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WHAT IS VALUE CAPTURE?

Value capture funding methods arose in California in the 1960s as a means of kick-starting urban renewal programs in economically depressed urban areas. Early state legislation required local government to classify these areas as “blighted” urban renewal districts as a precondition for putting a value capture program in place. Specific projects and programs were then planned within the blighted district to attract new investment, housing and jobs. These programs were called Tax Increment Financing (TIF) programs because they were funded by the increase (increment) in local property tax revenue resulting from the renewal district improvement programs.

In the US, TIF programs allow local councils and development authorities to sequester increases in property tax revenues above
a base year generated within the urban renewal district for a set period of time, usually 20 to 25 years. The sequestered funds
are combined with traditional local, state and federal government funds, such as local public works budgets, development levies and state government grants, to fill funding gaps for predetermined urban renewal programs and projects. Complementary private sector housing and commercial developments are identified and actively promoted as part of the scheme. In most cases, TIF funding fills the gap between what the public sector can afford and what the private sector will invest, thereby serving as the catalyst for economic development. TIF revenues underwrite bonds or loans which ensure stakeholders that key public elements of urban renewal programs will be put in place, demonstrating the public sector’s commitment to the program and attracting complementary private sector investment.

 

TIF programs have evolved considerably over the past 50 years and now exist under state enabling legislation in 49 of the 50 US states and the District of Columbia (Council of Development Finance Agencies, p. 1). It is the most widely used local government program for financing economic development in the US and TIF programs are also legislated in Canada and Puerto Rico.
 In 2012, the UK Government introduced TIF legislation which allows local authorities to borrow against future growth in business rates to fund infrastructure, attract private sector investment and create jobs. The UK Government initially earmarked £150 million for TIF projects from 2013-14. A program focusing on four key development sites in Newcastle and Gateshead Councils using the

TIF scheme is expected to initiate “a £92 million investment programme, creating 2,000 permanent jobs within five years, and 13,000 within 25 years”.

 

DEFINITION

There are a number of funding models in use in Australia and internationally to contribute to urban infrastructure and transport planning, and each has advantages and disadvantages that must be tailored to local circumstances and objectives. A Canadian study on smart growth identified 15 different funding methods currently used in North America (Tomalty 2007). Over-use or misapplication of any of these methods can have unintended consequences and have actually discouraged complementary private sector investment. Over-reliance on upfront development levies is widely acknowledged as having stalled economic growth, diminished housing affordability and reduced employment in the mid to late 2000s. These findings forced the NSW Government to reduce upfront developer levies by $64,000 per lot. Clearly, understanding how various funding models work is critical in implementing effective urban renewal programs.

In Australia and New Zealand, the value capture funding model is not well understood and has taken on a variety of meanings, not all of which are consistent or appropriate. This can result in less effective program design, delayed implementation or premature rejection of value capture as a potential funding method for urban renewal and transport projects. For example, a report for the New Zealand Transport Agency incorrectly defines value capture mechanisms as user charges applied to recover general funds, and concludes that only perceived benefits would be recovered from its use (Kemp et al. 2012).

For the purposes of this paper, value capture refers to funding methods that are closely tied to increases in public tax revenues from private property. The method relies on establishing a revenue benchmark prior to program commencement that can be monitored against specific planned investments in transport infrastructure and urban renewal. Revenues above the benchmark are then sequestered into dedicated accounts and used to repay bonds or loans which fund projects and programs, while revenues below the baseline continue to flow to taxing authorities. Examples of potential value capture revenue streams include:

Improved property values resulting from infrastructure investments, land rezoning, and density controls,
 increases in property transfer taxes, local government rates, business rates, land taxes and related local government charges, sale of additional development rights over and above those permitted under existing zoning, also called sale of “bonus floorspace”, Sale of under-utilised government land beside public transport corridors and stations,
 sale of air rights over public land and transport corridors and stations.

HOW IS VALUE CREATED AND CAPTURED?

Numerous studies demonstrate that well-planned urban renewal programs which integrate land use and transport infrastructure produce significant increases in land values. A 2006 study of 89 TIF districts spread across 67 municipalities in the Chicago metropolitan area found that mean annualised property values in TIF districts increased by 35 per cent between 1983 and 1993, compared with a six per cent increase in overall municipal property values. Industrial and CBD districts experienced the highest median increases, growing by 32 and 26 per cent respectively. These increases are caused by improved access to jobs and housing, more efficient and productive uses of land and infrastructure, and the ability of employers and employees to specialise in order to produce high value services and products.

Value capture programs provide an equitable means of reinvesting a portion of the benefits created by urban renewal and transport infrastructure programs. The chart in Figure 2.1 provides an illustration of the TIF conceptual funding model, which is the basis of value capture. The key features of the model are:

+It focuses on generating funds from incremental revenues above a predetermined baseline, as opposed to imposing additional upfront costs on development.

+It establishes a clear nexus between public infrastructure investment and the captured revenue sources. Captured revenue streams are dedicated to repayment of specific public infrastructure projects and programs for a set timeframe,

typically 20 to 25 years.

+The full revenue stream is returned to the original taxing authorities at the end of the repayment period.

+Captured revenue streams provide a long-term source of revenue to underwrite loans and / or bonds which fund initial infrastructure and urban renewal investments.

 COMMON USES OF VALUE CAPTURE FUNDS

Uses of value capture funds in the US vary from state to state depending upon enabling legislation. The most common uses of funds are: 

+Studies, surveys and plans of existing land uses and infrastructure assets,

+Professional services, such as architectural, engineering, legal, property marketing and financial planning,
􏰀􏰁Property acquisition and site consolidation,

+Demolition and site preparation,

+Rehabilitation and renovation of existing buildings,

+Construction of new or improvements to existing infrastructure,

+Affordable housing programs for new or displaced residents,

+Enhanced security services, job training programs and day care services to promote employment opportunities for low income residents, and

Relocation costs for businesses or residents affected by redevelopment.
While not all of these uses would be appropriate in the Australian context, they demonstrate the flexibility of value capture programs in 

addressing local needs in the US system.

TEN KEY SUCCESS FACTORS

+DEVELOP A COMPREHENSIVE, LONG-TERM PLAN

Value capture programs typically rely on the successful implementation of a number of mutually supportive and coordinated public and private investments to lift economic activity over a sustained period.

+EMBRACE GENUINE AND ROBUST STAKEHOLDER CONSULTATION

Stakeholder consultation has evolved into an established and essential component of public transport and urban planning programs at the national, state and local levels.

+CAREFULLY SELECT THE IMPROVEMENT DISTRICT

Successful value capture districts in North America vary from small downtown improvement districts in rural communities covering several city blocks to large industrial precincts covering hundreds of hectares, such as the 345 ha Pilsen industrial TIF district in Chicago (Trkla, et al 1998). In setting the boundaries of an improvement district, consideration needs to be given to the nature and cost of physical improvements needed to create value uplift, catalytic projects that are likely to kick-start development activity, and the attitudes of business and residential property owners to the proposed activities. Assuming financial objectives can be met, it may be better not to include staunch opponents in the scheme in order to keep the program moving forward smoothly.

Once the program’s success is evident, attitudes may change and boundaries can be extended.

+CREATE A SHARED VISION

A shared vision involving all stakeholders requires building early consensus among residents, property owners, community groups, hospitals, educational institutions, employers and businesses, even those opposed to the scheme. A widely scoped stakeholder consultation program involving all stakeholders and the media will assist in getting the message out and building alliances. It is far better to have robust debate and informed opponents than an information vacuum or misinformation about the program.

+ ESTABLISH A CLEAR AND BALANCED GOVERNANCE FRAMEWORK

Value capture programs rely on establishing and maintaining good will among a wide range of public and private interest
groups. Government agencies and commercial interests invest hard capital to create value, but as a form of PPP operating
within a democratically elected system of government, the success of these programs often relies heavily on the non – financial contributions and support from other interests, such as neighborhood associations, educational institutions, local health and social service agencies and various other special interest groups. This often requires a widely supported and collaborative process, and mechanisms to provide appropriate involvement from all groups, such as the use of task forces, facilitators and intermediaries.

+SECURE CONSISTENT AND COORDINATED LEADERSHIP

Studies of high speed railway stations in Europe and Asia found that a major factor in successful station precinct development programs is the presence of strong and consistent local leadership.