Land Value Capture : Innovative Financing for Urban Rails


A good public transport system is often one of the defining feature of a city, generating multiple far reached benefits, enhancing sustainable living, attracting residents, businesses, daily commuters and tourists. Rail based public transport projects such as LRTS/ MRTS/ RRTS generate large scale economic values for cities and are necessary for long term inclusive and sustainable development. However, even in the case of the world’s great public transport systems, fares/ ‘user pay’ do not fully cover costs.

Substantial government monetary support, subsidies & loans are required to build, maintain and operate most of the rail based transit systems. This traditional way of urban rail financing leads to a growing debt-subsidy cycle which undermines the economic development.

At the time when urban rail investment appears to be a priority for cities, governments face budgetary pressure leading to challenges in the financing of urban rail. The fiscal challenge for urban rail has prompted cities to find alternative funding and seek different governance frameworks to implement rail projects.

Cities are recognizing the potential of urban rail in creating economic value through its multiple non-transport benefits specially its impact on land values and thus its potential for influencing more intensive land development/ Transit Oriented Development (TOD) and hence urban regeneration with its associated agglomeration benefits. Innovative financing through ‘beneficiary pay’ methods have emerged lately to cope up with the crunch of finances for building capital intensive public transport facilities such as Metro’s and Rapid Rails. Thus it becomes essential for Indian cities to learn from the successful experiences of Innovative Financing for Mass Transit across the globe.

Understanding the impact of Transit on Land & Real Estate Developments

The LRTS/ MRTS/ RRTS provides fast, reliable, safe and comfortable connectivity solution to the expanding urban centres. It serves as the integral commuter transport backbone in the region. High speed, significant reduction in travel time and wider reach offers a very different propositions to the spatial geographies. The hypothesis is that even incremental changes in transport infrastructure may encourage both land development and economic growth stems from the concept of the “accessibility” of locations. The more easily people and goods can access a given location, the more desirable that location is for both people to live and for businesses to locate. This added increment of location desirability will lead to tremendous development in public transport station areas/ influence zones – both physical land development and redevelopment as well as economic development. With the coming of MRTS corridors, there is sharp rise in valuations which has been established in various market studies. The enhanced real estate development activity brings in

  1. Catchment Area Increase where newer areas becomes accessible,
  2. Valuations Increase where Real Estate Valuations increases due to increased ease of accessibility, infrastructure development and economic development and
  3. Transaction Velocity Increase with increase in number of Real Estate transactions. Till date, in the current market scenario, these rise in land & asset valuations due to public investment are usually captured by private players only.

Understanding Land Value Capture (LVC)

Land Value Capture refers to a type of innovative public financing, in which increases in land values generated by a new public infrastructure investment are all or in part “captured” through a land related tax or any other active or passive mechanisms, such as betterment charges, tax increment financing, air rights sale, property development, to pay back such an investment. In other words, Value Capture, in a broader sense, opposes the windfall gains derived out of public infrastructure creation accrued to a privileged few as unearned income, but argues for redistribution of such gains fully or partially to fund public investment and also to compensate social-costs often resulting from these investment negativities.

However, the LVC concept is still perceived as a workin-progress with varied success. As evident from global experiences, this was primarily due to the fact that there is a notional misconception of the Value Capture mechanism as only a financing tool. Mostly they have overlooked the needed support investments for infrastructure integration and the sustainable community living aspects specifically in the case of using LVC for a mass transit project. Land Value Capture can be blended with planning and development framework to bring in the realizations of Transit Oriented Development as well.

Figure 1: The effect of Transit Infrastructure projects on relative rental values, London Cross rail, Source: MSCI

Development Based Land Value Capture (DBLVC) : Development based Land Value Capture (DBLVC) is the type of LVC mechanism where transit agencies or transit investors are directly or indirectly involved in the delivery of development on land around transit stations (George Hazel Consultancy, 2013).

Examples : Direct Property Development, Joint Property Development, Land Sales/ Auction, Air Rights Sale, Land Lease Agreements, Land Readjustment, Urban Redevelopment Schemes.

Taxation Based Land Value Capture (TBLVC) : Taxation based land value capture (TBLVC) is the type of LVC instrument that is used to recover transit induced value gains by imposing taxes or fees on existing developments located in ‘transit investment benefitting areas” established by the transit agency. (Medda & Modelewska, 2009; Walters, 2012).

Examples : Cess, Taxes, Levies like Tax Increment Financing (TIF), Special Assessments, Land Value Taxes (LVT), Betterment Charges, Impact Fees, Station Connection Fees etc.

Figure 2 : R+ Property, MTR Hong Kong

Applicability of LVC Tools

Overall, Land Value Capture finance is rapidly acquiring global legitimacy as an ancillary and innovative source of funding for expensive urban transport projects. The highlighted economic impacts of public transit investments on surrounding properties make a strong case for transit value capture finance in emerging cities. However, Development Based Land Value Capture type mechanisms have unique advantages over Taxation Based Land Value Capture type mechanisms and vice versa.

Figure 3 : Property Development, London Cross Rail

It is critical that city leaders and transit executives consider the unique advantages of the two types of LVC to ascertain which best fits their local context and funding objective. Alternatively, DBLVC and TBLVC mechanisms can be consolidated to meet a funding objective, while leveraging the strengths of each type. Feasibility, Equity, Efficiency, and Revenue Capacity and their supporting criteria must be adhered to maximize the utility of any type of LVC mechanism for transit finance. Efficiency and Revenue Capacity especially underscore the essence of evaluating the revenues LVC mechanisms relative to their costs. This is a critical step towards thinking more economically about LVC finance tools used for financing transit and sustainable urban development.

Project NameLondon Cross RailRail Plus Property ProgramInclusive Land Value
Capture Schemes
Development – Based LVC
Financing a Metro with Development
Rights of Public Land
Air Rights Sales
LocationLondonHong Kong SAR, ChinaTokyo, JapanNew York City and Washington, DCNanchang, ChinaSão Paulo, Brazil
13.6 million7.1 million21 million4 to 8 Million2.3 million11.9 million
Type of TransitRegional Rapid RailMetro (Heavy rail, Light rail)Regional Rapid RailSubway MetroMetroSubway Metro
Length of Transit
Corridor (km)
118218304223 km in New York and 170 km in
168205 (by 2030)
Public Transit (%)37405123% (NY), 37 % (DC)1437
Project Duration2017-20211980 to 20111986 to 19961991- 20062012 to 20202013 to 2040
OwnershipFully State Owned80% Govt. & 20% PvtGovt. & PvtFully State OwnedCorporation (PSU)PPP
CompanyCross rail Limited, subsidiary
of Transport for London (TfL)
MTR Corporation Limited –

1. Transport Operations

2. Hong Kong Station
Commercial Businesses,

3. Hong Kong Property and
other Businesses

4. Mainland of China &
International Business.

Corporations, namely Tokyo Rail
& Japan East Rail (PSU)
Washington Metropolitan Area
Transit Authority (WMATA)
Nanchang Railway Transit Group Co. Ltd.
(NRTG) , Nanchang Municipal Govt. (NMG):
local body
São Paulo Company of the
Metropolitan (METRO)São Paulo Metropolitan Trains
Company (CPTM)Metropolitan Urban Transportation
Company (EMTU).
Contribution of VCF
25%38%: From Property
59%: Revenue from real estate
development is 34 %
17 % in DC70% Proposed: 20 % of the transfer fees of
land use rights
VCF ToolsStamp Duty Land TaxLand Readjustment & Land leaseAdditional FAR & Development
Rights (TDR, TIF- New York)
Sale of development rights, Mixed Land UseTradable Air Rights
Community Infrastructure
Levy (MCIL)
Rail Plus Property (R+P)
development :
Internalization, Requirement,
Integration, Auction
Landmark Transfer- FAR of 1.2–6.6,
purchasing unused development
Direct Property DevelopmentUrban Redevelopment Areas, called
“Urban Operations” (UOs),
Business Rate Supplement
(BRS): Zonal retention of
revaluation growth from
business rates
Public Land parcels leased for
50 years at premium, Annual
rent payment equivalent to 3
% , Certificate of Additional
Construction Potential
Incentivize land readjustment
(Gets Added FAR) & to maximize
rail’s value added. Developer
floor area rights
Superior Development Special
Permit (FAR:30)
Re-auctions the land sitesAdditional building charge, Urban
Development Rights Auction
Model (DRAM)
Fuel Tax & Cess on Vehicle
Registration Fee
Joint Development (DC)Betterment levy in Urban
Intervention Area (UIA)
State Pooled FundRule of cost and profit sharing
between public agencies, MTR
Corporation & private developers
Special Urban Railway Reserve
District Improvement Fund, special
taxing district
NMG collects fee to Development FundsUrban Development Fund
Influence AreaStation Areas & Market
400 m : around rail stations vary
by location
Vary by development generation,
location, and stakeholder
300 m :TOD ZonesTOD Zones: 500 m around station areasCentral Business District , UIA &








Author :-

Name : Ishita Aryan

Organization : National Institute of Urban Affairs

This article will be a part of our upcoming Magazine. If you would like to subscribe , Click Here to subscribe .