Development-Oriented Transit

Occasionally, people faced with very high transit construction costs propose value capture, where some of the increase in land value coming from transit access is directed to the transit agency. Yonah Freemark has just brought up this issue again, in the context of Toronto’s failure to find private investors willing to put money for its extravagant suburban subways in exchange for greater land value.

Despite the list of examples of value capture used to fund transit, the idea remains a poor one. Jarrett Walker gives a list of consequences of value capture, one good (it ties transit success to density) and two bad (it is bad at serving existing density, and at social justice).

In New York, Second Avenue Subway and the 7 Extension are both very expensive, but the 7 Extension is getting funded by value capture whereas to construct Second Avenue Subway, backroom deals by Assembly Speaker Sheldon Silver were required. If anything, Jarrett’s first bad consequence is understated: politicians prioritize projects they can find private support for, especially reformists, and ignore transit lines that merely have very high ridership potential. At worst, it encourages collusion with developers and therefore corruption.

Jarrett misses one additional problem: nobody expects developers who build near highways to contribute to highway construction costs, and until they do, to tax developments near transit is to give developers an incentive to build near highways. Transit agencies should either reform themselves to become profitable or seek a reliable source of tax subsidy, but they should not tax people who do the right thing and build compact, transit-oriented development.

There’s a common misconception that in Japan and Hong Kong, both famous for the integration of rail construction and development, development is used to subsidize transit. Reality is the other way around: in most cases, Japanese private railroads use development to raise transit ridership, and although the real estate dealings are often higher-margin, the rail transportation is profitable by itself without exception. The Hong Kong MTR, too, is profitable on transportation alone, but keeps engaging in development to raise profit margins and provide patronage for the trains.

Many cities do in fact follow the model of Hong Kong and the private railroads of Japan, but entirely in the public sector. They upzone around transit stations, reduce or eliminate parking minimums, and restrain or avoid expanding auto capacity. This was done intensively in Calgary and Vancouver, which in recent years have been North America’s leaders in both efficient transit construction and transit modal share increase.

Note that this is still to a large extent development-oriented transit, and still creates problems with politicians who overfocus on greenfield TOD, but not to the same extent as value capture. Vancouver is seriously planning a rapid transit line to UBC, the main neglected urban line, just later than it should have. In contrast, New York is sidelining future phases of Second Avenue Sagas entirely; even PlaNYC only incorporates the first two of four phases, which are too far advanced to ignore.

Toronto could not follow the positive example of Vancouver and Calgary; there was too much NIMBYism along the routes proposed. This same problem also plagued the proposal for land value capture. The problem is that Toronto’s bad government is so suburban-focused it really believes in building transit to low-density suburban regions, and at the same time in enhancing auto accessibility (Mayor Rob Ford demagogued about a war on cars in his campaign).

In this sense, land value capture, and in general development-oriented transit, should be viewed as a failure of consensus for good transit, regardless of whether this consensus allows transit to be profitable or to be stably subsidized. At its best, for example in the Vancouver suburbs, development-oriented transit is a political price to be paid for suburban support for high-ridership urban lines. More commonly, as frequently happens with value capture, it sidelines the high-ridership lines completely. And at its worst, as is happening with the 7 extension, it’s a transfer of wealth from the public to private developers in the hopes of future tax revenues.

23 comments

  1. D

    Nice piece; note, however, that Vancouver does in fact have minimum parking requirements for nearly all uses (with the exception of some categories of heritage-conversion and affordable housing projects), even in the downtown core. For a city that aims to be the ‘greenest’ in the world, it still requires parking, even for new development immediately adjacent to the frequent transit network (<15min frequency). Vancouver has a great reputation and has laudable goals, but it is still woefully behind in some areas.

    • Alon Levy

      Sure – the description I gave of good practice is an amalgam of what Vancouver did and what Calgary did. It’s general enough that we could consider it best practice and treat Vancouver’s parking minimums as a deviation.

  2. Jim RePass

    Not all profit-making ideas are evil; some actually work, and are indeed win-win.

    TOD/Value Capture projects are necessary because America has a tax system that has cut revenues so drastically that infrastructure can not be built with tax money alone, even when social justice would dictate that. That was and is stupid, but there are ways to bring some otherwise elements of the social strata back to the table, until we reach the utopia that you are waiting to eventuate, unless we kick them in the teeth for being less pure than we are.

    Jim RePass

    • Alon Levy

      The 7 Extension is not win-win. It’s a win for Bloomberg, who gets a legacy, and for big developers, who’ll get Hudson Yards for much less than it’s worth (see Atlantic Yards). It’s a lose for the taxpayers, who have to foot the bill for such a low-value extension. It’s not about profits being evil; it’s about value capture and development-oriented transit being surefire ways to promote more corruption.

      • Alai

        I assume from what you write about the taxpayers footing the bill, that the developers are only paying for a small fraction of the project. If so, couldn’t you argue that the problem is insufficient value-capture?

        • Alon Levy

          Yeah, exactly. The issue is that governments routinely overestimate how much revenue those schemes will get, and by definition it’s the public sector rather than the private sector that’s on the hook for revenue shortfalls.

  3. Stephen Smith

    I always wondered if the value capture development model that private (/run-like-private) rail companies use isn’t just a way to compensate for the fact that they can’t raise fares. Charging a lot of money to users is really the best form of “value capture” when you think about it, and when you look at how much people pay in rent to live in cities like NYC, Hong Kong, and Tokyo, it’s easy to imagine fares being doubled without much effect at all on ridership (though of course, real estate prices would fall – something I view as a good thing). But as I understand it, even in Japan, intracity (I don’t know about intercity?) fares are regulated.

    • BruceMcF

      of course, fares can only capture from a fraction of the benefit ~ the portion that accrues to the passengers.

      in particular, the value that is harvested from the passengers as a consequence of the density of feet per square feet that become possible with space efficient transport is, intrinsically, not received by the passengers themselves, so cannot be captured from them via fares.

      • Alai

        I suppose you could argue that it would just be slightly more indirect– instead of the property owners paying fees/taxes, the passengers would pay directly– but then the property owners would have to raise salaries/lower prices to compensate. Thus, everyone would end up with roughly the same amount of money, but it would simply take a different route.

        I suppose the big difference would be that there would be a greater incentive for individuals to avoid traveling. Hard for me to say what the resulting society would look like.

  4. BruceMcF

    Jarrett misses one additional problem: nobody expects developers who build near highways to contribute to highway construction costs, and until they do, to tax developments near transit is to give developers an incentive to build near highways.

    Note that this does not apply to zoning easement incremental value capture, since the construction that is taxed for value capture is development that is not allowed merely as a consequence of having a freeway nearby.

    • Alon Levy

      Even then it applies; instead of thinking of overly restrictive zoning as the norm, think of the norm as zoning that already permits developers to build TOD. In that mindset, zoning easement incremental value capture says, “Okay, we’ll let you build at high density, but you have to give us kickbacks for transit.” It’s another tax on density.

      If that offends you too much, then think of it as analogous to an overzealous homeowners’ association in a place like Irvine, banning clotheslines and other forms of green behavior. If that HOA tells a resident that they can hang a clothesline but in return they have to kick back money and the HOA will give the money so collected in grants to alternative energy research, it’s still a tax on non-pollution.

      • BruceMcF

        It doesn’t offend me, its just that, empirically, overly restrictive zoning is the norm, so assuming otherwise is assuming a counterfactual.

        In order to get to a position where overly restrictive zoning is not the norm, we need to have vested interests in eliminating those restrictions. That means we need to grow a thriving TOD development economy in the context of our existing suburban landscapes. To do that, we need political wedges. If you’ve got a better suburban TOD development wedge than zoning easement taxable increment financing, I’m all ears.

        • Alon Levy

          On the contrary. A thriving TOD economy does not actually create the incentives, because it just encourages Atlantic Yards-style collusion. Zoning boards love making people ask for variances, because then they can extract pet civic improvements from the developers. In New York they’ve already used the possibility of zoning bonuses for good behavior (namely, affordable housing) as an excuse to downzone, so that to build at the same floor area ratio allowed before, developers need to do extra. You can and should expect the same of tax increment financing.

          Big developers in turn do not lose all that much from such a situation, because they’re politically connected; it’s only the schlub who wants to build a small 5-story building who’s stuck playing Mao. If you’re the type who can get Atlantic Yards for half the assessed value of the land, and then cry poverty and pay the city in installments over several years, then you don’t give a damn that the zoning is restrictive.

          The alternative is to do it the hard way and slowly focus on zoning reform. Bloomberg has actually done some good by upzoning near subway stations. It helps that although he’s connected to big developers, he represents a general booster ideology in which upzoning is good on principle. Another way is to try to work from the grassroots level and create local consensus for upzoning and higher density. In a reasonably pro-development city like New York, the community board is the main place to fight the battle; I think it’s Cap’n Transit who explained to me how exactly to persuade all the local stakeholders to accept some plan, and it’s annoying but possible.

      • Stephen Smith

        In New York they’ve already used the possibility of zoning bonuses for good behavior (namely, affordable housing) as an excuse to downzone…

        I made this argument once and linked to a post about a downzoning (or was it a non-upzoning?) in Chelsea where this rationale was explicitly given, but I’m always on the hunt for more examples – do you know of any other than the one I posted about?

      • BruceMcF

        I’m not talking about variances. An easement would be imposed from the state level, where the sovereign zoning power that is delegated to localities originally resides.

        • Alon Levy

          Getting the states to exercise more control over zoning is really hard – much harder than anything else proposed. Even if you can get the state government to care about cities more, which in many states is counterfactual, and to make it impossible for localities to compensate by downzoning in general, local NIMBYs love nothing more than to portray themselves as fighting the central government. It’s a fight that’s impossible to win.

          That’s why I’m talking up the strategy of building consensus within communities for upzoning. Although the nature of the game is such that authoritarians and powermongers are overrepresented on community boards, most members are just concerned citizens who want to make sure people listen to them, and activists and developers who make serious efforts to address their concerns can succeed. When the activists don’t care, it reinforces the system in which big developers get what they want and small developers get harassed; but when the activists can get positive things done to the zoning and parking requirements, it helps small developers compete.

          Local and state politicians, too, don’t actually get up every morning thinking, “How can I screw the city today?”. If the activists can credibly promise that there’s a popular community change and that the politician can get credit for pushing it through, the politician will push it through. The trick is always to make sure that all relevant parts of government are aligned in the same direction, and have a political interest in supporting your agenda.

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