Location Value Capture

Location value capture (also known as Land Value Capture or Value Capture Finance) is the appropriation of value, generated by public sector intervention and private sector investment in relation to an underused asset (land and/or structure), for local re-investment to produce public services and potential private benefit. LVC is the leveraging of public land through the return on investments for interchange operators (financing from commercial activities and rents of commercial spaces).

Successful public transport systems generate substantial economic value for cities because they improve accessibility in station areas. They increase the value of land in the immediate areas around stations, and they support the “agglomeration economies” that make cities the vibrant engines of our global economy. Value capture is the concept by which government may be able to capture part of the economic value generated by public transport systems, and use these funds to help finance the system.

The LVC mechanism applied in transport recoups the investment in public transport and returns the increase in profits – due mainly to increased accessibility – to the source of the investment, i.e. the taxpayers. Although all location value capture schemes differ to a greater or lesser extent, three main mechanisms can be identified: Betterment Tax is a value capture financial mechanism on property that has benefited from transport infrastructure gains; Tax Increment Finance is an economic development incentive package; Joint Development is a cooperation agreement between public sector and private developers.

The following variations of value capture mechanisms can also be identified: Property Tax, Special Assessment District, Transit-Focused Payroll Tax, Transit-Focused Real Estate Tax, Transit-Focused Development Fee, Development Rights/Air Rights.

Three sets of beneficiaries of urban transport infrastructure can be identified:

(1) The general public (because the urban economy benefits from the infrastructure);

(2) Property and business owners in the vicinity of infrastructure (because the access afforded by that infrastructure increases the value of their holdings);

(3) Direct users of the infrastructure.


NODES strategic objectiveContribution
Enhance accessibility and integration +
Enhance intermodality 0
Enhance liveability +
Increase safety and security conditions 0
Increase economic viability and costs efficiency ++
Stimulate local economy ++
Increase environmental efficiency 0
Increase energy efficiency 0

Good practice

Copenhagen metro and Orestad development scheme – The Copenhagen Metro is built on the financing principles of selling the land which is raised in value by the arrival of a new Metro connection. Underdeveloped land is given as assets to the Metro Development Company, which takes up loans to finance the building of the infrastructure. Once the land has risen in value thanks to improved connectivity, it is developed and sold to private investors. With the raised income, the Company is then able to pay back the loans.

London Crossrail – Crossrail is a new project that will develop a high frequency rail corridor across London. Once completed in 2018-19, the link is expected to add 10% to London’s rail capacity and substantially reduce congestion on the Tube, Dockland’s Light Railway and National Rail services. The expected cost of the whole project is £14.8 billion, with a total workforce of 14,000 people. Within the financial portfolio of Crossrail, £4.1 billion of the costs will be generated by the Greater London Authority (GLA) through the Business Rate Supplement (BRS), a fiscal method based on Land Value Capture Finance.

Barcelona 22@BCN project – The project involves the transformation of 200 hectares of industrial estate in the centre of Barcelona into an innovative productive district, aimed at developing knowledge intensive industries. The transformation enables the creation of new businesses, housing, and green spaces to transform the old industrial land into an area of highest urban and environmental quality. The new metropolitan railway station will connect the future Placa de los Glories Intermodal station with El Prat International Airport

Paris (payroll tax and development tax) – Three main entities in Paris play important roles in the finance, operations, and expansion of the city’s public transit system. The Syndicat des transports d’Île-de-France (STIF), or Paris Transport Authority, provides the budgets for operation, maintenance, and modernization. The Régie Autonome des Transports Parisiens (RATP) company operates much of the actual system, including the Paris Metro system, trams, buses, and two of the regional rail lines that serve the city. The Société du Grand Paris (SGP) is a regional governmental body created by the French national government in 2010 with the goal to build a 200-kilometre new extension to the rail system in the Paris region – the Grand Paris Express.

Two main location value capture mechanisms are used to finance public transport in the Paris region. The first is a longstanding payroll tax that was first implemented in the 1970s. This tax – the ‘versement transport’ – varies depending on which part of the region the business is located in. The most central areas pay a 2.6% payroll tax, less central areas pay 1.7%, and areas at the edge of the region pay 1.4%. These taxes go to STIF, which then distributes them to RATP and to other public transport operators in the region. The ‘versement transport’ provides 40% of the STIF budget.

The second major use of value capture in the Paris region is a newly-implemented development tax levied on office space that is raised to pay for the construction of the new Grand Paris Express. This tax is projected to raise €350 million per year starting in 2014, but there is considerable ongoing discussion about whether this value capture strategy is a good idea. Specifically, the concern is that the tax is too high that it might actually depress the regional economy through reduced new development, and not raise sufficient funds for the rail extension.


Potential interchange performance improvement

The strength of the value capture method is that it should represents a winning formula for all stakeholders in a development project, from local residents and local authorities to investors and developers. In other words, it maintains both inward and external rates of return. Without securing broader social benefits, however, a project cannot be considered as value capture.

Pre-conditions:

  • Good mix of commercial, retail, or residential density in proximity of the interchange;
  • Minimisation of volatility during economic crisis, ensuring timely finalisation of interchange project

Advantages for public finance based on VC approach:

  • Creates incentives to improve urban infrastructure;
  • Encourages better development;
  • Curbs land speculation, prevents land price booms and busts;
  • Curtails sprawl, finances public transportation and other infrastructure;
  • Promotes affordable land access;
  • Can generate additional return on investment that can be reinvested in the transport infrastructure or interchange itself.

Resources

The initial public investment is relatively high. Since the LVC mechanism is mostly relevant for major infrastructure projects with the potential of attracting businesses and where the surrounding land is of high value. In the long run, an LVC project is expected to generate broader societal benefits and generate additional return on investment from selling land.

References

Core Cities and British Property Foundation. A Rough Guide to Tax Increment Financing. http://www.corecities.com/news-events/rough-guide-tax-increment-financing-core-cities-and-british-property-federation

Ernst & Young (2010). Land Value Capture as a Funding Source for Urban Investment: The Warsaw Metro System. http://www.ucl.ac.uk/qaser/pdf/publications/ernst_young

Moldelewska, M. (2010) Value Capture Financing as a solution for closing the capital gap in cities in European countries (case Poland). http://www.ersa.org/IMG/pdf/MartaModelewska_Value_Capture_Financing.pdf

Rough Guide to Tax Increment Financing from the Core Cities and British Property Federation. http://connectedcities.eu/downloads/3rdparty/rics_tda_summary.pdf

Roukouni, A. & Medda, F. (2012) Evaluation of Value Capture Mechanisms as a Funding Source for Urban Transport: The Case of London’s Crossrail. Procedia – Social and Behavioural Sciences, vol. 48, pp 2393-2404.

Salon, D. (2014) Location Value Capture Opportunities for Urban Public Transport Finance. http://library.rpa.org/pdf/TLS-2014-Research-Paper-Value-Capture.pdf

Steer Davies Gleave (2011). The Value of Station Investment: Research on Regenerative Impacts. Report.  http://www.steerdaviesgleave.com/sites/default/files/newsandinsights/Station_Investment_Report.pdf