Instrument Overview
There is a range of LVC mechanisms related to specific development areas and partners. These include: 1. High-density building rights / Air rights in which cities can generate revenue from the transfer of development rights. In this case, developers who want to build at a higher density by adding more floors (height) can purchase such floor height from neighbouring lower buildings. Typically, public facilities such as schools, libraries, or hospitals can sell their air rights to private developers. The return can then be invested in funding infrastructure assets and social services. 2. Joint redevelopment approaches whereby well-coordinated development of transit station facilities and adjacent private properties. 3. Urban Redevelopment Scheme whereby landowners and developers establish a cooperative entity to consolidate into a single site developed [1].
Why it matters for cities
Development-based land value capture (LVC) offers cities a powerful financing tool to unlock the increased land values generated by public investments and policy actions. By monetizing these value uplifts—such as through selling air rights or coordinating redevelopment—cities can raise critical funds to finance infrastructure, green buildings, and climate-resilient urban improvements without relying solely on traditional taxation or external borrowing. This enables more sustainable and equitable urban growth by ensuring that those who benefit from development also contribute to its costs. Moreover, LVC helps cities shape urban development according to public goals, such as increasing affordable housing, preserving cultural heritage, or expanding green spaces, making it a strategic mechanism for inclusive and climate-smart urban planning.
Key features
- Range of mechanisms: Includes transfer of development rights (air rights), joint redevelopment near transit hubs, and cooperative urban redevelopment schemes to consolidate and develop land parcels.
- Value generation through public action: Public investments in infrastructure, land use changes, and granting additional building rights increase land values in targeted areas.
- Value appropriation instruments: Cities recover the increased land value using legal and financial tools like incentive zoning, exactions, impact fees, or sales of development rights.
- Value reutilization: Captured revenues are reinvested in local infrastructure and climate projects, creating a virtuous cycle of development and sustainability.
- Stakeholder involvement: Key stakeholders include city governments, private developers, financial institutions, appraisers, and local communities, all collaborating to balance development benefits and costs.
- Policy levers for sustainability: Cities can attach conditions to development rights sales to promote green building standards, social inclusion, and environmental quality.
- Financial and planning integration: LVC is most effective when combined with comprehensive urban planning, regulatory frameworks, and strong governance.
How It Works [2]
Development-based land value capture (LVC) methods involve harnessing the increased land value resulting from public investments and government actions to help finance public infrastructure or improvement projects. The revenue is generated from the specific developments that have benefited from the public investments, and it is often reinvested in the same area to support further development and infrastructure.
The LVC process can be represented in three inter-related steps. The first step is value generation, where city governments can undertake a wide range of actions to generate land value, including direct infrastructure investments, granting of building rights, land use modifications etc. The next step is value appropriation, which entails recovering the increases in the land value resulting from public investments and policy actions. This can be achieved through a diverse range of instruments (suitable for green buildings), such as transfer of development rights, land readjustment, incentive zoning, exaction, impact fee etc. The final step in the LVC process is value utilization, which includes reinvesting the captured land value to more equitable climate actions, such as renewable energy infrastructure development to further increase the surrounding real estate value, creating a virtuous cycle of revenue generation, growth and climate action.
Stakeholders and City Role: The key stakeholders in development-based LVC include private developers, financial institutions, property appraisers, businesses and local communities. Private developers can benefit from the increased land value and the opportunity to develop green buildings and sustainable infrastructure projects in areas where the land value has been captured.
Cities have a significant role in LVC as they can use this mechanism to finance sustainable development projects without entirely relying on public funds. City governments can also ensure that the benefits of LVC are distributed equitably among local communities. They can actively shape urban development through strategic planning, policies, and partnerships with stakeholders to capture the increased land values that arise from public investments.
Benefits & Challenges for Cities [1]
Benefits
- Ability to access finance from the start of the construction process, generating sufficient revenue to finance much of the required infrastructure to develop and service a site or district.
- Ability to shape development policy via financing conditions, incentivising urban developers to meet public goals such as cultural heritage preservation, a proportion of low-income housing or green space allocation.
Challenges
- Potentially complex processes are needed to implement and manage LVC approaches.
- Strong engagement and communication are required between the government and all stakeholders.
Use Cases
Land Value Capture in Quito, Ecuador
The Metropolitan District of Quito is the capital of Ecuador. To achieve sustainability objectives, the city in 2016 implemented the Eco Efficiency Ordinance. This municipal ordinance provides incentive for sustainable urban development and the reduction of GHG emissions by raising building height limits in proximity to public transportation hubs. Specifically, it allows properties to be 50 percent taller near bus rapid transit (BRT) stations and 100 percent taller near metro rail stations, contingent upon adherence to advanced energy-efficient building standards. This policy promotes environmentally responsible construction and generates revenue for the city through payments from real estate developers in return for the additional building capacity. The resource efficiency criteria it sets forth are rigorous, encompassing water and energy usage as well as seismic, safety, and bioclimatic design considerations. Projects are evaluated and scored based on their integration of water efficiency (34 out of 100 points), energy conservation (33 points), and contributions to landscape, environmental quality, and technological innovation (33 points), thereby encouraging comprehensive environmental stewardship and sustainability in building design [3].
Outcome: The policy has been very well accepted by the private sector, generating additional revenue sources for urban development. To date, over thirty buildings have been approved, contributing to reduced water and energy consumption, and real estate developers have paid over US$10 million to the municipality through the policy [3].
When to Use It
LVC methods are particularly beneficial for sustainable development in low- and -middle-income countries where municipalities are often resource-constrained and need ‘own-source’ financing opportunities for investments in green infrastructure. When used in tandem with efficient urban planning and governance, development-based LVC can be an integral instrument to help governments advance positive fiscal, environmental and social outcomes [2].
References
[2] Development-based land value capture (LVC) | Net Zero Buildings
Comments ()