Housing Policy | Use Value Capture to Build on Market Momentum

Use Value Capture to Build on Market Momentum

Goal: Promote Sustainable and Equitable Development
Policy: Capture a portion of the value generated by market-rate development to support affordable homes

What are value-capture mechanisms and how do they work?

Value-capture mechanisms build on the momentum of the marketplace to increase affordable housing opportunities in growing communities. Tools in this category can be structured in a variety of ways, but all take advantage of expected increases in property values or economic activity to support housing solutions paid for partially or entirely by those increases. Inclusionary housing policies, for example, encourage or require that a percentage of units in new market-rate developments be set aside for lower-income families. Tax increment financing uses the increased property tax revenue that flows from revitalization and growth to finance the early-stage infrastructure improvements that help generate the growth and, in some cases, the construction of new affordable homes. A third approach, the linkage fee system, uses modest charges assessed on owners of non-residential buildings to ensure that the additional housing needs generated through economic development and new job creation can be met.

How does value-capture contribute to the development of affordable homes in sustainable communities?

In many communities, land costs in areas adjacent to planned or redeveloping transit stations increase rapidly in anticipation of new investment, quickly pricing out the low- and moderate-income families that most rely on public transportation. Similar increases in housing costs can be experienced in other location-efficient places, such as areas near growing job centers or in town centers. Value-capture mechanisms help to ensure public investments in transit and other amenities remain accessible to households at all income levels by capturing a portion of market activity—in the form of increased tax revenue, housing units produced, or through some other channel—to support new affordable housing opportunities. States and localities can also employ value-capture tools to cover some of the increased infrastructure costs associated with development around transit stations, including pedestrian and bike paths, station area lighting, and structured parking facilities. The expense of providing these necessary "place-making" features can quickly overwhelm the budget of non-profit and mission-driven developers. Value-capture programs can help to mitigate the burden of these costs.

Where do these tools work best?

The tools discussed in this policy guide tend to work best in growing communities, where the real estate market can generate the activity needed to make value-capture possible. That said, localities may wish to consider adopting policies well before the market heats up, to ensure that programs are in place in advance of new development. Local governments can use value-capture tools such as tax abatements to encourage development in neighborhoods needing reinvestment in or rehabilitation of an aging housing stock.

Learn more about tools that capture value to support affordable homes

Go back to learn about other ways to promote sustainable and equitable development

Goal: Promote Sustainable and Equitable Development
Policy: Capture a portion of the value generated by market-rate development to support affordable homes

Well-designed and balanced value-capture mechanisms help to ensure that all community members benefit from local development, including both long-time residents and developers
interested in capitalizing on new growth opportunities.

Click on the links below to learn more about steps that state and local governments can take to capture a portion of the value of market-rate development to support affordable housing near transit:

Adopt an inclusionary housing policy
Many communities use inclusionary housing policies to create mixed-income developments and neighborhoods near transit and other amenities.

Create tax-increment financing districts
TIF districts around new and redeveloping transit stations can help to cover the cost of necessary infrastructure and may include affordable housing set-asides.

Assess linkage feeson non-residential development
Linkage fees help to ensure that the supply of new affordable keeps up with job growth and economic development.

Goal: Promote Sustainable and Equitable Development
Policy: Capture a portion of the value generated by market-rate development to support affordable homes

Adopt an inclusionary housing policy

Many communities use inclusionary housing policies, often called inclusionary zoning, as a tool to grow the affordable housing stock at little or no direct cost to taxpayers. Inclusionary housing policies require or provide incentives to encourage developers to set aside a percentage of units in new market-rate developments for low- and moderate-income families. In exchange, participating developers typically receive a variety of benefits and cost offsets, including density bonuses, reduced parking requirements, and eligibility for an expedited permitting and review process, to name a few. By reducing the developer's costs or allowing the developer to sell more units than otherwise permitted, these policies are designed to "offset" in whole or in part the costs of providing a share of units at below-market prices.

Local communities have considerable flexibility in designing inclusionary housing programs. A local government can tailor all elements of an inclusionary housing ordinance or policy to specific local conditions—from the share of units set aside as affordable, to the income level targeted, to the offsets or incentives provided to participating developers. Several of these features make inclusionary housing especially valuable in areas near transit stations and in other location-efficient, walkable neighborhoods.

The affordability toolkit of HousingPolicy.org includes an extensive overview of inclusionary housing policies.

The links below highlight specific aspects of inclusionary housing policies that make them particularly well-suited to fostering sustainable and equitable development:

Design incentives and cost off-sets that are suited to the neighborhood

Apply coverage in areas around new or redeveloping transit stations, or on a citywide or regional basis

Enhance the impact by extending the affordability period and layering subsidies to reach the lowest-income families

You are currently reading:

Adopt an inclusionary housing policy
Many communities use inclusionary housing policies to create mixed-income developments and neighborhoods near transit and other amenities.

Other pages in this section:

Create tax-increment financing districts
TIF districts around new and redeveloping transit stations can help to cover the cost of necessary infrastructure and may include affordable housing set-asides.

Assess linkage fees on non-residential development
Linkage fees help to ensure that the supply of new affordable keeps up with job growth and economic development.

Incentives and cost offsets

Whether voluntary or mandatory, inclusionary housing programs typically offer a variety of incentives and cost offsets to compensate developers for the lost revenue associated with providing affordable rental or ownership units. Each community determines which incentives/offsets will be most meaningful and appropriate, given local conditions; however, some commonly-used incentives work especially well in compact neighborhoods and transit-oriented development.

Density bonuses

One of the most commonly-used cost offsets in inclusionary zoning policies, density bonuses entitle developers to build more homes on a parcel of land than would otherwise be allowed by the underlying zoning. For example, a 30-percent density bonus would permit 130 units of housing to be built in an area originally zoned for 100 units. When tied to an inclusionary housing program, density bonuses increase the number of units that may be sold at market rates and help make developers whole for the reduced revenue associated with offering a share of units at below-market rates.

Practitioners have noted that, in some cases, the promise of a density bonus may fall short of what can actually be achieved on a given site. In some communities, for example, neighbors' opposition to higher-density development may prevent project sponsors from realizing the full benefit of a density bonus. Moreover, if the surrounding neighborhood is characterized by large-lot or other lower-density development, the proposed structure may be incompatible with existing homes and difficult to market.

Because the neighborhoods around transit stations and other town centers tend to be characterized by higher-density development, developers in these areas should be far less likely to experience the obstacles described above. Public transit systems and local businesses actually require a minimum density to operate successfully and thrive, and density bonuses can help to reach this threshold.

Research has shown that low-income families are less likely to own a car and thus more likely to rely on public transit for at least some trips. [1] Providing additional opportunities for these families to live near transit stations and other amenity-rich areas not only helps to lower their travel time and transportation costs, but also builds ridership for a new or expanding system.

Reduced parking requirements

In many communities, the local zoning code establishes a minimum number of off-street parking spaces that must be created for every new residential unit. When implemented on a jurisdiction-wide scale, these regulations may result in an excessive supply of parking spaces, especially in walkable neighborhoods with access to regular public transit service. Parking requirements that have been set too high create several problems, including increased development costs (especially for providers of affordable housing) and limited opportunities to use smaller sites for infill development or provide other services and amenities on-site.

Some communities relax parking requirements for developers participating in inclusionary zoning programs, helping to lower costs and increase the amount of developable land. This incentive may not be practical in low-density areas where residents rely on a personal vehicle to get around, but can work well in compact neighborhoods served by transit. In fact, some localities may have already reduced or eliminated minimum parking requirements in these targeted areas. Learn more about reduced parking requirements in location-efficient areas.

Back to top

Coverage

In general, inclusionary housing policies work best when adopted on a citywide or even regional basis, reducing the chances for land owners or developers to "game the system" by pursuing projects just outside of program boundaries to avoid affordability requirements. A city-wide or regional policy can work perfectly well for building affordability into new development near transit or in other location-efficient areas.

In some cases, however, it may not be feasible to adopt a broad-based program for political or other reasons, and in these cases, it may make sense to consider an inclusionary policy limited to specific high-demand areas, such as a one-half-mile zone around public transit stations. Some practitioners advise against creating limited inclusionary housing policies that apply only to neighborhoods surrounding new or redeveloping transit stations, to avoid discouraging development in these areas. However, if the market demand for transit-oriented development is strong and the incentives are well-designed, this type of approach may work well and be easier to achieve than a city-wide or regional policy. Inclusionary requirements or incentives may be adopted through an amendment to the zoning plan or through the introduction of overlay zones in targeted areas.

Use in-lieu fees to fund development near transit

Many communities build an "in lieu fee" option into their inclusionary housing ordinance that allows developers to satisfy their affordability requirements by paying a per unit charge. Fee proceeds are typically deposited in a housing trust fund for use in other housing programs. The City of San Leandro, California is putting its in-lieu fees to work in support of affordable transit-oriented development, by using revenue generated from fee payment in its downtown TOD zone to subsidize affordable homes near the local Bay Area Rapid Transit (BART) station. The city has also taken additional steps to promote affordability near transit, including lowering parking requirements in the TOD zone to a maximum of one space per unit. [2]

It is important to note that there are differences of opinion regarding the desirability of in-lieu fees in this context. Some practitioners are concerned developers in highly desirable neighborhoods – including gentrifying neighborhoods near transit stations – will opt-out of the affordability requirements and pay the in-lieu fees, reducing access by low- and moderate-income families to these neighborhoods. Others argue that it may be possible to use the in-lieu fees from a single unit in an expensive neighborhood to subsidize several units in less expensive but equally accessible neighborhoods.

Long-term affordability and deep subsidies

To address specific priorities, localities can include provisions that maximize the value of new affordable and transit-accessible homes, such as requiring long-term affordability and layering housing subsidies to reach very low-income populations.

Long-term affordability

Transit lines and associated infrastructure are designed to provide service over the long-term. While repairs and upgrades will be needed, these amenities are considered essentially permanent investments. The affordability requirements tied to many housing subsidy programs, however, often fall far short of this threshold. In many cases, inclusionary housing programs call for only 5- or 10-year periods of affordability, after which affordable units may be rented or sold at market rates. A transit system will usually outlive even a 20- or 30-year affordability requirement. Once the below-market units are lost, the high cost of land around station areas will likely make it difficult to regain site control and create additional affordable homes.

For these reasons, communities adopting or revising an inclusionary housing policy—especially one that will apply in transit-accessible areas—may wish to pursue long-term affordability requirements, including requiring that inclusionary units remain affordable in perpetuity. Learn more about providing long-term affordable housing near transit

Subsidy layering

In most cases, inclusionary housing policies do not reduce rent payments to a level affordable to the lowest income households. To serve very low-income and extremely low-income families, localities will likely need to layer additional rental subsidies on top of minimum affordability requirements. Communities can prioritize a portion of federal project-based vouchers, for example, for use in homes near transit stations, including affordable units created to comply with inclusionary housing program requirements. Alternatively, some communities, including Montgomery County, Maryland, have the option to purchase affordable homes created through the local inclusionary housing program, for use as scattered-site public housing. This approach ensures that below-market homes are affordable to the lowest-income families and remain so for the longest possible period. Learn more about layering subsidies for affordable housing near transit.

Back to top

[1] Pollack, Stephanie; Barry Bluestone; Chase Billingham. 2010. Maintaining Diversity in America's Transit-Rich Neighborhoods: Tools for Equitable Neighborhood Change. Dukakis Center for Urban and Regional Policy at Northeastern University.
[2] Maintaining Diversity in America's Transit-Rich Neighborhoods: Tools for Equitable Neighborhood Change, p 37.

Goal: Promote Sustainable and Equitable Development
Policy: Capture a portion of the value generated by market-rate development to support affordable homes

Assess linkage fees on non-residential development

Linkage fees are modest charges assessed on new non-residential development, typically on a per square foot basis, to help offset local housing impacts and ensure that development of affordable homes keeps pace with local economic development and job growth. Fee revenue is usually deposited into a housing trust fund for use in accordance with local priorities, including in transit-oriented developments. In areas expecting commercial, industrial, or retail growth following the introduction of a new transit station or line, linkage fees may be an effective strategy for ensuring that low- and moderate-income families have affordable housing options near these new jobs.

The Transforming Tysons plan for Fairfax County, Virginia, provides one notable example of how linkage fees can be used in a transit-oriented context. The plan addresses the redevelopment of the Tysons Corner area, an edge city set to undergo major growth with the addition of several new transit stops and thousands of new jobs and residents. The plan includes a recommendation that developers of new nonresidential projects contribute $3.00 per square foot towards a housing trust fund. Fee revenue will be dedicated to creating low- and moderate-income housing opportunities in Tysons Corner, helping to meet the need for workforce housing projected to result from the new development and ensure that families of all incomes can afford to live in Tysons.

You are currently reading:

Assess linkage fees on non-residential development
Linkage fees help to ensure that the supply of new affordable keeps up with job growth and economic development.

Other pages in this section:

Adopt an inclusionary housing policy
Many communities use inclusionary housing policies to create mixed-income developments and neighborhoods near transit and other amenities.

Create tax-increment financing districts
TIF districts around new and redeveloping transit stations can help to cover the cost of necessary infrastructure and may include affordable housing set-asides.

Goal: Promote Sustainable and Equitable Development
Policy: Capture a portion of the value generated by market-rate development to support affordable homes

Create tax increment financing districts

Tax increment financing (TIF) is a tool that municipalities in nearly every state can use (Arizona being the only exception) to stimulate economic development in a targeted geographical area. The locality designates a TIF district and establishes a base property tax level within the district based on the assessed value of existing properties. To stimulate redevelopment within the district, the municipality then funds capital improvements, such as new roads, water, sewers, and other public amenities. The municipality uses the incremental increase in property tax revenues resulting from the rise in property values to finance or otherwise cover the cost of the improvements.

Because transit improvements and transit-oriented development often enhance demand and create greater value in communities, TIF can be particularly effective in financing infrastructure development in transit centers. In addition, by designating a portion of the TIF revenues to be used for creating or preserving affordable housing near transit, TIF can be an effective tool for promoting sustainable and equitable development near transit.

The links below break down the process for creating a tax increment financing district to support affordable housing:

General approaches to using TIF to provide affordability near transit

Modify state enabling legislation to make transit-related expenses eligible TIF uses

Incorporate affordable housing set-asides into TIF to support affordable housing near transit

Employ credit enhancements to make TIF dollars go further in expanding affordability near transit

You are currently reading:

Create tax-increment financing districts
TIF districts around new and redeveloping transit stations can help to cover the cost of necessary infrastructure and may include affordable housing set-asides.

Other pages in this section:

Adopt an inclusionary housing policy
Many communities use inclusionary housing policies to create mixed-income developments and neighborhoods near transit and other amenities.

Assess linkage fees on non-residential development
Linkage fees help to ensure that the supply of new affordable keeps up with job growth and economic development.

General approaches

Localities generally use TIF in two different ways to provide affordable housing near transit:

Using TIF to fund transit-related infrastructure. A number of cities in the U.S. have used TIF to fund transit-related improvements such as parking structures, utility systems and sidewalks to help catalyze further development. By using this value-capture mechanism, communities can more easily fund these costly infrastructure items, potentially freeing up – or even setting aside (see below) – additional funds that the locality can dedicate to affordable housing or other community development purposes. This approach is often most effective when used to fund transit-related development in blighted neighborhoods, where the major infrastructure investment can spur revitalization.

Atlanta, Georgia

Atlanta BeltLine

Using TIF to preserve affordable housing opportunities in neighborhoods slated for new transit investments. In some cases, TIF can be an effective financing tool for preserving affordability in non-blighted neighborhoods where new transit investments or upgrades are planned and housing prices are expected to escalate. In this case, the TIF essentially acts as a mechanism for capturing a share of the increased value and applying it to affordable housing. The affordable housing funds help ensure that families of all incomes can continue to live in these neighborhoods even as they become more expensive.

Austin, Texas

Modify state enabling legislation

Local governments are usually responsible for creating and setting specific requirements for TIF districts. However, state governments develop statutes that enable and set general parameters – including eligible uses – for creation of these local TIF districts. Most of these statutes require that TIF revenues be used only for public infrastructure; not allowing for costs directly related to any private projects that the infrastructure may support. Additionally, state enabling legislation will often specify that TIF revenues be used to support development activities that expressly remove "blight."

Although these requirements in state enabling legislation help to direct tax revenues toward public improvements that aid in revitalizing communities, they may also present a barrier to using TIF to fund transit-related improvements that can also contribute to the public good. In light of this, several states have created new legislation or modified existing legislation to allow for TIF revenues to better support transit-oriented development in targeted districts, as well as the development or preservation of affordable housing in these areas. Below are some examples of features included in or added to TIF statutes: [1]

Designate transit-specific improvements as eligible expenses. States can include eligible uses in TIF legislation that are directly related to transit. For instance, Maine specifies in its enabling legislation that transit-related expenses are TIF eligible. These expenses include: transit vehicles; transit conveyance facilities; transit-related facilities such as bike racks, bicycle lanes, signs, benches, and pedestrian improvements.[2]

Allow for general redevelopment costs. An enabling statute can designate any redevelopment expense as an eligible use for TIF funds, rather than the conventional approach of only allowing for public infrastructure improvements. This, in essence, could allow for some portion of TIF revenues to support individual non-infrastructure projects within a TIF district. However, the types of redevelopment costs allowed should be restricted to those that contribute to greater access to transit and community revitalization, such as the cost of building or preserving affordable housing near a transit station.

Affordable housing set-asides

Although communities often use TIF revenues to fund infrastructure that supports further residential and commercial development in transit centers, state or local governments will often require that a certain portion of the revenues be set aside to create or preserve affordable housing within a targeted district. This practice is vital for ensuring that low- and moderate-income families will have easy access to transportation and jobs afforded by these centers.

Even though the set-aside requirements for affordable housing may be a relatively small share of total TIF revenues in a district (many localities who institute a set-aside require 15 or 20 percent), this portion can still generate substantial funds for affordable housing. For instance, the 15-percent affordable housing set-aside for the TIF district Atlanta has established for its BeltLine project is anticipated to generate approximately $240 million over the 25-year TIF period.

Solutions in Action

In April 2006, Portland, Oregon, established a TIF set aside requirement that mandates spending 30 percent of total TIF resources in its Urban Renewal Areas (districts that generate TIF money) for affordable housing. The set aside has supported two city priorities related to housing – providing affordable homeownership for working families and providing affordable rental housing for low-income and formerly homeless individuals and families. Under this policy, the Portland Housing Bureau (formerly the Portland Development Commission) has generated just under $109 million as of fiscal year 2010. [3]

Local governments can often determine the affordable housing set-aside requirements for their TIF districts. However, some state governments may dictate minimum set-aside requirements for any TIF districts that localities create. Currently, in California, local redevelopment agencies are required to set aside 20 percent of revenues from TIF districts for an affordable housing fund to serve the state's low- and moderate-income residents.[4] These set-aside revenues have become one of California's largest sources of funding for affordable homes. Over the last several years, the TIF affordable housing set–aside has generally produced over $1 billion annually.

In theory, communities do not need an affordable housing set-aside to use a portion of TIF revenues for affordable housing. They simply can make a decision to invest their TIF revenue in this way. In practice, however, the competition for TIF revenue is often fierce and despite the best of intentions, once the funds are in hand, there is a good chance they will be spent on something other than affordable housing. To ensure that funds are available to help cover the costs of providing affordable housing in sustainable communities, it is thus important for communities to adopt policies – at the very outset, when the TIF is set up – dedicating a set percentage of TIF revenue for affordable housing.

Back to top

Credit enhancements

TIF districts can generate substantial amounts of capital to help make large-scale, transformative transit projects possible. However, the creation of TIF districts and the bond-financing mechanism often employed to initially cover upfront development expenses have high administrative costs that reduce the amount of TIF revenues available for a project's hard costs. States and localities can provide credit enhancements, usually in the form of a guarantee on bonds issued to finance the project's development costs. By guaranteeing the bonds, investors will often accept a lower yield, making a larger portion of the revenues available for the project itself.

Several states, including Connecticut, Kentucky and Pennsylvania have programs that provide guarantees or similar credit enhancements for projects funded through TIF.[6] These programs have varying requirements

Solutions in Action

Pennsylvania uses its TIF Guarantee Program to assist local TIFs that meet strict criteria for providing a community benefits, such as blight removal. The state has currently funded the program for $100 million, which is generally used to assist smart growth projects across Pennsylvania. The program provides guarantees up to $5 million per project, and in some cases covers guarantee issuance costs. TIF proceeds from supported projects may be used for infrastructure and environmental remediation costs.

and employ somewhat different credit enhancement mechanisms, but all of
them seek to support projects that revitalize communities and would not be feasible without the support of such programs. The projects covered under these programs usually have a financing gap, even with the use of TIF, and need the credit enhancement to make the projects feasible.

Among other benefits of a TIF guarantee program is the ability on the part of the guaranteeing agency to require or encourage that participating municipalities adopt complementary policies to promote housing affordability, such as using a share of TIF revenue for affordable housing.

Jump-starting development by financing early-stage infrastructure improvements

Local governments often issue bonds to cover the upfront cost of improvements in new TIF districts; the bonds are repaid over the life of the TIF through the incremental tax revenue generated by property value increases. In order to float a bond backed by TIF revenue, however, localities generally need to demonstrate that a stream of tax increment already exists. This scenario results in a chicken-and-egg problem: How does a community finance the initial infrastructure improvements that jump-start increases in property values, when the resulting tax increment is needed to allow the locality to float the bond to fund those improvements? Recent legislative proposals, including the Senate version of the Livable Communities Act, introduced in 2010, include the creation of a federal credit facility that would make loans and loan guarantees to help cover the cost of early-stage investments in structured parking, new roadways, and other placemaking improvements for transit-oriented development. In the absence of a federal facility, some states have taken steps to finance the initial improvements from other sources. The MassWorks Infrastructure Program, for example, provides grant funding to Massachusetts municipalities (and public agencies acting on their behalf) to finance pedestrian improvements, utility extensions, roadways, parking and bicycle facilities, and other public infrastructure. Grants support infrastructure for four types of projects, including development of affordable and market-rate housing at density of at least 4 units per acre. According to the 2011-12 program guidelines, at least two-thirds of total funding will be used in support of transit-oriented development within one-half mile of a transit station.

[1] Information for some of these examples was drawn from Tax Increment Financing and Smart Growth: Policy Options for Maryland, prepared by Redevelopment Economics for the Maryland Sustainable Growth Commission. March 2011.
[2] SP0511, LD 1392, item 3, 124th Maine State Legislature, Amendment C "B", Filing Number S-296
[3] Tax Increment Financing Affordable Housing Set Aside, Annual Report FY 2009/10.
[4] California's proposed 2011-12 budget includes a plan to dissolve the redevelopment agencies that establish TIF districts and collect the set-aside funds for affordable housing. This measure is designed to help redirect tax revenues toward vital state services and expenditures, but would come at the cost of losing one of the state's largest sources of funding for affordable housing.
[5] Taylor, Mac. The 2011-12 Budget: Should California End Redevelopment Agencies? LAO Policy Brief. February 9, 2011.
[6]Tax Increment Financing and Smart Growth: Policy Options for Maryland.