The dubious value of ‘value capture’

Gov. Hochul’s Penn Station Area Civic and Land Use Improvement Project is speeding toward a vote this summer. But on May 9, New York City’s nonpartisan Independent Budget Office confirmed that the state’s proposal to use “value capture financing” to pay for it contains too little information to evaluate its prospects for success. As researchers who studied a similar financing scheme in Hudson Yards, we found a surprising twist: Such deals not only create and capture new revenues, but can also destroy them.

The state’s plan would provide much-needed upgrades to Penn Station. To pay their share of the costs, estimated at $10 billion, the plan would rezone eight surrounding blocks to allow for larger buildings and “capture” new property tax revenues to pay back the state’s infrastructure costs.

Governments love the idea of paying back today’s infrastructure expenses with expected future revenues. This so-called self-financing scheme promises to encourage growth nearby and burden local property owners with the project costs rather than spread those costs among all city or state taxpayers. In practice, however, value capture is far less straightforward as property values change in and around the project area, complicating what might otherwise look like simple math.

Fortunately, New York has experience from which it can draw: The state plan is similar to the one the city used in Hudson Yards. In a recent article in the Journal of American Planning Association, we examine the performance of Hudson Yards’ financing structure over the past 20 years. Our analysis shows that rather than paying for itself, Hudson Yards required citywide tax dollars to repay its infrastructure costs, entailed massive tax breaks to developers, and negatively impacted the value of commercial properties in other parts of the city, among other unanticipated outcomes.

As the state proceeds with the Penn Station redevelopment plan, it’s vital to learn the right lessons from recent history.

First lesson: Pumping billions of dollars of public and private investment into a targeted geography does not guarantee subsequent appreciation in property values. Value capture schemes presuppose that liberalizing zoning and investing in a designated site induce growth. In the case of Hudson Yards, the city invested $3.5 billion for the No. 7 subway expansion and a public park, after which the Related Companies built a platform over the West Side railyards and luxury skyscrapers on top of it. These investments increased property values in the area by 295% between 2009 and 2020, compared to an 83% increase in Midtown.

But this value almost did not materialize due to the Great Recession, significantly delaying construction in the area and diminishing the revenue streams committed to repaying the infrastructure bonds. To help the project through this crisis, the city subsidized it with an extra $359 million from its own budget. If property values do not grow or appreciate quickly enough to repay the initial public investments, value capture schemes can collapse.

Second lesson: Some of the value generated in a district is not really “new” as it comes at the expense of other parts of the city. Corporate tenants from Midtown, ironically the same area the Penn Station redevelopment hopes to aid, moved en masse to the new towers in Hudson Yards. Between 2013 and 2018, Midtown lost 12 million square feet of office tenants while Hudson Yards gained more than 7 million. In a slowing regional market, the Penn Station proposal would fuel more cannibalization, using public dollars to lure tenants back to Midtown after just luring them to Hudson Yards.

This is particularly worrisome when the commercial sector is still struggling and the future of office work is up in the air.

Third lesson: Because governments depend on new property tax revenues to repay their infrastructure bonds, they undermine themselves by giving developers tax breaks or allowing them to reduce their property assessments, as they did in Hudson Yards.

From the project’s inception, developers were guaranteed property tax breaks of up to 40% for 20 years. This city will lose $1.1 billion in revenue just for the first phase of the project. There were no restrictions on property owners disputing the Department of Finance’s assessed valuations in value capture districts. In fact, Hudson Yards experienced more appeals activity than Midtown, which cut into the revenues the city had anticipated to pay the redevelopment costs.

Commercial property owners in Hudson Yards effectively triple-dipped from the public till: They benefited from new infrastructure and lowered operating expenses to augment investment values while the municipality filled gaps in incremental revenues with monies from the general fund.

Value capture financing rests on a simple theory, but its implementation is complex and easily undermined. Be forewarned.