FInancing investment with land value capture
“One way for cities to finance neighbourhood development is by capturing the benefits of higher land values created by integrated planning”
By investing some of the captured value in parks, sidewalks, street lights, and cycle lanes, city governments can work with transit agencies, developers, and communities to develop efficient, attractive, and safe public places, increasing property values. By offering bonus floor area ratios (FARs) and other regulatory incentives, they can require developers to provide affordable housing and day care centres in their new facilities (Suzuki et al., 2015)
Land value capture is “mobilising” for the benefit of the community at large some or all of the land value increments (unearned income) generated by actions other than the landowner’s such as public investments in infrastructure or administrative changes in land use norms and regulations” (Smolka 2013).
Value Capture Finance is the appropriation of value, generated by public sector intervention and private sector investment in an underused asset (land or structure), for local reinvestment to produce public good and potential private benefit (Huxley, 2009)
Land-based infrastructure financing will bring the biggest payoff where cities are growing rapidly. Rapid growth drives swift increases in land prices and creates large revenue opportunities. Yet it also magnifies infrastructure investment needs, requiring major sources of development finance.
…and their attribution
Land values…
The government, on behalf of the general public, should keep this portion of the land value.
Increases in land value due to population growth and economic development
Public service providers should capture this portion of the increment to cover the costs of public infrastructure and local service provision.
Increases in land value due to public investment in infrastructure and changes in land use regulations
Private land owners should profit from this portion of the increment.
Increases in land value due to landowner’s investments
Land buyers (or lessees) pay sellers (lessors) to obtain the property rights of land.
Intrinsic land value
Creating a positive feedback loop of neighbourhood development
Land Value Capture agreements can be means for pursuing public policies that are goods for the local economy and the environment that encourage more include urban growth.
Floor Area Rations (FAR)
Using proceeds for investments in neighbourhoods development
Providing bonus FARs or other regulatory incentives
In King’s Cross Central and along Crossrail in London, and in Hudson Yards in New York, public investment in transport infrastructure and high-quality urban landscaping created value peaks. Several public interventions made these places desirable.
HOW TO CREATE A POSITIVE FEEDBACK LOOP OF NEIGHBOURHOOD DEVELOPMENT
Infrastructure investment leading to increases in accessibility and urban quality fosters raises in land value that can be captured for starting a positive feedback loop. The unlocking of the potential value of under-used assets (land and/or structures) as a result of a public sector intervention (re-zoning or provision of transit infrastructure) stimulates demand from the private sector.
Value capture is the arrangements by the public sector for the acquisition of a proportion of private sector returns for local reinvestment.
Local value recycling is the re-investment of acquired monetary or in-kind contributions from the private sector within the same development site or scheme.
VALUE CAPTURE INSTRUMENTS
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Tax- or fee-based instrument |
Description |
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Property and land tax |
Tax levied on estimated value of land or land and buildings combined, with revenues usually going into budgets for general purposes. |
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Betterment charges and special assessments |
Surtaxes imposed by governments on estimated benefits created by public investments, requiring property owners who benefit directly from public investments to pay for their costs. |
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Tax increment financing |
A surtax on properties within an area that will be redeveloped by public investment financed by municipal bonds against the expected increase in property taxes. Mainly used in the United States. |
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Development-based instrument |
Description |
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Land sale or lease |
Governments sell developers land or its development rights, whose values have increased thanks to a public investment or regulatory change, in return for an up-front payment, leasehold charge, or annual land rent payments through the term of the lease. |
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Joint development |
A well-coordinated development of transit station facilities and adjacent private properties between transit agencies and developers, where the latter usually contribute physically or financially to the construction of the station facilities, as their property value will increase thanks to the transit investment. Used in Japan, the United States, and other countries. |
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Air rights sale |
Governments sell development rights extended beyond the limits specified in land use regulations (such as floor area ratios [FARs]) or created by regulatory changes to raise funds to finance public infra- structure and services. |
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Land readjustment |
Landowners pool their land and contribute a portion of their land for sale to raise funds and partially defray public infrastructure development costs. |
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Urban redevelopment schemes |
Landowners and a developer establish a cooperative entity to consolidate piecemeal land parcels into a single site that they then develop (such as a high-rise mixed-use building) with new access roads and public open spaces. The local government modifies zoning codes and increases maximum FARs in the targeted redevelopment areas and finances the infrastructure. Mainly used in Japan. |
(Adapted from Suzuki et al., 2015)
Policymakers and practitioners need to understand the basic characteristics of various instruments and adopt appropriate combinations of development-based Land Value Capture (LVC) techniques
Floor Area Ratio (FAR) distribution is associated with development rights sales, land readjustment projects, and inclusive redevelopment schemes. FARs can be used as a market incentive to achieve several policy objectives.
One method for capturing land value does not preclude others. Cities can apply them separately or together in the way that best suits conditions.
Critical factors for success
Inclusive Value Creation: development-based LVC is designed and implemented around the incentives of the various stakeholders.
Public land ownership is important but not absolutely necessary: Development-based LVC is an exercise in creating value rather than just selling public land or leasing land use rights.
Sound planning principles: Maximizing income is important because developable land is scarce in fast growing cities, but development-based LVC should be based on sound planning principles that increase the profits of society as a whole.
Flexible zoning: Development-based LVC facilitates negotiations between planning authorities, developers, landowners and local stakeholders for mutual interests and benefits. Zoning codes and site design parameters must therefore be flexible enough to meet changing market demands and diverse local needs.
Clear, fair, and transparent rules: Creating development opportunities among voluntary public-private contributors in a collaborative effort can generate additional values and greater synergies. It is therefore essential to establish clear and fair rules for sharing costs, benefits and risks between stakeholders in order to ensure the long-term commitment of public agencies and private entities to deliver projects and maximise the benefits.