What Is Value Capture (and How It Can Fund Sustainability)?

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When a city or county builds a hospital, school, or park, or places a subway stop or a highway off-ramp in a neighborhood, property value in the proximity can increase. Owners of homes or business nearby benefit from this increase, and are the recipients of good luck. Value capture is the concept of the government gaining back some of the benefits generated for citizens.

The Right Place at the Right Time

One of the major ways that infrastructure can generate value is through the growth and spread of business, and it has become an increasingly hot topic of discussion. For example, real estate developers may be quick to build a large apartment complex near a major highway. When scouting locations for a new laundrymat or convenience store, owners are likely to choose property adjacent to this residential development. Another circumstance might be re-zoning of land from residential to commercial, or even to industrial when rezoning occurs, private owners of vacant lots may experience a huge windfall in property value.

Value Capture Spreads the Fortune

But a dilemma comes from such gains for property owners. Remember, the highway (or hospital or light rail line) was paid for by everyone's taxes, and meant to benefit an entire city or large area, not just property owners whose immediate area had the good fortune to be chosen for public works. Value capture can be viewed as a way of spreading the value around, since the public works are just that, public.

Using Value Capture for Further Projects

One of the up-and-coming ways of using the funds from value capture is to pay for further public work, including those which might support community sustainability. There are three major methods of using this land value capture.

1. Property Tax

As property values rise, so do property taxes. Rather than just receiving property taxes, municipalities can do something called collateralizing them. This action means turning the future revenues into collateral with which to get money from investors--after the taxes are brought in, the investors can be paid off.

2. Fees

A second main strategy is basically to gain profits from the value of the land itself--capturing in its truest form. This means that when, as in the example above, a business would like to build on land enhanced by a public project, it is agreed that they will pay extra to be able to do so because of the added value.

A variation on this, one that has been used in Australia, is to levy surcharges on, for example, apartment complexes or other developments made on the land in question.

3. Development-based

A third, less common method, is to effectively trade land for future infrastructure projects. This means that a government may sell parcels of land (or the right to build on that land) to private investors. However, the agreement will state that in exchange for that, investors are obliged to fund future public works of some kind.

Value Capture and the New Urban Agenda

One important thing to realize about value capture is that it's a concept so respected and prominent that it is favored by the United Nations for its New Urban Agenda. One of the stated goals of this sweeping plan is "establishing the adequate provision of common goods, including streets and open spaces, together with an efficient pattern of buildable plots."

Habitat III was the U.N.'s 2016 global summit. At this Brazil event, value capture was one of the key concepts. One of the themes discussed was that private developers had to be made to understand that the contributions of cities and other government entities can greatly increase the value of their projects.

Value capture has been widespread for decades in South America, Asia, and Europe--it is beginning to take hold in the U.S.

The MTR and Hong Kong

One example of using value capture to fund sustainable public transit is that of MTR. The subway and bus systems in Hong Kong are run by a private company, the Mass Transit Railway Corporation. This corporation (which parallels municipalities or other government entities that often run public transit) engages in thorough value capture.

The thousands of retail businesses in Hong Kong receive huge value from a smoothly-functioning public transportation system. That being the case, the MTR gets shares of the profits from shops in malls along system routes. Additionally, it leases space to retailers in its train stations. Further, the MTR owns many of the buildings closest to its stations. With the revenue from these ventures, the MTR is able to fund its operations and invest in their efficient operation.

In 2012, the MTR earned profits of $2 billion dollars; fees paid by passengers covered 185% of operating fees.

Overcoming Controversy

Value Capture is not without its controversies. As one might guess, private investors and businesses feel they are being punished (with extra fees) for purchasing and developing land. Some people think of it as government interference.

None the less, value capture is an exciting approach to generating revenue for funding important sustainable development projects. That is why, as discussed at Habitat III, government entities must clearly communicate that value capture, when used in public projects, is an important tool that should not be taken for granted.