What is Land Value Capture (LVC)?
Land value capture is a principle that recognizes how private land and buildings can increase in value due to public investments in infrastructure and policy decisions made by governments. This financing tool enables cities to access the income generated from public sector investments, including infrastructure development and transit-oriented projects. LVC tools can be used to capture a portion of the increase in value of urban land and buildings. Furthermore, these funds can be utilized for public projects established by the Central/State Governments and ULBs.
By capturing a portion of the value uplift in land prices as a result of public investments, local governments can generate revenue to fund important initiatives. This approach ensures that private developers and landowners contribute to the costs of urban development rather than solely benefiting from it.
India’s Current Scenario
According to the McKinsey report 2008, urban India needs to increase its per capita spending to $134 per year by 2030. Further, the World Bank report 2022 states that India will need to invest $840 billion over the next 15 years, or an average of $55 billion per year, into urban infrastructure in order to effectively meet the needs of its rapidly growing urban population. Several national urban missions are investing about Rs. 32,500 crore annually leading to an investment gap of nearly Rs. 65,000 crore.
Typically, sources of revenue in ULBs can be categorized into three types: (a) taxes imposed by the municipality, (b) user charges for civic services, and (c) fees and fines for regulatory and statutory functions (MoUD, 2017). However, with time, the ULBs are facing serious dent to mobilize resources and are increasingly getting dependent on State Governments. Capturing alternate methods for financing urban infrastructure is of much greater significance given the scarcity of public finances in improving the quality of life for the citizens.
Methods of Land Value Capture
Land value capture is a financing tool that enables cities to access the income generated from public sector investments, including public infrastructure development and transit-oriented projects. There are a range of land value capture mechanisms, including taxes, fees, Betterment levy, Transferable Development Rights (TDR), etc. Some of these are explained below:
Land value tax
Land and/or property taxes are the most commonly used tool to capture land value. These taxes are levied on urban land and property owners based on the value of their assets, and can be used to fund urban infrastructure projects.
Betterment Levy
A betterment levy is a one-time fee imposed on landowners whose property values increase due to public investments. These fees are paid in addition to any taxes the landowner already pays. The amount of the levy can be calculated based on the increase in value of the land and/or buildings as a result of public investment, and it can be used for financing urban infrastructure or public services.
For example, the Mumbai Metropolitan Regional Development Authority (MMRDA) Act, 1974 allows for the imposition of betterment charges for certain projects. Great Britain also implemented a betterment levy that was equivalent to 40 percent of the increase in land value caused by public investment.
Transferable Development Rights (TDR)
TDR allows landowners to transfer their rights to build on a property to another location, often resulting in denser development at the destination site. This tool encourages private developers and landowners to contribute to the cost of urban development while allowing them to benefit from it as well. States such as Maharashtra, Karnataka, and Gujarat have laws in place that allow for the use of TDRs in various ways, including the development of open spaces and the promotion of affordable housing.
Change of Land Use
Change of Land Use (CLU) is a regulatory mechanism used to capture land value generated by changes in the use of land, such as a conversion from agricultural to commercial purposes. Under CLU, landowners pay a premium for changing the use of their land to non-agricultural activities, such as residential or commercial uses.
Development charges
Impact fees are imposed on new constructions in an area where a significant new public investment has been announced, in addition to development charges. This is the most commonly used land-based fiscal tool in states. Investments may encompass various types of public infrastructure facilities such as major roads, highways, metro rail, industrial corridors, ports, airports, and more.
States such as Andhra Pradesh, Gujarat, Maharashtra, Tamil Nadu, and Madhya Pradesh levy an Impact Fee, which is collected in advance when development permissions are granted. Impact fees are commonly implemented in the United States to finance infrastructure.
Land Acquisition
Land acquisition is another method of capturing land value. It usually involves the government purchasing land in order to develop it for public use or as part of an urban regeneration project. While this can be a costly and time-consuming option, it is often necessary in order to acquire the right amount of land or to ensure that a development has the necessary access rights. The Government of India has recently introduced the Land Acquisition, Rehabilitation and Resettlement Act, 2013 (LARR) to ensure that land acquisition is fair and transparent.
Land Pooling
Land pooling involves the cooperative consolidation of small parcels of land into larger plots. The government incentivizes landowners to combine their smaller plots in exchange for a share in the larger development project. This can be used to promote denser development and urban regeneration projects. For example, Andhra Pradesh implemented land pooling to get land for in its former capital city, Amaravati. States like Gujarat and Haryana have implemented land assembly programs, similar to a land pooling system, where landowners consent to exchanging their barren lands for smaller plots with infrastructure services.
Additional FSI/FAR
Premiums on relaxing rules or providing additional Floor Space Index (FSI) or Floor Area Ratio (FAR) benefits are another way of capturing land value. This involves allowing developers to build higher or more dense structures in exchange for a fee. In India, this tool is often used to promote urban regeneration projects and the development of affordable housing. In Mumbai, the Development Control Regulations 33(9) allows for the payment of a premium in exchange for additional FSI.
Tax Increment Finance
Tax Increment Financing (TIF) is a tool used to finance public infrastructure and urban regeneration projects. It works by capturing the increase in property tax revenue resulting from an increase in land value due to improvements in public infrastructure. The captured revenue is then used to fund the project. This tool has been used extensively in India, including for the redevelopment of Delhi’s Connaught Place, Mumbai ’s Dharavi, and Hyderabad’s Old City.
Conclusion:
Land value capture has become an increasingly important tool for financing urban infrastructure projects in India. It is a cost-effective way to generate revenues that can be used to fund public investments and services without increasing the burden on taxpayers.
Indian cities should actively pursue and implement a range of tools based on their local context in order to capture the financial benefits of their intended investments. Further, cities should consider using multiple VCF tools simultaneously in an area-based approach, and then expand the successful options citywide.
Although some of these land value capture mechanisms, such as land acquisition and development charges, have been used for many years, others such as TDR, land pooling, and premiums on relaxing rules or providing additional FSI benefits are new approaches that states are beginning to explore. With the right implementation, these tools can provide much-needed funding for urban infrastructure projects and foster the urban growth while also promoting denser development and urban regeneration.
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