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Value Capture, the Dulles Rail Extension, and the Future of Transit Funding

3:54 PM EDT on August 20, 2012

The failure of Atlanta’s transportation ballot measure late last month led to speculation among many analysts about what the vote meant for other regions across the country looking for ways to fund infrastructure projects. But though the Atlanta vote captured the lion’s share of media attention, another vote cast in July could hold as much – if not more – importance in coming years.

In an increasingly contentious political environment, it can be difficult to get important transportation projects off the ground. Finding funding sources for these projects, no matter how valuable they might be, can prove politically impossible, with many people skeptical over both increased spending and revenue creation sources. Gas taxes are almost entirely a non-starter, and despite the fact that 79 percent of transportation ballot measures overall passed in 2011, according to the Center for Transit Excellence, they can still fall victim to the kinds of pressures seen in the metro Atlanta area.

On July 3, the Loudoun County Board of Supervisors voted to support the extension of the Washington Metropolitan Area Transit Authority’s Silver Line to Dulles Airport and beyond. The vote ended months of intense speculation about the second phase of the planned Silver Line extension, the first phase of which is already under construction between Falls Church and Reston, Virginia. And while the vote will have a tremendous impact on the region for decades to come by helping to reshape its auto-oriented suburban job centers into mixed-use, walkable transit districts, the importance of the vote -- and particularly the use of a funding concept called value-capture -- goes far beyond Northern Virginia, and could have implications for how transit projects nationwide are funded in coming decades.

The cost of Loudoun County’s contribution to the extension – estimated at approximately $270 million – as well as ongoing contributions to the line’s operations of around $17 million a year starting in 2019, made the vote especially contentious to fiscally conservative county officials. Ultimately, what broke the deadlock amongst commissioners, who were evenly split on the decision until the vote, was the structure of the financing the county would use to fund the project. Rather than increase taxes on all county residents and businesses, the county adopted an innovative funding structure that seeks to capture the value created along the rail line.

To achieve this, the Loudoun Board of Supervisors established special tax districts of commercial and undeveloped properties surrounding the future stations. Properties within a half-mile of the stations would pay a tax of 20 cents per $100 of assessed value. Properties further out would pay less. As noted by the Washington Post, most current residential properties would be excluded from the district. Future residential development would be subject to the tax though.

Value capture has a number of advantages over traditional funding from both from a policy and political perspective. Policy-wise, value capture financing helps align the costs and benefits of transit funding better than traditional tax funding. While mass transit creates a general benefit for all residents, property owners immediately adjacent to new transit stations often see a significant rise in their property values when transit service is added. Indeed, a study in New Jersey found that simply increasing service to certain stations increased the value of nearby homes by an average of $23,000 -- which rose to $34,000 for homes within walking distance of the station. Capturing some of that increase in value to help pay for the costs of transit improvements, when done equitably, can be beneficial to all parties.

Politically, value capture impacts fewer people than broad-based taxes like sales and gas taxes, and those who are affected stand to benefit directly from the investment, making it an easier sell.

While the structure of Loudoun’s financing plan is unique, it also wasn’t the first time the concept of value capture has been employed to fund transit in the DC region. Though somewhat different in structure, the New York Avenue Metro Station also was funded in part through a value capture mechanism. There, owners of properties adjacent to the proposed station agreed to contribute $35 million toward the cost of building the station, in the hopes that the value it created for their property would far surpass that amount. Since then, assessed values in the area have increased by nearly 300 percent, going from $535 million in 2001 to $2.1 billion in 2007. Clearly, it can pay to invest in the right projects.

More recently, the DC Office of Planning has proposed paying for a planned streetcar system using tax increment financing to capture the increase in property value along the lines that the system would create. Special tax districts, like the ones employed to fund the Dulles Extension, take the value capture concept even further by taxing only those people who stand to benefit directly from the project. Moreover, by taxing future value, special tax districts have the effect of taxing future residents and businesses, rather than current ones.

Smart Growth America’s LOCUS real estate developer coalition wants to capitalize on market trends and provide the kinds of properties people want. Though the demand for public transportation options continues to increase, the recently passed federal transportation bill holds traditional funding for transit steady, meaning that cities and regions looking to keep pace with new market demands for walkable, smart growth neighborhoods will need to find other ways to fund improvements.

Several regions, including Denver, Los Angeles and Salt Lake City have chosen to meet this challenge by taxing themselves to fund expansions of their transit systems. But new region-wide taxes are massive undertakings, and not guaranteed to pass. By taking a more narrow approach that seeks to align the costs of new transit investment more closely with its benefits, the Loudoun Board of Supervisors has provided a new blueprint for transit funding in these resource constrained times.

Jay Corbalis is Regional Coordinator of LOCUS at Smart Growth America.

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