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Publication Number:  FHWA-HRT-20-001    Date:  Autumn 2019
Publication Number: FHWA-HRT-20-001
Issue No: Vol. 83 No. 3
Date: Autumn 2019

 

Innovation Corner

Filling Funding Gaps

by Mark Sullivan

Current conditions and changing demands across the Nation necessitate innovative thinking to finance infrastructure improvements that are vital to helping communities thrive. Value capture helps communities complete projects before they otherwise might be able to and is one method for State and local highway agencies to pay for infrastructure needs.

"Freight traffic is on the rise, connected and autonomous vehicles will become a reality soon, and communities are demanding accommodations for all mobility modes such as walking, biking, automobiles, and transit," says Thay Bishop, senior program advisor for the Federal Highway Administration's Center for Innovative Finance Support. "These demands require forward-thinking approaches to financing transportation projects."

Value capture is the process of capturing a portion of the value generated by an infrastructure investment to pay for some of that investment or to reinvest those funds for constructing and maintaining new infrastructure. Transportation improvements often increase the value of nearby land, benefitting landowners and developers. Value capture techniques harness a portion of the increased property values to pay for the improvement or for future transportation investment.

"FHWA is working to help State and local highway agencies fill funding gaps by increasing awareness of the potential use of value capture approaches that can provide funding for transportation investments," says Bishop.

How Value Capture Works

When the link between transportation improvement and the ability to monetize the value it creates is possible, State and local highway agencies can employ value capture techniques. Essentially, value capture is a financial real estate (land-use) and transportation opportunity transaction.

Value capture techniques take several forms. The most common mechanisms in the United States are air rights, impact fees, joint development, land value tax, negotiated exactions, sales tax districts, special assessments, tax increment finance (TIF), and transportation utility fees (TUFs).

An illustration depicting that value capture recovers a portion of increased land values from landowners who benefit directly, resulting in a more equitable distribution of the monetary benefits of well-performing transportation facilities. Scales with coins show the differences between the current system and value capture. Source: FHWA
Value capture recovers a portion of increased land values from landowners who benefit directly, resulting in a more equitable distribution of the monetary benefits of well-performing transportation facilities.

In any form, value capture enables the public sector to share in a portion of the increased land value to build, maintain, or reinvest in the transportation system. Public investment in transportation assets that improve access and make surrounding locations more desirable benefits owners of adjacent properties through greater land value and other economic impacts.

Value Capture in Action

Many States—such as California, Colorado, Florida, Georgia, Massachusetts, Missouri, Ohio, Oregon, Pennsylvania, Texas, Virginia, and the District of Columbia—are using value capture options successfully.

In Oregon, for example, the City of Newberg was one of the first agencies in the Nation to fund pavement maintenance projects through TUF. TUF is a financing mechanism that treats the transportation system like a utility in which residents and businesses pay fees based on their use of the transportation system rather than taxes based on the value of property they occupy. The City of Newberg had planned reconstruction of four blocks of East Fifth Street from River Street to Wynooski Street. However, by 2016, available annual revenues of $600,000 from existing State gas tax receipts and Federal funds exchange fell far short of the projected $2.5 million needed. In response, the city adopted a TUF in May 2017 to generate an estimated $1.2 million annually to help close the $1.9 million gap.

In another example, the Pennsylvania Department of Transportation leveraged several funding mechanisms such as private contributions and TIF to construct a new interchange along Pennsylvania Route 33 in Palmer Township. TIF is a value capture revenue tool that uses taxes on future gains in real estate values to pay for new infrastructure improvements. A development agreement set out responsibilities for payment of the improvements with approximately $13.6 million paid by the private developer and $27.4 million in public improvements. The public improvements were financed in part by bonds issued against a tax increment levied on the properties within the improvement district.

In round five of Every Day Counts (EDC-5), FHWA is providing support and technical assistance to State and local public agencies interested in pursuing financing options available through value capture. For profiles of real-world projects, see www.fhwa.dot.gov/ipd/value_capture/project_profiles.

For more information, visit www.fhwa.dot.gov/ipd/value_capture, or contact Thay Bishop at 404–562–3695 or thay.bishop@dot.gov.


Mark Sullivan is director of the Center for Innovative Finance Support in FHWA's Office of Innovative Program Delivery.

 

 

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