Using the Economic Value Created by Transportation to Fund Transportation (2014)

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98 STUDY OBJECTIVES AND CASE EXAMPLES This synthesis examined the state-of-the-practice methods for capturing a portion of the economic value generated by public investment in transportation infrastructure to fund transpor- tation improvements to inform the planning practice. This study is developed from a literature review of 10 categories of mechanisms and specific case examples of how some agen- cies have employed the mechanisms to explain the nuances of actual implementation. Many communities have undertaken value capture (VC) mechanisms to fund and finance transportation projects in their regions. This synthesis documents current practices that diverse communities have undertaken in a range of settings and contexts with the goal of providing transportation infra- structure (primarily highways), along with the challenges faced by the communities that implemented these practices. These case examples are not best practices. They also do not constitute a comprehensive database of case examples. They are merely a compilation of case examples as identified by the screening survey, the respondents, and through reviews that serve a primary purpose of increasing the knowledge base with respect to a number of aspects identified in the scope of the work, including (1) the matching of mechanism to project; (2) the design and implementation of the adopted mechanism with specific reference to issues in the capture of value and revenue considerations; (3) the stakeholders in the process and their involvement; and (4) key challenges in the case context. The case examples demonstrate the universal challenges facing transportation professionals who are trying to use VC techniques and some common themes in the ways that communities have sought to address the challenges and the benefits received. From the high-population areas of Mercer County, New Jersey, Washington State, and Boston, Mas- sachusetts, to less dense areas, such as Corvallis, Oregon, and Bozeman, Montana, meaningful efforts at VC for fund- ing and financing projects rely on a guiding framework and often are enhanced by collaboration and cooperation with other relevant agencies or stakeholders, along with an overall approach that uses creative adaptation to formulate mecha- nisms that work for specific situations. The case examples cover project- and program-based settings, and several examples refer to projects from transportation improvement plans, capital improvements programs, or long-range plans. VALUE CAPTURE AS A NET GENERATOR OF NEW FUNDS This study and many others in the domain suggest that some mechanisms that are discussed in this study, such as incre- ment finance, do not really create a new source of funding. They only partition an existing source of wealth and transfer it to other parties. Methods that levy a fee [impact fees (IFs), special assessments] can lead to net new sources or genera- tion of revenues. Similarly, air rights (ARs) and joint devel- opment (JD) when used in the context of project funding, as discussed in the case examples, may be considered a net new revenue source. CHOOSING A VALUE CAPTURE MECHANISM AS PART OF A FUNDING MIX This study does not suggest any specific mechanism, but it does suggest through a variety of case examples that VC mecha- nisms can serve as a complement and be part of a larger fund- ing package for a project. The VC mechanisms can reflect the capture of value created from one large beneficiary group of transport investments—the real estate community comprising landowners and developers. Similarly, other beneficiaries of transport investments, such as direct users of a facility, may provide different revenue streams, such as user fees. Thus, a useful economic assessment of projects would benefit greatly from a fuller identification of all the beneficiary classes in early stages of a project planning process. The case examples show- case different mechanisms and the specific circumstances that led to those choices in that local context, whenever possible. In most cases, the presence of a guiding framework appears to be a significant driver. However, even with a guiding framework stakeholder support may perhaps be the most significant factor in actual adoption and implementation of a preferred design, as reflected in rates, voluntary agreements, and exclusion/ inclusion of land uses. The choice of a mechanism is also influenced in large part from an assessment of relative reliance on that source in the context when program guidance provides many choices locally. The selection of any approach is recognized by respon- dents as accompanied by the need to address the equity and financial risk associated with the adoption and actual imple- mentation of the funding method selected. Finally, many choices are possible for funding capital costs of transpor- tation, including up-front and ongoing project costs. Only chapter five CONCLUSIONS

99 one method, transportation utility fees (TUFs), appears to have been discussed in the context of funding operations and maintenance. CHALLENGES TO WIDER IMPLEMENTATION A few studies, such as the Government Accountability Office 2010 one, have noted the challenges in wider application of VC mechanisms. Most of these challenges stem from obtain- ing stakeholder support and coordination across agencies, as discussed in chapter three, even with an enabling framework. However, in the context of project-based funding, there are other technical and information challenges that come in the form of knowledge gaps. Some of these knowledge gaps include: • A lack of knowledge of the private land development effects from capacity-enhancing transportation projects. These impacts include how land development may have evolved in corridors and regions served by projects. This facet of transportation projects is an important factor in allowing a better assessment of the revenues from the VC mechanisms. There is a large amount of literature on property value effects of transportation investments; however, land development effects encompass much more than pure property value effects. • A richer understanding of costs, benefits, risks and uncertainties of projects that have employed such fund- ing methods. The sample included in this synthesis has pointed to several costs, such as transactions costs and administrative costs, that come from implementation and benefits from having the project in place. The sample also provides insights into risk considerations stemming from uncertainties associated with economic risks or other project contingencies, all from a qualitative per- spective. An analysis of the costs and benefits of VC mechanisms is of value for selecting between alter- native mechanisms when they are available. It is also of value for evaluating a given or chosen mechanism in parallel with other more typical non-VC funding sources and other innovative finance sources that may be used to fund transportation projects. Toolkits such as the Public Private Partnership Toolkit (FHWA 2012), noted in chapter four, allow VC to be considered along- side other non-VC funding sources to permit an evalu- ation approach for PPP projects adopted anywhere in the country. • A better assessment of legal frameworks allowing states and regions to allow financing based on funding streams based on methods discussed in case examples. Almost all case examples included in this synthesis noted that financing backed by funding streams generated by VC mechanisms was allowed. • A comprehensive understanding and characterization of factors that can lead to successful VC for different project types, locations, and at different times in the business cycle. Although some of the case examples examined in this study may be considered “successful,” for others it may be too soon to tell if the efforts are suc- cessful. The literature review also points to examples that have not been very successful. This study suggests that it may equally important to study examples that have not been so successful. • The formal delineation of land beneficiaries and spa- tially appropriate service areas for different types of projects. The case examples reveal how practical guide- lines have been used to delineate proximity-based ser- vice areas for almost all mechanisms that rely on these geographic boundaries, including IFs, special assess- ments, sales tax districts (STDs), and tax-increment– like mechanisms. There is little understanding of the actual beneficiaries of projects and linkages with prox- imity based boundaries. As noted in the literature, road- way systems are open systems complicating the linkage assessment. Throughout the literature on land value effects of transportation, a relatively unexplored issue is the spatial distribution of effects and the formal link- ages between beneficiaries and land outcomes. • There is a knowledge gap on challenges, issues, and effects of a wider adoption of land-based taxes. This study identified only two states that have considered land-based taxes. FUTURE RESEARCH SUGGESTIONS Several of the knowledge gaps discussed point to future research needs. An important consideration, as suggested from this synthesis and past research, is that VC tools offer the advantages of accelerated delivery, local matching of monies, and mobility improvements. Despite that most mech- anisms are part of toolkits related to local government eco- nomic development, highway agencies need to be able to suggest or consider feasible options for transportation plan- ning in a fiscally constrained environment. It is evident that the use of such tools comes with several challenges, includ- ing but not limited to transaction costs, stakeholder involve- ment costs, and administration costs. • Research is needed to examine ways by which trans- portation agencies can (1) match VC mechanisms with the investment decision needs, and (2) have at their disposal toolkits or other decision-support mechanisms that can evaluate costs, benefits of specific individual transportation projects, and established goals. A valu- able extension of this line of investigation could be to explore the feasibility of considering groups of projects. • Research is needed to understand how to better improve the analysis of VC mechanisms as part of a funding package in the context of traditional design build and public private partnership delivery processes. At the same time, research is needed to facilitate a feasibil- ity assessment of the likely costs, benefits, and risks of

100 as a land value tax (LVT), would also be of value in determining the value of new sources of funding. • Finally, this study suggests that there is a need to investigate better and more useful ways of community engagement for the use of VC mechanisms that do not rely on a legal framework. Stakeholder involvement has been noted as a key element in almost all studies once a method has been decided upon. SUMMARY This chapter concludes this study by noting the following key points. • Fee-based VC mechanisms can lead to net new revenue sources. Increment finance approaches do not lead to new sources of revenues. All mechanisms are of value in a funding toolbox. • The most important factor that was identified through the literature review and case examples was the guiding framework. This was followed by the stakeholder sup- port. Ultimately, these factors become vital for agencies to consider when choosing among mechanisms. Future research is needed to better optimize how VC mechanisms are used. If state DOTs better understand how local entities use VC mechanisms, they can achieve the most bang for their buck in an era when development and main- tenance dollars are becoming ever more constrained. A bet- ter understanding of the cost/benefit and economic impact of mechanisms most often used for corridor and project financing—namely, IFs, STDs, SADs, and TIFs—is also needed. This chapter has identified several knowledge gaps that exist in furthering VC mechanisms. These knowledge gaps have been summarized into six research needs. A formal research statement is provided in the abstract (Appendix D). adopting a specific VC mechanism and to understand the roles and value of supporting economic and other models and methods at various stages of adoption. • A need exists to understand how best to identify real estate beneficiaries for different types of high-capacity projects and the value of using different tools, methods, and models to further the process. The current report and its evidence suggest that service-area–based IFs, STDs, special assessment districts (SADs), and tax increment financing (TIF) are the VC types that have been used predominantly for corridor and project financing and require the identification of beneficiaries. • Little to no research has been conducted on the cost/ benefit or economic impact on projects and corridors that have used such mechanisms. This study shows that there are valid examples that can provide a richer con- text for a full before and after study. • Much has been invested in the development of national databases of transportation capacity projects, such as those developed under the Strategic Highway Research Program (SHRP 2). This line of research led to the devel- opment of economic impacts of capacity projects drawn from across the country and a database of those projects. This database of projects, the “Transportation Project Impact Case Studies,” is housed at the Transportation for Communities website (http://www.transportation forcommunities.com/) or http://tpics.us/ and consists of more than 100 case examples from different types of capacity projects geographically distributed across the United States. Databases such as these provide a valu- able resource for assessing the general economic impacts and also may be of value in studying the broader land development impacts in support of VC mechanisms. Thus, research to leverage existing databases such as those just noted in support of VC would be of value. • Policy studies evaluating and documenting the issues in a more widespread adoption of land-based taxes, such