When public funds increase land value, communities may tap the profit to fight climate change.
When the Warm Springs / South Fremont Station in San Francisco opened for passenger service on March 25, 2017, there was much rejoicing. Not only had the station come in $100 million under budget, it promised reliable public transport for thousands, with an estimated 6,000-7,000 riders using it every weekday.
It was also a godsend for the 2,500-acre Fremont / Warm Springs Innovation District, launched in 2014 adjacent the station, which had been languishing after the closing of the New United Motor Manufacturing plant in 2010. Just 10 years later, thanks to the station and other investments by businesses, developers, and government bodies, the space has been transformed almost entirely, including with a Tesla factory, elementary school, a network of parks and greenways, pedestrian bridge, and a target of 4,000 residential units.
Now a much more desirable area with the new station, the district saw land values skyrocket. The initial property value gain was $1.69 billion, and a 30-year gain of $2.79 billion was projected in a 2019 report by San Jose State University. Ultimately, that created a windfall for land and property owners, who did little to nothing to earn it, instead reaping profits off the back of the public money that funded the project. That lost the city a great opportunity to tap that value increase to both cover the costs incurred in building the new station—and future infrastructure projects.
Land value capture — also called rental value capture and economic rent capture, would allow them to do so. It’s based on the idea that public action should generate public benefit. That means states and municipalities should be able to recoup at least a portion of the new land value, which they can then reinvest into further infrastructure improvements, including those that remediate environmental damage and enhance sustainability.
Meeting the Costs of Climate Change
The cost of climate change only seems to grow each year. In fact, meeting U.N. sustainability goals now reaches $176 trillion, with a funding shortfall of $135 trillion. The numbers are just as fearsome elsewhere. A September 2023 study in Nature Communications scientific journal pegged climate change-related losses at about $140 billion per year between 2000 and 2019, or $16.3 million per hour. The Cities Climate Finance Leadership Alliance announced in November that cities around the world will need $5.4 trillion annually through 2030 to adapt to changing climate realities. Currently, they are receiving less than 1% of those funds.
Land value capture offers one way to bridge at least some of the gap. It’s an idea that’s winning every more supporters, as a 2022 report by the World Bank and Georgia State University. “Land value capture provides the mechanisms that link public investment on climate to increases in land value and offers
opportunities to sustainably finance urban climate investments,” the report notes. “When utilized, LVC can improve the fiscal health of cities and help close the global climate finance gap, enabling local governments to respond to urgent local needs exacerbated by climate change.”
A Different Kind of Climate Tax
Land value capture potentially offers a more effective way to fight climate change than simply taxing carbon, as 46 countries are currently doing through direct carbon taxes or emissions trading schemes. Fossil energy is a land-like asset and the value is determined by what the market can bear, explains Frank De Jong, a former Canadian Green Party leader and board member of The Robert Schalkenbach Foundation. “Fossil energy producers may simply choose to absorb the tax, forgoing some of the super profits they normally pocket, leaving the price, and thus the amount of energy used, unchanged.” That’s because fossil fuels often command prices well above the cost of production.
Economic rent capture, on the other hand, changes the equation, De Jong believes. Rather than a punitive “sin” tax on any particular industry or lifestyle, it merely captures the increase in land value due to the efforts of the community. It’s remains essentially neutral, too, because it always leaves an operating profit in place. That’s a good thing for sustainability efforts, according to De Jong.
“The genius of rental value capture is that it’s hands off the economy, rental value capture collects unearned income not earned income,” De Jong explains, “It creates a level playing field between the fossil fuel economy and the job-rich efficiency, renewables and conservation industries.”
Taking the Warm Springs / South Fremont Station as an example, property owners would only need to share less than one-fifth of the total property increment to fund the entire project, the San Jose State report claims, and less for apartment, office and commercial buildings, which share property value increments.
Accessing these revenue streams can come through a range of instruments, including special assessments, betterment levies, property tax, transfer of development rights, land readjustment, and charges for development rights. These can then be directed toward sustainability improvements that further increase land value, further increasing the value and capture to create a virtuous cycle. These value-producing investments include tree cover, green infrastructure like storm water basins and water recycling, air quality, and urban form projects like public transport that encourage denser, more accessible cities.
Land Value Capture in Action
Boston, a city largely built on landfill, is employing land value capture in the development of its Seaport District, not more than 15 years ago, a derelict industrial area. Development started in 2010 and by 2014, real estate agents were already calling it “the hottest, fastest-growing real estate market in the country.”
However, as it sits right on the ocean, the district is threatened by the impacts of climate change, especially as hurricanes and flooding grow in scale and regularity. That means significant investments are needed in resilient infrastructure, like berms, seawalls, and natural systems. Land value capture provided some of those funds by exacting payments from developers that were channeled into a Climate Resiliency Fund, which supports those investments.
Another example in the United States is in San Francisco, where the Transbay Transit Center was funded by land value capture, in this case via the mechanism of tax increment financing, which reclaims $1.4 billion in property taxes over 45 years of which $171 million will be used to repay a federal loan used for the Transit Center construction. Hudson Yards — one of the largest private real estate projects in U.S. history in New York City — was also partially funded by a value capture approach and will dedicate some of proceeds to infrastructure, including the provision of green space. Indeed, the development itself claims to be “a model for sustainable neighborhood development,” pointing to its status as the first LEED gold-certified neighborhood in Manhattan, with five acres of greenery including 200 Mature trees, 225 Species of pollinators, and 10 million gallons of stormwater recycled each year to water plants.
One More Tool in the Toolbelt
While land value capture can indeed add significant funds to the sustainability coffers, it’s not a panacea. But short of stopping all carbon emissions at once, nothing is. Instead, it can become part of a “stack” of public finance options that can be leveraged together, said Lourdes Germán, executive director of The Public Finance Initiative. For De Jong, in fact, land value capture actually removes some of the cost in one sense, as it makes warranted public infrastructure — sustainability included — essentially free.