The concept of “value capture” surfaces as a possible path to more equitable growth.
QUITO—The United Nations global cities summit, Habitat III, began with long security lines under a bright Andes sun, and ended in song. The musical group Nick Horner Family performed “City of Dreams” on the final day of the conference that drew some 40,000 participants. A little more than an hour before, the New Urban Agenda—a manifesto intended to guide the future growth of cities worldwide—was officially adopted.
But as attendees flock to the airport to go home, what actually was accomplished? What happens now?
Among the many takeaways, Habitat III may very well have given birth to a land use revolution. Many participants, as well as the president of Ecuador, are calling into question the historic financial model of city-building, where government provides the streets and other infrastructure, and private landowners and developers take it from there. In the process, one of the hottest topics at the summit has emerged with unlikely celebrity: value capture, where the private sector must acknowledge that an array of government actions—from a zoning change to putting in a light rail line—prompt huge increases in property value.
Ecuador President Rafael Vicente Correa Delgado, an economist by training, started the bidding early on at the conference by proposing legislation to curb real estate speculation. If a landowner purchases a plot of land for $100, and sells it five years later for $500, he or she would only be able to realize a 7.5 percent price appreciation under Correa’s proposal; the rest would essentially be confiscated by the government. You can think of it as a more extreme version of President Obama’s admonition that “you didn’t build that”—that the bulk of increases in value, plusvalía in Spanish, are the result of public investments framing the land, and thus should be recaptured.
Correa’s concept is not actually a pure version of value capture. Elsewhere in Latin America, land-based financing mechanisms takes other forms, such as “betterment contributions” or developer exactions providing funds for urban development at the front end. In São Paulo, Brazil, landowners begin with a floor-area-ratio of 1. If they want to build anything more, they must purchase certificates traded on the stock market.
In yet another form of value capture, government may increase the building envelope in growth areas in return for more affordable housing provided by developers—a version of the “density bonus” that has been deployed in the United States. But otherwise the concept is the same: when government sets zoning that will ultimately benefit the private sector, the private sector must give something back.
Value capture has a long history, going back to Roman times in the construction of infrastructure such as aqueducts. The framework was in place in the Philippines in the colonial era as far back as the 16th century, and was inherent in redevelopment plans for Paris in the 19th century. The 19th century political economist Henry George, who advocated a single tax on land or land value tax, spelled out how real estate owners were enjoying a windfall by being smart or lucky enough to purchase land near a train station, for example.
Today, value capture is in relatively wide use in Latin America, Asia, and Europe, and is beginning to gain traction in the United States. Transportation officials in Massachusetts, confronting cost overruns in the extension of the Green Line through Somerville, have floated the idea of having the private sector pay for new stations along the new corridor, recognizing that transit-oriented development will be enormously profitable. Land is already more valuable along the route of the line, in many cases in industrial areas that have been rezoned for mixed-use development.
In Dallas-Fort Worth, the proposed rail line known as the Cotton Belt is predicated on a similar framework: that private development benefitting from the infrastructure should contribute to the public works in the first place. Australia is also wading into these waters, with the prime minister calling for a gear change in how major urban infrastructure is financed.
A backlash to all of this has already begun, starting with a critique that value capture is a new kind of tax on private landowners and developers. Complex questions about property rights are also being raised—what it means to own land, a commodity in fixed supply.
But it was striking how often value capture came up in the sessions of Habitat III. In a way it’s no surprise. The basic premise of the conference was how global cities can accommodate huge increases in population in the coming decades. In the current paradigm, downtowns are densifying, while unplanned and irregular growth sprawls out at the periphery. There’s a clear need for infrastructure, housing, and amenities such as parks and open spaces in these growth areas, but the question is how to pay for all of those things. Local governments are charged with the responsibility, but don’t have many options. In most cases, cities are severely constrained by national governments on how they can raise revenues.
The concept of value capture is embedded in the New Urban Agenda, and UN-Habitat executive director Joan Clos sprinkled in references to it in his many official remarks, including at a press conference on how the media covers Habitat III issues. He called on journalists to explain how urban planning and urban design increases property values in the process of urbanization. “Who is explaining that?” he said.
Does it sound a bit radical, to change the paradigm of urban development going forward? It’s not revolutionary enough for some, who led protests outside Habitat III and organized parallel alternative gatherings urging more action to improve conditions for the urban poor. Amid the camouflage fatigues and cocked berets of the soldiers around this city, and the progressive impulses of the Latin America region, the concept of value capture may be the most conservative revolution in city-building at hand.