TABLE OF CONTENTS
LIST OF FIGURES
LIST OF TABLES
Historically, value capture (VC) techniques have been used predominantly in the context of major real estate development projects. They have been used primarily to fund various local transportation and other support infrastructure improvements necessitated by the real estate projects. Public improvements funded through VC techniques typically have included:
Streets, roads, and other right-of-way (ROW) improvements within the real estate project boundary
Offsite improvements to roads and intersections impacted by the real estate project.
Additional capacity in utilities, including gas, electricity, cable television, telecommunications, water, sewer, storm drainage, etc.
Additional capacity in public services, including police, fire, emergency, etc.
Provisions for open space, including parks and pedestrian and bicycle facilities
Other infrastructure improvements as required by the environmental mitigation measures to reduce the impacts of the real estate project
When the main VC driver is a major real estate development project, making the business/economic (B/E) case for VC is mostly about determining the specific publicly funded improvements needed to support the specific land use program called for in the project. The cost of these improvements establish the minimum level of funding that must be generated by using one or more VC techniques.
For real estate projects, developer exactions or contributions (e.g., developer impact fees) can be looked at as the first source of potential VC revenues. The level of developer fees, however, is in large part limited by the overall project economics and by local jurisdictions' ability to pass the essential nexus and rough proportionality tests. When these fees are not enough to cover all the improvement costs, the next step is to explore one or more government-sponsored VC techniques, such as tax increment financing (TIF) and/or special assessment districts (SAD).38 When multiple VC techniques are used for a given project, a useful integrative tool is a development agreement (DA), in which the developer and local agency can together spell out specific VC tools to use to pay for specific public improvements.
For those real estate projects with significant positive economic impacts on local communities that require major publicly funded improvements, local governments can also choose to provide additional funding from their general fund to supplement the VCgenerated revenues. For some of these projects, local governments can also decide to enter into a joint development agreement (JDA) by committing public assets or ROWs in exchange for various revenue sharing arrangements with the developers. The additional revenues thus generated can be leveraged in part to pay for the needed public improvements on the project.
In short, for real estate development projects, all of the above discussions–i.e., what VC techniques are used and how the projects are structured–have some bearing in making the B/E case for VC. Ultimately, however, it is the cost of the improvements that drive the VC needs.
When the main VC driver is a core infrastructure project (such as a new highway or transit corridor), making the B/E case for VC is essentially about establishing the direct nexus between the core infrastructure project and any major real estate developments that are triggered by the project (such as a regional shopping mall at a major highway intersection or transit-oriented developments [TODs] at a centrally located transit station). Here, the strongest rationale for the direct nexus is on "but-for" grounds–the recognition that real estate developments (and the resulting substantial increase in local tax revenues) would not occur without the core infrastructure project.
Although there are some precedents,39 the use of VC techniques to pay for core infrastructure projects have been limited to date. Yet, VC techniques are useful for generating alternative local funding sources for core infrastructure projects to supplement traditional Federal and State funding sources. For critical core infrastructure projects with lasting positive impacts in local communities around the United States, the overall approach to VC could be more expansive and innovative than how the techniques have been used to date.
For TIF, the key is to gain a formal recognition on the part of the local and regional governments of the "but-for" rationale to increase their willingness to contribute and to determine the level of tax revenue allocation that is reasonable and acceptable for all. For SAD, though limited, the successful, existing precedents for funding major transit corridors (e.g., the Metrorail Silver Line connecting Northern Virginia areas with Dulles International Airport)–over and above public improvements to support local real estate projects–indicate that its use could have much wider applications for core infrastructure projects throughout the United States. There has been increasing voter support for public transit and the use of sales tax districts to generate additional revenues for transit projects. The private sector-driven TODs, however, have not kept pace with public investments in transit stations (Kim, 2018). The strategic use of VC techniques could potentially serve as the catalyst for robust TODs along major transit corridors in major U.S. cities.
For VC to be successful for core infrastructure projects, it is essential for there to be buy-in from local and regional governments. Various incentive measures could motivate local and regional governments to contribute their tax dollars for VC purposes. As a case in point, LA Metro has recently established a capital project acceleration policy40 that incentivizes local governments' participation. The policy outlines conditions under which local governments can help accelerate those Metro projects that directly benefit their own communities. These conditions have included: (1) generating new local revenue sources to supplement Metro funding, including the use of VC techniques; (2) having streamlined local planning and environmental review processes; (3) ensuring strong local partnerships; and (4) providing opportunities for innovations that achieve project efficiency gains, including engaging private partners.
The qualitative and quantitative assessments provided in Chapters 4 and 5 to make the B/E case for VC are directly applicable in the context of core infrastructure projects. The basic approach presented can be used not only by local/regional governments but also by State departments of transportation (DOTs), metropolitan planning organizations (MPOs), and regional transit authorities to support and encourage the use of VC techniques and help build critical infrastructure projects as planned.
Value capture is essentially about generating revenues to pay for infrastructure, whether they are for infrastructure projects or other publicly funded improvements linked to real estate development projects. When used for infrastructure projects, VC techniques provide a potential funding (revenue) source for the project and do not address directly the method used to deliver the project nor the securing of upfront financing for that particular project. Though not a project financing/delivery mechanism per se, VC revenues can play an important role when a public-private partnership (P3) model is used to deliver and finance core infrastructure projects.
The P3 delivery model is a whole-life, performance-based capital project delivery method that comes with a private-sector project financing package over the project life cycle. The P3 delivery model is performed through a long-term concession agreement, sometimes referred to as a comprehensive development agreement (CDA),41 between a private concessionaire and a government sponsor. In general, securing a P3 project financing package upfront by the private sector is based on reasonable assumptions about an anticipated future funding (i.e., revenue) stream.
Typically, P3 is delivered using either a revenue-risk (RR) (also referred to as demand-risk) P3 model or an availability payment (AP) P3 model. As shown in Table 11, under RR P3, most of the anticipated funding (revenue) generally comes from third-party user charges with the private sector taking on the revenue (or demand) risk. Under AP P3, the more prevalent of the two models, the anticipated funding (revenue) comes from the public sponsor where the private sector is paid pre-established annual payments (albeit contingent on performance) for the life of the contract, in part for securing the upfront financing. In short, under AP P3, the long-term P3 financial liability lies on the public sponsor's shoulders.
When a P3 project is based on an AP P3 model with a significant real estate development component within its scope, it offers opportunities to use VC techniques in the real estate component to generate additional funding sources to support the infrastructure component. In this case, the public sponsor administers the VC techniques, and the VC revenues generated help defray the public sponsor's P3 annual payment obligations.
Parameter |
P3 Model |
|
|---|---|---|
Revenue Risk (RR) P3 |
Availability Payment (AP) P3 |
|
|
Primary Revenue Source |
User Charges |
Annual Payments from Public Sponsor |
|
Type of Risk |
User Demand (i.e., Revenues from Users) |
Public Sponsor Fiscal Status |
|
Risk Bearer |
P3 Private Concessionaire |
Public Sponsor |
When real estate is part of the P3 project structure, it is important to recognize that real estate and infrastructure assets are inherently different from a financing standpoint. From an investor's perspective, the risk profiles are different, appealing to different market segments.42 Some infrastructure investors can accept real estate risk within their investment portfolio, providing opportunity to gain some economies-of-scale benefits. To maximize the development opportunity for a P3 project, public sponsors have an incentive to structure the deal to get the best of both real estate and infrastructure markets in the most efficient way.
AP P3 projects can still benefit from VC when real estate is not part of the P3 deal structure. As separate and distinct from the P3 project, P3 public sponsors can set up TIF districts and/or SADs adjacent to P3 infrastructure projects to generate new VC revenues to fulfill their P3 obligations. Such a VC approach enables the public sponsors to help establish clear and steady revenue streams for P3 purposes, which in turn helps to minimize the cost of private capital (both debt and equity) involved in P3 project financing. When applied appropriately, P3 project delivery combined with the use of VC techniques could potentially provide a win-win situation–private sector life-cycle efficiency gains combined with public sector low-cost financing to successfully implement core infrastructure projects.
38 In particular, the use of SAD, as is the case for impact fees, can sometimes be limited to those specific improvements that are "unique, measurable, and direct" to the assessment district itself (e.g., sidewalks, sewer lines) and exclude general community-wide benefits beyond the district (e.g., parks, library, and some offsite improvements).
39 For example, two SADs have been largely responsible for funding the new Metrorail Silver Line designed to connect the fast-growing Northern Virginia area with Dulles International Airport.
40LA Metro Proposed Policy, Project Acceleration/Deceleration Factors and Evaluation Process, October 2017.
41 P3 concession agreements are often referred to as comprehensive development agreements (CDAs), which should not be confused with a development agreement (DA) in the VC context.
42The infrastructure market is about longer term, government-backed, and contractually secured obligations for essential public projects where valuations are typically stable (especially for AP P3 projects; RR P3 projects are subject to economic recession risks). The real estate market, on the other hand, is about shorter term investments secured by land-related values and taxes/fees/charges considered nonessential, catering typically to local private office, residential, or retail markets. Valuations vary depending on location and the demand/supply of inventory is subject to greater volatility during economic recessions. Projects that combine these elements without good understanding of both markets can create conflicting risk profiles, lost opportunity/value, and reduced market interest.
