States and localities across the country often face a difficult conundrum – a growing need for housing and limited subsidy sources to meet that need. Local governments often must consider ways to fund new housing units without a broad tax increase that could adversely impact residents and businesses. Given this dynamic, value capture policies – traditionally considered for supporting development of infrastructure – have increasingly become popular options for states and localities considering new and innovative means to support both affordable and market-rate housing.
How Value Capture Works
At its core, value capture posits that public actions or investments raise the value of land within proximity of those actions or investments – creating incremental new value. Several fiscal and regulatory mechanisms allow the public sector to recover a portion of the value increase that its own investment or land use decisions generate and reinvest it for public benefit. Two of the most prominent value capture mechanisms from a housing perspective have been density bonuses and tax increment financing (TIF).
Density Bonuses: a regulatory mechanism that allows a developer to build at a higher density than normally permitted under local zoning code, in exchange for a commitment to the inclusion of affordable units or other forms of public benefits. Density increases are typically defined by increases in dwelling units allowed per acre, higher permissible floor area ratios, or greater building heights overall, while benefit commitments can range from affordable unit set aside within the development or financial contributions to housing funds or nearby public spaces, parks or transit infrastructure.
Tax Increment Financing: a financing method in which a locality designates a district or geographic boundary in which a public investment will occur. As the investment occurs and property values increase, property taxes generated within the district will be higher. The base value of property taxes goes on to support the usual services supported by property taxes, while the incremental tax revenue growth goes on to support TIF financing for the investment within the district. Typically, TIFs are supported by a local bond issuance, and the tax increment is used to pay down the debt service on the bond issuance.
When choosing an approach to move forward with, localities should consider their fiscal position and the ability of their local market to support development. For example, a locality with a stronger, more established market may prefer to move forward with a density bonus policy that could clearly provide a sufficiently large financial incentive to support the additional cost of affordable housing. Alternatively, softer emerging markets would possibly want to consider the application of a TIF strategy, where a clear increment creation and capture can support the strategy’s associated debt.
Prominent Value Capture Examples Supporting Housing
Local and state governments across the country – spanning the geographic and political divide – have introduced value capture policies focused on housing in recent years. The examples below highlight some of the most notable:
Density Bonus
Austin, TX: Over the past decade, Austin has introduced several density bonus initiatives aimed at increasing density and adding affordable units to neighborhoods across the city. Currently, Austin has fifteen different density bonus initiatives – each with different neighborhood and zoning applicability and corresponding affordable set-aside requirements, or a mandatory fee-in-lieu payment in the alternative. The two most prominent programs for Austin have been the University Neighborhood Overlay and the Downtown Density Bonus Program, each of which are described below:
An analysis supported by Austin’s Planning Department found that the DDB program supported nearly 3,500 dwelling units since its adoption in 2013 – approximately 90 percent of all units built in the central business district during that timeframe. However, many of these developments opted to pay the fee-in-lieu rate rather than include the affordable unit set-aside. Meanwhile, the same analysis found that the UNO program, originally adopted in 2004, has supported the construction of more than 7,000 units, of which approximately 600 were affordable. Notably, of the 76 developments that were eligible to participate in the UNO density bonus, 66 participated in the program.
California (AB 2345 / AB 1287): California’s Density Bonus Law requires cities and counties to grant additional residential density and other development concessions to residential developments that include affordable housing set-asides. Depending on the depth of affordability and percentage of affordable units within a development’s total unit count, the program grants one to five concessions, including a density increase of up to 50% or more, reduced parking requirements, and other zoning incentives. Recent changes in 2020 and 2023 – AB2345 and AB1287, respectively – helped strengthen the program by increasing the allowable density bonus and allowing for additional density stacking. Since the enactment of both changes, utilization within the program has increased significantly. Available reporting has shown that the number of units approved annually through the bonus program has increased each year since 2020, increasing from 17,283 to 48,120.
Tax Increment Financing
Minnesota: Minnesota allows for TIF housing districts as part of its broader TIF policy. Unlike other TIF districts, housing TIF districts can collect a tax increment over a longer period – up to 25 years. Within housing TIF districts, funds can be used on housing or directly supporting infrastructure. Rental housing projects that receive TIF funds must include either 20 percent of units available at 50 percent of the area median income, or 40 percent of the units available at 60 percent of the area median income. According to the most recent data from the Minnesota State Auditor, approximately 36 percent of all TIF districts in the state are housing TIF districts – second only to redevelopment TIF districts – speaking to the broader application of the financing method across the state. In 2024, housing TIF districts supported more than $50 million in revenue.
Baltimore: As a broader approach to reducing vacancy, Baltimore recently introduced an innovative housing TIF district to support the development of affordable housing in priority areas across the city. Rather than having a contiguous boundary, the district covers the city’s thousands of vacant buildings. As these properties are activated and neighborhoods improve, TIF funds will be supported by the incremental increase in taxable value associated with the renovated and redeveloped properties. Funds can go towards owner-occupant or renter-occupant units and must be affordable for those at or below 115% of the area median income. The total overall goal for Baltimore is to issue a maximum of $150 million in bonds over the next fifteen years. Baltimore offered the first series of TIF bonds, totaling approximately $29 million, in December 2025. During the offering, Baltimore received more than $389 million in orders, representative of a demand level greater than 13 times the amount offered – a signal of investor interest and market confidence in Baltimore’s continued growth.
As these examples show, value capture is not a single tool but a spectrum of mechanisms, each suited to different market conditions and policy goals. The challenge for policymakers lies in matching the right approach to local circumstances: a density bonus that offers too little incentive will go unused, while a TIF district in a market without a credible path to value growth cannot support its own debt. ESI helps states and localities navigate these tradeoffs, grounding value capture strategies in a clear-eyed assessment of local market strength, project feasibility, and the affordability and development outcomes a community is working toward. By pairing fiscal and economic analysis with an understanding of how these policies perform in practice, our team helps clients design mechanisms that are both financially sound and aligned with their stated housing goals.
Stephen Madsen, Director | [email protected]
Stephen Madsen is a director at ESI, specializing in projects related to housing policy, market research, and real estate development finance. His work helps clients align policy approaches with market conditions and understand the impact of policy frameworks on development feasibility. During his time at the firm, Steve has supported engagements across the Northeast and Southeast regions–ranging from economic impact analyses, existing conditions analyses, housing needs and affordability assessments, and development feasibility analyses.
