Jarrett Walker produced yet another compelling post on the transit investment planning process that is well worth a read. He muses about what level of sophistication plans should achieve at various points in the planning process and it led me to think about what level of sophistication value capture plans should be at various stages of the transit planning process.
It’s easy for a journalist to say that a plan is short on specifics, but all plans are short on specifics. If included every detail, you’d have construction drawings, escrow arrangements, employee work shifts, and so on. But that’s a lot of work, so you don’t do it until you’re sure you want to proceed.
Jarrett uses New York's recently announced BQX project to illustrate his points (see route diagram above). He notes that there are plenty of questions that still remain regarding fares, frequencies, connections, reliability, and other important transit matters. However, the plan is being put forward at this level of completion to see if it has legs and if it can go forward. The mayor is seeking fellow backers and gathering the support the project will need to proceed and flourish. According to Jarrett, now is not the time to spend millions on design.
Further, as Walker argues, putting out too much information too early suggests a level of specificity that doesn't yet exist. And, perhaps, the specificity shouldn't exist for a freshly announced publicly funded project. Too many specifics is cause for great concern on the part of citizens and advocates who may perceive that they were inadequately consulted.
In the case of BQX, I expect that the plan is being presented in a napkin sketch format partly to illustrate the amount of fine tuning and dialogue still to take place (those curves on the illustrative map don't correlate to exact rights of way). The project is conceived thoroughly enough to be thrown against the wall without morphing into something completely different and De Blasio can now see if the idea sticks.
In fact, we now know that a diverse HDR team spent approximately five weeks to develop high level plans for the project before it was announced. It shouldn't surprise anyone that there are factors still under consideration and that important details continue to emerge, including the number of bridges that will need to be built for the optimal alignment.
As part of HDR's five week planning process, high-level value capture estimates were also developed. The mayor considered the value capture funding opportunity important enough and solid enough to include it in his introduction of the project (likely to ameliorate concerns that he'd be dipping into transit funds that had already been allocated to other projects). The expectation has now been set that some portion of the project's cost will be covered through real estate value capture.
Administration officials believe the system’s cost can be offset by tax revenue siphoned from an expected rise in property values along the route.
So, at this early point in the transit planning process, what level of value capture estimating should be conducted? Should there be back of the envelope estimates or should there be property level estimates of the value that might be captured? Well, you only need as much detail as is required to make an informed decision. Any more detail and you've wasted your resources.
You need to know a few things:
In the case of BQX, I have to assume that someone made sure that value capture's cost coverage potential was "substantial" or "significant" before the mayor included value capture in his announcement. Leading up to the next election cycle, De Blasio cannot afford to go back to elected officials and citizens to inform them that value capture might fund only 10% of the cost of the project and other sources will be required to pay for 90%.
So, what is "substantial" or "significant" cost coverage? If you think you can get federal funding for 50% of the project, does value capture need to be all of the local match (50% of project costs)? If you cover half of the local match (25% of the total project cost), does that meet the mayor's promise that BQX would be funded through value capture?
This is a political question. What cost coverage is De Blasio comfortable with given the expectation that he has set?
For the mayor to achieve a minimum level of comfort, does he need detailed value capture analytics? Well, I hope not.
You see, there's a analytical issue. Even if you had the most sophisticated value capture analyses produced from the outset, cost coverage calculations rely on an estimate of the cost of the project. At this stage of the planning process, the cost of the project is highly uncertain. So, you're potentially faced with estimation errors in the denominator of your critical metric.
Furthermore, detailed value capture projections are likely to be wrong the further one is from implementation, so early specificity does little to actually improve your results.
And the same political issues also exist for the specificity of value capture programs. Value capture inherently impacts real estate interests. Proceeding toward detailed analyses requires that you make assumptions about the value capture policies, which are factors that should be addressed with stakeholders. By making assumptions, it could appear that planners and the mayor have short circuited the political process and dictated terms - not something that works well in the U.S. political system.
It would seem that a back of the envelope value capture estimate is as sophisticated as one needs if you only have a sketch transit plan. You really cannot know what the cost coverage might be until you're deeper into the planning process and closer to implementing the value capture program (which you're unlikely to do in advance of finalizing the transit plans!). I'm sure the mayor had enough evidence to support anything that was said and it was probably wise that his statements were vague about the funding situation until more robust plans can be developed and more sophisticated value capture estimates are warranted.
But, it's worth noting that financing plans are a critical component of developing any transit investment. It's inefficient and ineffective to go too far down the path with transit designs if there's no way to fund them.
So, as a critical part of the funding planning process, value capture estimates should probably be refined at the same pace as the project cost estimates, though a few steps behind. Why behind? For one, the transit design dictates the value capture analysis so you might as well wait until after the next iteration of transit project plans is completed before defining the value capture opportunity. Also, as previously mentioned, your estimates are more accurate the closer you get to implementation. Additionally, you might as well not waste money on sophisticated analytics if a napkin sketch will do.
In the case of the BQX, it is an early transit plan that is appropriately vague and only deserves a high-level estimate of the value capture potential. I look forward to following the BQX planning process and using it as a case study.
Miami Today's Catherine Lackner writes in a recent article that, in traffic-choked cities like Miami, the value of living or working close to transit is one's ability to avoid time spent in the car. So, does that mean that Bentley-loving and Ferrari-worshiping sun lovers in South Beach are giving up their cars for the bus? Well, no. But it does seem that transit is influencing real estate trends in car-loving Miami and other congested cities.
“This is a major shift that’s going to affect everything,” said W. Allen Morris, chairman and CEO of the Allen Morris Company. “Access to all forms of mass transit is very important for both residential urban properties and office space. People want to live and work near transit.”
As I have noted previously on this site, for transit to directly generate positive real estate value, the key is that the transit is designed to maximize accessibility gains relative to other transportation options. It seems that transit is providing an advantage over other transportation modes in Bentley-loving Miami.
Transit improvements can have distinct real estate development benefits, both for horizontal (land conversion) and vertical (building construction) development. In addition to many of the operational benefits that a real estate asset manager might perceive from a transit investment, transit's impacts on markets, travel behavior, and public policies can influence the profitability of real estate development.
From the perspective of the developer, in what ways could a transit improvement impact a potential development project?
Developers might witness changes in the marketplace that would also be perceived by asset managers of existing buildings. In the case of a forthcoming transit improvement, a developer might anticipate the shift in local market dynamics and convince investors of their projections. Transit-induced changes in local real estate markets could directly influence the best use of land, informing the type and/or scale of projects that developers would undertake to maximize their return on investment.
For example, a transit improvement may broaden the market shed of a site and, in turn, increase absorption rates in the surrounding area. Faster absorption rates would increase real estate revenues and could reduce both leasing/sales costs and project financing costs. Such projections may give the developer a better shot at attracting investors to the project and, depending on the magnitude of the market changes, allow a developer to deliver a larger scale project than they would have without the transit improvement.
Additionally, a transit improvement may also fundamentally alter the market surrounding a site. For example, a site in a bedroom community might be an attractive location for auto-oriented residential development. The addition of a nearby station along a transit line connecting the airport and downtown might make the site an ideal location for consulting firms to lease office space. The developer may project that an office building would be a more profitable development option than a residential project. Thus, the site is now part of a broader, different market. As with other market-related impacts, the introduction of transit may influence the best use of sites and reshape development.
The transit improvement may also be expected to inform how people access the new development. Just as an asset manager might see a change the property's automobile parking utilization following a transit improvement, a developer might also foresee travel behaviors that would allow them to provide less parking. They might deliver less parking and enjoy the cost savings or they may repurpose the space for other productive land uses, yielding more leasable space.
Furthermore, different travel behaviors may lead to lower development impact fees in transit served areas. For example, development projects served by transit may not have to pay as much in fees related to schools, sidewalk infrastructure, or highway transportation improvements because projects in transit-served areas do not have as many offsite spillovers as auto-oriented projects. A reduction in impact fees may be a small overall reduction in the cost of developing a project but may substantially reduce equity requirements because fees are often not considered collateral for debt financing. This can make many otherwise marginal investments more feasible.
In all of the cases enumerated above, there may be local restrictions on how a landowner can use their site that could preclude changing the size, use types, and parking profile of a development. Yet, transit improvements can motivate local authorities change regulations so that developers can take advantage of market opportunities. For example, the city council can reduce parking requirements for new developments within 3,000 feet of a transit stop. Or, the local planning commission may modify the zoning code so that larger mixed-use buildings are allowed on select properties near a transit stop.
Transit can also have profound indirect impacts on real estate development by encouraging agencies and organizations to subsidize projects. To capitalize on a new transit investment, local officials may provide financial subsidy payments to spur development. Agencies that own land might offer it at discounted price to make development more attractive. Subsidies of various forms can make marginal projects feasible and profitable projects more profitable, increasing the supply pipeline in the process.
The landowner's bottom line
Ultimately, all of these vertical development impacts of a transit investment flow to the bottom line of the landowner. Those who own land that can be modified into more profitable uses stand to reap financial benefits because they actually own the right to convert the land and construct new buildings.
So, if a developer is the landowner when these transit-related advantages are conferred to property, that's great for their bottom line. If a developer shows up late to the game, after all the benefits have accrued, then the landowner will be able to sell the improved property to the developer and capture the value. The developer takes home their profit, but not the transit windfall that the landowner "earned" prior to the developer's arrival.
Ian Carlton is a transportation and land use expert specializing in transit-oriented development (TOD). He helps clients - including transit agencies, planning departments, and landowners - optimize real estate development around transit.
Special thanks to Burt Gregory at Mithun for permission to use the Portland Streetcar image above.