Using Value Capture Strategies to Finance Transportation Infrastructure

This is a simplified example of how value capture could work. Not all projects will require JPAs, since they would not be cost effective for smaller projects. Taxing mechanisms could be different; there really is not a “cookie cutter” formula. Other considerations are that FTA regulations on value capture mechanisms are still evolving and state laws vary on what is and is not permitted.

Value Capture in Action

For some real-world examples, consider two projects that are currently utilizing value capture to fund transportation infrastructure. In San Francisco, there is the $4 billion Transbay Transit Center Project. The project includes a new transportation terminal, as well as housing and retail development, in the downtown financial district. The transportation terminal will facilitate connections between 11 different transportation systems, including commuter rail, heavy rail, light rail, Amtrak, buses and in the future, California high-speed rail. The development will also include 2,600 new residences, 3 million square feet of new office and commercial space, and 100,000 square feet of retail.

Situated in the Far West Side of Manhattan is the Hudson Rail Yards Development Project. The transit component is the extension of the No. 7 subway line, which is being funded with revenues derived via a value capture mechanism. The commercial-residential component of the project includes four high-rise towers that encompass 5.5 million square feet. Hudson Yards is a mixed-use development that will include office, retail, residential, parks, open space, culture and entertainment. At the completion of the project, it isanticipated that 30,000 people will work there and 10,000 people will live in the residential tower.

The projects share similar aspects even though it could be argued that they were started for different reasons. Transbay was driven by the need to construct a 21st century transportation center, a high-speed rail station, and other commercial-residential development, with transportation being the important priority. In New York City, the No. 7 Line was extended to provide subway service to an area of the city that lacked connectivity. The follow-on, high-density development in Hudson Yards, including potential expansion of the nearby Javits Convention Center, was the primary objective.

Value Capture Terminology

Most value capture agreements are incredibly complicated and have idiosyncrasies unique to the areas they serve. But certain terminology will pop up:

• Joint Powers Authority (JPA): The governmental or quasi-governmental entity that has overall management and financial responsibility, including bonding authority, for the project. The Hudson Yards Infrastructure Corp. (HYIC) JPA is interesting in that it has no employees of its own.

• Special Assessment District or Business Improvement District (BID): A predefined area for which the JPA or managing entity can assess taxes or fees to support the project.
• Tax Increment Financing (TIF): A method for collecting taxes or fees in a BID. A baseline assessment is established for the properties and the increase in value of those properties in future years, relative to the baseline year, is subject to special assessments.
• Interest Support Payments (ISP): Should the JPA be unable to generate enough income to cover interest payments to bondholders, another entity can be compelled to make up the difference.
• Development Impact Fees: Fees (generally one time) assessed to cover the cost of public facilities (water, public safety, schools, etc.) required to support the new development.
• Transferable Development Rights (TDR): TDRs are special rights to a property that grant zoning variances to the developer. The most common is permission to exceed established height or density regulations.
• Passenger Facility Charge (PFC): A per-ticket or per-vehicle charge for users of the facilities. Transbay has different schedules for different transit systems, ranging from $.25/trip for AC Transit to $2.00/ticket for HSR.
• Payment in Lieu of Taxes (PILOT): To incent developers, JPAs can establish a property tax-free zone. But the developers aren’t entirely off the hook — they are required to make payments to the JPA, based on assessed value. These PILOTs are generally significantly lower than what the developer would normally pay to the city under prevailing tax rates.
• Tax Equivalency Payment (TEP): TEPs are remittances by the local taxing authority (e.g. New York City) to the JPA of the taxes collected by the city in the BID for existing buildings and improvements.