As people continue to pour into America’s largest cities, good transit is increasingly critical. Cities without robust transit systems see it as part of the solution for gridlocked streets and housing problems. Cities with good transit systems, such as New York and Washington, D.C., are stretched to capacity and face billions of dollars in backlogged projects to upgrade and expand. With a dwindling pool of federal transportation funding available for local and regional projects and a local tax base often still recovering from the recession, transit agencies and governments are scrambling to find new sources of funding to build out the trains, bus rapid transit and streetcars many constituents want.
“In the current [economic] climate, it’s more important than ever to be able to … control your own destiny through local sources of funding,” says Steve Schlickman, executive director at University of Illinois at Chicago’s Urban Transportation Center. Schlickman was the lead principal researcher on a new study that makes the case for value capture as an untapped resource for funding capital transit projects.
The UTC’s “Transit Value Capture Coordination: Case Studies, Best Practices, and Recommendations” looked at transit projects funded in part by value capture in San Francisco, New York City, D.C. and Chicago, in order to establish value capture best practices they hope other cities might draw on for their own projects.
Value capture is a wonky term for the money cities recover from private entities that benefit from public investment. Value capture can be a land-value tax, tax increment financing (TIF), impact fees or even joint investment by public and private entities. When, for example, a new light-rail station is built, land values around the station tend to increase dramatically and lead to greater profit for developers. According to the UTC study, a city that plays their cards right can capitalize on that land value increase by coordinating with developers and convincing them the profits they’ll gain by investing in infrastructure will outweigh the costs of higher taxes and fees.
It’s not a new concept, nor is the idea of using it to pay for transit projects. Schlickman says several years ago former Federal Transit Administration head Peter Rogoff even told state and local agencies to start using value capture strategies rather than relying on traditional funding sources. But, Schlickman explains, “that hasn’t really happened in dramatic fashion throughout the industry. You hear about things here and there, but there’s no groundswell effort.”
He hopes his report can help change that. To do so, the UTC researchers looked at a planned extension of San Francisco’s Muni light-rail M line, D.C. Metro’s NoMa-Gallaudet station construction, NYC’s Hudson Yards redevelopment and 7 line subway extension, and six TIF-funded transit projects on Chicago’s L train system.
The details of each case study vary widely. In San Francisco, value capture provided $70 million of the project’s estimated $420 million to $720 million cost. In D.C., it provided $25 million of the total $103.7 million needed. NYC’s $2.3 billion subway extension is being fully funded by two “value capture” bond issuances totaling about $3 billion, which the study says makes it the “largest transit value capture initiative in the country.” In Chicago, TIF provided anywhere from 2 percent to 100 percent of the funding for the six transit projects.
With the exception of Chicago, the case studies did have a few key things in common. In each case there was coordinated collaboration between city officials, transit agencies, private developers and community members and that coordination got started early in the planning process. Chicago required little coordination because its value capture mechanism, TIF, was already in place as part of the city’s 153 TIF districts and therefore didn’t require negotiation between government and private developers the way the other three cities did.
Drawing on lessons learned from their case studies, the UTC report makes recommendations for value capture best practices. Among them: A city needs to be very proactive in planning their value capture program to leave time for transparency and negotiation with developers.
“If you have no prior conversation and set a tax rate that kills development, who’s won? Nobody,” Schlickman says. The transit agency also needs an employee who understands both transit planning and private development who can bridge the gap between government and the private sector in negotiations. And, in cities where transit agencies don’t have taxing authority, the UTC says it’s critical that transit agencies build close ties with municipal and regional taxing authorities.
The study points to D.C.’s NoMa station, which had less than 25 percent of total project cost covered by value capture. Had they better recognized and explained the station’s benefit to private entities and been more proactive in their value capture planning, they likely could’ve garnered more private funding. “There were hundreds of millions if not billions added in value around that station. They probably could’ve captured more if they’d been a bit smarter about it,” says Schlickman.
Ultimately, Schlickman says value capture has potential for just about any capital transit project a city might be thinking of doing.
“You do need the particular opportunity. It has to be a transit improvement that people recognize as adding value,” he explains. A new light-rail station is going to have obvious enough positive impact on nearby land value to convince developers to allow the city to tax them, but a renovation of an existing station might not.
“My sense is that if you went to any particular large transit system, they can give you an example of value capture, but it’s not become the major strategy to fund a capital transit project,” says Schlickman. “It’s a lost opportunity to tap those who were particularly benefiting from that investment.”
The Works is made possible with the support of the Surdna Foundation.
Josh Cohen is a freelance writer in Seattle. His work has also appeared in The Nation, Pacific Standard, Vice and Crosscut.