Understanding Investment Funding Capture: Strategies For Success

Investment in funding capture is a type of public financing that recovers the value that public infrastructure generates for private landowners. It is a mechanism that allows public entities to secure and recover a portion of the benefits delivered by public investments to offset the costs. Funding capture is an innovative financing technique that generates upfront local funding by capturing a portion of the real property value increases generated by transportation improvements. It can be applied to developers or landowners, before or after a public improvement is built.

Tax-increment financing (TIF)

TIF districts are usually established for a period of 20 to 25 years, during which time all incremental real estate tax revenues above the base rate at the time of the district's establishment flow into the TIF. The proceeds from the TIF can be used to repay bonds issued to cover upfront project development costs, or they can be used on a pay-as-you-go basis to fund individual projects. In some states, private developers may self-finance infrastructure improvements, with the municipality reimbursing them from the tax increment as tax proceeds are received.

The first TIF was used in California in 1952. By 2004, all US states except Arizona had authorised the use of TIF. TIF districts are usually established in blighted areas to channel funding towards improvements in distressed, underdeveloped, or underutilised areas where development might not otherwise occur. TIF districts can also be used to fund redevelopment of Brownfield and Greenfield sites.

Implementing TIF financing is complicated and involves the creation of a special district and a public agency to administer it. A finding of necessity is prepared to establish the need for the TIF and formalise the boundaries of the district. A redevelopment agency is then created by resolution or ordinance, and a development plan is prepared and approved by the agency and the city. The base year is declared following the adoption of the plan, and the redevelopment agency solicits developers and enters into development agreements to implement the improvements.

Special assessment districts

In the case of the Washtenaw County Road Commission (WCRC), the specific service provided through SADs is the improvement of public roads. Citizens and business owners can turn to Public Act 246 of 1931, administered by the WCRC, and Public Act 188 of 1954, administered by the township, to petition for road improvements through a SAD. The WCRC agrees to front the cost of road improvements with an agreement from property owners to repay the cost over several years, typically through property tax bills.

The requirements for a road to be considered for a SAD road improvement project through the WCRC include:

• The road must be public (private roads are not eligible).
• The road must be outside a corporate city or village's limits (the WCRC does not have jurisdiction over residential streets within incorporated areas).
• At least 75% of the property owners along the road must be subdivided into parcels with road frontage of 300 feet or less in width, and there should be no fewer than one building for every 300 feet of road frontage.
• Owners of properties representing more than 51% of the linear frontage along the road must support the SAD project.

To initiate an SAD petition, citizens can contact the relevant government agency, such as the WCRC's Engineering Department, to understand the process. Once a valid petition is submitted, the agency will initiate meetings with interested property owners, notifying all property owners in the proposed district of the planned improvements.

Another example of SADs is Business Improvement Districts (BIDs), which are special assessment districts where property owners vote to initiate, manage, and finance supplemental services or enhancements beyond the baseline services provided by their local city or town governments. A special assessment or common area fee is levied only on properties within the district, and the funds are used for services such as marketing, public relations, capital improvements, and public safety enhancements. The goal of a BID is to improve a specific commercial area by attracting customers, businesses, and other entities.

Infrastructure impact fees

New development brings new residents, which can put a strain on a city's infrastructure and services, including schools, libraries, water and sewerage, police and fire protection services, and roads. Impact fees are calculated based on the size of the new development, the cost of implementing it, and how much it will impact the surrounding area.

There are two common methods for calculating impact fees for infrastructure improvements: the inductive method and the deductive method. The inductive method involves identifying the capacity and cost capacity of a generic facility, such as a road or fire house, and then using those figures to calculate the cost of expanding infrastructure capacity as new development takes place. The deductive method calculates the impact fee in a more tailored fashion, determining the additional demand that population growth and/or new commercial and industrial development will place on infrastructure systems.

Impact fees are a popular alternative to raising property taxes to pay for new infrastructure. People who already own property in a rapidly developing area would rather see the developer pay an impact fee because the developer is forced to cover the cost of new infrastructure necessitated by their development, rather than the taxpayers already living there.

Developers sometimes view impact fees as a disincentive to invest, as the fees can significantly raise the cost of a large construction project, which can result in the loss of potential jobs in an area. However, research from the Brookings Institution disputes this notion, showing that impact fees are more efficient in raising revenue for infrastructure compared to property taxes, which often fail to provide sufficient funding for municipal needs.

Impact fees also create a larger bank of land that can be developed. This is because impact fees take into account the cost of development and creating new infrastructure. A city may be densely populated and growing, but without the financing to build more homes and infrastructure, growth is limited. An impact fee allows a developer to pay for the cost of growth, which can help the city expand.

Examples of Infrastructure Impact Fees

Impact fees may be levied by states or municipalities. In California, the City of Oakland assesses residential and commercial impact fees on new construction. In Zone One, the builder of a new single-family dwelling must pay $28,000. Of this, $23,000 is earmarked for affordable housing, $4,000 goes to a capital improvement fund, and $1,000 goes toward transportation. Oakland also charges a school impact fee of $3.48 per square foot for residential buildings.

Other municipalities throughout California use similar fee structures to support civic infrastructure and stabilize the housing market. California is home to some of the highest impact fees in the United States.

Public-private partnerships

PPPs typically involve private capital financing government projects and services upfront, with revenues then drawn from taxpayers and/or users for profit over the course of the PPP contract. While PPPs are not compulsory, they have been employed for building, equipping, operating, and maintaining schools, hospitals, transport systems, and water and sewerage systems.

PPPs are particularly useful when private-sector technology and innovation can combine with public-sector incentives to complete work on time and within budget. However, they are controversial due to concerns about blurring the lines between legitimate public purposes and private for-profit activity, as well as the perceived exploitation of the public.

PPPs can be structured in several ways, including:

• Build Operate Transfer (BOT): The government hands over construction and operations to a private party for a set number of years, after which it is transferred back to the government.
• Build Operate Own (BOO): Similar to BOT, but the private entity is not required to transfer the project to the government.
• Design-Build (DB): The government contracts a private party to design and construct a project for a fee, retaining ownership and opting to operate it or contract out operations.
• Buy Build Operate (BBO): The government sells a pre-existing project to a private party, who takes it over fully and may need to invest in rehabilitation or expansion.

PPPs are often structured so that borrowing for the project does not appear on the balance sheet of the public-sector body but is instead incurred by the private-sector vehicle implementing the project. This has been criticised as an accounting trick to make the government appear more fiscally responsible while offloading costs to service users or future governments.

PPPs are promoted by various institutions, including the World Bank and the United Nations, which seeks to encourage effective partnerships to meet its development goals.

Developer contributions

In some cases, developer contributions can be highly variable and unpredictable, leading to increased costs for developers, which can, in turn, impede new housing supply. They are also typically complex to estimate and costly to administer. If they are unpredictable, poorly scoped, or administered inefficiently, they can unnecessarily increase the cost of new housing and impede new housing supply.

Value capture

Value capture is a type of public financing that recovers some or all of the value that public infrastructure generates for private landowners. It is a mechanism of financing that secures and recovers a portion of the benefits delivered by public investments to offset the costs of the investment itself. Value capture strategies assume that public investment often results in increased valuation of private land and real estate. By "capturing" this subsequent increase in value, governments can recoup funds, which can ultimately be used to generate additional value for communities in the future.

Public investments, such as building transportation or sewer facilities, can increase adjacent land values, generating an unearned profit for private landowners. The unearned value 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.

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

Frequently asked questions