New methods have been increasingly utilized to great effect to help close funding gaps or to repay investments in public transportation infrastructure
By Roger Moliere
In recent years, substantial shortfalls in transportation funding have become the result of shrinking state and local budgets, declining purchasing power of fuel tax revenues, and growing capital and maintenance costs. While the federal government has provided a veritable alphabet soup of transportation acts reinforcing the need for integration of land use and transportation , it remains the case that public transit systems require significant capital and operating subsidies.
With the growing realization that the cost of transportation infrastructure will not be sufficiently met by the existing financing and revenue generation methods, new methods have been increasingly utilized to great effect to help close funding gaps or to repay investments in public transportation infrastructure; this new trend is expected to greatly accelerate in coming years. The two most prevalent new financing methods are the well-known public private partnerships (P3s), and the lesser known “value capture” group of financing tools that are rapidly gaining ground among transit agencies throughout the country.
In the simplest terms, value capture is the identification and capture of the increased land value resulting from public investment in infrastructure. Our current transportation funding system emphasizes user fees (essentially fares and tolls) in contrast to value capture systems which attempt to recover the value of benefits received by property owners or developers; this is due to infrastructure improvements and the use of those revenues to fund current or future transportation improvements. The rationale for value capture systems is that the beneficiaries of transportation investment are not limited to direct users, but also include landowners and developers who may benefit from enhanced land value brought by new transportation infrastructure improvements.
Various methods have been devised and increasingly utilized, both in the U.S. and around the world, to directly or indirectly capture this increased land value. The principal methods include: a) transit impact fees; b) property tax increment financing; c) special assessment districts; d) joint development (including use of air rights); and e) increased property taxes through reassessment.
While all of these mechanisms can and have been utilized in a variety of contexts, their implementation is heavily dependent on the availability of state and/or local enabling legislation, stakeholder support (from either or both the development community and/or voter approval in the case of fees or assessments), and the willingness of cities and counties to implement value capture techniques for transit funding.
Increased Agency Land Costs and the Private Sector: It is worth noting that most transportation agencies have recently experienced significantly higher land costs as they move to acquire right-of-way, station sites, construction staging areas, and required land for parking and ancillary operations; this is largely because the timing of agency purchases is most often restricted by law to a period after the full environmental certification of a project—a function of the requirements imposed when utilizing federal funding. This puts transportation agencies at a severe disadvantage since the projected route and placement of planned routes and facilities are well known in advance of the agency’s ability to negotiate and consummate a purchase. Unless some form of value capture can be implemented, transit agencies will continue to forfeit much of the increased land value created by their building programs and instead pay a premium for the added value they have created.
One example of recent value capture is the 50 percent funding achieved for the Charlotte, N.C. Red Line through tax increment and special assessment revenues. Another example is the Sound Transit Seattle Streetcar projects’ use of a local improvement district funding mechanism to close a $25.7 million funding gap. A mega-project example is the $1 billion sale by the New York MTA of air rights to its Hudson Yard property, now envisioned as one of the largest development projects in U.S. history.
Transportation agencies are, in fact, among the largest landowners in their areas of operation. Recognition of the value that can be derived from land assets is key to capturing essential revenue that can allow its operations to grow and thrive. A former L.A. Metro park-and-ride surface lot at Hollywood and Vine in Los Angles, Calif. now sports a W Hotel, condominiums, apartments, and retail development over the subway station and generates close to $1 million a year in the form of lease revenue to L.A. Metro.
As transportation agencies come to recognize the opportunities their current and projected land holdings present, we can expect an ever increasing emphasis on value capture as a means to augment the revenue that is sorely needed to finance transportation project.
Roger Moliere is a senior advisor for Land Use, Energy, and Natural Resources for Manatt, Phelps & Phillips. His practice focuses on the public-private development of various mixed-use and commercial projects, public-private partnerships, and more. He may be reached at www.manatt.com.