« PreviousNext »

Chapter 3. BUSINESS/ECONOMIC CASE BUILDING BLOCKS

3.1 Value Capture Goals and Objectives

Value capture (VC) is about monetizing the appreciation in real property values triggered by infrastructure improvements. Although infrastructure is a critical element, VC revenues are generally derived from real estate projects, not infrastructure projects. As it relates to transportation infrastructure, the use of VC can be triggered by either (1) major real estate development projects that require additional local transportation capacity or (2) major transportation corridor projects that induce real estate developments along the corridor (e.g., regional shopping malls at major highway intersections, transit-oriented developments [TODs] at centrally located transit stations). In these cases, VC is directly linked to real estate developments, and the local jurisdictions where the developments are to occur would have the primary responsibility for implementing appropriate VC techniques–and, for that matter, making the business/economic (B/E) case.

The basic objective of using one or more VC techniques is first and foremost about generating new funding sources to:

• Pay for ancillary transportation and other public improvement needs directly linked to major real estate development projects

• Provide local contributions to major transportation corridor and other core infrastructure projects, especially when Federal, State, and other traditional funding sources are insufficient⁵

Beyond generating new revenues, the use of VC techniques can also help local jurisdictions in meeting their overall policy goals established in their general plans (GPs).⁶ These GPs are designed to guide the development projects to help meet the local long-term economic growth/development, land use/zoning, and transportation/mobility goals. For local governments, a VC approach can therefore offer an opportunity to better enforce policy goals through the development projects, which could include, for example:

• Creating more and better jobs

• Providing more housing, including multifamily and affordable housing units

• Promoting smart growth, including TODs around light rail stations

• Improving local and regional transportation connections

• Providing more open space and parks, including trails, bike paths, and other amenities

• Promoting balanced economic growth and development

For major transportation corridor projects with wider regional impacts, the overall VC approach could be broadened at the corridor level beyond a "single node" undertaking (i.e., at an intersection or a station) and involve multiple jurisdictions. At the corridor level, for example, the B/E case for VC could be made by transportation agencies to encourage the use of VC techniques to generate new local revenues. The revenues from multiple jurisdictions along the corridor could help pay for the corridor itself, which in turn could help trigger major real estate developments at multiple nodes along the corridor. The VC goals and objectives under these cases also have the potential to reflect the overall policy goals of State departments of transportation (DOTs), metropolitan planning organizations (MPOs), and/or transit agencies, as relevant.

For a major regional transit corridor, for example, the local jurisdictions' VC approach to TODs at individual stations would be aligned with those of the regional transit agency. The transit agency's goals would generally be much broader, reflecting the basic "three E's"–economy, ecology, and equity–including smart growth (i.e., high-density developments to achieve economic efficiency), affordable housing (i.e., provisions for low-income households for social equity), and greenhouse gas (GHG) reduction (i.e., climate resiliency through environmental responsiveness).

In short, for VC to be successful, it is beneficial to have clearly articulated policy goals at the outset with broad stakeholder buy-in. The VC techniques pursued subsequently should be directly linked to achieving these goals.

3.2 Value Capture Opportunity Areas and Buildout Scenarios

When the main VC driver is a major real estate development project, the B/E case for VC is largely dictated by the project-specific real estate programming, the resulting project economics, and the nature of the agreement between the developer and the local agency (which can be influenced by the local economic and political climate). When the main driver is a major transportation corridor project, where the developments along the corridor are either under planning or yet to be contemplated, making the B/E case for VC becomes much more open ended. In this case, the need for a B/E case assessment could be more critical, because it could help gain better understanding of the feasibility and nature of future developments (and thus the VC potential) along the corridor. The focus in this section and throughout this primer is therefore more on the open-ended case. The basic concepts presented are still relevant for cases where development projects are well defined.

For transportation corridor projects, VC opportunity areas (OAs) are typically represented by major nodes along the corridor (e.g., major highway intersections, passenger or freight terminals or stations) where substantive real estate developments are most likely to occur. A regional shopping mall at a major freeway intersection or high-density TODs at a centrally located transit station are good examples of real estate projects where substantive VC opportunities could exist.

Where VC needs are open ended, defining VC OAs for a given node entails three main factors:

• Geographical boundary of the node (referred to as the VC catchment area) where various VC techniques could be implemented–e.g., the area within a shopping mall project boundary, the area surrounding an agricultural or industrial complex, or a predefined area around a transit station

• Locational characteristics of the node–e.g., urban vs. rural, high- vs. low-growth areas, commuter concentration within the node–which reflects relative propensity for VC potential (referred to as the VC propensity factor)

• Site- or project-specific buildout potential, which is be determined by the maximum density allowed by local land use/zoning regulations associated with the node–e.g., maximum allowable density for residential and commercial uses (referred to as the VC buildout scenario).

These factors are important inputs to performing the quantitative assessments discussed later (see Chapter 5 and Appendix B).

3.3 Relevant Value Capture Techniques

There are many VC techniques currently available that could be applied in different project contexts. The more prevalent ones are:

• Tax increment financing (TIF) (and many variations thereof)

• Special assessment districts (SAD) (and many variations thereof)

• Developer impact fees (DIF) (and many variations thereof)

• Negotiated developer exactions/contributions, such as land dedication and/or in-kind provisions

• Transportation utility fees (TUF)

• Contract-based VC techniques

  • Development agreement (DA)

  • Community benefits agreement (CBA)

  • Public asset/right-of-way (ROW) use agreement

  • Joint development agreement (JDA)

• Zoning incentives (density bonus, transfer of development rights [TDR], etc.)⁷

Table 1⁸ provides a brief description of these techniques.⁹ Especially for TIF, SAD, and DIF, there are also many different variations, which are called by different names in different States. To minimize confusion, the following table (Table 2) provides representative examples of these variations and alternative names:

Table 1. Summary of VC techniques.

VC Technique	Description
Tax Increment Financing (TIF)	Based on existing ad valorem tax, TIF captures organic and incremental increases in property values and taxes resulting from public improvements within a designated TIF district (no new tax assessment involved).
Special Assessment District (SAD) Financing	Property and business owners/tenants within a designated SAD are subject to new tax surcharges (not ad valorem) to pay for public improvements and services within the SAD.
Developer Impact Fees	Developers pay in-lieu fees to account for the cost of any incremental public improvement or service capacity necessitated by their development projects.
Negotiated Exactions	Developers dedicate their land for public use or provide in-kind services or physical facilities for public benefit.
Transportation Utility Fees (TUF)	Fees typically associated with recurring maintenance and repair costs for local roads and transit networks that are allocated to properties within a given jurisdictional limit (can be used for capital improvements).
Development Agreement (DA)	Legally binding, long-term contract negotiated between developers and local governments in which developers provide large (sometimes upfront) contributions for public improvements in exchange for vested right, i.e., no change in land use/zoning for the term of the contract.
Community Benefits Agreement (CBA)	Often used in conjunction with DA, developers provide specific community benefits (i.e., job, social programs, affordable housing) in exchange for the communities' support.
Public Asset/Right-of-Way (ROW) Use Agreement	Involves the private use of public assets, public ROWs, and development rights above, below, and adjacent to public ROWs; examples include air rights (e.g., above expressway turnpikes), naming rights, advertisements, third-party franchise agreements (e.g., solar panels on public real estate).
Joint Development Agreement (JDA)	Involves local government directly partaking in the private development project by committing public assets and/or development rights above, below, and adjacent to public ROWs in exchange for various revenue/cost sharing arrangements.
Zoning or Regulatory Incentives	Often used as a part of negotiated exactions; involves favorable zoning changes, such as up-zoning with density bonus for affordable housing provisions; transfer of development rights (TDR) to monetize latent rights; vested rights used in DA; etc.

Table 2. Variations and alternative names of VC techniques.

VC Category	Representative Examples of Variations/Alternative Names
Tax increment financing (TIF)	Tax allocation district (TAD) (Georgia), transportation reinvestment zone (TRZ) (Texas), and urban renewal area (URA) (Oregon)
Special assessment district (SAD)	Many States use benefits assessment district (BAD) (generic), business or community or local improvement district (BID/CID/LID), transportation development district (TDD), or transportation improvement district (TID) State-specific examples include community facilities district (CFD) (California) and special service area (SSA) Illinois)
Developer impact fees (DIF)	Other common terms in the transportation sector are mobility fee, intersection development charge (IDC), road or traffic impact fee (RIF/TIF), and system development charge (SDC)

The choice of a particular VC technique should reflect the context in which it is applied. Table 3 provides a summary of the type of VC techniques used on more than 70 transportation project examples in the United States.¹⁰ Context includes: (1) type of mode (i.e., local roads, highways, or transit), (2) locational settings (i.e., urban vs. suburban), (3) project size (small, medium, large), and (4) VC revenues as a percentage of total project cost. As shown, in most cases, projects used more than one VC technique and there appears to be no particular consistency in the selection of VC techniques for a given project context (see Appendix A for additional details). More generally, the selection of a particular VC technique is often based on the most expedient and available option at the time.

Section 3.5 provides qualitative VC evaluation criteria that can be used to compare different VC techniques. These criteria can assist in selecting specific VC techniques for specific project contexts.

Table 3. VC techniques for different project contexts–representative examples.

Mode	Location	Project Size*	VC % of Project Funding	VC Tool Category
				TIF	SAD	Impact Fees	Other Developer-Based	ROW Use Rights	Others
Local Roads	Urban	S	100%				✔︎	✔︎
		M	100%	✔︎	✔︎		✔︎
		L	100%	✔︎	✔︎	✔︎	✔︎	✔︎
	Suburban/Rural	S	60-100%	✔︎	✔︎	✔︎
		L	50-100%	✔︎	✔︎	✔︎		✔︎	✔︎
Highways/ Bridges	Urban	M	100%	✔︎	✔︎				✔︎
		L	1-60%		✔︎				✔︎
	Suburban/Rural	S	80%	✔︎	✔︎	✔︎	✔︎
		M	10-45%	✔︎	✔︎	✔︎
		L	1-90%	✔︎	✔︎		✔︎		✔︎
Toll Roads	Urban	L	100%						✔︎
	Suburban/Rural	M	30%				✔︎
		L	2-100%			✔︎			✔︎
Transit/ Multi-modal	Urban	M	35-50%	✔︎	✔︎		✔︎	✔︎	✔︎
		L	2-100%	✔︎	✔︎		✔︎	✔︎	✔︎
	Suburban/Rural	L	5-40%		✔︎				✔︎

* S (small)–less than $50M; M (medium)–between $50M and $250M; L (large)–over $250M.

3.4 Stakeholder Identification

There are many stakeholders in VC implementation. In addition to local governments that are responsible for implementing the various VC techniques chosen, other public entities such as State DOTs, MPOs, public transit agencies, and rural planning organizations have a stake in the successful VC outcome. Most importantly, the key VC stakeholders are those who benefit directly from property value appreciations and public improvements linked to VC, and who ultimately bear the financial burden to contribute to the VC revenue funding sources. VC stakeholders also vary depending on the specific VC techniques used.

Table 4 identifies, for each VC technique, examples of key stakeholders that have primary responsibility for bearing the VC financial burden. Identifying key stakeholders should also be directly tied to relevant regulatory and institutional requirements specific to each VC technique. Finally, as relevant, lenders and members of the investment community that cater to real estate or infrastructure projects (whether publicly or privately financed) may also have a stake in how different VC approaches could impact the overall project economics.

Table 4. Key stakeholders by VC techniques.

VC Technique	Key Stakeholder with Financial/Contractual/Regulatory Responsibility
	Taxpayers (General Tax Base)	Property or Business Owners or Tenants	Developers	Local Jurisdictions	Private Entities or Corporate Sponsors
Tax Increment Financing (TIF)	✔︎
Special Assessment District (SAD)		✔︎
Developer Impact Fees			✔︎
Negotiated Exactions			✔︎
Transportation Utility Fees (TUF)		✔︎
Development Agreement (DA)			✔︎	✔︎
Community Benefits Agreement (CBA)		✔︎	✔︎
Public Asset/ROW Use Agreement				✔︎	✔︎
Joint Development Agreement (JDA)			✔︎	✔︎
Zoning/Regulatory Incentives			✔︎	✔︎

3.5 Value Capture Evaluation Criteria

In developing the overall VC approach, establishing a set of criteria for evaluating the effectiveness of various VC techniques enables direct comparisons among the techniques. Strathman and Simmons (2010) recommend VC evaluation criteria based on the principles of public finance theory, in which six key features are used to characterize an optimal tax regime (as described in Musgrave and Musgrave [1989]). These features are yield/revenue potential, equity, efficiency, administrative ease, transparency, and political/legal feasibility. This primer uses the same six criteria and adds macro-policy goals in evaluating the relative merits of different VC techniques. The following describes the resulting seven evaluation criteria:

1. Yield/revenue potential: (a) ability to generate VC revenues within the desired or reasonable timeframe, (b) stability of such revenue stream, and (c) flexibility in financing a wide range of public improvements

2. Equity: (a) financial equity as considered reasonably fair by those who receive VC benefits and bear the VC financial burden, and (b) social equity in terms of the ability to pay the VC financial burden and provisions for those who cannot pay

3. Efficiency: (a) magnitude of benefits derived from VC financing mechanism and (b) extent to which the VC mechanisms are based on direct usage, i.e., those who benefit should pay in direct proportion to the benefits they receive

4. Administrative ease: (a) relative ease of administrative processes (e.g., fee collection) and (b) cost-effectiveness of district formation and administration of specific VC techniques

5. Transparency: whether the method used to determine the VC benefits and financial burden are (a) visible to the general population and (b) easy to understand

6. Political/legal feasibility: whether there are any known potential political or legal obstacles to VC implementation (e.g., lack of enabling legislation)

7. Macro-policy goals: whether the outcome of the VC technique is consistent with the overall policy goals (e.g., job creation/retention, affordable housing) of the local jurisdictions and, as relevant, State DOTs, MPOs, and/or other agencies

These criteria form the primary basis for the qualitative assessments presented in Chapter 4.

3.6 Value Capture Risk Allocation and Phasing Strategy

Major lessons learned in past VC applications have been twofold. First, VC techniques are often applied too late, after property appreciation has already occurred. Second, existing properties next to new developments often enjoy windfall gains in property appreciation without paying their fair share of the new improvements. Best VC practice now is to start early, use as large a footprint as possible, and apply the VC techniques for a longer period.

Given these lessons, for a major transportation corridor project, an effective VC approach is to start early when there is a general recognition of the transportation project's potential to generate value, but before the land use entitlements for future developments along the corridor are granted without proper assessment of their monetization potential based on benefits and costs to each major stakeholder involved. The VC approach at the corridor level can be planned alongside the corridor project planning process, and well in advance of the project procurement and subsequent opening date, to maximize
its potential.

Once ROW is acquired and a project is procured, for example, much of the negotiating leverage is lost and incentives for developers may be weakened. Generating and maximizing negotiation leverage in capturing value during the planning and public involvement phase is an important element in making and implementing the VC business case. Developing a strategy for strengthening and preserving negotiating leverage early in the planning stage also helps to reduce overall risk in VC monetization.

At a strategic level over the long run, the basic VC approach could be multilayered, starting with those techniques that have the least new impact–and thus lowest risks, real or perceived–on stakeholders (e.g., TIF with no new taxes) and followed by those involving new charges with increasing risks (e.g., SAD and/or developer impact fees) in a risk-adjusted manner so that each stakeholder can better bear the VC financial burden.

Developing an overall VC approach entails identifying which VC techniques will be used when and where, and how these techniques will be implemented. The VC approach addresses how multiple techniques could be integrated and phased over a project life cycle based on an underlying framework that considers: (1) the equity factor–i.e., those who benefit the most pay the most–and (2) the risk factor–i.e., those who bear the risk do so when they are best able.

For example, for transportation corridor projects, real estate developments (including TODs) along new or improved corridors can be further encouraged by incentivizing developers through the use of government-sponsored VC techniques first–e.g., a TIF district first followed by, as needed, SAD.¹¹ As the real estate project proceeds, the development risks decrease progressively, and developers' willingness to pay should increase accordingly with increasing levels of exactions/contributions. From the outset of the development project, with complete transparency, such an integrated and risk-adjusted VC implementation strategy could be established for the entire project life cycle to help streamline the VC implementation process. This is especially beneficial when multiple techniques and stakeholders are involved and when the VC implementation becomes quite complex with multiple layers of regulatory and institutional requirements.

Footnotes

⁵ Local contributions in this case can increase the probability that infrastructure projects that directly benefit the local communities will proceed as planned and that the project will be completed on time to kick-start real estate development projects.

⁶ Also referred to as comprehensive plans or master plans.

⁷ These incentives are often part of negotiated exactions.

⁸ Unless otherwise indicated, the tables and figures without sources are prepared specifically for this primer.

⁹ Additional details on these techniques can be found in the FHWA Value Capture Implementation Manual (FHWA-HIN-19-004, FHWA 2019).

¹⁰ These project examples are from the U.S. Department of Transportation's Center for Innovative Finance Support (Value Capture Project Profile) (https://www.fhwa.dot.gov/ipd/value_capture/project_profiles/).

¹¹ Assuming that the real estate projects considered are not speculative in nature but have a high degree of viability in terms of specific project economics and positive overall economic impacts on local communities

« PreviousNext »