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With Trump infrastructure plan, a new focus on value-capture financing

It is unclear at present how lawmakers will fund President Trump's $1.5 trillion infrastructure plan, but real estate may end up playing a significant role in financing one sector in need of upgrades: mass transit.

Tucked in the middle of the 55-page infrastructure framework released earlier in February, the Trump Administration proposed something novel and unexpected: For transit-related projects buses, trains and other fixed-route services and related infrastructure state and local governments will be required to use value-capture financing to receive some of the $200 billion in total federal funding.

A hot topic of late in transit circles, value capture is a public financing mechanism whereby government agencies claw back some of the real estate value generated by new infrastructure projects a new rail station or subway line, for example from private businesses or property owners that have directly or indirectly benefited from it. The model has been implemented successfully in Hong Kong and elsewhere on the international stage, but it has seen limited use to-date in the U.S., where state or local enabling legislation is often required.

In an interview, Jennifer Brickett, who works on finance policy issues at the American Association of State Highway and Transportation Officials, framed the Trump plan as a significant departure in transit financing policy. The plan relies heavily on already-stretched state and local governments to fill the funding gap, and the document is the first time she has seen a value-capture requirement in writing.

"Certainly the focus on [value-capture] financing and the higher contributions from the state and local governments are very different from the traditional federal highway program and transit program," she said. "I would say we're moving in a different direction."

Oladapo Olajide, a consultant and planner within KPMG's global infrastructure advisory practice in Toronto, said there is sufficient appetite to explore wider and greater uses of value-capture financing in North America, but those in the U.S. expecting to bridge the funding shortfall with the method in one or two years' time are misguided. U.S. planners are not sufficiently acquainted with the model, he said.

"People don't really understand what it is," Olajide said of value capture. "They've read about it, but they can't really define what it is and what it's not, what it can do and what it can't do."

Olajide said value capture ultimately could be used to fund a wide array of infrastructure projects, including hospitals, schools and roads. He recommends that planners move forward with pilot projects before attempting to implement the method on a broader level.

"The trick of value capture is the methodology around how you assess what portion of the increase in value is attributable to that specific public investment," he said. "There's no really good way to assess that."

In its 2017 infrastructure report card, the American Society of Civil Engineers gave U.S. transit infrastructure a D- grade (U.S. infrastructure on the whole received a D+), citing chronic under-funding in the space and a $90 billion rehabilitation backlog. Brian Pallasch, a lobbyist for the organization, told S&P Global Market Intelligence that surface transportation — which includes roads, bridges and transit systems is a priority for investment among the 16 infrastructure categories. He expects Congress to have advanced materially with draft legislation by the July 4th recess.

Whether the value-capture requirement for state and local government-led transit projects makes it into final legislation that Congress assembles from President Trump's framework is anyone's guess. In an interview, Aaron Renn, senior fellow at the nonprofit think tank Manhattan Institute, said he is skeptical about the potential near-term use cases for value-capture financing. He said the focus with any new U.S. infrastructure investment should be on repairing existing infrastructure rather than building glitzy new facilities that win votes on the political stage. Outside of a few select metro areas, he said, the U.S. needs more infrastructure maintenance than infrastructure expansion.

"I think a lot of people have this idea that it's a panacea," Renn said of value-capture financing. "But certainly it's unproven at scale in an American context."