Value capture: an innovative strategy to fund public transportation projects

Officials in Shenzhen, China, this month announced a $900 million project to expand the city’s metro system in anticipation for the XXVI Universiade Games. City officials hired the Mass Transit Railway (MTR) Corporation – best known for running and managing Hong Kong’s mass transit system – to build and operate the ten-mile-long, ten station extension.

Unlike most transit operators around the world, MTR maintains a robust development portfolio that produces revenue far greater than its transit fares. Most of MTR’s properties surround the company’s rail lines, and in many instances – such as in Hong Kong – MTR received the properties from the city in return for financing and operating a transit system. In essence, MTR provides metro service below ground in return for property above. This strategy is called “value capture.” Although it’s not yet clear whether Shenzhen’s expansion will use this model, the speculation about using value capture there reaffirms the idea’s financial viability.

In Latin America, value capture has been utilized to help fund Bus Rapid Transit (BRT) in cities such as Bogota, Columbia and Sao Paulo, Brazil. Property values have increased dramatically along BRT corridors as a result of the improved transit, and the local government has been able to recoup public funds used to finance the system through increased value of government-owned properties along the line. Both Bogota and Sao Paulo helped pay for new transit lines by betting property values would increase along those corridors.

Porto Alegre in southern Brazil employed a far more aggressive model of value capture. As population in the city grew during the 1990’s, speculators hoarded undeveloped land in the city center – which in turn created a housing shortage in the city and forced residents to balloon out into suburban slums. In response Porto Alegre created an incentive for land owners to develop vacant properties, and implemented a land value increment tax to help capture increased values from the city’s investment.

By encouraging development near existing infrastructure in the city, Porto Alegre’s property tax revenue increased significantly and the city was able to provide not just public transportation but also education, street cleaning and security to lower-income residents at a fraction of the expense. The result was a far more stable revenue stream for Porto Alegre, as well as increased property values for downtown landowners and developers.

Value capture as a concept is certainly not foreign to the United States. 19th century developers took advantage of the mechanism when building the transcontinental railroad. And although there are some modern examples in the United States – such as the planned 62-mile Cotton Belt rail line in Dallas, and Business Improvement Districts throughout the country – value capture’s potential has yet to be used to the extent that it once was and could be again.

Opportunities to pay for infrastructure by leveraging property values may range in scale, but value capture remains consistently viable. Boston’s “Big Dig” project, for example, will cost state and federal taxpayers an estimated $22 billion over the next 25 years, but land owners in the surrounding areas have already seen property values rise astronomically. Massachusetts developer Frank McCourt used the increased value of his Seaport District properties – from roughly $10 million to $200 million – to help finance his acquisition of the Los Angeles Dodgers. In a recent conference on value capture, Richard Henderson, an executive at one of the agencies involved in the Seaport District’s transformation, described the investments as “a tremendous boon to the landowners in the area.”

The Big Dig is a great example of a project that could have been partially financed by value capture. Such an approach could have reduced costs for state and local budgets, made future infrastructure investment more feasible and evoked support from the private sector for such investments. Perhaps even greater investment would have resulted if both private and public interests shared risk and potential benefits.

Value capture can help give local, state and federal governing bodies the financial means to improve infrastructure and accommodate growing populations. Many members of the development community support leveraged financing like this, and growing numbers of both developers and public leaders are beginning to better understand the potential of value capture.