Assessments are collected either up front or annually and usually fixed at the time of SAD formation.
Example: The City of Atlanta utilized revenue from the Midtown Improvement District, a community improvement district, to fund multimodal improvements to enhance walkability conditions on a segment of 5th Street. The Midtown Improvement District was established in 2000 by the Midtown Alliance. In the Midtown Improvement District, property taxes are levied upon buildings to fund transportation improvements within the district. In 2020, the Midtown Improvement District generated $11.3 million in revenues. For the 5th Street Complete Streets project, the Midtown Improvement District contributed $750,000, or 25% of the total project cost.
Revenue basis: Future property values
Overview: TIF provides an alternative to finance urban infrastructure in blighted and underdeveloped areas, fostering (private) development that would not otherwise occur in the absence of those up-front investments. TIF aims to capture revenues from anticipated future incremental increases in property or other taxes within a geographically specified area of redevelopment (“TIF district”). Local governments use a debt instruments, such as bonds or loans, backed by the projected future tax revenue within the TIF district. The debt instrument proceeds pay for up-front investments for land acquisition, upgrade of utilities, road improvements, or remediation of environmental contamination necessary to facilitate private development. This up-front public investment creates the real estate market and economic conditions that lead to the incremental increase in land value and tax revenue, promoting a virtuous cycle in which growth pays for growth.
Key Requirements: Requires robust land assessment and tax administration capacity at the local level, as well as strong political backing and enabling legislation. Might require credit enhancement or guarantees from the municipal government. Real estate markets must be strong enough to maintain demand and growth potential for high-density development and prices. The use of TIF requires agreement among overlapping taxing agencies such as school districts, police and fire departments, and public utilities.
Challenges: TIF requires a robust real estate market that is anticipated to grow. Jurisdictions must be prepared to allow TIF uses to absorb and restrict incremental future revenues to the TIF area and uses. TIF districts and guarantor are vulnerable to national and local economic downturns affecting the real estate and credit markets; without real estate growth, revenues may fall short of expectations, creating repayment risks. It requires a strong commitment of the municipality beyond political cycles to ensure continuity of economic development and TIF legislation between administrations.
Opportunities: If properly structured, TIF debt does not affect municipal budgets and complements the traditional infrastructure funding sources. Promotes private development to further economic development and enhances municipal funding and financing of infrastructure. TIF (like SAD) is able to yield the highest revenue among value capture techniques. Strengthens municipal management and relationships as it requires high coordination between entities.
Example: The City of Biddeford, Maine used a mix of value capture techniques, including TIF, to fund the Pearl Street Garage parking structure and related pedestrian amenities that had long been recognized as important for the city’s downtown vitality and economic development. Projections indicated that parking revenues would not sufficiently cover the costs of the facility, so an allocation from an existing TIF district was used to close the funding gap. The Route 111-Mill Redevelopment Tax Increment Financing District was established in 2004 to capture revenue from commercial development to fund public facilities and improvements and city economic development projects. Since its inception, the TIF development program has been amended 10 times and the TIF period has been extended to last a period of 25 years. The TIF district allocated $8.4 million to the Pearl Street Garage project, which closed the funding gap and allowed the city to meet its commitment to building the facility without residential property taxes.
Revenue basis: Lease or sale value of public assets
Overview: Asset recycling refers to monetizing existing infrastructure and engaging private partners to invest in and upgrade existing assets. The public agency retains ownership and control through long-term leases. Lease revenue can then be used to fund new infrastructure. Asset recycling can be applied to existing facilities or future infrastructure projects.
Key Requirements: (1) Enabling legislation and authority to enter into Public Private Partnership (P3) Concession agreements; (2) Assets that the agency has identified as available and eligible to lease, consolidate, or sell; (3) The market value of the public assets must be clearly established and have potential to generate additional value; (4) Must effectively communicate the rationale for sales or lease of public assets (e.g. consolidation, underutilized asset, etc.) to stakeholders; and (5) The public agency must have negotiating capacity comparable to that of potential private sector partners to achieve fair pricing.
Challenges: (1) Jurisdiction may not have the expertise to determine the optimal pricing and market demand for the asset over time; (2) Regulatory and legislative limitations on public asset disposition may stall or encumber the process; (3) Public perception of long-term lease of public-owned land or infrastructure is important, where the public may have concerns regarding the loss of control over future development and long-term asset conditions. (4) Negotiated disposition price of publicly owned assets may face public objection and raise political concerns.
Opportunities: Asset recycling can result in long-term direct cash revenue for a municipality through putting vacant or underutilized assets back into productive use. Asset recycling has minimal negative fiscal impact and is a relatively straightforward two-way transaction (once the value to private sector partners is established and the price has been negotiated). This technique balances private sector risk and reward with risk and value from surrendering operational control of asset by the public sector through asset sales and leases.
Example: The City of Amesbury, Massachusetts leveraged underutilized municipal land through asset recycling and transformed the former Titcomb landfill into a renewable energy generation site. The city leases the land to Kearsarge Energy LP, who developed, financed, and built the power plant in collaboration with NEC Energy Solutions. Kearsarge will continue to own and operate the system once the project is fully completed. The site hosts one of the first solar plus energy storage projects in Massachusetts and will produce an estimated 5.2-million-kilowatt hours of electricity annually once completed. The project generates tax and lease revenue for the city in addition to energy credits that will save the city an estimated $4 million in energy spending over a 20-year period.10
Revenue basis: Future development potential and returns
Overview: Joint development is a value capture strategy allowing a transportation agency to coordinate with developers to improve the transportation system and, at the same time, develop real estate in ways that share costs and create mutual benefits. Using air space above, below, and nearby or adjacent to highway rights-of-way provides benefits via transfer of rights and joint development. A public agency utilizes land it owns, often in the form of surface parking lots or excess right-of-way, for a private redevelopment project and then shares profits with the private sector developer. Transit joint development creates revenue streams that can be used to cover transit system operating expenses and finance capital projects. A transit agency might cooperate with a developer to convert a publicly owned park-and-ride lot into a mixed-use development of offices and housing. Air rights over public land or facilities may also be leased or sold for joint development. Depending on how much land the agency owns, its role in the development could be limited.
Key Requirements: When new Federal funding or land previously acquired with Federal funding is used for a joint development, it must go through a Federal approval process; the combination of local political culture, State law, and agency regulations must allow for the lease or sale of public assets. There must be sufficient market demand for additional development in the location where the rights will be assigned. Legal provisions that allow cities to create and sell additional development rights. The city must have a comprehensive plan for growth, planning, and infrastructure management. The city must have adequate administrative capacity.
Challenges: This technique is vulnerable to macroeconomic conditions (more than many other land value capture tools). For efficient and equitable implementation, strong and transparent land use controls are prerequisites. Strong real estate markets, significant institutional capacity, and clear policy guidelines are needed to undertake joint development. Joint-development plans must be in line with local market demand and satisfy local planning efforts for density, parking, and affordable housing.
Opportunities: This technique generates cash for front-funding or expedited cost recovery of infrastructure projects. The sale of development rights better mitigates the risks of loss of control over land use relative to selling land title alone. Air rights are most suited to situations where land prices are high and there is significant market demand for new housing or commercial space. This combination of factors generally occurs only in dense, urban cores and less likely to occur in settings with vacant parcels.
Example: The Nevada Department of Transportation (NDOT) entered into an air rights agreement and lease for the airspace above I-80 in Reno, NV with a private developer for a 15-story hotel-casino development in the 1970s. After constructing a concrete and steel cap above I-80, the project was halted because the financing for the project fell apart. The lease was transferred among private parties over the years until Walgreens secured an air rights sub-lease to build a drugstore on the deck in the late 1990s. Walgreens then rehabilitated the deck and constructed the drugstore which services the nearby downtown and University of Nevada Reno campus. The air rights agreement with Walgreens generates revenue for NDOT while utilizing a previously vacant space to fulfill a community need.
Overview: An innovative way to offset the costs of construction, operation and maintenance while providing enhanced services to the public. Transit Agencies can raise revenue for operating and maintenance expenses by selling advertising to private companies within places like transit stations and bus shelters. Naming rights and sponsorships are often used on transit facilities, where transit agencies sell the right to name a station for a defined period of time to generate revenue to subsidize operating expenses.
Highway sponsorships can include either funding or volunteer work to offset highway operations and maintenance costs. An example is State Adopt-a-Highway programs. Sponsorship signage must comply with the Manual on Uniform Traffic Control Devices, or MUTCD. It is important to note that Federal law prohibits commercial uses like advertising and naming rights within Interstate Highway System right of way.
Key Requirements: Must adhered to FHWA Policy Order on Sponsorships (Order 5160.1A Issued in April 2014), which distinguishes advertising (which is prohibited) from sponsorship (which is encouraged). Sponsorships provide companies and organization with high quality exposure from high ridership volumes.11
Challenges: It must be weighed against many rules covering safety, discrimination, billboards, and government owned facilities. The main legal considerations are the Federal Highway Beautification Act (Title 23, United States Code), First Amendment preventing company from being excluded from naming rights transaction because of its image, Fourteenth Amendment prevents agency from rejecting bidder based on agency’s politics, and State laws regarding signage and nuisances. Legal challenges included: Portland, ME’s bus service faced controversy over ads promoting marijuana ballot initiative on buses, Los Angeles Metro canceled plan to sell naming rights; and political challenges (concerns over losing historic landmarks) and difficulty navigating the transport network when names change.
Opportunities: Advertising can raise moderate sums of money for operating and maintenance expenses or supplement construction. Transactions are usually not complex, as they involve standard procurement processes and generate new revenues with little public investment. Transactions also provide political opportunity for naming rights linked to subsequential economic benefits. The volunteer programs improve social and environmental benefits through cleanup activities, gives civic pride, and serves as a reminder not to litter while saving tax-payers money.
Example: In 2014, the Ohio Department of Transportation (ODOT) entered into a naming rights agreement with State Farm Insurance to raise money to offset transportation budget shortfalls. Through the agreement, State Farm advertises on ODOT Freeway Safety Patrol vans that provide roadside assistance for stranded motorists and to help clear crashes and stranded vehicles from busy highways. The agreement rebrands the Freeway Safety Patrol as the State Farm Safety Patrol. The sponsorship will generate $8.65 million in revenues over the 10-year contract period, which will help to offset the cost of the program and other State maintenance obligations.
Revenue basis: Current and future development of the traffic generation profile for a particular land use
Overview: TUFs, also known as street user fees or road maintenance fees, are ongoing fees paid by real estate occupants (i.e., owners or tenants) according to the intensity of transportation use rather than the value of property. TUFs are typically used for maintenance and repair of existing roads and target charges to properties that generate higher traffic, such as commercial properties. A TUF may be applied across an entire jurisdiction or within a specified benefit area. TUFs charge both existing and future users, which is a more equitable mechanism in areas that are already developed.
Fees are based on the cost of estimated transportation utilization rather than actual or observed use. Estimated transportation utilization is calculated based on the character and density of property occupants, and on assumptions about their use of transportation facilities such as roads, public transportation, or parking.
Key Requirements: A direct and equitable connection to the service provided must be demonstrated. There must be enabling legislation allowing the municipality to charge the fee. Though fees are not subject to voter approval, political will and stakeholder support are important for the success of a TUF program.
Challenges: TUFs involve new administrative and institutional requirements and may be difficult for a locality to implement or administer. TUFs have raised questions as to if they are truly a fee or instead a tax (municipalities generally have less power to impose taxes than to charge fees). Legal challenges have also arisen due to the fees being charged involuntarily and calculated based on assumed trips taken; some residents who do not utilize the roadways do not want to pay the fee but do not have the option to opt out.
Opportunities: TUF programs are advantageous because they provide new revenue streams that are based directly on the estimated use of a city’s transportation network. They also allow implementing agencies to incentive behavior that reduces stress on the transportation network, such as travel by foot, bicycle, or transit. TUFs are an equitable means of raising revenue to address backlogs in infrastructure maintenance and preservations needs not met by other funding mechanisms like the gas tax, property taxes, and other funding mechanisms. The fees can support timely preventative maintenance, which can extend pavement life.
Example: The City of Hillsboro, Oregon established a TUF in 2008 to support citywide investments in pavement condition and bicycle and pedestrian facilities. The city collects TUF fees from all residential, business, government agency, school, and nonprofit property owners through regular city utility bills. The size of the fee is based on the estimated trip generation rates from the Institute of Transportation Engineers Trip Generation Manual. Residential properties in two categories, single-family and multifamily, are charged flat monthly fees. Nonresidential properties pay a base charge of $8.20 per month plus a calculated charge according to property type category and square footage. Hillsboro’s TUF generates approximately $5 million in annual revenues. It is estimated that TUF revenues will allow the city of Hillsboro to zero out its entire backlog of street maintenance projects by 2024.
8 “Virginia’s Proffer System and the Proffer Reform Act of 2016,” Edward A. Mullen and Michael A. Banzahf, Richmond Public Interest Law Review (Vol. 20:3, Article 3, page 3).
9 Federal Highway Administration, Center for Innovative Finance Support, “Land Value Taxes.” https://www.fhwa.dot.gov/ipd/fact_sheets/value_cap_land_value_taxes.aspx.
10 Federal Highway Administration, Center for Innovative Finance Support, “Project Profile: Amesbury Landfill Solar Plus Storage Project, Amesbury, Massachusetts.” https://www.fhwa.dot.gov/ipd/project_profiles/ma_amesbury_landfill_solar_plus_storage_project.aspx.
11 FHWA, Frequently Asked Questions—FHWA Order 5160.1A—Policy on Sponsorship Acknowledgment and Agreements within the Highway Right-of-Way. https://mutcd.fhwa.dot.gov/resources/policy/sponsorshipfaq/#q1.
