Cities, Cities Infrastructure & Transportation, New York City
June 24th, 2021 14 Minute Read Issue Brief by Arpit Gupta

Building in Times of Fiscal Constraint: How New York City Can Capture Value from Transit Projects


As New York City rebuilds in the wake of the COVID-19 pandemic, a key focus will be upgrading the public transit system in the context of fiscal constraints. While the city has so far averted crisis in fiscal year 2020, the next years will bring severe challenges for the city.

Although subway ridership declined during the pandemic, the rise of remote work may be here to stay, at least to some degree. Many New Yorkers have already moved to distant suburbs and may choose to commute from there, even if only irregularly, rather than every day. The city will have to find a way to provide sufficient transportation infrastructure for meeting these new challenges—and also for the millions of New Yorkers who remained in the city.

To help fund infrastructure projects during times of fiscal constraint, the city should rely on an approach known as “value capture.” Value capture is a means by which the value produced by the infrastructure expansion itself can be used to fund some of the cost of the project.

Value capture is both fair and efficient because real estate and infrastructure are complements. Accessibility to transit stops is an important amenity, so new transit improvements increase the value of real estate in the area. The result is windfall gains for those landowners—not because of anything they did but because of extensive public investment.

Value-capture attempts recoup the costs of transit improvements and allow the public to share in these windfalls. A number of methods can be used, but the most common are to levy taxes on existing properties in the vicinity of new transit stops or to permit expansions of new construction in the vicinity of transit stops.

In this brief, we will offer a careful examination of recent evidence in New York City—including from the Second Avenue Subway expansion—as well as evidence from other cities around the world, all of which reveals important benefits from the value-capture approach.


The Second Avenue Subway Experience

The Second Avenue Subway construction illustrates the potential for value capture. The expansion of the Q train on the Upper East Side was the most substantial investment in public subway infrastructure in the U.S. over the past several decades, allowing for a detailed analysis of the spillovers of new transit on the broader neighborhood and the value generated as a result of the project.

In joint work with Stijn Van Nieuwerburgh and Constantine Kontokosta, we find that the Second Avenue Subway project did indeed have substantially positive local impacts.[1] Nearby residents in areas serviced by the subway expansion—those living between First and Third Avenues on the Upper East Side—were able to reduce their commutes by 7.5%, or three to five minutes, on average. Residents who actually used the subway to commute saw even larger savings, of about 14 minutes in each direction.

While the time savings in commuting are the most visible aspect of the new subway’s construction, the area is likely to see many other benefits stemming from the subway’s expansion. Research on other lines has documented substantial improvements resulting from subway expansion, such as reductions in traffic, pollution, and crime, as well as an overall reallocation of economic activity resulting from improved transit links.[2]

To measure the changes in real-estate value resulting from the project, we compare properties on the corridor affected by the subway, between First and Third Avenues, against other regions on the Upper East Side that were less affected by the subway’s construction. This difference-in-difference approach allows us to estimate the incremental increase in property values that can be attributed to the subway’s construction.

We find that real-estate prices started to increase after construction began on the Second Avenue project in 2007, even before completion of the project in 2017. Relative to the period prior to subway construction, real-estate prices in areas served by the subway increased by about 8% more than in other areas of the Upper East Side. These estimates suggest substantial demand for properties in the area served by the new transit expansion, as well as large value creation from the subway. Aggregating across the region, we find that the subway expansion increased total real-estate prices by as much as $5.8 billion—enough to pay for the extraordinary $4.5 billion cost of construction.

However, we find that the city did not recoup the bulk of that cost of construction. While the existing property-tax system will result in the city taxing some of the windfall gains from higher values, the resulting revenue gain falls far short of the total cost. We find that the present value of the increase in future property-tax revenues amounts to just $1.78 billion. This means that even though the subway project generated enough real-estate value to pay for itself, the bulk of this simply accrued to private landowners with preexisting ownership stakes. The city government faces a substantial shortfall in revenue to pay for the project. These costs were instead borne by federal and local taxpayers.

The limited value capture resulting from the Second Avenue project was amplified by another feature of land-use policy in Manhattan. To accommodate the increased demand for living near transit stops, the city could upzone, or allow increased building in the vicinity of transit stops. While there was limited construction in the area, this was nearly offset by the decline in available units resulting from demolitions and alterations.[3] As a result, only 278 more units were available on the Upper East Side from 2010 to 2020, the second-lowest increase across New York City community districts. As David Schleicher notes, a failure to upzone reduces the gains from new infrastructure.[4] The lack of housing growth in transit-rich areas also forces New Yorkers to engage in longer commutes or live in more crowded housing.

The experience of the Second Avenue Subway suggests two key lessons for future NYC transit experiments. First, the headline cost remains a prohibitive factor. As Alon Levy and Eric Goldwyn have shown, the cost of building new infrastructure is an order of magnitude higher in the U.S.—and especially in New York City—than in the rest of the world.[5] Bringing these costs down is essential to building projects on a more cost-effective basis.

Second, the city must develop more value-capture methods to better fund transit activities. Doing so would allow the city to build more stable and ongoing revenue sources to enable the sustainable funding for essential infrastructure projects.

Other NYC Value-Capture Projects

Outside the Second Avenue Subway expansion, New York City has seen considerable improvements in value capture. In other projects, the city has attempted to capture value through one of three methods: 1) transferring the windfall resulting from infrastructure investments; 2) selling development rights in the form of rezoning; or 3) converting the windfall of rezoning toward infrastructure improvements.

The most notable of these projects was Hudson Yards—a large mixed-use real-estate development project involving the substantial construction of commercial, residential, and office buildings built above MTA rail yards. Preparing the site for private development required substantial investments of public funds by expanding the Number 7 train to a new station in the area and creating new public space, such as the Hudson Park Boulevard.

These public investments were undertaken by the Hudson Yards Infrastructure Corporation (HYIC), which issued $3 billion in bonds to pay for these projects.[6] In order to repay these bonds, private developers pledged a variety of revenue streams dedicated to HYIC. These included recurring property-tax revenue in the form of payments in lieu of taxes (PILOTs) for office and retail buildings, as well as tax equivalency payments (TEPs) for residential and hotel properties. The city also collected revenue from selling additional development rights that allow developers to exceed zoning limits.[7] The project was an effective use of value capture because the private development fostered by public infrastructure was used to self-finance those investments.

While traditional new underground construction—similar to the methods used for the Second Avenue subway—may be a difficulty for the city facing a constrained fiscal situation, other NYC projects illustrate how value capture can be adapted depending on specific contexts.

Another example is the renovation of Grand Central Station, which was partly funded via $220 million from SL Green in exchange for a rezoning that enabled the construction of the One Vanderbilt office tower immediately adjacent to Grand Central.[8] These improvements funded new transit halls and corridors that improve the functioning of one of the country’s busiest transit stations.[9]

This region of Midtown East around Grand Central has been further targeted by the Midtown East rezoning plan, which rezoned the area while also creating a dedicated local improvement fund.[10] New development, renovations, and air-rights transfers in this area will generate contributions to the public fund dedicated to improving local transit improvements. Directly tying the benefits from upzoning charges to improvements in local infrastructure maintains a tax nexus enabling local governments to levy these charges. It also has public economy benefits, by ensuring that local residents see benefits from new construction—rather than only bearing the externalities and costs of building, such as noise and increased congestion.

One project that did not come to fruition was the proposed BQX streetcar, which was projected to raise $1.3–$1.4 billion from a property tax–based value-capture method focused on properties in close vicinity to the proposed line. The city’s plans, which were never finalized, did not envision new taxes or rezoning—but rather would have created a new nonprofit entity to help fund the project’s creation, which would then repay these infrastructure expenses by channeling incremental property value generated by the project to help pay for the line.[11]

MIH: Not an Effective Way to Capture Value

In some ways, New York City has already implemented a version of this type of value capture through Mandatory Inclusionary Housing (MIH) requirements. These requirements force developers to set aside a fraction of housing associated with new developments for lower-income households.

In practice, New York has fallen far short of its goals on housing production through MIH. As Eric Kober discussed, the city has approved just 2,065 MIH units since 2016—and many of these still require heavy public subsidies.[12] This is partly because opposition by local city council members has blocked MIH construction in affluent areas—meaning that this program has largely failed to capture value from new development and has instead been a financial drag on the city.

Even when they work well, affordable housing requirements are simply an inefficient way to implement value capture. Any resulting benefits from cheaper units simply accrue to a small set of residents who happen to qualify for the affordable housing units. In other words, one small group of windfall beneficiaries (property owners) are replaced by another small group: the few people who manage to get an affordable unit. In neither case does the public writ large get to share in the returns of the investment that is paid for.

Developers are eager to build new housing, so given the degree of regulatory constraints on new construction, an auction for developments rights would likely raise considerable funds. This is a more transparent method to directly capture value in order to help finance essential public investment.

Value Capture Around the World

Other cities around the world have taken even more aggressive approaches to value capture. These include Asian cities such as Tokyo and Hong Kong, where private or quasi-public subway entities are able to finance a large share of operations through real-estate investments.

In these systems, value capture is achieved not through taxation or rezoning but through the subway companies directly investing in real estate in the vicinity of transit stops. In Hong Kong, for example, the Mass Transit Railway (MTR) corporation had exclusive development rights in the vicinity of transit stations. MTR then developed these sites or sold these development rights to private developers in exchange for a fraction of the profits.

In Tokyo, a range of private and quasi-private developers procure land on their own in the vicinity of transit stops. The development of these properties, as well as the resulting recurring revenue, accounts for a substantial share of operating revenue for these companies.[13] While local governments participate by making low-cost financing available, these subway systems are notable in being fully self-funded, rather than being reliant on heavy government subsidies, as in the United States. While a fully privatized MTA might not be feasible, MTA currently sits on large real-estate holdings—associated with stations, as well as other land parcels—that could be monetized by MTA or in cooperation with private developers to raise revenue.

In London, the Crossrail project—a cross-city suburban rail link—was partially funded by incremental taxes in the vicinity of station stops, as well as the sale of local development rights. These included Business Rate Supplements (BRS), which act as property taxes on nonresidential properties, as well as a Community Infrastructure Levy (CIL), which is applied to additional projects. While CIL levies apply to new development across London, Crossrail also implemented specific public-private construction along the station in the form of over-site development, which provides dedicated funding from developments in the immediate vicinity of transit stops. These value-capture methods not only transfer windfall gains but generate additional revenue alongside new construction and target this new construction along transit lines.[14]

The combination of selling development rights in conjunction with infrastructure has been pursued most aggressively in São Paulo. This development approach has followed a strategy that Christopher Elmendorf and Darien Shanske refer to as “auctioning the upzone.”[15] Following this concept, the city auctioned tradable development rights, known as a Certificate of Potential Additional Construction (CEPAC), for specific neighborhoods in the city. The certificate gives the holder the right to undertake development in specific regions but can also be resold to other developers until applied to a specific project. The funding raised from the issuance of these certificates was used to help finance infrastructure improvements in those same districts.[16]

This attractive model neatly aligns the incentives of public authorities and private developers. The increased revenue from auctioned development rights provides the city with necessary funding for infrastructure, while the resulting improved public goods make developers more willing to pay for these development rights in the first place. And adding incremental density in these transit-rich areas lowers environmental impact while concentrating new development in areas where the demand for housing is strong.


New York City has a mixed record on value capture. Although some recent projects, such as Hudson Yards and the Grand Central renovation, have incorporated various means of value capture, its largest recent infrastructure expansion—the Second Avenue Subway—failed to recoup most of the resulting increases in real-estate value. Instead, windfall gains simply flowed to landowners. Nor does the city’s MIH program provide a meaningful way to capture value—and it would not do so even if it could produce a significant number of affordable units.

As the city moves forward in an era likely to be marked by meaningful fiscal constraints, it should consider not only these examples but lessons from around the world, where more aggressive methods of value capture have been very successful. Through a variety of taxation and rezoning implements, the city can better ensure the maintenance and improvement of public infrastructure even with tight budgets.


See endnotes in PDF

About the Author

Arpit Gupta is an adjunct fellow with the Manhattan Institute and an Assistant Professor of Finance at New York University’s Stern School of Business, where his research focuses on using administrative datasets to understand risk and return dynamics in alternative asset categories.

His interests in policy research include real estate, housing and land-use regulation, transit, infrastructure, public finance, pedestrianization, and the management of urban street space. His recent academic papers examine the role for foreclosure contagion in mortgage markets and estimate the risk-adjusted valuation of private equity funds.

He received his B.S. in Mathematics and Economics at the University of Chicago and his Ph.D. in Finance and Economics from Columbia Business School.


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