Paying for the City We Need: The Role of Land

                                                              

Paying for the City We Need: The Role of Land

Lincoln Institute of Land Policy
Solution proposed by: 
Paying for the City We Need: The Role of Land
In a Nutshell: 
Equitable and sustainable urban growth requires a strong financial base, and land plays a key role. Land-based financing tools such as value capture, or “value sharing,” combined with a well-functioning property tax, are critical for providing infrastructure, housing, open space, public safety and other basic public goods and services.
Where and When: 
Tools such as value capture have been widely implemented in Latin America, including Brazil, Colombia and Ecuador. São Paulo, Brazil has been especially innovative, introducing Certificates of Additional Potential Construction Bonds (CEPACs) beginning in 1995. Value capture has also been used in countries such as the UK and Ireland.
Challenges: 
Cities will gain 2.5 billion people by 2050. If current patterns persist, future generations will live in unplanned settlements lacking clean water, transportation and other basic goods, and bear the brunt of climate change. Even in wealthier societies, fiscal instability will put the economic and social fabric at risk. Local governments require greater autonomy and a broader set of tools to generate the revenue needed to deliver services and plan for growth. Municipalities have greater control of and access to land based financial tools, and many are embracing them anew and expanding their revenue generating capacity.
Innovation: 
The value of land grows tremendously because of public actions such as infrastructure investment and regulatory changes, but many governments lack the tools or capacity needed to reap the benefits of this growth. The massive scale of urbanization requires the acceptance of a proven system (the property tax), enabled by innovative technology and tools for registering and assessing property, as well as complementary tools, such as value capture, which can provide substantial capital to fund infrastructure investment. Value capture policies have been designed to ensure returns on public investment while encouraging a more transparent and efficient local land market.
Concept: 
The property tax is a proven system for funding the provision of basic goods and services by local government, and it plays a foundational role in local government finance in countries such as the United States and Canada. As a complement to the property tax, land-based financing tools such as value capture make use of the land value created for adjacent private landowners and developers by specific public investments in urban infrastructure. It is possible to measure this “land value increment,” and encourage the private sector to contribute to the creation of infrastructure, such as a transit line and station, at the front end. This strategy has the effect of correcting market failures that, in many cases, prevent public and private investments in infrastructure and planned urban expansions.
Description: 
): Land-based financial innovation has occurred in many contexts, but the case of São Paulo, Brazil, and specifically, the city’s implementation of the Faria Lima Urban Operation, provides a good example of how value capture can be deployed in context. In Brazil, urban operations are a tool for transforming parts of a city, to improve the quality of life through housing, transportation parks and other infrastructure. They require the participation of landowners, investors, residents, local government and other stakeholders. In São Paulo, the city used a tool known as Certificates of Additional Potential Construction Bonds (CEPACs) to recapture the tremendous land value generated by increasing the allowable floor-area-ratio (FAR) – allowing developers to build taller buildings at greater density than would have otherwise been allowed. Building on constitutional and legislative groundwork at the federal level, the city created CEPACs – rights to build that can be auctioned on a public market. From 2004 to 2010, public and private auctions of CEPACs generated more than $700 million within the area associated with the Faria Lima Urban Operation, an area of transformation tied to the extension of Faria Lima Avenue. This value capture tool helped fund public improvements along the newly extended avenue, including a new metro station.
Impacts: 
In the U.S. and Canada, the relative stability of property tax revenues during the Great Recession enabled cities to continue to fund important public services despite sharp declines in property values. In other countries, value capture and other land-based financing tools have helped harness the value of land to make cities more sustainable, livable, equitable and economically vibrant by financing the infrastructure needed to achieve these goals. For example, the increased mobility offered by high-quality transit has opened up job opportunities previously cut off to some residents, and has provided an alternative source of funds to support inclusionary housing.

Photo Gallery

Photo by Alvaro Uribe. Caption: Faria Lima Avenue in São Paulo, Brazil