Value Capture: Financing sustainable transportation

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Portions of the North/Clybourn Red Line station were completely rebuilt using funds contributed by Apple in an example of joint development – a value capture financing tool. Photo by Kevin Zolkiewicz.

Ed. note: Jason Saavedra was a fellow student at the University of Illinois at Chicago College of Urban Planning and Public Affairs. He is now a planning, policy and communications consultant and writes for a blog called the Terre Haute Project in Terre Haute, Indiana. -Steven

As a nation, we are not investing enough money in our transportation infrastructure. We pay for transit, sidewalks, roads, and trails using a set per-gallon fuel tax – an unsustainable revenue source (see note 1) – and the recently proposed MAP-21 surface transportation bill does not propose any new fees or tax increases to ensure that federal money will be available to pay the cost of maintaining our transportation system.

The unsustainable nature of our current transportation funding system is not really news,  and Grid Chicago readers are particularly well-informed: we discussed the shortfalls of “traditional” transportation funding in a recent series of posts. But what may be news to you is that forward-thinking local communities are choosing to go the DIY route: they are looking for innovative ways to pay for needed infrastructure investment themselves.

This is where Value Capture (VC) comes into play.

What is Value Capture?

In this article, I will briefly introduce you to VC and the ways in which it can be used to fund sustainable transportation infrastructure. First of all, a definition is in order: what is “sustainable transportation infrastructure”? I define a mode of transportation as “sustainable” or “active” if it has a low environmental impact and it promotes a healthy lifestyle. Therefore, these terms will be used to refer to infrastructure that facilitates biking, walking, and riding transit – which can take a wide variety of forms, from basic road striping to large transit stations, and even Transit-Oriented Development (TOD).

Value capture strategies include a specific set of tools that enable new infrastructure projects (improvements) to be built by government entities. They are founded on the principle that these improvements can generate value, and this value should be at least partially captured by the government entity that created that value. Without VC mechanisms in place, the value is instead transferred directly to the pockets of nearby private property owners, whose properties are then worth more money. The revenues captured by government can be used to pay the cost of the improvement, which sometimes makes it possible for projects to be built in cases where it would otherwise not be possible. Other times, project costs would have to be paid by a wider set of taxpayers – most of which are not benefiting financially from the investment.

Types of Value Capture Strategies

There many types of VC tools in use in the United States and throughout the world, however existing studies tend to focus on the following:

Air Rights (ARs) refer to the ability for public agencies to utilize the vertical space above or below a publicly owned facility to extract a financial benefit. In other words, public agencies can sell or lease the space above or below a transit station to private entities in order to gain revenues. In this way, the agency captures the value of the publicly owned property.

Development Exactions (DEs) include development impact fees (DIFs) and negotiated exactions (NEs). These are fees or negotiated contributions from a private entity used to offset the cost of providing infrastructure to the private entity’s new development. If the existence of this new project will require new or updated infrastructure (i.e., new road connections, transit service, water or gas lines, etc.), DEs can allow public agencies to capture some or all of the value of the new infrastructure investment it must make to accommodate thew new development.

Joint Development (JD) is an agreement between a public agency and a private entity (a public-private partnership, or PPP) to jointly fund a real estate development project. There is overlap here between this and some other VC concepts. For example, an AR development can be considered JD. However, JD refers to a wide array of PPP agreements, including contributions of land or money, promotional agreements, approval of zoning variances, or other innovative approaches. In most cases, the public agency is capturing the value of its investment with the agreement.

Land Value Taxation (LVT) differs from conventional property taxation in that there is a separate taxing structure placed on land and the buildings (“improvements”) on the land. Traditionally, land and improvements are valued together, and the total value is then taxed at a given rate. This system discourages land owners from developing on their properties. Also, given that land values tend to increase as a result of a nearby land improvement, this also allows them to benefit from others’ investments. A higher tax on land value along with a lower tax on improvements allows recapturing of public investment value and also encourages development (discourages vacant properties).

Special Assessments (SAs) are fees levied on properties near an improvement on top of the regular property tax bill in order to capture expected increases in property value. The assessment amount is typically calculated by starting with the total cost of the improvement and allocated to each property based on the degree of special benefit it is expected to receive from the improvement.

Tax Increment Financing (TIF) is one of the more well-known VC solutions and is used frequently in the Chicago area. An area in need of economic development can be designated as a TIF district if it meets certain criteria. Over a specific time frame – say, 20 years – each property will continue to pay the same amount of tax to existing taxing entities (for example, schools, the city, etc.), and any increase in tax (due to increased property values) will go to a separate TIF district fund. The property tax rate itself is not increased – an important distinction from from SAs, which levy a fee on top of the existing property tax rate.

The TIF district is a solution that can be used in distressed areas that are in need of economic development. While each state has its own rules governing when TIF can be used, most states (including Illinois) require that the area be “blighted” according to a specific set of criteria. Other states, such as neighboring Indiana, allow TIF to be used in areas with high economic development potential, even if there is no finding of “blight”.

Value Capture and Sustainable Transportation Projects

Now that you (hopefully) have a better understanding of VC, let’s discuss its application to sustainable transportation infrastructure.

Value capture mechanisms can be used to finance either a portion or the the full extent of the costs of sustainable transportation projects. The amount of revenue that VC tools can generate is limited to the potential value that can be generated, and in cases where a project has a high price tag (for example, construction of a new transit station), VC makes up only a portion of the full funding and financing package. However, VC can be used to fully fund lower-cost projects such as road striping, bike parking, and installation of bus shelters. Also, VC funds can be used to encourage developers to build housing and commercial projects near transit stations using joint development.

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Revenue from value capture strategies can be used to pay for sustainable transportation infrastructure, such as bike parking. Photo by Thomas Le Ngo.

According to a recent study conducted by SB Friedman Development Advisors, a Chicago-based real estate and development advisory firm, some of these VC tools are more appropriate for larger-scale projects. They note that a recent report by the Government Accountability Office (GAO) suggests that, among the mechanisms mentioned above, a special assessment or a TIF-like district would be best for financing a new transit station.

The SB Friedman study was commissioned by the Chicago Metropolitan Agency for Planning (CMAP) as it implements its GO TO 2040 plan, which identifies a total of 32 planned transit projects throughout the Chicago region that can meet significant need. However, sufficient funding is expected to be available for only eight (yes, 8). The other 24 require either additional study or a source of funding to become a reality. The study was initiated in an effort to demonstrate how VC could be used to finance a major transit project, and the future Oakton Yellow Line station in Skokie was selected as the focus of the analysis. The Oakton station has already secured federal funding, but the analysis considers a “what if” VC financing scenario for this station since construction costs are already known, as are project timelines. They find that both a TIF-like VC district and a special assessment district could generate significant revenue – enough to finance tens of millions of dollars toward station construction.

Value Capture in the Chicago Region

Value capture strategies are in widespread use across the U.S., and in Chicago. In fact, the use of Tax Increment Financing (TIF) is quite common here: according to the recently released TIF Task Force Report, there are currently 163 TIF districts within Chicago.

While the majority of TIF funds in the Chicago area are not dedicated to sustainable transportation infrastructure, some area TIF districts are funding these types of projects. For example, $27.8 million was appropriated (page 94, line 15) from the Kinzie Industrial Corridor TIF to partially cover the cost of constructing the CTA Green Line station at Morgan. In addition, the TIF Projection Report within the City of Chicago Data Portal shows that TIF funds either have been used or are scheduled to be used to fund the following during 2011, 2012, or 2013:

• Protected bike lanes (specifically, Kinzie Street from Milwaukee to Canal)
• Construction of new sidewalks
• Corner ramps to make sidewalks more accessible
• Sidewalk reconstruction
• Street lighting
• Street resurfacing, which benefits bikes and buses as well as cars
• Crosswalk improvements
• Improvements to the CTA Cermak/Chinatown Red Line Station
• Construction of concrete bus pads at various bus stops
• Pedestrian countdown signals
• Other, more vague items such as “pedestrian safety improvements”

That said, TIF is not without its issues. There is sometimes controversy surrounding the use of TIF, typically regarding the fact that tax revenues for existing districts are frozen over the period of the TIF district’s existence. The Chicago Reader has posted a series of articles on TIF, largely critical of the way TIF is being implemented in Chicago, asserting that TIF money gets funneled into wealthy communities and citing a lack of oversight over spending of TIF dollars.

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The new Kinzie Street protected bike lanes were financed using TIF, a value capture financing tool. Photo by Josh Koonce.

In fact, with proper reallocation rules and oversight measures in place, the TIF concept can work well in communities that are truly economically depressed – where development would not occur unless infrastructure and other community investments are made. In these cases the application of TIF comes closest to the ideal defined by TIF theory, and the fact that tax revenues for existing districts are frozen is a non-issue since property values are not expected to rise without added improvement.

When the investment spurs additional development (specifically housing development and increased population), TIF revenues should be reallocated as appropriate to existing districts (most particularly schools) that are experiencing pressure as a result of the new development. In fact, while data are not easily assembled in order to analyze historical spending patterns of Chicago TIF districts, the previously mentioned TIF Projection Report shows that quite a few payments are scheduled to go to Chicago Public Schools for the Modern Schools Across Chicago program and for other purposes. However, unless there are policies in place to allocate this money systematically, decisions on TIF expenditures can be subject to the inequities that are inherent in the Chicago political game.

Aside from TIF, other VC tools are already in use throughout Chicago. For instance, Special Assessments (SAs) take form locally as Special Assessment Districts (SADs) and Special Service Areas (SSAs). These tools are less controversial due to the fact that taxes going to existing districts are left alone, and the process for their establishment is more… let’s say, “democratic”. An SSA can be initiated through majority vote by a city council or town board, but can be blocked if a certain number of property owners and citizens file a petition against it. Both of these tools have been used to fund bicycle and pedestrian infrastructure, among other infrastructure improvements, in the Chicago area.

Other regional instances of VC in use include the joint development agreement between the Chicago Transit Authority (CTA) and Apple to renovate the inside and outside of the North/Clybourn Red Line station. The Citigroup Center complex above and attached to Ogilvie Transportation Center, an example of air rights development, is yet another instance. Also, the Regional Transportation Authority (RTA) has been a strong proponent of TOD and has studied the potential for using VC to implement TOD in the future.

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The Citigroup Center building, built above Ogilvie Transportation Center, is an example of air rights development. Photo by Eric Allix Rogers.

Roadblocks and Opportunities

So if VC is so great, why aren’t we using it to fund more sustainable transportation infrastructure? The answer, of course, is complicated. Part of it is due to the political game, and part of it lies in the basic fact that current public policy is either fuzzy on the subject or may not allow the mechanism to exist.

In one example, let’s look again at TIFs: In the past, the City administration arguably did have significant power to decide how TIF money is to be spent. Take the Kinzie Street protected bike lane project, which had not been a planned TIF expenditure before Rahm Emanuel became mayor. Now that the TIF Task Force has released its list of suggested reforms, which includes increasing accountability with a TIF Oversight Board and providing justification for expenditures, projects will not be shoved through so quickly in the future. With TIF outlays being subjected to an additional layer of oversight and/or authorization, there will have to be sufficient political will in order for any project to be funded. Regardless, my guess is that there is greater potential for TIF funds to be used for sustainable transportation, it will just take the political will to get it done.

In the case of funding transit, existing legislation would likely pose a challenge in attempting to form VC districts. For a TIF-like VC district to be established in an area that cannot be proven as “blighted” yet shows demand for a new transit station, new legislation would have to be enacted at the state level that enables transit-specific TIF districts. In the case of SAs, transit stations may be deemed as benefiting too many people outside the district, and an SA requirement is that only those who experience a “special benefit” shall be taxed. If the wording is changed to clarify support for the use of SA money to fund transit stations, this would not be an issue. There is more detail in the SB Friedman study.

Notes
1. In order to make its contribution toward paying for transportation infrastructure, the federal government collects and places revenue in what is called the Highway Trust Fund (HTF) (the name of which is now misleading, given that a portion of the fund now goes to pay for more than just highways). This vast majority of this revenue comes from a tax on various types of fuel, including gasoline, diesel and others used for transportation. The tax is charged per gallon – not as a percentage of the price paid. See the FHWA’s website for gas tax details.

Since vehicles have become increasingly fuel efficient and gas prices have gone up recently, people are consuming less fuel (and therefore, per-gallon fuel tax revenue has decreased). These tax rates may have been established with the assumption that our infrastructure spending needs would decrease over time, but they most certainly are not. Download the VMT Fee and Long Range Planning presentation given at the 2011 meeting of the Transportation Research Board for a good illustration of the problem.