Value Capture Strategies Toolkit for Practitioners

Innovative Strategies for Funding, Financing, and Project Delivery for Multimodal Infrastructure Projects. The Value Capture Strategies toolkit for practitioners provides resources and information to support the implementation of Value Capture Techniques to supplement traditional infrastructure funding sources. The Value Capture Strategies Toolkit is comprised of four components: Publication Resource Library, Value Capture Analytical Tools and, Innovative Finance Mechanisms to raise upfront capital, Project Delivery Tools, and Case Studies. Together, these resources constitute a toolkit that state and local transportation agencies can use to advance Value Capture Strategies across the country. Additional toolkits will be developed in the future for this initiative. As new components of the Value Capture Toolkit are completed, they will be added to this website.

FUNDING & FINANCING DEFINE

Although the terms funding and financing are often used interchangeably, they mean very different things. Understanding this difference is an important part of analyzing and communicating the challenges to closing the infrastructure gap.

In the Funding and Financing phase of the infrastructure lifecycle, current or prospective infrastructure owners, including governments and private developers, must identify the future revenue source(s) necessary to pay for the development, capital, and operational costs of a proposed project. A project could include the construction of a new infrastructure asset or modernize/retrofit of existing infrastructure to address infrastructure conditions. While there are other points along the infrastructure lifecycle in which the need to pay for development, capital and/or operational costs arises, this is the point in time when the greatest planning and coordination efforts related to funding and financing occurs.

Funding and financing are intrinsically linked from a transportation infrastructure perspective as oftentimes decisions related to transportation project are governed by the availability and sources of financing at the start of a project, and these decisions will influence long-term funding needs during operation and in the event of a climate stress or shock. As the financing of transportation infrastructure is a rapidly evolving space, this phase identifies infrastructure funding and financing.

Funding/Revenue: Funding is the means by which a project’s costs are repaid, regardless of the period to which these costs are time-shifted. For infrastructure, this generally means identifying the long-term future revenue stream necessary to repay the money initially invested, plus interest.

Funding can also mean money allocated to a project that does not need to be repaid such as Federal and State grants. For government infrastructure projects, funding may come from money set aside for a project, typically sourced from taxes and fees, or it may come from a grant issued by the national government to the government entity leading the development of the infrastructure project. In low-income countries, funding may also be provided by international donors or development banks.

Financing: is money that is borrowed and must be repaid. Financing is how you pay upfront for infrastructure. In this context, it refers to how governments or private companies that own infrastructure find the money to meet the upfront costs of building it. Financing represents the money borrowed and has the effect of time-shifting costs incurred. For example, a city borrows money to construct an infrastructure project and doesn’t start to repay the loan for five years. In this case, the cost of the project has been time-shifted into the future through financing. However, financing does not set out how the funds to repay the loan will be earned.

VALUE CAPTURE REVENUE/FUNDING SOURCES

Value Capture refers to the concept of capturing the benefits generated by investment in infrastructure, to either finance the infrastructure itself or to re-invest in other unfunded infrastructure projects in beneficial ways. The Value Capture strategy has been used increasingly in the context of transportation funding and finance, particularly as a means to fund new transportation infrastructure, such as highway corridors, public transportation/transit, active transportation, or multimodal facilities. Value Capture is one proven sustainable source that can be tapped to supplement much-needed funding and get the project off the ground for a variety of State and local transportation projects.

There are several different forms of value capture used in the United States. The most common include air rights, impact fees, joint development, land value tax, negotiated exactions, sales tax districts, special assessments, tax increment finance, and transportation utility fees. These techniques may vary in their application and they may also be known by additional terms. Want to learn more about Value Capture.

One characteristic that all innovative financing tools and P3s have in common is the need for a source of revenue to support the financing tools. Almost exclusively, funding for transportation comes from traditional sources. Value capture is an untouched revenue sources can be used to supplement traditional funding pay for roadway and transit improvements by leveraging localized benefits. While more common with transit projects, Value Capture techniques may also be used with highway improvements, as is the case with the San Joaquin Toll Road in southern California and E-470 outside Denver, Colorado, and others. Most Value Capture revenue is generated at the local level. Thus, Value Capture strategies provide opportunity for collaboration and partnerships of State, local, and private sector to advance infrastructure project.

Value capture can generate sustainable, long-term revenue streams that can support debt issuance and repayment used to build highway interchanges, corridor improvements, transit stations, and other infrastructure. It can also be used to leverage Federal and State grants, attract private capital, provide access to Federal low-interest-rate loans, and can seed funding to get the project off the ground. Revenue from Value Capture techniques can also be used to fund the highway on-going operations and maintenance costs, which are generally not eligible for Federal-aid funding. Value Capture can be used in a wide range of scales and settings (urban, suburban, and rural). Until recently, most domestic Value Capture applications have been used to generate new funding for transit projects. More recently, however, a growing number of States and localities have begun using innovative Value Capture to help fund highway improvements that including complete streets projects, safety enhancements, preventive maintenance, electric vehicle charging stations, fiber optic broadband in the public right of way (ROW), and smart technologies. Several Value Capture techniques have been used successfully to supplement traditional funding highway improvements and road maintenance in the States of California, Colorado, the District of Columbia, Florida, Georgia, Massachusetts, Missouri, Ohio, Oregon, Pennsylvania, Texas, and Virginia as demonstrated in Table 2. Table 2 provides Value Capture Project Case Examples Representative

Developer Contributions

One-time charges to the developer. Can be voluntary or compulsory contribution from private sector or developers. Compulsory contributions include Negotiated Exaction and Development Impact Fees or Mobility Fees.

Negotiated Exaction: Direct payments to local governments from a private developer can be used to offset development investment costs. These may be set a necessary condition before a development approval is granted. Negotiated exactions are determined on an ad hoc project-by-project basis through the development approval process. Similar to Impact Fees but generally applied to only on-site infrastructure. One-time developer agreement is created that must not exceed impact. The costs for the developer are upfront by providing land or making a payment with the money to be used for infrastructure serving the development

Impact Fees (Mobility Fees, Development Charges, and Connection or Facility fees):one-time, up-front payment by the developer to pay for capital costs needed to serve new development. Implementation is based on legislatively enacted fee, not a tax. Impact Fees generally do not require voter approval. Must meet the Dual Rationale Nexus Test:

  • The needed improvements are tied to the impact of new development
  • The new development that pays the fees should receive a benefit from the payment

In general, Impact fees are designed to recover a portion of the costs associated with new development to serve the new development such as Construction of off-site roadways, local street improvements, or intersection improvements.

Applicable Purpose: Cost recovery for a purpose of financing a portion of the cost of public facilities related to the development project. These are one-time charges applied by a local governmental agency to an applicant in connection with approval of a development project.

Revenue Potential: Marginal, generate marginal revenue for highway (mostly)

Use of Fund: Impact fees can only use for capital expenditures not operating & maintenance

Leveraging: Can be used as local matching share to Federal and State grants, borrow from State Infrastructure Bank, or long-term debt obligation such as tax-exempt bonds (Osceola County, Florida)

Project Delivery: Design Bid Build (DBB), Design Build (DB), Construction Manager/General Contractor or Construction Manager at Risk (CMGC/CM@R), Design Build Finance (DBF).

Special Assessments

Authorized in 50 States. In most States, special assessments may be initiated in two ways, either by local governments that determine to make improvements in a given area or by a majority of property owners in a given area who decide, through a petition process, they want to collectively fund an improvement that mutually benefits everyone within the area.

Local jurisdictions can create special assessment districts (SADs) around transportation improvement projects and can impose new fees or tax increases on owners within those areas. The taxes can be based on property value, sales, special business fees, or other measures of value. Members of the benefiting district pay a property tax directly for the cost of the improvement, which is levied annually to the property owner in the district before and after an improvement is made. Although this special assessment resembles a tax—it is not (Chadban, City of Grandville; 442 Mich 495 (1993); quoting Knott v City of Flint, 363 Mich 483 (1961)). The Special Assessment District is initiated either by the local jurisdictions and by resolution of the City Council or County Commission or by a property owner request for formation of the Petition for specific assessment duration.

  • Government Districts Initiates-Transportation Improvement District (TID)/Transportation Development District (TDD): Formed as a separate political subdivision with a board of directors. A local government body, typically a county commission, acts as the lead entity in forming the district in some States for the purpose of coordinating and financing transportation infrastructure improvement programs, particularly road construction projects, among local governments in a specific area. Depending on the State, the lead entity may have the authority to levy sales or property taxes. Transportation Improvement Districts or Transportation Development Districts are authorized in Missouri, New Jersey, Ohio, and Virginia.
  • Property Owners Initiates-Community Improvement District (CID)/Business Improvement Districts (BID)/Neighborhood Improvement Districts (NID): Property owners initiative to manage and improve the environment of a district with services financed by a self-imposed and self-governed assessment. Voluntarily impose assessment/fee by the property owners to fund improvements and services within the district.
    • CID/BID: A not-for-profit corporation formed by commercial property owners voting to impose a self-assessment to pay for special public improvements or services. A simple majority of affected property owners (51 percent) or property owners representing 75 percent of property values within the CID boundary must consent and the request must be ratified by the governing authority.
    • NID: Strictly a local initiative with a special taxing district where revenues are collected within the designated boundaries to help pay for public infrastructure, facilities, or other improvements that confer a benefit on property within the district, normally a residential and not a commercial area. NIDs are created by election or petition of owners of property within the proposed boundaries of the district and typically generate funding for projects through the sale of municipal revenue bonds backed by the district’s special property assessments, which may be extended beyond retirement of the bonds to pay for maintenance and upkeep.

Applicable Purpose: Captures project expansion benefits and returns them to the public. These are typically collected by the city for city service provided improvements that benefit property owners. The benefit may be a new transportation development and or improvements such as complete street improvement to enhance public safety.

Revenue Potential: High, can generate substantial revenue to fund the entire project and is applicable to all modes

Use of Fund: Can be used to fund infrastructure that does not generate revenue, so the tool is applicable to a wide variety of circumstances. SADs can fund capital and operating and maintenance expenditures, including correcting deficiencies. Georgia CID has initiated major transportation improvements, such as for complete street projects, pedestrian safety, etc.

Leveraging: Can be used as local matching share to Federal and State grants by borrowing from the State Infrastructure Bank, or creating a long-term debt obligation, such as tax-exempt bonds

Project Delivery: DBB, DB, CMGC/CM@R, DBF, P3s.

Sales Tax District

Sales tax districts levy an incremental sales tax on goods sold within a designated area that derives benefit from a transportation improvement. The resulting revenue is used to support the development of the infrastructure improvement. Sales tax districts may be established at the municipal or county level, but they are more commonly implemented in smaller local areas. States establishing sales tax districts normally specify the rate of the incremental sales tax and the types of projects their proceeds may support. Unlike other special assessment districts, there is no formal process for establishing the rate of the incremental sales tax that is a local benefit because of the accruing sales tax property due to improved access. Members of the benefiting district pay a small sales tax directly for the cost of improvement on levied sales within the district.

The revenue raised by the tax, however, should reflect the value the area derives from the transportation improvements funded by the district.

Applicable Purpose : Captures project expansion benefits and returns them to the public. Applicable to all modes

Revenue Potential: High, can generate substantial revenue

Use of Fund: Can be used in tandem with TIF and can fund for capital and operating and maintenance expenditures including correcting deficiencies

Leveraging: Can be used as local matching share to Federal and State grants by borrowing from the State Infrastructure Bank, or creating a long-term debt obligation, such as tax-exempt bonds

Project Delivery: DBB, DB, CMGC/CM@R, DBF, P3s

Tax Increment Finance Districts (TIF)

Authorized in 49 States and the District of Columbia. A popular revenue or funding generation Value Capture mechanism available to local districts to spur economic development, build strong communities, and create jobs that would not occur without public investment/assistance. It allows the local district to use the incremental increase in property tax revenues and economic activities within defined areas to fund infrastructure improvements. Tax revenue from properties in the district is capped at a certain level, and all revenue over the capped amount is directed into the TIF fund. The key is no new taxes are requested and no existing taxes are used to pay for the project.

Applicable Purpose: Spur economic development and create jobs. Generate sustainable stream of funding by capturing project expansion benefits and returning them to the public. This funding method estimates the level of development that will occur as a result of the transportation improvement and uses this funding stream as the basis for securing a bond to help fund the transportation improvements. Expected growth in property tax revenues is securitized to provide funds for infrastructure improvements.

Municipalities use TIF to incentivize property development in distressed areas – areas that frequently overlap with Qualified Opportunity Zones (QOZs). TIF allows municipalities to pledge a portion of the property tax increment that results from project investment to reimburse the project developer for certain eligible project costs. The combination of TIFs and QOZs may be particularly attractive to Real Estate Investment Trusts (REITs) and real estate developers who are looking to reduce project development costs.

Revenue Potential: High, can generate substantial revenue for transportation improvements and is applicable to all modes

Use of Fund: Can be applied to infrastructure that does not generate revenue. Typical items financed include street improvements; sidewalks; street lighting; utilities, including water lines, storm and sanitary sewers, and plant expansions; parks and open space; and off-street parking. TIF/Tax Increment Reinvestment Zones or Transportation Reinvestment Zones (TRZs) can fund capital expenditures including correcting deficiencies. TRZs can only be used for transportation improvement projects

Leveraging: Can be used as local matching share to Federal and State grants by borrowing from the State Infrastructure Bank or creating a long-term debt obligation such as tax-exempt bonds, and/or access to Transportation Infrastructure Finance and Innovation Act (TIFIA) and/or Railroad Rehabilitation & Improvement Financing (RRIF) Federal low interest rate loans. Another option is developer finance where local jurisdictions reimburses the developer for TIF-eligible costs, such as tax incremental revenues as they become available.

Project Delivery: DBB, DB, CMGC/CM@R, DBF, P3s, or developer financing

Joint Development

Joint Development refers to cooperating public and private partners who provide facilities based on the financial contribution for the benefits received. One-time developer-related opportunities typically happen after an improvement (can be on- and off-site improvements). Joint Development is mostly used in transit, where the practice of developing public transit agency‐owned land in partnership with a private entity is most common. This can provide new sources of revenue for public transportation agencies, meaning more funding for public transit improvements.

  • Air Space/Air Rights: A form of Value Capture that involves the establishment of development rights above, below, under, and nearby/adjacent highway right of way by transfer of rights and joint development for public and private benefit. These rights are a one-time developer-related opportunity that typically happens after an improvement. One example may be selling rights to build a station with shopping spaces on top of a metro exit to a private actor, as this will increase land value and be beneficial for both the public and private party. Air Space/Air Rights give the transportation agency an opportunity to transform underutilized ROW into a revenue source for renewable energy and fiber broadband; provide economic development techniques controlled by the local jurisdictions to spur economic development by increasing a local jurisdiction’s tax base and creating new jobs; and providing collegial cooperation between the State, localities, private sector, Federal agencies, and transportation modes to create a seamless connectivity of transportation networks.

  • At-Grade Joint Development: Development near or at the transportation facility. Retail concession at the transit station or parking garage near a highway or road or use highway ROW for solar energy to generate revenue or save on operating costs.

  • Below-Grade/Utility Joint Development: The ROW is leased to a private entity or the public agencies use ROW for fiber optics infrastructure.

  • Development Above-Grade Joint Development: The agency sells or leases the development rights on the top of the train station or on the top of the highway to the developer, or caps a portion of the highway for community amenities, such as for parks and green space.

Applicable Purpose: By capturing the created value, a cost and revenue share of the transportation investment between the public sector and private operators and developers is formed.

Revenue Potential: Moderate, generate moderate revenue for highway and transit by sales or on-going lease revenue

Leveraging: Can be used as local matching share to Federal and State grants by borrowing from the State Infrastructure Bank or creating a long-term debt obligation such as tax-exempt bonds, and/or access to Federal low interest rate loans such as TIFIA and/or RRIF.

Project Delivery: DBB, DB, CMGC/CM@R, DBF, or P3 Concession

Asset Recycling

Asset Recycling is monetization of public or non-public infrastructure assets by selling or leasing assets to create revenue streams to pay for other infrastructure needs. Asset recycling involves at least two pieces of infrastructure: the asset being sold or leased to the private sector and the infrastructure unrelated to the first piece; built or repaired with the proceeds from the sale or lease. Value Capture by Asset Recycling strategies creates a continuous funding cycle that stretches lease proceeds much further and can also supplement traditional funding sources. Some types of Asset Recycling are land banking, lease of public lands, and the monetization of green infrastructure.

Applicable Purpose: Generate immediate revenue for State and local jurisdictions, while at the same time ensuring infrastructure improvement needs are met. Such assets are typically unused or underutilized land or buildings, or assets that are more valuable such as toll roads, for any number of reasons, if they are sold or leased to a private entity for an up-front payment.

Revenue Potential: High, generates substantial revenue for highway and transit

Leveraging: A portion of this revenue can be allocated for long-term investment to generate on-going revenue for unfunded projects/programs. Also, can capture economic benefits from the project funded with the revenue to create a virtuous cycle

Project Delivery: Sales or Long-Term Lease Concession

Land Value Tax/Split‐rate Property Taxes

Most jurisdictions apply one property tax rate to the entire value of a parcel that includes the value of the land as well as the value of the buildings on the parcel. Split‐rate property taxes impose separate tax rates on the values of land and buildings – with a higher rate on the value of the land. Higher tax rates on land encourage development in high‐value areas, such as those with public transportation infrastructure, by making it more expensive to purchase an empty parcel and wait for the value to appreciate. Split-rate property taxes can reduces land speculation and can help areas grow faster by creating infrastructure improvements. An example is in the late 1970s and 1980s, Pittsburgh increased its tax on land values to six times the rate of the city’s tax on buildings. Office and residential development in Pittsburgh grew considerably in the 1980s, even as the city’s steel industry was struggling. Development within the city was faster than in the suburbs, unlike much of the United States.

Applicable Purpose: Captures project expansion benefits by assessing land value rather than property value and focuses on landowners in order to encourage development. Implemented in Pennsylvania Counties

Revenue Potential: High, generates substantial revenue for transportation improvements and can be appliable to all modes

Leveraging: Can be used as local matching share to Federal and State grants by borrowing from the State Infrastructure Bank or by obtaining a long-term debt obligation such as tax-exempt bonds, and/or access to Federal low interest rate loan such as TIFIA and/or RRIF.

Project Delivery: DBB, DB, CMGC/CM@R, DBF, or P3 Concession

Transportation Utility Fees

Fees assessed on properties based on number of trips generated/used. These are levied annually to property owners for charges before and after improvement. This charge has been used for recovering operating expenses as opposed to project capital costs.

Applicable Purpose: Recovers operating and maintenance costs. The fee is treated as a utility (e.g. water, electricity). Rather than establish a fee with respect to the value of the property, the fee is estimated on the number of trips that property would generate.

Revenue Potential: Moderate, recover a portion of the local transportation improvement expenditures and can be applicable to all modes.

Leveraging: Can be used as local matching share to Federal and State grants and/or borrow from State Infrastructure Bank.

Project Delivery: DBB, Job Order Contract, or CMGC/CM@R

Advertising/Sponsorships/Naming Rights

A public agency may choose to sell a station or another asset’s naming rights to a private entity in exchange for an up-front or ongoing payment. The venue advertising/sponsorship/naming rights industry continues to expand and has become a key medium and measurable media tool for a wide range of corporations. Naming rights generate revenue by selling the right to name transportation assets to the private sector. Naming rights are an alternative means to generate revenue for transportation agencies that are looking for new sources of funding other than taxes and fees. For example, Salesforce pays $110 million for the right to name the Transbay Station for 25-years. Naming rights are prohibited for highways. However, some public transportation agencies around the country are utilizing a variety of innovative ways to use naming rights to derive greater value from existing assets to subsidize operating and maintenance expenses.

Applicable Purpose: Recovers some of the operating and maintenance costs by selling rights to name public facilities, e.g., toll roads, highway corridors, transit stations.

Revenue Potential: Moderate, offset some of operating and maintenance expenses and can be applicable to all modes.

Leveraging: Can be used as local matching share to Federal and State grants or access to State Infrastructure Bank.

Project Delivery: Sponsorships can be volunteered from communities or paid for by third party services; Naming rights can be processed via RFI and RFP to select the best corporation.

Parking Fees

Parking fees may be established within a district, or regionwide to fund transportation investment.

Applicable Purpose: Generate funding for paying project cost. Can complement the use of TIF and SADs when building its streetcar project or active transportation

Revenue Potential: Moderate

Leveraging: Can be used as local matching share to Federal and State grants, access to State Infrastructure Bank, or tax-exempt bonds.

Project Delivery: DBB, DB, CMGC/CM@R, DBF, or P3 Concession

VALUE CAPTURE REVENUE PUBLICATION RESOURCES

A suite of primers, guides, discussion papers, and informational reports designed to help practitioners understand and navigate the different aspects of implementing Value Capture projects.

Value Capture Factsheets

Value Capture Legislations

Value Capture Primers

Value Capture Frequently Asked Questions

VALUE CAPTURE ANALYTICAL TOOLS

  • Public Agency Assessment Tool: Value capture strategies are time consuming and complex, and typically require the expertise of municipal bond financing experts, economic development experts, real estate appraisers, financial analysts, and planners. Projects must be of sufficient scale and offer significant potential for the public and private sectors in order to justify the time and effort involved in implementation. Click here to download Assessment Tool
  • Value Capture Capacity Maturity Matrix/Model (CMM): The Capability Maturity Model (CMM) structure is intended to provide a framework for organizations to characterize their current capabilities, determine their current situation in relation to a desired future level of expertise, and devise and execute an improvement plan. The Value Capture CMM is being designed to help State and local DOTs and MPOs to implement Value Capture techniques and identify the skills needed to effectively use Value Capture techniques as part of their day-to-day planning and funding processes. To begin the Self-Assessment and view the CMM click here.
  • Template-letter to the State Attorney General to ascertain Value Capture information with the greatest ease and accuracy suitable to implement in your State and local jurisdictions. Click here to download the template-letter to the State Attorney General
  • Essential Nexus, Rough Proportionality, and But-For Tests State of Practice
    • Essential Nexus, Rough Proportionality: Development Impact Fees and Special Assessment must meet the two tests: 1) “nexus” and 2) “rough proportionality.” Nexus means the exaction must have a rational connection (nexus) to the burden the government seeks to avoid, and Rough proportionality means that the amount of the exaction must roughly correspond to the burden placed on the government, resulting from the proposed development.
    • “But For” Test for TIF: The “but for” test is an inquiry into whether the property would be redeveloped without TIF assistance – but for the approval of TIF, the redevelopment would not occur. An important safeguard for protecting local revenue sources. It is essential for determining the size of the TIF investment necessary to spur economic development and without TIF investment development would not occur at the proposed level solely from private investment in the reasonably foreseeable future
  • How to Brief: These How-To Briefs provide detailed accounts of the challenges and opportunities associated with different value capture techniques. These Briefs include implementation challenges and solutions, appropriate procedures, technical approaches, and recommended legal language. To view Value Capture How to Brief, click here
  • Value Capture Case Studies: Case Studies were developed to help transportation agencies explore the opportunities and challenges of implementing Value Capture strategies to accelerate Value Capture Initiative deployment.To view Value Capture Case Studies, click here .
  • Value Capture Implementation Manual: This document provides information for State departments of transportation and local public agencies to consider implementing value capture. It includes options for making the business case for value capture, as well as overviews of the regulatory framework involved and risk management. Several case studies and examples are provided. Click here to access to the Value Capture Implementation Manual
  • Quick Start Guide: This Guide provides wayfinding for individuals and organizations with little experience with value capture techniques, while also providing further resources to individuals and organizations with experience.
  • Notable Value Capture Approaches Database: This Notable Approaches Database captures notable value capture techniques used by transportation agencies to assist individuals and organizations in the early development of value capture initiatives. To download the complete database, click here

TRAINING/WEBINARS

FHWA is launching a variety of capacity building initiatives and events to assist public agencies in using Value Capture strategies to capture a portion of the value generated by public infrastructure investment. These activities are being undertaken as part of the fifth cycle of the Everyday Counts (EDC-5) program. Under the right conditions, Value Capture techniques can be powerful funding tools that can help public agencies bridge funding gaps and accelerate the implementation of needed projects. Value capture can be used in a wide range of settings to help fund transportation improvement projects, as well as operations and maintenance.

VALUE CAPTURE INNOVATIVE FINANCE TOOLS

This section provides the transportation agencies the Innovative Financing Tools available to raise upfront capital to pay project costs. These financing obligations can be repaid with Value Capture Revenues. Financing can be considered as the initial capital required to deliver an infrastructure project. A project typically needs financing to get off the ground (short-term), and this will be paid back through future revenue/funding arrangements (long-term). The terms are linked and often used interchangeably, but they are distinct.

This section also explains how transportation practitioners can leverage Value Capture revenues using Federal funding/resources via Federal Matching Share or Federal Innovative Finance Programs, which are low interest rate credit program. These Federal Innovative Financing Tools help to raise upfront capital in order to finance transportation improvements with secured Value Capture mechanisms. This can include infrastructure facilities that are vitally important to sustained economic growth.

Leverage Federal Resources-Federal Grant Management Tools.

Grant Management strategies are commonly termed cash flow tools. Under the Federal-aid Highway Program, States receive annual share of Federal obligation authority and then obligate or commit Federal funds for individual projects throughout the year. The Federal reimbursement expenditure on the project is set to a predetermined matching share, usually 80 percent.

These Federal fund management tools do not increase the total amount of Federal aid available to States, but they can help to accelerate construction of certain projects (which limits exposure to cost escalation) and may enable States to reallocate funds that otherwise would have been used to provide the non-Federal match.

  • Advance Construction (AC) and Partial Conversion of Advance Construction (PCAC): Advance Construction (AC) allows States to begin a project even if the State does not currently have sufficient Federal-aid obligation authority to cover the Federal share of project costs. Under Partial Conversion of Advance Construction (PCAC), a State may elect to obligate funds for an advance-constructed project in stages.

    Applicable Purpose: AC and PCAC allows States to begin the projects with their own funds, such as Value Capture funding sources, and later convert these projects to Federal assistance.

  • Tapered Match: With tapered match, the non-Federal matching requirement applies to the aggregate cost of a project rather than on a payment-by-payment basis. For example, the Federal share could start out at 100 percent and taper off to zero as the project nears completion.

    Applicable Purpose: Enables States to advance the project before fully securing bond and capital market financing. The applicable purpose can also be used if the State lacks the funds needed to match a Federal-aid project at the start but will accumulate the match over the life of the project. For example, this technique may facilitate a project when a new SAD has recently been enacted. Using tapered match, the project can move forward immediately with 100 percent Federal funds, allowing time for the new SAD revenues to accumulate. The use of tapered match also may help a State overcome near-term gaps in State matching funds.

  • Flexible Match: Flexible match allows States to substitute private and other donations of funds, materials, land, and services for the non-Federal share of funding a highway project.

    Applicable Purpose: In a project with a public or private partner, the applicable purpose makes sure the partner has a clear interest in seeing a given project advance and is willing to contribute toward the project’s construction.

  • Toll Credits: Allows States to count expenditures of toll revenues on capital investments serving interstate travel as part of a State's required match for Federal highway grants.

    The State may apply toll revenue used for capital expenditures to build or improve public highway facilities as credit toward the non-Federal matching share of certain transportation projects. State credits are accrued when capital investments are made in Federally approved tolled facilities, including toll roads and bridges. These credits can then be used as a “soft match,” meaning that they do not represent an actual source of funding. Essentially, these credits reduce the amount of funding a State or local entity has to contribute and allows many programs to be funded with 100 percent Federal funds, as opposed to the traditional 80/20- percent split between Federal and State/local funding sources.

    Applicable Purpose: While toll credits lack cash value, States can use those credits to cover the local match on Federally funded highway and transit projects – especially as many States find themselves left with more toll credits than they can use. This can also free up State money that would need to be used to meet the Federal matching requirement.

  • Off-System Bridge Credits: Similar to toll credits, State and local funds expended on off-system bridges may be credited to the non-Federal share of Federal-aid bridge projects.

    Bridge or toll credits earned in accordance with 23 U.S.C. 133(f)(3) or 23 U.S.C. 120(i) may be used for the Competitive Highway Bridge Program (CHBP) match. If the bridge or toll credit is proposed as part of the financing proposal, States may fund the credit from either the National Highway Performance Program (NHPP) or Surface Transportation Block Grant (STBG) Program funds. If a State proposes to use NHPP or STBG funds in addition to the amount needed for application as credit with CHBP funds, then the funds for the credit must be from the same funding category.

    Applicable Purpose: Encourages State and local entities to improve the off-system bridge condition. This is similar to the applicable purpose of toll credit. In Ohio, for example, counties have the option of buying and selling (brokering) CBP credit, and several counties have taken advantage of this. Credit is typically sold at a discount as determined by the selling county. The County Engineers Association of Ohio (CEAO) must be provided with supporting documentation for all credit sales so that they can be accounted for in the CBP records.

Debt Financing/Municipal Bonds

Debt financing occurs when a municipality raises upfront money by selling debt instruments for repayment of debt obligation with Value Capture revenue sources, most commonly in the form of bank loans or bonds, often referred to as financial leverage. As a result of taking on additional debt, the company makes the promise to repay the loan and incurs the cost of interest. The State or local entity can then use the borrowed money to pay for large capital expenditures or fund its working capital. This includes both long-term and short-term debt, tax-exempt and taxable debt, as well as debt issued for the purpose of refunding existing indebtedness.

Tax-Exempt Bonds: Municipal bonds or tax exempt bonds represent a promise by government agencies or other qualified issuers to repay to investors/bondholders an amount of money borrowed via Value Capture revenues, called the principal, along with interest according to a fixed payment schedule. Municipal bonds generally are repaid, or mature, anywhere from 1 to 40 years from the date they are issued. For more information about municipal bonds related to transportation see Municipal Bonds and Tax Increment Financing-A Primer. There are two types of municipal bonds – General Obligation Bonds and Revenue Bonds

Tax Increment-backed Bonds or TIF Bonds: Tax increment-backed bonds are Revenue Bonds and the pledged revenue is tax increment. A good rule of thumb when using TIF bond proceeds is that anything associated with development is applicable, such as roads and bridges, public improvements, utilities, transit, land acquisition, relocation, site preparation, planning and financing costs. TIF bonds are often used with Special Tax District or Special Assessment in Transit Oriented Development. For more information about municipal bonds related to transportation, see Municipal Bonds and Tax Increment Financing-A Primer

Build-America-Bonds: BABs were introduced by the Federal government as part of the American Recovery and Reinvestment Act, signed into law by President Obama on February 17, 2009. The BABs program is designed to help State and local governments pursue various capital projects for construction of public buildings, schools, roads, energy projects, public utilities, and other public infrastructure projects. BABs were first used by universities. Investors in BAB municipal bonds receive interest payments that are taxable, but issuers receive a subsidy from the U.S. Treasury. The BAB program was expired in December 2010. BABs are a more efficient way of helping State and local governments to finance infrastructure projects and are attractive to a broader segment of potential investors, as compared to traditional tax-exempt municipal bonds

Private Activity Bonds (PABs): SAFETEA-LU amended Section 142 of the Internal Revenue Code to add highway and freight transfer facilities to the types of privately developed and operated projects for which PABs may be issued. This change allows private activity on these types of projects, including development, design, finance, construction, operation, and maintenance, while maintaining the tax-exempt status of the bonds. PABs are issued by a public conduit issuer on behalf of a private entity. The private entity is the obligor on the PABs. No substantive changes have been made to the PAB program by subsequent legislation. Value Capture Tax Increment and Special Assessment revenues can be pledged as repayment of the PABs debt service payments.

Grant Anticipation Revenue Vehicles (GARVEEs):

GARVEEs permit States to pay debt service and other bond-related expenses with future Federal-aid highway apportionments. GARVEEs Bonds can provide the State with a significant opportunity to accelerate its capital construction program through leveraging its future Federal highway reimbursements. States must decide how to match the Federal reimbursement of debt service. A TRZ can be used as a GARVEE debt service State matching share.

Certificates of Participations (COPs) and Lease Revenue Bonds (LRBs): COPs and LRBs are tax-exempt bonds issued by State entities usually secured with revenue from an equipment or facility lease. COPs enable governmental entities to finance capital projects without technically issuing long-term debt. This can be advantageous, as the issuance of long-term debt is commonly subject to voter approval and other State constitutional and statutory requirements. COPs have been used primarily for transit investments, as transit operations often rely on capital equipment, such as rolling stock, buses, or depots that are well suited to lease agreements.

Credit Assistance Program

Credit Assistance Program: Infrastructure Banks: Infrastructure banks use initial seed capital to lend money for infrastructure projects and then recycle the repayments in a revolving loan fund to finance future projects. This provides a self-sustaining funding opportunity. Several States have used their banks to accelerate the delivery of both large and small public works projects, while also leveraging Federal funds into projects.

  • Federal Infrastructure Banks Allow States to capitalize revolving loan funds with regularly apportioned Federal-aid highway for surface transportation that are established and administered by States. SIBs can offer a range of flexible finance assistance, including loans and various forms of credit enhancement. SIB loans can be repaid with Federal funds or dedicated revenue sources such as tax revenues, special assessments, tax increment, transportation/street maintenance fees, impact fees/mobility fees, tolls, and other fees associated with the use of the project, such as fees for parking.
  • County Infrastructure Banks (Dauphin County Infrastructure Bank) The Dauphin County Infrastructure Bank in Pennsylvania and the Franklin County Infrastructure Bank in Ohio are revolving loan programs, which provide low-interest loans for transportation improvements. These loans can be used for supporting tourism, economic development, and roadway safety. These counties have provided loans to TIF districts to attract private capital. The loans are more flexible and affordable for municipal recipients. These county banks provide timely, flexible, and below market rate loan financing for economic development projects within county. The size of these loans ranges from less than $1 million to $10 million for roads, bridges, bike trails, traditional energy infrastructure, drinking water, stormwater, telecommunications, fiber optics, and more.
  • State Infrastructure Banks, The Georgia Transportation Infrastructure Bank (GTIB): Please use font size #12 Several States have established State infrastructure banks with State only funds such as the Georgia Transportation Infrastructure Bank (GTIB). GTIB has provided over $165 million in grants and loans to highly competitive transportation projects that have enhanced mobility and driven economic development in local communities throughout Georgia. GTIB provides loans to local, regional, and State government entities in Georgia, including CIDs (a form of Value Capture Special Assessment District).

Section 129 Loans: Section 129 of Title 23 allows Federal participation in a state loan to support projects with dedicated revenue stream may include, but are not limited to: tolls, excise taxes, sales taxes, property taxes, motor vehicle taxes, and other beneficiary fees (Value Capture revenue sources such as Special Assessments, Tax Increment Financing, Transportation Utility Fees, Developer Impact Fees, Parking Fees, etc.). One of the key advantages to Section 129 loans is the opportunity for States to get more mileage out of their annual apportionments, by allowing States to use regular Federal-aid highway apportionments to fund loans to projects with dedicated revenue streams. For projects that do not meet the cost threshold required for TIFIA projects, or do not fit the profile of TIFIA projects, Section 129 loans remain a good alternative.

The Transportation Infrastructure Finance and Innovation Act (TIFIA) program: TIFIA allows USDOT to provide direct credit assistance, up to 49 percent of eligible project costs, to sponsor major transportation projects. The project must have a dedicated revenue source pledged to secure both the TIFIA and senior debt financing. Credit assistance can take the form of a loan, loan guarantee, or line of credit. For more information about the TIFIA program, visit USDOT Build America Bureau, TIFIA website.

Railroad Rehabilitation & Improvement Financing (RRIF): RRIF provides direct Federal loans and guarantees to support the development of railroad infrastructure. The US Department of Transportation is authorized to provide direct loans and loan guarantees up to $35 billion to finance development of railroad infrastructure. Not less than $7 billion is reserved for projects benefiting freight railroads other than Class I carriers.

Private Financing : Private financing for public infrastructure projects involves government borrowing money from private investors to pay for specific projects. The involvement of the private sector in developing, constructing, and operating transportation facilities also introduces additional sources of capital to leverage through project finance mechanisms. Through a public-private partnership, a contractual agreement between a public agency and a private sector entity allows for greater private sector participation in the delivery and financing of transportation projects. To this end, recent legislation and finance mechanisms have helped projects leverage private capital and redistribute project risk.

PROCUREMENT/PROJECT DELIVERY TOOLS

This section identifies and defines some of the more common types of procurement techniques can be used with Value Capture Strategies to advance the transportation improvement project. Transportation improvements/investments provide economic, mobility, and safety benefits. These benefits include improved goods movement, reduced congestion, and safer roadways. While the direct beneficiaries are those areas within the corridor, most highway corridors generate broader regional and national benefits. These benefits cannot begin accruing until the project is completed. In order to accomplish this, it will be necessary to utilize the most innovative delivery mechanisms to deliver the project in an efficient manner and pair with appropriate revenues and financial structure that balances the public policy objectives of the State with the fiscal reality of modern and generation transportation. Basic innovative delivery methods currently being employed around the country include:

Alternative Project Delivery

Bundled Facilities/Project Bundling: Project bundling is a procurement process where a single contract is used for the rehabilitation or replacement of multiple projects. Bundled contracts may also include the design and ongoing maintenance of those facilities. Bundled contracts may be used a single county, metropolitan region or state and they may also be tiered to allow a combination of different types of work. Bundling strategies achieve economies of scale and builds momentum to remediate critical facilities that are often in deficient condition. Project bundling enables project sponsors to address large numbers of projects with similar needs using standard and cost-effective rehabilitation and replacement strategies. The resulting economies of scale increase efficiency and creates the potential for cost and time savings. Larger bundled contracts may also attract private investors or larger and more experience contractors and help sponsoring agencies reduce project backlogs. States and other project sponsors are using multiple funding sources and financing tools to pay for these larger contracts.

Construction Manager/General Contractor (CM/GC): An alternative contracting method to Design-Bid-Build or Design-Build. CM/GC allows an owner to engage a construction manager during the design process to provide constructability input. The Construction Manager is generally selected on the basis of qualifications, past experience, or on a best-value basis. CM/GC has been used by Osceola County to deliver the roads and bridges program via Value Capture Development Impact Fees revenue.

Design Build (DB): DB contracting process with a single entity to both design and construct segments of independent utility. Projects are often awarded not on the basis of a low bid, but instead on the best value to the State and local jurisdiction. DB includes schedule, price guarantees, and resources available to commit to the project. Depending upon how the specific DB contract is structured, a government can transfer significant cost and schedule risk to the private sector. It has been proven that this delivery method can reduce the time and money spent on a project.

Design-Build-Maintain (DBM): DBM projects are identical to DB projects, with the exception that the private contractor retains responsibility for maintaining the facility for a given number of years. This maintenance responsibility can be limited to mowing, snow removal, and sign replacement, or it can be expanded to include major rehabilitations. This additional responsibility transfers the risk associated with fluctuations in long-term maintenance to the private sector.

Design Build Operate Maintain (DBOM): DBOM is commonly used for projects such as shopping and leisure centers, light rail, highways, tunnels, bridges, and other infrastructure. Projects are procured from the private sector in a single contract while work is typically paid for by the government. DBOM, also refers to as ‘turnkey’ procurement and ‘build-operate-transfer,’ is a variation of the classic design and build method of procurement in which the main contractor is selected to design and construct the project.

Design Build Finance (DBF): The DBF model has been implemented successfully in highway construction by State DOTs with projects constructed in Florida and Georgia. The DBF allows State and local jurisdictions the efficiencies of the DB model and the opportunity to expedite delivery of projects that would otherwise have to wait for public funding to become available in the out-years of the Capital Improvement Program. Responsibility for the ordinary and long-term maintenance and operation of the project will remain with the public sector.

Design-Build-Finance-Transfer (DBFT): A project delivery method that allows a single contractor with expertise in design, construction, and financing to be selected to design, construct, and arrange financial resources for the works. This is similar to DBFO, except that the contractor eventually transfers ownership of the project back to the client. Variations include DBO, and BOOT.

Design-Build-Finance-Operate (DBFO): A project delivery structure in which the private sector party is awarded a contract to design, construct, finance, and operate a capital project. In consideration for performing its obligations under the agreement, the private sector party may be paid by the government agency (for example, availability payments) or from fees collected from the project's end users, such as tolls. The government or government-owned entity retains ownership of the project.

Design-Build-Finance-Maintain (DBFM): Allows one contractor to design, build, and finance a project and then to handle facilities maintenance services under a long-term agreement. DBFM can be attractive to some States and local jurisdictions, as it creates a single point of responsibility for delivering the project, reduces long-term risk, and incentivizes the contractor to adopt low-maintenance solutions. It may also be an attractive option for the contractor who is providing maintenance services, since it results in regular payments from the client over a long period (sometimes as long as 25 to 30 years).

Public Private Partnerships (P3s):

P3s for new build facilities can involve construction of a new surface transportation asset or modernization, upgrade, or expansion of an existing facility. These P3s are structured as DBFOM concessions that bundle together and transfer to a private sector partner responsible for design, construction, finance, and long- term operations and maintenance over the concession period.

Design Build Finance Operate Maintain (DBFOM) Toll Concessions: Also known as real toll concessions—tolls generated by the project are the primary revenue source for the P3 transaction. The private sector partner maintains the right to collect the revenues during the concession period but bears the risk that the project toll revenues may not be adequate to pay the underlying project loans and interest and make a fair return on its investment. To protect the public sector interest in the event of robust revenue generation, some concession agreements include a revenue-sharing provision between the private partner and public sector if revenues exceed certain specified thresholds.

DBFOM toll concessions have been used in highway projects to develop toll roads, tolled bridge or tunnel waterbody crossings, and priced managing.

Design Build Finance Operate Maintain (DBFOM) Availability Payment Concessions: With availability payment DBFOM concessions, project revenue risk is retained by the public sector sponsor. The sponsor provides the private partner with availability payments to compensate for designing, constructing, operating, and maintaining the facility for a set concession period. During this time, the private partner receives a predictable set of income. Availability payments may be used on non-tolled projects or on tolled projects where the revenue may not be sufficient to cover the debt repayment, or in cases where the project sponsor wants to retain control over toll rates.

CASE (Contracting Alternatives Suitability Evaluator):

The CASE Webtool Is an Innovative Approach to Selecting Your Project Delivery Method In addition to the traditional Design-Bid-Build (DBB) project delivery method, Alternative Contracting Methods (ACMs) effectively deliver transportation improvements by integrating design, construction, and sometimes private financing. The most common ACMs include Design-Build (DB), Construction Manager/General Contractor (CM/GC), Progressive Design-Build (PDB), and Public-Private Partnerships (P3s). ACMs are often used for more complex projects due to their ability to bring significant time and cost savings through improving risk management and incorporating innovation. However, it can be challenging for an agency to decide when to use an ACM and which ACM to use for a given project.

Other Innovative Project Delivery

Special Purpose IRS 63-20 Alternative Project Delivery: A 63-20 financing option may enable governmental agencies, such as port districts, cities, or counties, working in partnership with the private sector to satisfy demands for additional capital facilities in a very cost-effective manner. Typically, a governmental entity utilizes 63-20 financing avoiding the practical, legal, and political problems associated with the construction of its own facilities or the issuance of its own debt and with the added benefit of receiving unencumbered fee titles to the facilities once the bonds are retired. In a 63-20 financing, a nonprofit corporation created under the nonprofit corporation laws of a State may issue tax-exempt obligations on behalf of a State or political subdivision for the purpose of financing governmental facilities as long as certain requirements are met. The nonprofit corporation must transfer title to the financed facility to a governmental entity when the debt is retired. 63-20 debt in the form of tax-exempt bonds generally is sold in the same financial markets as governmental tax-exempt bonds. Interest on 63-20 debt is exempt from Federal income taxation. The cost of capital financing is, therefore, lower than it would be in the conventional capital markets.

Transportation Corporation: Transportation corporations are public entities created to finance and, in some cases, implement transportation improvements. Governed by a board of directors under the oversight of a state transportation commission, these nonprofit corporations primarily focus on implementing or providing funding for major transportation projects - typically highway projects. Transportation corporations are generally created alongside funding mechanisms including tolls, tax increments, or dedicated allocations of public funds.

This toolkit is designed to encourage the use of Value Capture funding strategies to assist in supplement funding transportation projects. Specifically for practitioners who need to have a thorough understanding of Value Capture strategies in order to communicate with decisionmakers and conduct outreach to communities.