The Seductive Appeal of Value-Capture Finance

Today, the Antiplanner is in North Carolina, where transit agencies seem to be competing to plan the wackiest, most-expensive rail transit lines that few people will ever use. Right now, the leading contender must be Raleigh, which (according to a paper by UNC-Charlotte transport professor David Hartgen and transit accountant Tom Rubin) is planning a light-rail line that will cost $33 per trip and a commuter-rail line that will cost $92 per trip.

The Antiplanner, however, is in Charlotte looking at a proposed commuter-rail line that is expected to cost more than $450 million to start up and is projected to carry only about 5,600 trips (meaning 2,800 round trips) a day in 2025. The Antiplanner calculates that, for about the same price as the rail line, taxpayers could give every one of the 2,800 riders a brand-new Toyota Prius every other year for the life of the rail project.

This rail line is such a dog that not even the Federal Transit Administration will help pay for it. So the Charlotte Area Transit System (CATS) is proposing that local cities and counties cover half the costs, while the other half would be shared by CATS and the state of North Carolina. Under a proposed financial plan, five cities and two counties are to use “value capture” to raise their half of the money.

Value capture is based on the idea that new transportation facilities increase the value of properties served by those facilities. Taxes on that increased value thus form a sort of “user fee” to help pay for those transportation facilities. While it sounds reasonable to some, in fact this idea is completely nuts, especially when applied to transit projects such as the proposed commuter-rail line.

The Interstate Highway System increased the value of properties that it served. But it did so by massively increasing personal mobility. The average American today travels about 4,000 miles a year on interstates, all of which is new travel (the average American travels about 15,000 miles a year total by auto today, compared with just 7,000 miles a year in 1960, before most interstates were built, so the 4,000 miles on interstates is all new travel). However, the interstates did not need to rely on “value-capture” since they were paid for more directly by users in the form of gas taxes and tolls.

At 2,800 round-trip riders per day, each rider would have to pay about $44 per roundtrip to cover the capital and operating costs of Charlotte’s proposed commuter-rail line. No one is going to do that when the same trips could be taken in a single-occupancy vehicle for about $8. So CATS expects users to pay only about 10 percent of the cost.

To cover half of the remaining cost, CATS proposes that cities use tax-increment financing (TIF) and other special assessments on local property owners. But these won’t really capture the value created by the rail line, mainly because the rail line will create no new value.

Unlike the interstate highways, virtually all of whose travel was new travel, virtually all of the 2,800 round-trip riders will not be new travelers but merely be shifting from other modes such as bus or car. If there is no new travel, there is no new value that can be captured to pay for the rail line. Instead, the TIF and other taxes collected would be on property values that would exist even without the rail line.

Mecklenburg County, in which Charlotte is located, is growing at about 3 percent per year. The taxes proposed by CATS would capture the value of this growth, not the value added by the rail line, which is nil. A rail line that carries only 2,800 round trip riders a day (which is about 280 for each of the suburban rail stops) is not going to add much to property values, but even if it were 28,000 riders, at best the rail line would increase the value of property near the rail stations at the expense of reducing (or slowing the growth rate of) property values elsewhere, resulting in zero net value for the region. No one at CATS claims that the rail line will cause the Charlotte region to grow faster or that it will lead to more new travel. Thus, any value-capture taxes will merely leech money away from other property-tax dependent programs.

If the rail line were truly worthwhile, the users themselves would be glad to pay for it. It is only because it is so much more expensive (not to mention less convenient) than the alternatives that users won’t pay for it. Asking others to pay based on some mythical “value capture” is simply deceptive.

No matter how it is financed, the commuter-rail proposal is ridiculous. Presentations in support of the project argue that highway traffic in the area is “exploding” (see slide 11; note: Google sign-in needed to download presentations). But the rail line will make congestion worse, mainly by disrupting traffic signal coordination on roads crossing and parallel to the rail line. According to the environmental assessment (60MB), average arterial travel speeds in the corridor in 2030 will be 15 percent slower with the rail line than without it. Based on that alone, the project should be rejected.

The Antiplanner will present these findings to the Town Council of Cornelius, North Carolina at 9 am and to the Lake Norman Transportation Commission at 6:30 pm in Mooresville Town Hall. If you can’t attend, you can download a 14-page paper summarizing the Antiplanner’s findings.

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23 thoughts on “The Seductive Appeal of Value-Capture Finance

  1. C. P. Zilliacus

    Randal, I believe that the Transportation Corridor Agencies (TCA), which built the network of toll roads (73, 133 241, 261) in Orange County, Calif., uses some type of value capture to help pay off the bonds used to build those roads. Of course, the number of trips is dramatically higher on those highways than it is on this proposed North Carolina rail line.

  2. bennett

    I am not familiar with “value capture” be it seems to me that there is way too much grey area in the capture area. Is there an objective way to define the capture area?

  3. Jardinero1

    Fundamentally, for value capture to work, you have to accept the premise that rail will create an increase in taxable value in the taxing area that would not occur in the absence of rail. There is plenty of data out there to test this premise as we enter the third decade of an urban rail buildout. The best data points would be places like Miami and Los Angeles and Dallas that have two decades of rail and taxable values to draw data from.

  4. MJ

    I am not familiar with “value capture” be it seems to me that there is way too much grey area in the capture area. Is there an objective way to define the capture area?

    It is basically an empirical question. Do prices increase faster in locations closer to the stations than those not in close proximity?

    It’s not hard to imagine that this might be the case for some heavily-used commuter rail systems (e.g. New York, Chicago, Philadelphia, Boston). You might even be able to find an effect in a place like Charlotte, though I strongly doubt that there will be enough of an increase to provide any significant revenue stream to finance the project. With so few riders forecast, it is hard to imagine there being enough consumers of housing (much less commercial property) willing to bid up the price of housing near the stations. Francis also pointed to the fact that the level of service will not be terribly attractive.

  5. bennett

    “It is basically an empirical question. Do prices increase faster in locations closer to the stations than those not in close proximity?”

    I get that, but how is “proximity” defined? Properties directly adjacent to a station? A half mile around a station? The point in which property value isn’t increasing beyond normal levels for the region? Is there a value increase threshold?

    Basically, where is the line literally drawn?

  6. LazyReader

    Didn’t these people ever consider that raising the inherit land value of an area would inevitably decrease the amount of “possible transit riders” that they could have absorbed. Let’s just break this down and I don’t want to seem insensitive…..Poor people will take transit. Rich people do not. Those in the lower-middle class bracket might consider riding it in certain situations. And those in the upper-middle class bracket; a few might consider it if they have “environmental beliefs” like those who cranked out 40 grand plus for a Volt.

  7. the highwayman

    bennett said:
    I am not familiar with “value capture” be it seems to me that there is way too much grey area in the capture area. Is there an objective way to define the capture area?

    THWM: Bennett,

    O’Toole, Rubin & Cox commenting on rail.

    Is like the KKK commenting on MLK.

    If you want to know what “value capture” actually is, look else where.

  8. Jardinero1

    If anyone reads the link to Value Capture, and reads the report they will find that it is a variant of tax increment financing. Most of the empirical work on TIF’s shows that TIFs don’t increase property values, in the aggregate, across a region. TIF’s just shuffle the property value around from other areas where development might have occurred in lieu of the TIF. It’s not a given that a TIF will attract investment in the first place.

  9. Jardinero1

    Continuing, the idea is that if you put a TIF around a section of railway, then all the development around that section of railway will more than make up for the expense of the railway. Good luck.

  10. LazyReader

    Didn’t Portland try using TIF to encourage development around the light rail stations they built. And of course after ten years the development they got was……..nothing. How does that make up for the expense of the rail.

  11. the highwayman

    Jardinero1 said: Continuing, the idea is that if you put a TIF around a section of highway, then all the development around that section of highway will more than make up for the expense of the highway. Good luck.

    THWM: Why do you like double standards?

  12. Jardinero1

    I don’t know what you mean. I don’t like TIF’s, cause I think they are unnecessary gifts to developers and more often than not they turn into boondoggles for taxpayers.

  13. Sandy Teal

    Somebody needs to explain to me why a city would think that, “Hey, if we capture all the value the city produces for the next ten years, and tie it up in light rail, then nobody will have any reason to invest in our city for the next ten years”.

  14. MJ

    I get that, but how is “proximity” defined? Properties directly adjacent to a station? A half mile around a station? The point in which property value isn’t increasing beyond normal levels for the region? Is there a value increase threshold?

    Basically, where is the line literally drawn?

    You don’t have to literally draw a line. Imagine a regression equation that predicted the price of an urban property. You could define a variable that measured the distance of the property from the nearest rail station. Assuming this variable is continuous, you should be able to estimate the increment in price associated with moving some unit of distance closer to the station, holding all other (observed) factors constant.

  15. Sandy Teal

    And of course you would have subtract the value destroyed by the construction period, and subtract the value destroyed by the track between stations, and subtract the value destroyed by increased traffic congestion caused by giving the empty trains priority.

  16. MJ

    And of course you would have subtract the value destroyed by the construction period, and subtract the value destroyed by the track between stations, and subtract the value destroyed by increased traffic congestion caused by giving the empty trains priority.

    If they turned out to have negative effects, then yes. But again, that is an empirical question and there are ways to control for these things.

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