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Value Capture Strategies within the U.S.

As state and local agencies deliver infrastructure projects in an environment of less federal government funding and rising capital and operating costs, they are increasingly considering value capture mechanisms as alternative revenue sources. Value capture refers to a collection of mechanisms that can be used to help pay for infrastructure projects’ capital or maintenance costs by monetizing the development benefits that the project creates and channeling them into a project fund. There are several value capture tools that can be used to achieve this end, however, statutory language allowing value capture mechanisms varies by state.

Parsons Brinckerhoff has advised state and local authorities on the opportunity to use value capture mechanisms, most recently for the Kansas Department of Transportation (KDOT) and the Maryland Transit Administration (MTA). The state of Kansas allows for a broad range of mechanisms, although the viability of each depends heavily on economic and real estate market conditions, regional growth patterns, and site specific strengths and weaknesses for new development. In Maryland, the MTA and Maryland Department of Transportation (MDOT) are exploring the use of value capture mechanisms to fund the proposed Purple Line light rail project.

Each engagement has provided valuable lessons learned and has added to Parsons Brinckerhoff’s vast knowledge base of transportation value capture best practices and case studies. Beyond Kansas and Maryland, funding transportation improvements through value capture strategies is being explored in numerous locations across the country, with a variety of lessons learned from locations in Colorado, North Carolina, Pennsylvania, Texas, and Virginia.

 

Transportation Value Capture Mechanisms

While there are a broad range of available mechanisms that can vary from state to state, they typically fall into three general categories, each with pros and cons: tax-increment financing, special tax assessments, and development impact fees/excise taxes.

Tax-Increment Financing

Tax-increment financing (TIF) is a mechanism for capturing all or part of the increased property tax paid by a subset of properties within a designated area. TIF is not an additional tax, nor does it deprive governments of existing property tax revenues up to a set base within the TIF district. Instead, part of or all of future property taxes (above the set base level) resulting from increased property values or new development are dedicated to paying for the public improvement that caused the value increases and additional development. TIF revenues can be used as they accrue on a pay-as-you-go basis or can be bonded against.

Special Tax Assessments

Special tax assessments are additional taxes paid within defined geographic areas where parcels receive a direct and unique benefit from a public improvement. Generally, the cost of the improvement is allocated to property owners within the defined benefit zone and collected in conjunction with property or sales taxes over a predetermined number of years. Once the annual assessment collections cover the cost of the improvement (or debt issued to pay for the improvement), the assessment is removed. Implementation of special tax districts can be challenging relative to

other value capture mechanisms, as increases in property and sales taxes are politically sensitive and highly visible to affected property owners, businesses, and local consumers. Nevertheless, special tax districts are one of the most common forms of value capture for transit projects nationally.

Development Impact Fees/Excise Taxes

Development impact fees are one-time charges collected from developers and/or property owners to fund public infrastructure and services made necessary by new development. Impact programs are most successfully implemented in areas poised for significant growth with little or no existing development and therefore may be applicable for greenfield highway projects. Generally, rates are based on a formula taking into consideration the number of new dwelling units or square feet of non-residential space and the relative benefit the infrastructure provides the property. For transportation projects, relative benefit is usually determined by the distance a development is located from the transportation improvement. Politically, the mechanism is generally well-accepted, as fees are levied against new development rather than existing residents and business owners, but, if fees become excessive, they can negatively impact properties relative to the local market.

U.S. Examples

Kansas Mechanisms: Despite a Broad Range of Flexible Tools, Strength of Market Still Determines

Overall Value Capture Opportunity

The state of Kansas offers a diverse menu of potential value capture mechanisms, including TIF, Sales Tax Revenue (STAR) bonds, Transportation Development Districts (TDDs), Community Improvement Districts (CIDs), Special Benefit Districts, development impact fees, and excise taxes. While certain mechanisms can be used to capture value for transportation improvements, they are often used more simply as local funding mechanisms or real estate development incentives, depending on locational context and market conditions.

Parsons Brinckerhoff analyzed five case study locations, each in need of transportation improvements and each with dramatically different economic, demographic, and real estate supply conditions. The key finding in the analysis of Kansas value capture is that it is most effective in financing transportation improvements in areas that already have strong fundamentals for new real estate development.

Our analysis of the rapidly growing suburb of Overland Park showed that the cost to complete an interchange, including adding lanes to an existing highway and new on- and off-ramps, could be partially funded from a TDD on a mix of proposed residential and commercial development on a large, contiguous adjacent parcel.

However, in smaller, slower-growth areas just a few miles away in the towns of Spring Hill and Tonganoxie, where development potential was lower, similar proposed transportation improvements were not expected to spark sufficient incremental development to help fund the improvements. Furthermore, in these areas where development potential is more limited, the same mechanisms that could be used for transportation value capture are more often used as incentives to facilitate development, further limiting their potential to offset public infrastructure costs.

Dallas Transit- Oriented Development TIF District: A Successful Strategy to Overcome Weak Market

Conditions to Foster New Development in Challenged Areas

While real estate market conditions still drive the overall value capture opportunity in Kansas, the city of Dallas, Texas has developed a strategy to use transit-oriented value capture to help revitalize areas with otherwise weak real estate conditions. Because value capture is inherently reliant on the opportunity for new real estate development, policy that spans a geography comprised of a diverse mix of socioeconomic submarkets can catalyze new development in already healthy areas without helping less affluent areas, bringing about potential issues of social inequity within a defined district.

The Dallas Transit-Oriented Development TIF District successfully mitigates this issue by channeling funds from new transit-oriented development in stronger “sub-districts” to help foster development in weaker ones. For example, 60 percent of TIF revenues generated from new development surrounding the Mockingbird and Lover’s Lane Stations is used to help finance public infrastructure improvements, new market-rate developments, parks and open space, and affordable housing in the weaker and less developed Lancaster Station area. Although the TIF revenues are not used to directly finance the initial transportation improvements, the improvements and developments they finance ultimately serve to increase transit ridership and revenues at otherwise underutilized station areas.

Baltimore-Washington Region: Value Capture is Becoming the Go-to Strategy for Helping Fund

Large-Scale Transit Improvements

From the Dulles rail corridor in Northern Virginia to the State Center in the heart of Baltimore, value capture mechanisms are being used to help finance large-scale transit facilities across the region. Recently Parsons Brinckerhoff was engaged by the MTA to analyze the opportunity to use value capture to finance the Purple Line, a planned 16-mile light-rail corridor stretching from Bethesda to the New Carrollton Metrorail Stations.

Parsons Brinckerhoff also played an integral role assisting the city of Alexandria in exploring financial strategies to fund a new Metrorail station at Potomac Yard. Our financial analysis informed negotiations between the city and the developer, which ultimately resulted in a plan that relies on two types of special assessments on private development, a direct equity contribution from the developer, and incremental taxes from the new development.

Elsewhere in the region, the special assessment has been the mechanism of choice. In the District of Columbia, property owners adjacent to the New York Avenue Metrorail Station agreed to help fund the station through a special assessment that raised $25 million for the $110-million project. Phase II of the Dulles Corridor Metrorail project—also known as the Silver Line—will be partially funded by the Dulles Rail Transit Improvement District, anticipated to raise over $400 million in property taxes on commercial and multifamily residential properties near the line. The Baltimore State Center transitoriented redevelopment will use a combination of mechanisms, including joint development, special assessments, and TIF, where the special assessment will cover any potential TIF shortfalls.


Conclusion

Around the country, local tax mechanisms are being increasingly considered to help fund transportation improvements. The examples in this article show a broad range of mechanisms can be used in a wide variety of scenarios, each with varying degrees of effectiveness. Public approval is usually required, and always recommended, when implementing local tax mechanisms, so thoroughly examining and articulating the potential value created by the infrastructure investment is critical. Without this link, the value capture mechanism is no more than an increase or reallocation of local taxes, which is usually met with stiff opposition. Regardless of geographic location or mechanisms used, the magnitude of revenues generated through value capture is contingent upon the overall opportunity for new real estate development in a given area. As such, a thorough understanding of local real estate economics is required to properly estimate the potential for positive impacts from new infrastructure.

 

Image Header Source: C.M. Keiner (Creative Commons)