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Value-Capture Strategies

Cities can use a variety of targeted tools to generate revenue in an equitable and sustainable way. Capturing and monetizing the value of investments in and improvements to cities is a smart way to generate revenue. Value capture essentially means capturing the increase in property value that flows from a public investment. Used wisely, value-capture strategies can allow cities to generate revenues from assets that would otherwise benefit private entities for free.

 

The sale or lease of air rights above a publicly owned facility offers the opportunity for cities to generate revenue and to ensure that land used for public purpose is not lost from the tax rolls. Cities may choose to lease or sell the air rights conveyed in conjunction with public facilities to a private developer, benefitting the city, the developer, and the public if executed well. Tax increment financing, or TIF, is also a popular public finance tool used to fund public infrastructure, promote development, and expand the future tax base. It uses taxes levied on the projected incremental increase of property values resulting from development to pay the present cost of improvements made both by private developers and the municipality.

 

Economists of all stripes generally agree that taxing land, rather than improvements on the land, generates more profitable, equitable growth. Split-rate taxation is a value-capture strategy where land and buildings on the land are taxed at different rates. It reduces the incentives for speculative development on the outskirts of cities and incentivizes development in closer-to-transit nodes and city centers. Special assessment districts, or SADs, are another value-capture tool commonly used by municipalities to fund basic infrastructure improvements. A special assessment, or tax, is levied against parcels of real estate that receive a direct and unique benefit from a public project.

 

The Special Assessment District (SAD) financing mechanism was the foundation for Property Assessed Clean Energy, or PACE, financing, a value-capture tool focused on energy-efficient retrofits and solar-energy projects. The application allowed interested property owners to “opt-in” to a citywide SAD and receive 100 percent upfront financing to cover the cost of the energy installation or building retrofit. The loans would then be repaid as a property tax assessment for up to 20 years-- ideally from the energy cost savings achieved as a result of the installation or retrofit. 


Value Capture for Public Transportation Projects, American Public Transportation Association, August 1st, 2015. Read more.



Special Assessment Toolkit, League of Minnesota Cities, January 1st, 2015. Read more.



Case Study: Tax Increment Financing (TIF), C40 Cities, December 16th, 2012. Read more.



Sundance’s Stomping Grounds Get TIF’D, Bridget Moriarity, Next American City, May 22nd, 2012. Read more.



The Simple Math That Can Save Cities from Bankruptcy, Emily Badger, March 30th, 2012. Read more.



Value Capture for Transportation Finance, Center for Transportation Studies, June 1st, 2009. Read more.



PACE for Municipalities, PACENation. Read more.



Bethesda, Maryland, is home to the most financially remunerative air-rights deal in the country: an office-retail-hotel project on top of the Bethesda Metro Station that generates 1.6 million annually in air-rights rent for the Washington Metropolitan Area Transit Authority. Not incidentally, the development has spurred nearby office, retail, and residential development, as well as a popular nighttime entertainment, restaurant, and arts district.

 

In Denver the Regional Transit District, or RTD, leased air rights over the city's Civic Center Transit Facility to a developer for $400,000 in each of the first 15 years plus 38 percent of the developer’s profit after it first deducts a 13.5 percent return on its cash investment. Upon expiration of the lease, RTD will own the 600,000 square-foot office building.

 

In December 2016, the Boston Planning & Development Agency board approved plans for a 51-story office and condominium tower over South Station. The developer, Hines, will build a lobby connecting the station's main concourse and its bus terminal, expand bus facilities by 50 percent, and expand a parking garage, adding 527 spaces.

 

In 1980 Harrisburg decided to combat its severe economic decline by reducing the tax on buildings to one-half the tax on land. By 2010 most of the more than 5,000 business and homes that were previously boarded up were back in use, and the property tax base for the city increased from $212 million to more than $1.6 billion. Seeing these benefits, the city further reduced the effective tax rate on improvements to one-sixth the rate placed on land.

 

The City of Lenexa, Kansas established a TIF district in the late 1990s to stimulate development in the city center. Since then, the TIF district has become a thriving commercial and residential hub, with a number of development projects under way, including a 14,000 SF conference center, a 124-room hotel, and a 5 acre, 200,000 SF mixed use civic center.

 

Kansas City, MO and Portland, OR have both developed Property Assessed Clean Energy (PACE) programs that enable developers to access financing for energy efficiency upgrades.

POLICY CONTACT


Satya Rhodes-Conway
(608) 262-5387
satya@mayorsinnovation.org