VALUE CAPTURE:THE GOOD, THE BAD & THE UGLY

Land & Poverty Conference 2014Rick Rybeck

March 2014

Our Quest Can we obtain funds for infrastructure so

that:

Sufficient funds are available to build, operate and maintain public facilities & services?

Development is encouraged adjacent to the infrastructure rather than remote locations?

Development near infrastructure is affordable for residents and businesses?

All beneficiaries pay a fair share?

FOR INNOVATION

LOOK BACK INTO HISTORY

Connecticut Ave Streetcar

In the early 1890s, the Chevy Chase Land Company (CCLC) acquired 1700 acres of woods and farmland in northwest DC & MD

The land was cheap, because it was not very accessible to downtown jobs & stores.

CCLC built and operated a private streetcar line connecting their land to downtown. They charged a few pennies to ride the streetcar.

Connecticut Ave Streetcar

The streetcar fare was not enough to recoup costs.

Was building the streetcar an act of Charity or Altruism?

ABSOLUTELY NOT !!!

Connecticut Ave Streetcar

CCLC recouped its costs (and more) by selling lots for homes and businesses at higher prices.

Not Transit-Oriented Development (TOD), but Development-Oriented Transit.

NOTE 1: If CCLC had attempted to recoup all streetcar costs through the farebox, both the streetcar and the land development efforts would have failed.

Connecticut Ave Streetcar

NOTE 2: After CCLC sold all of its land, it no longer had any financial incentive to maintain or improve the streetcar.

Thus, although some private landowners can build infrastructure and recoup costs from higher land values, there is a reason for public ownership and control –- to maintain the infrastructure over the long term.

What is Value Capture?

“Value capture” is merely the ability to exchange something produced for money.

If I build a house for Paul, I could collect money from Peter. I might recoup my costs, But this is NOT value capture. (This is “robbing Peter to pay Paul.” We could call this “value transfer.”)

If I build a house for Paul and collect money from Paul according to the length of his pants, I might recoup my costs. But this is NOT value capture. (Paul might start wearing kilts & shorts.)

If I build a house for Paul and collect money from Paul based on the value of the house, this IS value capture because there is a NEXUS between value produced and value received.

It is the price nexus between what is produced and what is consumed that allows “price” to transmit information between producers and consumers -- thereby informing decisions about consumption, production and resource allocation.

REGARDING INFRASTRUCTURE, the value of public goods and services is often reflected in the value of land.

Neighborhoods with good schools will have higher residential land prices than comparable neighborhoods with poor schools.

Areas near a noisy airport might have low residential land value but high value for land zoned for warehouses.

Value Capture’s Potential to Fund Infrastructure

Financial Viability An often overlooked revenue stream

Land Use Consequences of Value Capture Value capture can reduce land prices and induce more

development near existing infrastructure. If value capture revenues are used to offset taxes on buildings, then development near infrastructure can become even more affordable for residents and businesses alike.

Equitable & Comprehensible Beneficiaries pay in proportion to the benefit they

receive

Value Capture In The Academic Literature

Definitions of value capture are sloppy.

In the transit field, almost any revenue source, other than fares, has been labeled as “value capture.” This creates confusion.

Value Capture Techniques ?

Land Value Tax

Special (or Benefit) Assessment District

Joint Development / Access Fees

Betterment Levies

Exactions

Transportation Utility or Impact Fee

Tax Increment Financing

Land Sale / Lease

Value Capture Techniques ?

Land Value Tax YES

Special (or Benefit) Assessment District Maybe

Joint Development / Access Fees YES

Betterment Levies YES

Exactions NO

Transportation Utility or Impact Fee NO

Tax Increment Financing NO

Land Sale / Lease YES

Conclusion

Landowners might never drive on a road, or ride a transit vehicle, but they use this infrastructure to extract windfall profits from public investments.

Value capture can be like a user fee that recaptures publicly-created land values in proportion to the benefit received and returns this value to the entity that creates it.

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Why Does It Matter How The Public Is Compensated

for Transit?

COMPARE THE EFFECTS OF A

Development Impact Fee

Versus

A Land Value Tax

Development Fees v Value Capture

Development Fee = Tax on Building Value

Fee = $0 Transit Fee = $XXXX

Development Fees v Value Capture

Development Fee = Tax on Building Value

Tax = Cost of Production

Cost of Production Quantity Produced &

Prices

Do we want to reduce development near transit and increase its price?

Taxing buildings appropriates privately-created value. It burdens builders, future owners & tenants.

Development Fees v Value Capture

Value Capture Fee = Tax on Land Value

Fee = $XX Transit Fee = $XX

Development Fees v Value Capture

Value Capture = Tax on Land Value

Land is NOT ProducedLand Tax ≠ Cost of ProductionWhat’s the Impact of Land Tax on Land Price?

Price of Land Not Based on Cost

Price of Land Based on Expected Benefits

Development Fees v Value Capture

Land Value Tax = Cost of Ownership

Cost of Ownership Benefits Price

Taxing land value does not diminish the quantity of land and tends to lower its price.

Taxing land captures Publicly-Created Values. No burden on private production.

Development Fees v Value Capture

Landowner Responses: Avoid the Development Fee

Number / size / quality of new buildings

Maintenance / improvement of existing buildings

Invest in buildings where tax rates are lower

Fund Value Capture Land Tax Cannot be Avoided

Location-value of parcel not determined by owner Owner can’t move land to a lower-tax jurisdiction

Land will be developed – or sold to someone who will – in order to generate funds to pay the value capture fee.

WHAT PERCENTAGE OF INFRASTRUCTURE COSTS

CAN BE RECOUPED THROUGH VALUE CAPTURE ?

SOME TRANSIT EXAMPLES

Potomac Yards

In the mid 1990s, there was an old railroad yard just south of National Airport, across the river from Washington, DC.

The pension fund that owned it wanted to develop it.

Government officials said that development was not possible because the access road, Route 1, was already over capacity during rush hour

Potomac YardsHOWEVER . . .

Officials noted that a rail transit line runs through the middle of this property.

IF a transit station was created there, then dense mixed-use development could be allowed without relying solely on Route 1.

Landowner did the math: It was cost-effective to pay the entire cost of a new transit station to get development rights!

Potomac YardsUNFORTUNATELY . . .

Nearby residents thought that the development was too dense & would bring too much new traffic.

They pleaded for Down-Zoning

Politicians Listened to Constituents

Down-zoned parcel no longer supported enough development to justify a new station.

New York Avenue Metro In the late 1990s, owners of derelict industrial

land north of Union Station near New York and Florida Avenues in NE Washington, DC found that they could not get development permits because nearby streets were gridlocked during rush hour.

They approached the Mayor and offered $25 million toward constructing a new station there.

The Mayor’s Office was so surprised that private landowners would offer to pay for public infrastructure that they accepted the offer without any negotiation. (If landowners offered $25 million, it was probably worth more.)

Some land was also donated. Total landowner contribution was about 30% of total station costs.

New York Avenue Metro After construction was underway, the

landowners went back to the Mayor’s Office and requested a credit for their special assessment payments against any increases in property taxes that would result from the new station. “Otherwise, we’ll end up paying twice,” they said.

An economist was hired. His study confirmed that the enhanced value of land exceeded the landowners’ contribution by between 10 and 12 times. The potential for value capture was confirmed to be much greater than achieved.

Academic Studies

Academic Studies show the value capture potential for transit projects ranging between a few percent to over 100%.

Why the huge disparity in results?

Study Methodology

Transit Project Characteristics

Methodology What is the land value base and When is

it established? One study noted minor increases in land

values after a new transit station went into operation.

Real estate experts in DC noted increases in land values near the future New York Avenue Metrorail station as soon as the feasibility and environmental study process began.

Land prices escalated more rapidly after the decision to proceed was announced.

By the time the station opened, increases in land value had begun to taper off.

Methodology Thus, land value increases can begin before

operations & even before construction.

How familiar is the real estate market with the effects of transit in a particular location? If no rail transit exists in a city, buyers might be

more tentative and land value appreciation, if any, might not occur until after operations begin.

If rail transit exists and has been proven to increase nearby land values, then buyers might bid up prices as soon as an area is targeted for a new station.

VALUE CAPTURE & TIMEWHERE TRANSIT IS UTILIZED & VALUABLE

Project Characteristics

Transit does not automatically increase land values.

Building rail transit in an Iowa cornfield would ruin good cropland and would depress land values there.

Project Characteristics

Key Characteristics for Land Value Creation

There must be a need for the project

Project must be well-designed & well-executed

The value of the service provided must be location specific. Thus the value of transit access is greatest near rail transit stations. One can be adjacent to a transit line, but if there is no station access, there is no transit access value added to land values there.

Project Characteristics

Key Characteristics for Land Value Creation

The value of the service must exceed its direct cost to riders.

In the absence of value capture, reducing transit fares may benefit landowners more than riders to the extent that lower fares result in higher land rents.

Likewise, significant fare increases or service degradation could result in lower rents and land values near the stations.

USER FEES FOR TRANSIT

Equitable & Comprehensible Beneficiaries pay in proportion to the benefit

they receive

Price Incentives Can Foster Efficiencies Encourage Shorter Trips or Trip Avoidance Encourage Off-Peak Trips Locate Homes & Businesses Closer Together to

Minimize Distance-Based Fares

Full Cost Recovery?

Setting transit fares high enough to compensate for total capital & operating costs would:

Reduce transit ridership

Increase congestion & pollution

Are There Other Beneficiaries?

General public benefits from Transit: Better Access to Employment, Shopping,

Schools & Recreation Cleaner Air Reduced Congestion Leads to Lower Costs of

Goods

But general benefits not suited to user fees General Taxes Used Instead

Traditional Transit Budget Equation

Fares + General Taxes = Transit Costs

Traditional Transit Budget Reality

Fares + General Taxes < Transit Costs

TRANSIT CONUNDRUM

Transit is created to facilitate development and assist transit-dependent households.

Transit inflates the value of well-served land.

Higher land prices chase low-income households & affordable development to cheaper but more remote sites

Transit extended to more remote sites

Development chased even further away.

Traditional Approach

Is There an Alternative

Approach That Can

For Innovative Ideas, Look Back

In the 1800s, the streets of Washington, DC were mostly unpaved. In wet weather, mud made travel very difficult and unpleasant.

Paving streets and sidewalks was a tremendous advance. It made properties more accessible and the air cleaner.

Everyone would benefit.

INVISIBLE BENEFICIARIES IDENTIFIED

Yet, people whose property fronted a paved street would benefit more. No longer would folks track dust, mud and

manure into their homes & businesses!

Even if landowners never walked or rode on the new streets, they would benefit financially from them.

INVISIBLE BENEFICIARIES CHARGED

In 1894, Congress enacted a law requiring adjacent property owners to contribute 50% of the cost of first-time paving of streets, gutters, curbs and sidewalks through a special assessment.

NEW Transit Budget Equation

Value Capture+ Traditional User Fees + General Taxes_______ = Transit Facilities & Services

Value Capture: Like a Public Service User Fee

Landowners pay for a substantial benefit.

Landowners pay in proportion to benefit received.

The greatest impetus for development will occur where land values are high – adjacent to urban infrastructure. Instead of chasing development away, value capture draws development to infrastructure -- which is where we want development to occur.

Administrative Issues

Does a Jurisdiction have good and frequent property value reassessments based on fair market value?

Does a Jurisdiction provide separate assessments for land and improvement values?

Do assessors have access to multiple-regression analysis tools (e.g., CAMA) to help distinguish between land and improvement values?

TRANSFORMING THE PROPERTY TAX INTO A VALUE CAPTURE FEE:

IS THIS EQUITABLE?

Empirical Evidence Shows that Middle- and Low-Income Neighborhoods Benefit The Most Middle-class & working class houses aren’t

very swanky – but they constitute the lion’s share of total property value.

In wealthy neighborhoods, the homes are fancy but the land value is a much greater percentage of total property value.

Shifting taxes off of buildings and onto land is progressive