Guide to Value Capture Financing for Public Transportation Projects (2016)

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8Value capture refers to a range of strategies for providing funding to infrastructure projects (such as transit projects) from value induced by the project. Value capture is the public recovery of a portion of increased property value created as a result of public infrastructure investment. Com- mon value capture mechanisms are impact fees, joint development, sale or leasing of air rights, land value taxation, station naming rights, negotiated exactions, parking fees, sales tax and special assessment districts (SADs), and tax increment financing (TIF). Given expanding demand for new transit infrastructure and scarce financial resources, U.S. transit agencies are increasingly looking toward innovative funding sources and strategies. Value capture is one of these innovative strategies. Case studies presented in this guide illustrate examples of successful value capture strategies that provide funding solutions for between 20% and 50% of transit project capital costs. The purpose of TCRP Research Report 190: Guide to Value Capture Financing for Public Transportation Projects is to identify for transit agencies, local governments, and developers the opportunities, challenges, and considerations related to value capture as a strategy for funding or financing public transportation projects. The guide: • Provides definitions of key value capture mechanisms; • Highlights the importance of local economic and market conditions and regulatory consid- erations; and • Outlines elements of compelling business cases from public and private perspectives, artic- ulates funding/financing opportunities, and describes institutional capacities required to deploy various value capture strategies. This guide may also be of interest to federal, state, and local agencies; economic development organizations; business and community groups; and other stakeholders interested in maximiz- ing the potential for value creation and economic opportunity associated with development that is influenced by transit, including transit-oriented development (TOD). Transit infrastructure investment often induces value creation in surrounding land and real estate. Realizing the potential of value creation and the value capture it may facilitate requires a number of enabling conditions, as illustrated in Figure 4. This guide provides definitions of key value capture mechanisms, highlights the impor- tance of local economic market conditions and regulatory considerations, outlines elements of compelling business cases from public and private perspectives, articulates funding/financing opportunities, and describes institutional capacities required to deploy various value capture strategies. C h a p t e r 1 Introduction

Introduction 9 1.1 Background and National Context Public transportation contributes to the quality of life for many in the United States. In 2013, Americans took 10.7 billion trips on public transportation—among the highest in years (APTA, 2015b). All modes of transit require capital outlays as well as operation and maintenance costs. Fed- eral, state, and local governments are facing budget constraints resulting, in part, from lowered gas tax revenues, flat or declining sales tax revenues, and increasing needs to fund state-of-good-repair systems following years of deferred maintenance and insufficient infrastructure investment. Few U.S. transit agencies cover their operating costs through fares. Transit agencies increas- ingly look to value capture, among a number of innovative funding and finance options, to facili- tate new infrastructure projects. Even Hong Kong’s Mass Transit Railway Corporation, serving very high ridership through densely populated urban neighborhoods, requires real estate–related non-fare revenues to fund its services. Successful value capture from TOD and transit-influenced development involves even greater complexity than that associated with typical transportation infrastructure. Thoughtful integra- tion of land use, transit, transportation planning, and project execution is important to transit- influenced development and to generating value that can be captured. In October of 2014, the FTA issued final agency guidance on joint development and transit, stating that “FTA encourages project sponsors to undertake joint development” and “the pursuit of joint development that can raise revenues for transit systems and enhance transit ridership” (FTA, 2014a). In addition, the 2015 Fixing America’s Surface Transportation Act (FAST Act) offers additional provisions to help finance TOD. 1.2 Partnerships That Optimize Value Creation Opportunities and constraints defining the real estate development potential on which value capture depends vary by transit type, station, neighborhood, city, region, and state. Revenue potential, feasibility, and obstacles associated with various value capture strategies will similarly vary from system to system, line to line, and station to station. Roles required of and assumed by transit agencies will necessarily vary from one circumstance to another. Transit agencies may take a laissez-faire approach to transit-influenced development Value CaptureValue Creation Transit Infrastructure Investment Figure 4. Key elements for successful value capture.

10 Guide to Value Capture Financing for public transportation projects and value creation or may proactively engage in planning, program facilitation, deal making, direct development, and development advocacy. Optimizing value capture, however, will require that the transit agency assume “an imperative to be involved in a meaningful project partnership with other stakeholders. An effective partnership will need to accommodate the complex finan- cial and organizational issues involved” in real estate planning, design, and execution (Cervero et al., 2004). The many lifestyle and urban amenity benefits that may be realized from within transit- influenced projects such as TOD result not only from transit access but also from particularly complex and compact mixed-use real estate development and occupancy. The complexity and intensity of TOD projects can create risk and discourage value-maximizing real estate devel- opment and private-sector investment. TOD often requires significant up-front investment in infrastructure and common amenities (Carlton, 2009). Appropriately structured value capture strategies can help to distribute such investment burdens over time, benefitting both developers and local governments. Many of the requirements for successful value creation within TOD fall outside the control of developers and require engagement, collaboration, and partnership with transit agencies and local governments (Hale, 2008). A great deal of cooperative engagement and strategic partnership are required in both planning and execution. A paradigm shift is needed “from current practice of small scope—ad hoc, technical solution driven—planning approach towards a new practice that considers a broad network scope—strategy driven—planning approach” (Arts, Hanekamp, and Dijkstra, 2014). 1.3 How This Guide Fits into Existing Literature Much has been written about the prospective benefits of TOD, the price and value premiums that can be associated with TOD in certain settings, and the economic justification and finan- cial potential of value capture. Extensive reporting has suggested the need for transit agencies to explore every feasible source of funding and financing and be increasingly creative with deploying solutions. The research team intends for this guide to support interested parties with practical approaches to maximizing value creation and funding transit infrastructure through value capture. 1.4 Methodology and Approach This guide has been developed to answer the following research questions: • What are the key issues that transit agencies must address to maximize transit-induced oppor- tunity for value creation, and • What are the key issues that transit agencies must address to leverage value capture mecha- nisms to fund and finance transportation infrastructure improvements? The analytical framework for this guide is based on an exploration of research questions supplementary to the key questions, as identified in Table 1. The research team employed pub- lished academic research, secondary sources of material and data, case study interviews, and professional experience. To supplement publicly available data, the research team prepared the following: • Considerations Checklist (Appendix A): A step-by-step list of considerations for implement- ing value capture for transit projects. The considerations are grouped into categories and in order of those that are most useful to transit agencies, developers, and other stakeholders for understanding how to undertake transit value capture.

Introduction 11 • Case Studies (Appendix B to Appendix G): The research team produced a set of case studies that illustrate key concepts addressed in this guide. Appendices B through G present six case studies that highlight the use of value capture for transit projects. All but one of the cases are U.S.-based. The case studies present a variety of value capture funding sources, transit modes, and characteristics (such as station versus corridor or agency versus developer-driven). • Interviews (Appendix H): The research team sought to interview at least three key stakehold- ers per case study. Where possible, the case studies included interviews with the representa- tives of a transit agency, local government, and a developer familiar with the project. Case studies for this guide were selected to highlight how to implement value capture mecha- nisms for a range of transit projects. Table 2 shows a brief summary of the six case studies featured in this guide. Primary Research Question Key Theme Supplemental Research Questions How is transit-induced real estate value created? Local economic conditions What market conditions are necessary for successful value creation and value capture? Regulatory issues How do regulatory issues affect opportunities for transit-induced value creation and value capture? How is value capture funding leveraged? Articulating the business case How can the opportunity for significant value creation best be structured, and how can the case for private participation in value capture best be framed? Creditworthiness, funding, and finance What makes up a viable value capture credit structure? Organization and coordination What institutional and organizational relationships and partnerships are required to facilitate value creation and maximize value capture? Table 1. Elements of a business case for value capture. Case Study City Project Type Value Capture Mechanisms Used Boston Landing at Allston/Brighton Station Boston, MA New infill station for commuter rail line Negotiated exactions Denver Union Station Denver, CO Reconstruction of historic station, with light rail terminal, commuter rail terminal, and bus terminal Special assessment district, sales tax district, tax increment financing Hong Kong Mass Transit Railway Corporation (MTRC) Hong Kong Integrated subway transit and real estate development business strategy Air rights leases, joint development Kansas City Streetcar Kansas City, MO A 2-mile starter line of a new modern streetcar system Sales tax district, special assessment district, supplemental surface parking lot assessment Portland Streetcar Portland, OR Modern streetcar system of 16-track miles, built in phases Special assessment districts and tax increment financing Dulles Metrorail Washington, D.C. A 23-mile extension of the Washington, D.C., Metrorail system Special assessment districts Table 2. Value capture case studies.

12 Guide to Value Capture Financing for public transportation projects 1.5 Guide Organization The guide consists of the following sections: • Summary; • Chapter 1: Introduction; • Chapter 2: Definitions of Value Capture Mechanisms—defines value capture mechanisms and other key terms; • Chapter 3: Local Economic Conditions and Market Considerations—focuses on the local conditions needed for successful TOD and subsequent value capture; • Chapter 4: Regulatory Considerations—discusses public policies to consider; • Chapter 5: Articulating the Business Case—provides the business case for value capture from the viewpoint of the transit agency and the developer; • Chapter 6: Creditworthiness, Finance, and Funding—describes financing and funding issues central to value capture; • Chapter 7: Institutional Capacity and Partnership—discusses how public and private entities need to coordinate and organize to realize value capture; • Appendix A: Considerations Checklist; • Appendix B: Case Study: Boston Landing at Allston/Brighton Station, Boston, MA; • Appendix C: Case Study: Denver Union Station, Denver, CO; • Appendix D: Case Study: Hong Kong Mass Transit Railway Corporation, Hong Kong; • Appendix E: Case Study: Kansas City Streetcar, Kansas City, MO; • Appendix F: Case Study: Portland Streetcar, Portland, OR; • Appendix G: Case Study: Dulles Metrorail, Washington, D.C.; • Appendix H: Interviews; • Acronyms and Abbreviations; • References; and • Notes The guide has been written to meet the needs of a variety of readers interested in value capture. For readers who are new to value capture, it is helpful to begin with Chapter 2: Definitions of Value Capture Mechanisms and then progress to Chapters 3 through 7. Readers more familiar with basic value capture concepts can focus on Chapters 3 through 7. Chapters 5 and 6 may be of primary interest to readers focusing on business and finance issues. Readers who want to better understand the dynamics of capacity, organization, and coordination summarized in Chapter 7 should read one or more of the case studies. Readers focused on heavy rail or multimodal value capture examples will find the Denver Union Station and Washington, D.C., Dulles Metrorail case studies illustrative. Readers interested in streetcar examples should read the Kansas City and Portland case studies. Readers focused on station development should read the Denver Union Station, Hong Kong Mass Transit Railway Corporation (MTRC), and Boston Landing Station case studies.