Porto Alegre in southern Brazil employed a far more aggressive model of value capture. As population in the city grew during the 1990’s, speculators hoarded undeveloped land in the city center – which in turn created a housing shortage in the city and forced residents to balloon out into suburban slums. In response Porto Alegre created an incentive for land owners to develop vacant properties, and implemented a land value increment tax to help capture increased values from the city’s investment.
By encouraging development near existing infrastructure in the city, Porto Alegre’s property tax revenue increased significantly and the city was able to provide not just public transportation but also education, street cleaning and security to lower-income residents at a fraction of the expense. The result was a far more stable revenue stream for Porto Alegre, as well as increased property values for downtown landowners and developers.
Value capture as a concept is certainly not foreign to the United States. 19th century developers took advantage of the mechanism when building the transcontinental railroad. And although there are some modern examples in the United States – such as the planned 62-mile Cotton Belt rail line in Dallas, and Business Improvement Districts throughout the country – value capture’s potential has yet to be used to the extent that it once was and could be again.
Opportunities to pay for infrastructure by leveraging property values may range in scale, but value capture remains consistently viable. Boston’s “Big Dig” project, for example, will cost state and federal taxpayers an estimated $22 billion over the next 25 years, but land owners in the surrounding areas have already seen property values rise astronomically. Massachusetts developer Frank McCourt used the increased value of his Seaport District properties – from roughly $10 million to $200 million – to help finance his acquisition of the Los Angeles Dodgers. In a recent conference on value capture, Richard Henderson, an executive at one of the agencies involved in the Seaport District’s transformation, described the investments as “a tremendous boon to the landowners in the area.”
The Big Dig is a great example of a project that could have been partially financed by value capture. Such an approach could have reduced costs for state and local budgets, made future infrastructure investment more feasible and evoked support from the private sector for such investments. Perhaps even greater investment would have resulted if both private and public interests shared risk and potential benefits.
Value capture can help give local, state and federal governing bodies the financial means to improve infrastructure and accommodate growing populations. Many members of the development community support leveraged financing like this, and growing numbers of both developers and public leaders are beginning to better understand the potential of value capture.