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Value capture (VC) is derived from real estate developments. Making the business and economic case for value capture to generate new funding for transportation infrastructure projects and programs is ultimately about establishing a clear and direct nexus between the transportation projects and the real estate developments that emerge or benefit from those projects.
Many local and regional agencies find that to maximize VC monetization potential, an effective strategy is to start early during project planning and public involvement phases and well in advance of right-of-way (ROW) acquisition and project procurement. Making the VC business case is also about developing a strategy to strengthen and preserve agencies' VC negotiating leverage with developers early in the planning stage.
The basic goal of this primer is to demonstrate how local and regional agencies tasked with providing infrastructure can make the business and economic (B/E) case for using one or more VC techniques to address funding challenges.
The overall VC implementation life cycle broadly entails the following phases: feasibility/evaluation, preparation, formation (institutional), financing, life-cycle administration, and stakeholder coordination. The B/E case can be made early in the feasibility/evaluation phase to help make decisions on whether to proceed with one or more VC techniques. At that point, the assessment would be more qualitative in nature. A more detailed quantitative assessment can be performed in subsequent phases, in particular to provide input in developing the overall VC financing plan.
The necessary building blocks for developing the B/E case include:
Comparative qualitative assessments are performed on select VC techniques–e.g., tax increment financing (TIF), special assessment districts (SAD), developer impact fees (DIF), and joint development and ROW use agreements–based on key evaluation criteria identified in Chapter 3. These criteria include:
When the main VC driver is a major transportation corridor project where real estate developments along the corridor are open-ended, the quantitative assessments can help determine the maximum VC potential that could support funding for both the corridor project and local improvements directly linked to potential real estate development projects along the corridor. In this chapter, the three most common techniques–TIF, SAD, and DIF–are considered for quantitative assessments.
The basic steps in the quantitative assessment are:
These steps are not required under Federal law; value capture techniques are generally implemented under State or local law. To illustrate these steps, the following paragraphs walk through a quantitative assessment for a single node–i.e., a regional shopping mall project at a single highway intersection or transit-oriented developments (TODs) at a single transit station.
Defining the VC OAs for a single node entails identifying areas along the transportation corridor where substantive new developments could occur–e.g., major highway intersections or transit stations with high growth potential ("OA nodes"). Local general plans (GPs) and specific plans (SPs) at these OA nodes generally help in defining the geographic extent ("VC catchment area") of the OA node and the intensity of development ("VC propensity") based on the growth plans and maximum allowable densities that are coded into land use/zoning plans. Developing buildout scenarios involves converting the current land use into higher-density uses based on the maximum increase in density allowed by local land use/zoning plans. Parcel-level data for the VC catchment area is needed to establish the existing conditions for the base case upon which incremental developments could be added to reach the buildout potential.
The basis for estimating VC revenues varies depending on the VC technique used. For TIF and SAD, the VC revenues are from taxes (whether ad valorem or special taxes requiring voter approval) derived from incremental AV of properties. For DIF, the revenues are from fees (generally no voter approval required) derived from the increase in number of trips generated by different land uses. Estimating incremental AVs entails translating the incremental commercial and residential developments associated with the buildout scenario into the incremental AVs based on higher projected unit pricing for each use. Estimating incremental trip generation is based on trip generation rates by land use that are used by local governments in developing their local DIF schedules. More local governments are now choosing to legislate their impact fee structures based on comprehensive nexus studies performed on their GPs and SPs. Where DIF uses are allowed, standard DIF schedules by land use and DIF-specific trip generations rates are publicly available for most local governments.
Estimating VC revenue potential for TIF and SAD involves estimating incremental tax revenues–i.e., increased taxes over a baseline, whether from new development or enhanced property values–that could be generated under the buildout scenario based on the incremental AVs estimated above. These revenues are generally under the discretion of the counties and cities that are included within the VC catchment area. The more difficult challenge for these tax-based VC techniques is determining what portion of these new revenues the affected counties and cities are willing to allocate for transportation corridor projects that extend beyond their jurisdictions. For TIF and SAD, the VC revenues are value based and market dependent, and there is a strong "but-for" rationale1 to attribute the incremental value to transportation corridor investments.
Estimating VC revenue potential for DIF involves applying the DIF fee schedule by land use (e.g., fee per dwelling unit for residential and per square foot [SF] for commercial) to incremental developments by use for the buildout scenario (e.g., increase in number of dwelling units and square footage, respectively, for residential and commercial uses). The main challenges for these fee-based techniques are twofold: (1) many local governments may not have formal fee structures or schedules that can be applied easily and (2) where there are formal fee schedules, they are based specifically on local capital improvement programs (CIPs). For DIF, the VC revenues are cost based where the fees are linked directly to the local CIPs that generally do not include capital projects outside the local jurisdictions. For this reason, it may be more challenging to estimate DIF-related revenue potential for open-ended cases without a significant shift in current practices and additional nexus study efforts on the part of local governments.
The final step in the quantitative assessment is to develop a long-term cash flow both to get the full life-cycle picture of the VC revenue potential and to estimate potential VC bonding capacity. This step requires basic assumptions about (1) the timeframe of the VC revenue collection; (2) the timeframe for the buildout, i.e., market absorption period; (3) the statutory property value appreciation rate allowed for existing properties; (4) the average turnover rate on existing properties; and (5) the discount rate for net present value (NPV) analysis.
The quantitative assessment described above is for a single node, which is a useful exercise for the local jurisdictions in which the node is located. Similar assessments can be made at multiple nodes to determine the VC potential at corridor and/or system levels. These broader assessments are useful for Federal, State, and/or other regional agencies (e.g., MPOs, regional transit authorities) that are involved with major infrastructure projects across multiple jurisdictions.
When the main VC driver is a major real estate development project, as is often the case, making the B/E case for VC is mostly about determining specific public improvements needed to support the specific land use programming called for in the real estate project. The cost of these improvements determines the level of funding that must be generated by using one or more VC techniques.
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 TODs at a centrally located transit station).
The 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.
Though separate and distinct, a VC approach can play an important role when public-private partnership (P3) models are used to deliver and finance core infrastructure projects. When a P3 project is based on an availability payment (AP) P3 model with a significant real estate development component within its scope, VC techniques may be used in the real estate component to generate additional funding (revenue) sources to support the infrastructure component. Administered by the P3 public sponsor, the VC revenues thus generated can help defray the sponsor's P3 availability payment obligations.
To date, the use of VC techniques to pay for core infrastructure projects has been limited. However, VC is becoming increasingly critical to generate alternative funding sources locally to complement traditional Federal and State funding sources. For critical core infrastructure projects with lasting positive impacts in local communities around the United States, an overall approach to VC that is more expansive, innovative, and, at times, precedent setting could help local and regional governments facing increasingly significant infrastructure funding challenges. This primer provides the basis for making the B/E case for using VC techniques for the benefit of public agencies that are responsible for critical infrastructure provisions and that are facing these funding challenges.
1 The recognition that real estate developments (and the resulting substantial increase in local tax revenues) would not be possible but for the core infrastructure project.
