LVC Business Model
How Technology Innovation Is Enabling New Sustainable Business Models to Finance Public Transport
LVC Methodology: Promoting prosperity, sustainability and equality
Land values are “community created” — without the surrounding community land would have little value. When public infrastructure like transit, hospitals, schools, bridges are built, the quality of life rises and more people want to live there, so land values rise. The community — not the individual land owner — should receive the benefits of publicly-financed projects. Without land value capture, the benefits of new transit systems will accrue exclusively to private land owners who live near the infrastructure, but this wealth should rightfully be captured to pay for the projects. In fact, land value capture is not a tax, as it doesn’t “tax” money that people actually earn; it simply returns to the community what the community creates by its collective hard work.
Traditionally, urban infrastructure has been financed from three sources: the operating savings of local governments, grants from higher levels of government, and borrowing.
Each of these financing sources now
faces constraints. Local budgets are hard pressed to finance basic
operating services, including adequate maintenance of existing
Higher levels of government must often limit grants to cities in the interest of prudent fiscal management. As decentralization policies have transferred service responsibilities downward, local governments are being asked to finance more of the urban capital budget from their own resources.
Local borrowing has helped finance growth in urban infrastructure investment, but the local government revenue base is often insufficient to service a significant expansion of local government debt.
Examples throughout history and from across the globe have shown the power of Land Value Capture (LVC) as a tool to effectively address these concerns.
LVC offers the logical idea that because urban investment in infrastructure and logistics, property and amenities, and green spaces creates value beyond the direct assets that are the focus of the investment, some of that value (a portion not used simply to provide private gain or to support general taxation) could be used for direct local re-investment.
The concept of using land value capture as a tool to finance public transit projects in Canada is still in its infancy. In the early 1900’s, when “public” transit was introduced in North America, it was private sector companies that provided transit services to enhance access to privately owned development properties, however, these companies disappeared when they were acquired and wound down by those with an interest in selling automobiles, parts , and supplies to the public instead of selling transit services.
From the introduction of transit in North America, it was recognized that transit served to increase area property values. In some cases, the impact of transit was so great that associated property development paid for the provision of transit service. The value added to properties located in proximity to transit is generated, in large part, through Transit Oriented Development. No other tool supports increased transit ridership and increased land values around transit infrastructure to the same extent.
The creation of mixed-use communities in close proximity to transit creates increased development densities which also increases transit ridership, and therefore the fare income of the transit line, and enhances the viability of local services; improving the quality of life and attractiveness of the area and helping to build community. This focused development also reduces congestion for private and public road users, including the movement of freight. There are, therefore multiple benefits to pursuing a strategy of LVC application that go beyond funding for transit.
The LVC positive feedback loop.
Successfully implementing LVC results in a financial positive feedback loop with four components:
The unlocking of and increase in the potential value of under-used
assets (land and/or structures) as a result of a public sector
intervention to stimulate demand from the private sector.
Subsequent investment and development from the private sector
which ensures that potential asset value increase is realized.
Arrangements by the public sector for the acquisition of a proportion of private sector returns for local reinvestment. This can take the form of monetary or in-kind contributions from the private to public actors.
Local value recycling
The re-investment of acquired monetary or in-kind contributions from
the private sector within the same development site or scheme. This re-investment can pay for the initial public intervention but tends to fund further interventions. These further interventions must have a public good element to them but may also benefit the private sector by consolidating value gains already made.
LVC can therefore be defined as the appropriation of value, generated by public sector intervention and private sector investment in relation to an underused asset (land and/or structure), for local re-investment to produce public good and potential private benefit.
In other words, LVC maintains both an:
- Inward rate of return. The revenue return for the private sector following initial investment;
- External rate of return. The proportion of this revenue which is reinvested in the same development scheme for the public good.
An independent study commissioned by Transport for London on the extension of the Jubilee Line estimated that between 1992 and 2002, the value of the land surrounding two of its 11 new stations (Southwark and Canary Wharf) had increased by €3.6 billion, while the cost of building the line amounted to €4.5 billion. The British government could have built the extension of the Jubilee line at no cost to the exchequer if it had chosen to capture barely a third of the land value increase
generated by the project.