Learn more about the climate–land value connection at our Land-Based Climate Finance page. 

In the Chinese city of Zhengzhou, a manufacturing center located roughly halfway between Beijing and Shanghai, eye-stinging smog routinely put the metropolis on lists of the most polluted cities in the world. About 10 years ago, local leaders joined a comprehensive national clean air action plan, initiated by multiple central government departments and designed to reduce emissions from industry, energy production, land use, and other consumptive activities. 

A few years later, the results were literally clear—nothing dramatic, but more blue skies, and enough of a difference to influence social behavior such as people’s willingness to travel and be outside. And a team of researchers discovered something else: the air-quality improvements correlated with across-the-board increases in property values. 

Using a spatio-temporal model that clearly quantified the association between cleaner air and land values, the researchers determined that improving air quality by 10 percent led to citywide increases in property values of 5.6 percent, said Erwin van der Krabben, professor at Radboud University in the Netherlands. Over time, that could translate to a potential uplift of $63 billion, Van der Krabben said. 

“We can predict, if you further improve air quality, how much value you will get, and so on,” said Van der Krabben, who is documenting the ramifications of climate action globally. He recently coauthored a Lincoln Institute working paper on air quality and land values in China with Alexander Lord of the University of Liverpool’s School of Environmental Science and Guanpeng Dong, professor of quantitative human geography at Henan University (Lord, Van der Krabben, and Dong 2022). 

The idea that environmental action leads to higher land and property values may seem obvious to some, but for the most part, it has not been well demonstrated. The kind of analysis done in Zhengzhou is important because it directly links environmental improvements to increasing value. Demonstrating that link is crucial in making the case for a financial tool that could be essential for addressing the climate crisis: land value capture. 

Once a little-known financial instrument, value capture is used around the world to help fund transit, affordable housing, open space, and other public infrastructure. The approach calls for developers and landowners to contribute a portion of the increases in property value, or land value increment, that are prompted by public investment and government actions. Municipalities use the resulting revenue for infrastructure or other projects that benefit the public (Germán and Bernstein 2020).  

As the world prepares to spend trillions of dollars in a massive effort to transition from fossil fuels, reduce emissions, and build resilience, value capture could help close the global climate finance gap, particularly at the local level. Establishing that what’s good for the planet is good for the economy, Van der Krabben said, gets to the heart of the fiscal argument to use value capture. In China, where land is state owned and leased to developers, land value increases get built into the price developers pay. “So if Chinese cities act in a rational way, if they invest that additional income from land leases, if they continue investing that in cleaner air, then you have this kind of virtuous cycle,” he said. 

Accordingly, increasingly sophisticated valuation and assessment methodologies are being deployed to describe the impact of government action on land and property values—and not just detailing how a new transit station or a flood-resilient park creates uplift in a local neighborhood, but how broader policies, like clean air requirements or the promotion of walking, biking, and transit, can have a positive economic impact across a wider catchment.  

The “virtuous cycle” analysis may make not only a powerful economic argument for a shared responsibility in financing climate action, but a moral one, too. In many places, private developers and landowners generally walk away with the windfalls created by public investments. 

“There’s a well-documented lack of funding for the action that’s needed to address the climate crisis,” said Amy Cotter, director of Climate Strategies at the Lincoln Institute. “Precious little of it operates like land value capture: created by the very action it enables, within local control.” Land value capture “won’t solve climate finance, but we see its significant potential to fill an important gap,” Cotter said. 

ONE COMPELLING FEATURE of the Zhengzhou air pollution case study is that the benefits were spread across an entire city. But a wide range of projects and policies that can contribute to climate resilience are manifesting themselves economically in urban contexts, whether at the scale of one city block or an entire neighborhood: 

• The Eco Efficiency Ordinance for the Metropolitan District of Quito, which won a Guangzhou Award for Urban Innovation in 2021, incentivizes energy efficiency and density by selling developers the right to construct taller buildings if the projects have green elements and are near transit. Since the city adopted the ordinance in 2016, 35 projects have been approved that penciled out so well, developers had no issues returning a portion of their profits through this value capture tool. The city will invest the $10.7 million raised so far in improvements such as parks and affordable housing, and is making the ordinance part of its new land use and management plan. 
• A study by the Center for Neighborhood Technology and SB Friedman Development Advisors found that green stormwater infrastructure installations in Seattle and Philadelphia, such as rain gardens and swales, resulted in statistically significant increases in sales prices of homes nearby (CNT and SB Friedman Development Advisors 2020). Doubling the square footage of rain gardens, swales, planters, or pervious pavement within 250 feet of a home is associated with a 0.28 percent to 0.78 percent higher home sale value, on average. 
• In Buenos Aires, a similar assessment of proposed blue-green infrastructure projects in the Medrano Stream Basin found strong potential for positive land value impacts stemming from both the reduction of flood risk associated with traditional gray infrastructure, and the improvements in public green space (Kozak et al. 2022). The authors cite a project that improved public access to the Paraná River in Santa Fe, Argentina, as an example of how this can play out; the revitalization of that waterway led to an average land value uplift of 21 percent within a 10-block band of the waterfront. 
• Major transit projects around the globe that are contributing to decarbonization goals, from Tokyo’s Tsukuba Express transit extension to the modernization and electrification of the interurban passenger railway in San Jose, Costa Rica, to London’s Crossrail project—the latter expected to achieve approximately 2.75 million tons of carbon savings over its lifetime—are being financed largely or in part by the assumption that property values will increase all along their corridors. 
• Developers and homeowners alike seek safety from rising seas and other climate impacts, and are willing to pay for that sense of security. Boston has established a Climate Resiliency Fund, to which developers contribute to help the city coordinate the construction of seawalls and natural systems to keep prized urban land high and dry. Contributing toward adaptation is increasingly seen as a small price to pay to safeguard real estate assets and ensure their continued inherent value, said Brian Golden, the recently retired director of the Boston Planning and Development Agency.  

The same appears to be true for individual homebuyers. They’ve always taken into account property characteristics and consumer preferences such as the number and composition of rooms or the quality of the local public schools. Now they want to know about—and might be willing to pay more for—features that make the home more resilient to climate change, according to Katherine Kiel, an economics professor at College of the Holy Cross in Massachusetts and author of a Lincoln Institute working paper on adaptation and property values (Kiel 2021). 

WHILE THE CONNECTION between environmental interventions and an uplift in values is positive news for property owners and developers, it has a complicated relationship with gentrification and displacement. One prominent recent example of green improvements affecting local economics is the daylighting of the Saw Mill River in Yonkers, New York, which transformed a downtrodden business area so dramatically that housing prices shot up all around the adjacent area, said Cate Mingoya, national director of Climate Resilience and Land Use at Groundwork USA. It was “the perception of a cleaner, greener space” that led to the increases, Mingoya said. 

“There’s nothing about the installation of trees or the daylighting of a river that forces landlords to raise rents so sharply. There’s nothing that says that landholders must be entitled to maximize profit from a system that is highly, and unfairly, regulated to their advantage,” she said. But property owners can and do cash in on these kinds of public investments, said Mingoya, who facilitates cross-sector partnerships to implement climate adaptation measures in vulnerable communities.  

Some communities seeking to temper green gentrification deploy measures that are “just green enough . . . where a limited number of improvements are made to low-income neighborhoods in an attempt to ward off displacement.” These efforts sometimes border on the absurd, Mingoya said: “Should they get 30 trees or 10 trees?” But they clearly demonstrate the growing awareness that green interventions and rising values are linked. (Strategically designed land value capture policies can help mitigate cases where environmental interventions are associated with gentrification and displacement, with provisions to increase affordable housing, for example.) 

Viewed from another perspective, bad environmental conditions that are unaddressed or only partially addressed have a negative economic effect. One recent report by researchers at several universities in Utah estimates that polluted air shortens life expectancy by two years and costs the state nearly $2 billion a year. Some local and state governments are keeping a running tally of the damage caused by climate change, according to the Pew Charitable Trusts, in preparation for litigation against fossil fuel companies. 

The absence of climate action—in cases when municipalities can’t or won’t implement resilience infrastructure and other measures to halt flooding, sea-level rise, mudslides, and the like—drives down values precipitously. A study of land subsidence in Java, Indonesia, where homes have sunk into unstable soil, found that the local practice of rebuilding on sinkhole sites—sometimes two or three times, done in the hopes of salvaging economic viability—did nothing to halt the decline in property values. The only solution for plummeting values, says the study, which was also led by Van der Krabben, would be a massive overhaul of water and soil management—or to give up on the land entirely. Indonesia is moving ahead with the wholesale relocation of its capital city, Jakarta, largely for this reason. 

In Miami, a big part of the argument for private sector contributions to resilience infrastructure is that without speedy action, more real estate is virtually guaranteed to be underwater. Seen in this way, protective measures do more than enhance land and property values; they stop values from being less than zero, by keeping land from becoming uninhabitable. 

EVEN AS EVIDENCE OF THE LINK between environmental action and economic uplift grows, many barriers must be overcome to make land value capture work. National urban development laws need to be reformed to authorize more local governments to mobilize land value increments and permit own-source revenue. Around the world, a pressing need remains to improve institutional capacity, good governance, land controls, and tenure systems. 

Governments will also need to keep in mind that land-based finance is just one way to fund climate and environmental initiatives, more suitable for closing gaps than for serving as the sole or primary source of revenue for a carbon-neutral world. 

Policy makers may also have to guard against overreach. The benefits of a new transit station on adjacent properties are “plain as day,” said Van der Krabben, so developers are more eager to contribute to such infrastructure. The ultimate payoff of an environmentally progressive citywide or regional policy—say, bans on fossil fuel heating and cooling systems in new construction, such as the natural gas bans enacted in major U.S. cities including Seattle, San Francisco, and New York—may be a tougher sell.  

“What you really want is for developers to contribute to regional investments, but that’s more difficult to negotiate. The benefits are more indirect,” Van der Krabben said. 

All the more reason, scholars say, to revisit the valuation and assessment practices that establish land and property value increases in the first place. More sophisticated valuation methods have improved assessment accuracy, said Lincoln Institute Senior Fellow Joan Youngman, citing the International Association of Assessing Officers (IAAO)’s technical standard on mass appraisal of real property designed to improve the fairness, quality, equity, and accuracy of valuation. Mass appraisal is defined in that standard as “the process of valuing a group of properties as of a given date and using common data, standardized methods, and statistical testing.” 

The assessment process may soon be aided by some technological wizardry. The International Property Tax Institute and IAAO both issued recent white papers on the potential use of Artificial Intelligence (AI) in property assessment. While AI poses some challenges and uncertainty, the hope is that it could produce more accurate values than those obtained by traditional approaches. 

When it comes to identifying the effects of public action and investment on land value, modern tools, data analytics, and statistical techniques will help identify and measure value increments, Youngman said.  

Armed with good practices, a theoretical rationale, and a growing list of cities around the world that have put value capture to use, those addressing the climate crisis hope the connection is becoming clearer between the massive public investments necessary to salvage the planet’s future and the economic bounty they provide—and, ultimately, the ways that bounty can be reinvested for the public good (Bisaro and Hinkel 2018, Dunning and Lord 2020, Van der Krabben, Samsura, and Wang 2019). 

Golden, the outgoing Boston planner, said he has sensed a “cultural shift” among landowners and developers, who recognize that public investments in resilience infrastructure plainly protect private real estate assets, making them more likely to help foot the bill. Requiring developers to help finance the berms, seawalls, and natural systems restoration that will guard against an estimated 40-inch sea-level rise along the city’s 47-mile coastline is seen as a matter of self-interest, Golden said—not only for individual development sites, but also for the continued prosperity of Boston as a regional economic engine. The private sector has exerted virtually no pushback on initiatives like the resiliency fund. “We have a lot of work to do,” Golden said. “They get it.” 

Anthony Flint is a senior fellow at the Lincoln Institute, host of the Land Matters podcast, and a contributing editor to Land Lines. 

Lead image: Zhengzhou, Henan Province, China. Credit: Zhang mengyang via iStock/Getty Images.

REFERENCES 

Bisaro, Alexander, and Jochen Hinkel. 2018. “Mobilizing Private Finance for Coastal Adaptation: A Literature Review.” WIREs 9(3). 

CNT and SB Friedman Development Advisors. 2020. “Green Stormwater Infrastructure Impact on Property Values.” November. Chicago, IL: Center for Neighborhood Technology. 

Dunning, Richard J., and Alex Lord. 2020. “Viewpoint: Preparing for the Climate Crisis: What Role Should Land Value Capture Play?” Land Use Policy Volume 99. December. 

Germán, Lourdes, and Allison Ehrich Bernstein. “Land Value Return: Tools to Finance Our Urban Future.” Policy brief. Cambridge, MA: Lincoln Institute of Land Policy (January). 

Kiel, Katherine A. 2021. “Climate Change Adaptation and Property Values: A Survey of the Literature.” Working paper. Cambridge, MA: Lincoln Institute of Land Policy (August). 

Kozak, Daniel, and Hayley Henderson, Demián Rotbart, Alejandro de Castro Mazarro, and Rodolfo Aradas. 2022. “Implementación de Infraestructura Azul y Verde (IAV) a través de mecanismos de captación de plusvalía en la Región Metropolitana de Buenos Aires: El caso de la Cuenca del Arroyo Medrano.” Working paper. Cambridge, MA: Lincoln Institute of Land Policy (February). [English version available.] 

Krabben, van der, Erwin, Samsura, Ary, and Wang, Jinshuo. 2019. “Financing Transit Oriented Development by Value Capture: Negotiating Better Public Infrastructure.” Working paper. Cambridge, MA: Lincoln Institute of Land Policy (June). 

Lord, Alexander, Erwin van der Krabben, and Guanpeng Dong. 2022. “Building the Breathable City: What Role Should Land Value Capture Play in China’s Ambitions to Prepare for Climate Change?” Working paper. Cambridge, MA: Lincoln Institute of Land Policy (June). 

Across every region of the world, countries of all sizes have demonstrated that land value capture is an effective tool for financing infrastructure, affordable housing, and other public goods using the land value generated by the public sector’s own actions, according to a new publication from the Organisation for Economic Co-operation and Development (OECD) and the Lincoln Institute of Land Policy. 
 
The Global Compendium of Land Value Capture Policies is the most comprehensive profile of land value capture published to date. The publication identifies five major land value capture instruments and shows how they have been implemented in all 38 OECD countries and 22 additional countries. It draws on deep expertise from the two organizations and the German Corporation for International Cooperation (GIZ), as well as surveys that shed light on the legal frameworks and policy issues in all 60 countries. 
 
“This compendium will provide policy makers with a unique resource as they develop ambitious plans to make cities more livable and sustainable,” Lamia Kamal-Chaoui, director of the OECD Centre for Entrepreneurship, SMEs, Regions and Cities, and George W. McCarthy, president and CEO of the Lincoln Institute of Land Policy, write in the publication’s preface. “It reveals the huge potential for land value capture to unlock important new infrastructure and land uses: from social housing to transport, from water to energy.” 
 
The five main land value capture instruments identified in the compendium are infrastructure levies, developer obligations, charges for development rights, land readjustment, and strategic land management. These instruments vary greatly in their design, but they all enable the public sector to recover and reinvest land value generated by two main types of activity—the creation of infrastructure, and enactment or amendment of regulations that govern land use. Often, these two types of activity occur in tandem—e.g., a rezoning that accompanies the construction of a new rail station. 
 
The compendium explores how governments use value capture instruments in different contexts. For example, it explains how large municipalities in Brazil have implemented charges for development rights as part of the master planning process. Developers pay the charges for the right to build at higher density, often in districts where the municipality is also investing in infrastructure and redevelopment. 
 
The publication explains the constitutional, legal, and administrative frameworks for land value capture, and identifies different methods for land valuation—a critical component of each instrument. It explores common challenges and considerations for policy makers who implement land value capture. Finally, it includes a detailed profile of each country. 
 
Policy makers who seek to implement land value capture in their jurisdictions can use the compendium as a guide, and scholars can use it as a platform to conduct more detailed research. It will be followed by the creation of a searchable database with additional details for each country. 

The compendium is available at no cost: https://www.oecd.org/publications/global-compendium-of-land-value-capture-policies-4f9559ee-en.htm. 

Image by R. M. Nunes via iStock Getty Images Plus.

Infrastructure upgrades and facilities are desperately needed around the world, but governments often struggle to pay for the high costs of developing and maintaining them. The newly published Lincoln Institute book Infrastructure Economics and Policy: International Perspectives includes two chapters that address issues related to infrastructure finance, including the development of innovative and replicable financing models. 

Basics of Infrastructure Finance 

In Chapter 9, economist Akash Deep of the Harvard Kennedy School explains why financing is a key challenge in infrastructure development. Governments must typically pay the costs of infrastructure up front, while the benefits are spread out over many years. This difference between the timing of costs and benefits is generally bridged through borrowing.  

It is important to note that financing differs from funding. The funder is the entity that ultimately bears the cost of the infrastructure, either the general public (in the form of taxes) or the direct users (in the form of user charges). Those who finance the project are the borrowers and lenders who reconcile the timing of the benefits and costs. Those borrowers and lenders can be public or private. The capital structure can be determined to reflect the riskiness, and the cost of financing, and thereby the financial value of infrastructure. Proper structuring and risk allocation can make infrastructure finance more efficient and less risky. 

Because infrastructure investments often have a long payback period, investors are typically less interested in infrastructure than other assets. Deep illustrates the potential for innovation in financing infrastructure, including efforts to tap the huge and growing savings in insurance and pension funds. Managers of such funds prefer the combination of modest but stable long-term returns that infrastructure offers, but they are often required to maintain their debt portfolio at investment grade or higher. One solution developed by the European Investment Bank is to provide direct financing (in the form of subordinated debts) or financial guarantees to make the investment less risky for insurance and pension funds. 

A more widely imitated innovation is infrastructure funds modeled after those pioneered by Australia’s Macquarie Group in 1996. The Macquarie Group introduced features such as pooling equity from multiple projects, active asset management, financial engineering, and listing on capital markets–reforms that made infrastructure equity funds more liquid and especially attractive for pension funds. Infrastructure funds have attracted both institutional and retail investors, thereby significantly expanding the pool of equity available for infrastructure investment. 

Infrastructure Finance through Land Value Capture (LVC) 

The benefits and costs of infrastructure are typically specific to the location where the project will occur. In urban locations, where the supply of land is limited and the infrastructure on it is often immobile, the benefits created by infrastructure often result in an increase in the value of land. In such cases, the public sector can fund infrastructure improvements by imposing property taxes, selling development permissions, or utilizing similar measures to capture all or part of the uplift in land value that the improvements create. Such measures ensure that the parties who benefit from the improvements pay to support them. 

Chapter 10, written with Yu-Hung Hong, former director of the Samuel Tak Lee Real Estate Entrepreneurship Lab at MIT, and Du Huynh of Fulbright University Vietnam, examines the record of land value capture around the world. Value capture is especially promising in developing countries, which have enormous infrastructure needs but fewer alternative funding sources. Chapter 10 focuses on the experiences of Brazil and Vietnam with one of the most important types of value capture—the sale of development rights.  

The case of São Paulo, Brazil, is internationally known and widely praised; the city developed a market-oriented value capture program, auctioning Certificates of Additional Construction Potential, or CEPACs, to developers in exchange for the right to build at greater density in designated areas. The city has used the proceeds to pay for affordable housing, transportation upgrades, and other public goods. 

The case of Ho Chi Minh City, Vietnam, is more controversial: through ad hoc procedures, the city sold the development rights to convert rural land for urban development. Both cases confirm that sales of development rights can generate substantial proceeds, often more than enough to pay for the extra infrastructure needed for the associated development. But the examples also show that successful implementation requires a clear and widely accepted delineation of property rights. Also important are a system of registries and impartial courts to record and protect those rights, a realistic and reasonably detailed land use master plan, and politically skilled sponsors. 

As both chapters illustrate, governments around the world are finding innovative ways to finance infrastructure. Given the urgent need for global infrastructure investments and upgrades, these methods should be more widely implemented and embraced.  

José A. Gómez-Ibáñez is the Derek C. Bok Professor Emeritus of Urban Planning and Public Policy at Harvard University. Zhi Liu is senior fellow and director of China Program at the Lincoln Institute of Land Policy. They are the editors of Infrastructure Economics and Policy: International Perspectives. 

Image: Octavio Frias de Oliveira Bridge, São Paulo, Brazil. Credit: R. M. Nunes via iStock/Getty Images Plus. 

This article was originally published by the American Planning Association and is reprinted with their permission. 
 
With 47 miles of coastline subject to punishing inundation, Boston is considering a range of innovative techniques to build resilience against the inevitable impacts of climate change. But one of the most groundbreaking features of this effort may well be the mechanism to pay for it. 

City officials last year established a Climate Resiliency Fund to help finance the berms, seawalls, and natural systems restoration that will help protect real estate in the vulnerable Seaport district and other potential flooding hotspots. Private developers will make contributions to augment local, state, and federal funding. 
 
The mechanism will be applied to the estimated $124 million cost of protecting a city-run, 191-acre coastal industrial park, but is poised to become a template for building resilience at many other vulnerable areas. 
 
While chipping in to help build defenses seems to be an obvious thing to do, the resiliency fund reflects an important recognition: Public investments in critical infrastructure benefit the private sector by boosting property values—and in the case of rising seas, allow land to continue to be usable. 

“There’s been a cultural shift,” said Brian Golden, who retired this spring as director of the Boston Planning and Development Agency after eight years of service. With such a huge task—preparing for 40 inches of sea level rise by 2070 across a landscape of hundreds of acres of squishy landfill dating back to colonial times—developers understand they have to pitch in and foot part of the bill, he said at the Lincoln Institute’s Journalists Forum in April. 
 
“We don’t get a lot of people balking at any of this,” he added, suggesting that developers have come to understand exactions and charges for climate infrastructure as a basic reality of the times, and appreciate the consistency and predictability of the policy. “If you’re doing business with us . . . you’re going to be paying to build some resiliency measures.” 

Don’t ‘Leave Money on the Table’ 

What’s happening in Boston reflects a growing consensus around the world, rooted in the concept of land value capture: the retrieval of increased land and property values specifically associated with government action and public investment. Just as a new transit line can increase values for properties all along it, resilience infrastructure can be shown to do the same. That increase in value is identified as the land value increment. 
 
Allowing the private sector to enjoy those benefits without making any contribution is increasingly recognized as the equivalent of “leaving money on the table,” noted Enrique Silva, director of International Initiatives at the Lincoln Institute. 
 
Value capture won’t fully finance climate adaptation efforts, but can become part of a “stack” of public finance arrangements that jurisdictions can leverage together, said Lourdes German, executive director of The Public Finance Initiative and a Lincoln Institute board member, also speaking at the Journalists Forum. Drawing contributions from developers and landowners can help fill critical gaps that often remain at the local level, after national and state funding is allocated. 
 
The search for the necessary revenue to fight the battle against climate change, estimated by the UN to be some $90 trillion worldwide through 2030, is certain to intensify. Governments have been using versions of value capture in Brazil, Colombia, Ecuador, the United Kingdom, and throughout Asia for many years. Officials in Miami are studying similar mechanisms to help pay for resilience infrastructure in that flood-prone city. 

Protecting Assets 
 
The argument for developer contributions is bolstered by the quality of the climate action efforts, which build confidence that real estate assets on urban land will indeed be protected. Boston has been taking steady steps for decades to address climate change in its planning, backed up by changes to zoning regulations and its broad application of Article 80, which provides the discretion to approve projects with certain strings attached. The Climate Ready Boston plan won an APA award in 2019, and Singapore’s Lee Kuan Yew World City Prize bestowed special recognition for the city’s efforts to address climate change in an older coastal city. 

It may have taken the climate crisis for landowners and developers to accept the obvious benefits of such government-funded interventions, said Golden. In the past, public investments that enhanced land and property values may have been regarded as a gift to the private sector or a form of stimulus for economic activity. Now the enormity of the task—fending off the water in some places, letting it be absorbed in others—is clear to all the stakeholders, who are more willing to be part of such a daunting, but necessary, effort. 

“It’s an old city, our building stock is fundamentally 19th century and early 20th century, and none of this was considered,” said Golden, referring to climate impacts and flooding. “And it’s not just about the benefit to metropolitan Boston. We are, after all, the economic engine of all the New England states. So people are, in 2022, signing up for this. They get it.” 

 
Anthony Flint is a senior fellow at the Lincoln Institute, host of the Land Matters podcast, and a contributing editor to Land Lines. 

Image: Boston’s Seaport District. Credit: Denis Tangney Jr. via iStock/Getty Images Plus.