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

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44 Successful value capture is dependent on value creation and realization. Neither transit development value creation nor value capture materialize spontaneously. Effective institutional design and cooperative value enhancing and value capture strategies are required for imple- menting successful projects (Alexander, 2012). Optimization of value capture and transit project viability requires agencies to engage early in partnerships with developers and local governments and to participate strategically in the process of real estate value creation. Early partnership is necessary, appropriate, and critical for success. Figure 16 identifies the partnerships between institutional parties (including transit agency, local government, and developer) that are important to successful value capture projects. Other stakeholders, such as additional public-sector entities, land owners, and other private-sector entities, can play important roles as well. For example, the regional metropolitan planning organization played a central role in organizing the development effort for the Denver Union Station project. Multiple developers and business groups played determinative roles in realizing the value capture–funded Dulles Metrorail project (see Appendix G). Figure 16 demonstrates that public and private stakeholders are constrained to some degree by characteristics and conditions of the overlapping financial markets in which they operate. Specific elements of a large TOD project might be financed with public or private debt instruments, or both. Rail and bus infrastructure within the Denver Union Station project was financed with TIFIA and RRIF, public financing vehicles available to both public and private entities. Real estate parcels making up the Denver Union Station project were sold to developers and financed privately in conjunction with TIF and special assessments (see Appendix C). New transit infrastructure can meet both public and private needs. For example, struc- tured parking may serve both private development and transit users, regardless of financ- ing. Dulles Metrorail’s 2,300-space public parking garage on Wiehle Avenue was financed with tax-exempt bonds secured by contract payments from Fairfax County subject to annual appropriations. Fairfax County expected that revenues generated by the 99-year lease with a developer for commercial development above the garage would cover these contract payments. Financing of the private garage, in the same structure as the public parking but physically segregated from it, was secured by Comstock, the developer responsible for the 1.5 million ft2 mixed-use development known as Reston Station. This project will include retail space, a restaurant, luxury apartments, and offices. The private garage offers daily park- ing rates similar to those in the public garage but provides different packages for reserve spaces (Fairfax County, 2015). C h a p t e r 7 Institutional Capacity and Partnership

Institutional Capacity and partnership 45 7.1 Overcoming Development Complexity and Risk In many settings, extensive coordination between the transit agency, local government, devel- oper, and other public and private interests will be required to maximize development and value capture opportunities. Transit agencies are effectively completely committed at the outset of a transit infrastructure project. Developers, on the other hand, often invest in real estate near transit incrementally and over long periods of time. Developers constantly monitor the chang- ing market, economic, and financial conditions to evaluate and underwrite new investments. Reflective of this relatively high-risk enterprise, investors and developers demand steep dis- counts for underwriting uncertainty, risk, and complexity. Developers must be enticed to take a long-term view of value creation and management of the unusually complex risk associated with developments such as TOD. Partnerships between the transit agency, developers, and local government can be employed to reduce uncertainty and risk. The literature addressing integration of transit, land use planning, and value capture urges: • Early development of substantive dialogue between public entities and the public and private sectors (Vadali, 2014). This was confirmed through the Portland streetcar project as early engagement was seen as an important factor in that project’s success. • Development of coherent value creation and value capture strategies between partners shar- ing common goals requiring the exchange of information. • Overcoming silos of professional practice that limit the sharing of knowledge and overcoming differences in culture, perspective, and institutional norms. The complex and multiparty nature of TOD projects requires extensive engagement and partnership between various public and private stakeholders (Hale, 2008; Cervero et al., 2004). The interconnectedness and potential mutuality of interest between public and private inter- ests require partnerships that span planning, design, organizational, management, and financial considerations (Dittmar and Ohland, 2004). Figure 16. Institutional engagement and partnerships for transit-induced value creation and value capture. TD D T T T T Strategic Engagement Strategic Partnership Value Exchange Value Distribu on Transit Development Public Sector Private Sector TD Public- Sector Finance Private- Sector Finance

46 Guide to Value Capture Financing for public transportation projects 7.2 Fostering an Ethos of Cooperation Regardless of how enticing any particular project appears at the outset, many are subject to obstacles that cannot be controlled or overcome by the developer alone. Many factors that contribute to TOD success are under the purview of transit agencies and local governments. For example, the transit agency or local government may be in the best position to negotiate TOD- favorable terms and standards with fire marshals, transportation engineers, municipal planners, and zoning administrators. Articulating the value capture opportunity and solidifying public support are other important components benefitting from transit agency/local government cooperation. Local governments are rich in experience in engaging neighborhoods and communities and facilitating public meet- ings, outreach, and education. Public support for projects is necessary for many reasons, not the least of which is securing legislative, regulatory, and financial support from policy makers. The need for cooperative effort may be particularly great between local, regional, state, and even federal governments. 7.3 Institutional Capacity The major institutional barriers to TOD are regulatory ones, either a product of restrictive state statutes or self-imposed transit-agency rules. Some states limit, ipso facto, real-estate transactions undertaken by transit agencies to “transportation uses.” Many transit properties shy away from land development mat- ters on the grounds that it is not central to their mission of delivering safe and efficient transit services. As a result, most agencies have no personnel assigned to TOD or, more generally, land development, leaving it to their legal departments to handle land-use affairs and disputes (Cervero et al., 2004, p. 28). Another challenge in effecting successful value capture projects is the lack of institutional capacity to manage these efforts, especially on the part of the transit agency. Employing staff devoted to fostering value capture or developing real estate can only be justified by the largest transit agencies. Often these property management staff have other duties, including manag- ing non-transit assets, disposing of unused property, and leasing retail space in major stations. Smaller transit agencies are not engaged in building major new facilities on a frequent basis, so it is difficult to justify hiring specialized staffing for this function. The solution for many transit agencies is to engage consultants for specified tasks or projects. Even the Massachusetts Bay Area Transit Authority outsourced its real estate functions to a private firm (Moynihan et al., 2016). The FTA is helping to fund some of this consultant work through its Pilot Program for Transit-Oriented Development (TOD) Planning (FTA, 2014b).