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A Decision-Support Framework For Using Value Capture to Fund Public Transit: Lessons From Project-Specific Analyses

Executive Summary

The federal government, through various transportation acts, such as the Intermodal Surface Transportation Efficiency Act (ISTEA), the Transportation Equity Act for the 21st Century (TEA-21), and, more recently, the Safe, Affordable, Flexible, Efficient Transportation Equity Act—A Legacy for Users (SAFETEA-LU), has reinforced the need for integration of land use and transportation and the provision of public transit. Other federal programs, such as the Livable Communities Program and the New Starts Program, have provided additional impetus to public transit. At the state and regional level, the past three decades have seen increased provision of public transit. However, the public transit systems typically require significant operating and capital subsidies—75 percent of transit funding is provided by local and state governments.1 With all levels of government under significant fiscal stress, new transit funding mechanisms are welcome. Value capture (VC) is once such mechanism.

This report examines five VC mechanisms in depth: tax-increment financing (TIF), special assessment districts (SADs), transit impact fees, joint developments, and air rights.


Simply put, VC is the identification and capture of the increase in land value resulting from public investment in infrastructure. Normatively, VC is based upon the “benefits received” principle—i.e., those who benefit from a particular infrastructure or service should also pay for it. In the context of public transit, provision of or enhancements to public transit systems accrue accessibility-related benefits to the neighboring properties. These benefits are positively capitalized into higher land values. Since the properties benefit from the public transit systems, they should contribute toward funding the systems.2

The increased land value can be captured through various mechanisms, including increased property tax revenues, the sale or joint development of public land in proximity to the transit system, lease or sale of air rights above transit stations, levy of special assessments, imposition of public transit impact fees, land-value taxation, and capture of property tax increments through TIF.

Any of these VC mechanisms could potentially be used to fund transit. However, the actual use of one or a combination of them depends upon factors such as:

  • The enabling environment: Does state-level enabling legislation allow the use of TIF for public transportation?
  • Stakeholder support: Would the local developer community oppose transit impact fees?
  • Institutional capacity: Does the local government have the financial, administrative, and technical capacity to undertake joint development?
  • Revenue yield: Would transit impact fees yield adequate revenues, or would joint development be a better option? Could both be used?
  • Horizontal and vertical equity: Would impact fees reduce vertical equity by increasing housing prices? Do the properties that pay special assessment fees benefit from the infrastructure funded through the fees in proportion to the fees paid? In other words, is the special assessment horizontally equitable? The beneficiary-to-pay (BTP) principle operationalizes the horizontal-equity rule in public finance. The underlying principle behind the popularity of user fees, impact fees, TIF, and special assessments, BTP calls for those benefiting from a public infrastructure or service to pay for it in proportion to the benefit derived. Operationalized through the ability-to-pay principle, vertical equity has its roots in welfare economics. In public finance, the vertical-equity rule calls for the rich to pay more than the poor for government-provided goods and services.
  • The chances of voter approval for any new tax.


While the literature has extensively demonstrated the impacts of transit investments on property value and has empirically simulated the potential magnitude of VC revenues for financing transit facilities, very little research documents and analyzes project-specific application of VC mechanisms. In fact, Smith and Gehring note that “it is now time for transit/land-use research to move from hypothesis testing to practical applications of value capture” (emphasis added).3

The recent step in this direction was taken in 2009, when a study at the Center for Transportation Studies, University of Minnesota, reviewed the suitability of several VC mechanisms for that state.4 While it described the VC mechanisms in great detail and assessed their suitability at the macro level, the study did not include in-depth feasibility analysis of individual-project-level VC mechanisms. For example, practitioners who would like to know whether a state allows the use of a SAD to fund public transportation would also be interested in details such as:

  • The studies conducted prior to the SAD formation
  • The stakeholders who supported SAD, those who opposed it, and how the local government addressed stakeholder concerns
  • The proportion of project cost funded by the SAD
  • The horizontal- and vertical-equity considerations addressed in the design and implementation of the SAD assessment calculation methodology
  • This study provides such details for 14 case studies of VC mechanisms in practice.



Our overall research objective is to assist practitioners in gauging the legal, financial, and administrative suitability of VC mechanisms for meeting project-specific requirements. To meet this objective, the study identifies and analyzes applications of five mechanisms and develops a decision-support framework to ascertain their suitability.


Our methodology consisted of four steps. First, five VC mechanisms were chosen for study. Then, transit systems in which each mechanism is used were selected and analyzed. Finally, findings of the case analyses were documented, and a decision-support framework (DSF) was developed. The DSF systematically assesses each VC mechanism’s performance on a set of decision criteria that local governments and transit agencies should consider prior to employing that mechanism.

A few cases use multiple mechanisms. For example, both TIF and joint development are used to fund Contra Costa Centre Transit Village in Contra Costa County, CA.

For each case, the state- and local-level VC environment is analyzed, focusing on the legal and policy framework enabling use of the VC mechanism. The local government’s institutional capacity to design and administer the VC mechanism is then examined. This is followed by investigation into the stakeholder support for or opposition to the mechanism.

Each case also examines the VC mechanism’s impact on horizontal and vertical equity. Wherever possible, ways to address equity concerns are recommended.

Finally, the project-specific economic environment is analyzed by examining the impact of local real estate and economic conditions prevalent at the time of the VC mechanisms’ use. For each case, the revenue generated by the mechanism is documented, and comments on the revenue stream’s stability and growth are presented.


Impact Fees

Impact fees are a type of development exaction. A development exaction requires real estate developers to contribute public facilities, infrastructure, and/or services, either financially or in-kind (for example, through land donation).5 The term impact fee is used specifically to describe financial exaction.6

Our review of the use of impact fees for transit nationally and our analyses of four cases (San Francisco Transit Impact Development Fee, San Francisco, CA; Portland Transportation System Development Charges, Portland, OR; Aventura Transportation Impact Mitigation Fee, Aventura, FL; and Broward County Transportation Concurrency Fee, Broward County, FL) find the following:

  • Only a few states allow transit impact fees. State- and local-level enabling legislation are critical for their use.
  • Significant institutional capacity is required to design, implement, and charge impact fees. A robust nexus study helps defend the fees from legal challenges.
  • In the four cases, the local governments faced moderate opposition to impact fees, primarily from the developer community.
  • Impact fees met a low to moderate proportion of the transit funding needs, often not exceeding 25 percent.
  • The impact-fee revenues displayed low to moderate stability. Jurisdictions with consistently strong real estate markets and ample green-field or in-fill development opportunities are likely to see strong revenue growth and low revenue volatility.
  • Impact fees have low to moderate impact on horizontal and vertical equity.

Tax Increment Financing

TIF is implemented by creating a geographic district administered by a TIF authority, usually a redevelopment agency.7 After the district is created, the assessed property value is frozen for a period of time, usually from 10 to 25 years.8 As new funds are invested, the property values in the district increase, and so do the property tax revenues. The property-tax increment (new property tax minus the property tax on the frozen property values) is diverted to the TIF authority rather than to the agencies that would normally receive it, e.g., the city, the county, and school districts. The tax increment is reinvested in the TIF district.

Our review of TIF use for transit nationally and our analyses of four projects developed using TIF funds (Contra Costa Centre Transit Village, Contra Costa County, CA; Wilson Yard Station, Chicago, IL; Cedar Rapids Ground Transportation Center, Cedar Rapids, IA; and Portland Streetcar, Portland, OR) find the following:

  • All the states except Arizona have state-level TIF-enabling legislation.9 TIF is most commonly used to revitalize blighted urban areas. However, the condition of blight is interpreted more liberally in some states than in others. Vermont, with the most liberal legislation, allows TIF to be used for development, job creation, or even simply to increase tax revenue.
  • State-level TIF-enabling legislation should be closely examined to ascertain whether it lists specific uses for TIF funds and/or whether it lists uses barred from TIF funding. If such lists exist, it is important to ascertain whether transit is permissible or barred.
  • Significant institutional capacity is required to plan, create, and manage a TIF district. Institutional capacity may also be required to garner the support of the community and other public agencies at the time of the district formation.
  • In the four cases, local governments faced low to moderate stakeholder opposition to TIF, generally from residents and other public agencies.
  • TIF funded a moderate proportion—one-sixth to one-half—of transit project costs.
  • TIF revenues displayed a moderate to high degree of stability. TIF revenues depend on property-tax increases. In turn, tax increases are impacted by real estate market conditions, the intensity of redevelopment of the TIF district, and the effectiveness of the redevelopment projects in improving the quality of the district.
  • The potential for horizontal inequity is low, as TIF revenues are spent on projects that benefit the property owners within the district.
  • The use of TIF for transit enhances vertical equity to the extent that lower-income persons are more likely to use public transit than higher-income persons.

Special Assessment Districts

SADs are a subset of special districts that charge property owners mandatory fees, called assessments, in exchange for the benefits provided to them.10

Our review of the use of SADs for transit nationally and our analyses of four projects developed using SAD funds (Seattle Streetcar, Seattle, WA; Portland Streetcar, Portland, OR; Los Angeles Red Line Segment 1, Los Angeles, CA; and New York Avenue Metro Station, Washington, DC) find the following:

  • A robust legal enabling environment is required for SAD formation. Usually state-level enabling legislation and a local SAD authorizing ordinance constitute the legal environment.
  • While the institutional capacity required to form and manage SADs may not be as great as that required for TIF, it is still substantial. Furthermore, significant institutional capacity may be required to garner community support at the time of SAD formation.
  • Several states require the vote of the majority of property owners for SAD formation. Therefore, local governments considering a SAD as a transit funding source must examine their state and local legislation for the majority-vote requirement. If such a vote is required, the local government can decide (a) to not use a SAD in a largely residential neighborhood, (b) to conduct extensive community outreach to gauge the popular resident sentiment toward the SAD, or (c) to exempt residential properties from assessments. However, equity considerations and project funding needs should be considered when deciding to exempt properties from assessments.
  • In the four cases, the SADs generated large sums of revenue for bus or light-rail transit systems. However, the revenues funded a small proportion of a higher-cost heavy-rail project, Los Angeles Red Line Segment 1.
  • SAD revenues are highly stable. Usually fixed at the time of SAD formation, the assessments are collected either up front or annually.
  • Ideally, all properties that benefit from the transit infrastructure should pay assessments. Furthermore, the benefit should be estimated for each property separately, and the assessment should be directly proportional to the benefit. Less-sophisticated methodologies leave room for horizontal inequities.
  • The potential for vertical inequity is low to moderate. Users with low ability to pay (such as low-income households) are often exempt from paying assessments. Smaller properties are also often exempt. This exemption enhances vertical equity to the extent that the owners of smaller properties have lower ability to pay than the owners of larger properties. Furthermore, property owners may have the option to pay assessments over time and at a reasonable interest rate. The interest rate is often equal to the rate of interest paid by local governments on long-term borrowing.

Joint Development and Air Rights

A joint development involves cooperation between private and public entities—for example, a real estate developer and a transit agency or local government—to develop a project. Rights to build over an existing structure, such as a transit stop, are called air rights.

Our review of joint development and air rights to fund transit nationally and our analyses of five projects (Bethesda Metro joint development, Bethesda, MD; Dadeland South joint development, Miami, FL; Contra Costa Centre Transit Village, Contra Costa County, CA; Cedar Rapids Ground Transportation Center, Cedar Rapids, IA; and Resurgens Plaza, Atlanta, GA) find the following:

  • While state- or local-level enabling legislation may not be required for undertaking joint development, a clear policy framework is helpful. At a minimum, a disposition and development agreement (DDA) forms the legal basis for a joint development.
  • Significant local government/transit agency institutional capacity is required to conceptualize, plan, develop, and manage joint developments. Expertise in project finance and real estate development is critical for negotiating joint development terms, especially the lease structure.
  • Our five case studies faced low to moderate stakeholder opposition, most of it from neighborhood residents who feared increased traffic congestion, air/noise pollution, and changes to the character of the neighborhood.
  • The case study projects’ revenue yield varied widely, ranging from a high of several million dollars annually to a low of few hundred thousand dollars. The developments also highlight the need for careful negotiations and structuring of the lease revenue agreements by public agencies. Furthermore, consideration should be given to other objectives, such as revitalization of blighted neighborhoods and generating transit ridership.
  • The public agency typically receives minimum guaranteed revenue (such as in Bethesda, Dadeland South, and Contra Costa Centre Transit Village) or receives a fixed revenue adjusted by the consumer price index (as in Resurgens Plaza). Furthermore, in two of the cases (Bethesda and Dadeland South), the transit agency also shares a percentage of gross revenue. The lease revenue stream depends on the economic conditions in such cases and hence is likely to be somewhat volatile.
  • The horizontal-equity concern for joint development projects primarily revolves around whether the involved parties benefit in proportion to their stake and risk in the development. Clear joint development policy guidelines and objectives help reduce the potential for horizontal inequities.
  • Since joint development is the result of a voluntary agreement between a public agency and a private developer, these entities are likely to enter only into a vertically equitable agreement.


The performance of the five VC mechanisms in our case studies is evaluated based on the criteria that transit providers should consider when designing and implementing a funding mechanism: the enabling legal environment, stakeholder support, institutional capacity, revenue yield, revenue stability, and equity. Using these criteria, we develop a decision-support matrix that should help policymakers, local governments, and transit agencies assess the suitability of these mechanisms.

Key findings that should benefit those planning to use these VC mechanisms include the following:

  • TIF and SADs are the mechanisms likely to yield the highest revenue.
  • Local governments may use a combination of VC mechanisms. For example, TIF and SADs fund the Portland, OR, Central Streetcar Project. TIF and joint development fund Contra Costa Centre Transit Village in Contra Costa County, CA, and the Ground Transportation Center in Cedar Rapids, IA.
  • The use of TIF requires significant institutional capacity, community support, and agreement among taxing agencies.
  • The use of transit impact fees is rare. It benefits from state- and local-level enabling legislation, robust nexus studies, a strong real estate market, and developer support.
  • Transit impact fees and SADs must be carefully designed and implemented to minimize inequities.
  • Strong real estate markets, significant institutional capacity, and clear policy guidelines are needed to undertake joint development.