Value capture

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Value capture is a type of public financing that recovers some or all of the value that public infrastructure generates for private landowners.

Public investments, such as building transportation or sewer facilities, can increase adjacent land values, generating an unearned profit for private landowners. The unearned value (increases in land value which otherwise profit private landowners cost-free) may be "captured" directly by converting them into public revenue. Thus, value capture internalizes the positive externalities of public investments, allowing public agencies to tax the direct beneficiaries of their investments.

Urban planners and finance officials are often interested in value capture mechanisms, for at least two reasons: 1) because they offer a targeted method to finance infrastructure benefitting specific properties, and 2) because some such investments can leverage in private investment in the area, which will hopefully benefit the city more widely, e.g. by providing employment opportunities, shopping and other amenities, and a more robust and diverse tax base. It can be politically useful to capture for the city treasury a share of the positive externalities of city-financed investment. This can help address public concern about the fact or perception of unfair windfalls when specific owners’ property values go up after urban infrastructure investment is paid from general city revenues.

Although it is not always talked about as such, the most common value capture mechanism is the general real property tax, with no special features other than regular assessment of market value. The value of any given property is correlated with its proximity to various amenities. Thus, for example, when a new subway station or highway interchange is installed, land near the new facility becomes more valuable. And as the real property is developed or re-developed, its value typically goes up even more. Thus, even if the rate of taxation does not change, the tax revenue generated from properties which benefit goes up. The effectiveness of value capture depends, of course, on a smoothly functioning ad valorem property tax system, with regularly updated property values.

Value capture strategies can be applied to developers or landowners, and they can be applied before or after a public improvement is built.[1] In the case of new public transit facilities, the property value premium nearby can be as high as 167%.[2] Types of value capture include the following:[3]

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