Panel 1: Emerging Ideas for Financing Equitable Transit-Oriented Development, Value Capture and New Partnerships
Dena Belzar (moderator); Scott Bernstein, Center for Neighborhood Technologies (CNT); Chris Leinberger, Locus: Responsible Real Estate Developers and Investors; Brian Prater, Low Income Investment Fund (LIIF); Marilee Utter, P3 West, LLC
First question for panelists: What are some of the key challenges and areas of opportunity regarding financing equitable TOD?
Marilee Utter: If you build rail in a suburban location you also have to create a place. In a strong market, developers working on 1 million square feet, at a cost of $200 million, will probably end up taking home $7 million to 8 million in profit. Value capture could hypothetically take $4 million. It wouldn’t cover rail but maybe a street car could work.
Brian Prater: We’re interested in equity, affordability, child and early care, and charter schools around TOD. Our question is how do we maximize services in a neighborhood but balance that with an economically feasible, pragmatic approach. The government can help with acquisition and pre-development financing.
Chris Leinberger: Of the four categories of transit corridors, the economic development and future growth categories show potential for value capture. The price of a square foot around the south capitol waterfront has gone from $7 to $712. These deals are more expensive and have more risk. Maybe the federal government can help with time tranching cash flow and a private sector tax-increment financing.
Scott Bernstein: If a household gets rid of a car, its disposable income will go up 15 percent. Transit seems to be mitigating foreclosures and bankruptcy. It also plays an unmonetized role in reducing greenhouse gas emissions. A 1 percent drop in vehicle miles traveled will equal a 4% drop in GHGs. Increases in the costs of fuel have caused companies to relocate. It can also help out with brownfields. Land swaps could allow for the expansion of efficient freight capacity along with increasing the size of middle-class neighborhoods.
Second question: What can be done with innovative partnerships?
Brian Prater: There are many challenges. We put together a pro-forma contract. When the deal closes, I get paid for having put all the myriad private and public pieces together. Securing land from the public agency is a big issue because they’re not clear on how best to do it. They have trouble operationalizing FTA rules.
Asian and foreign capital are becoming involved because they looking for things that get a bigger return than T Bills and are long-term. This helps them establish relationships over here, and something that’s green because it will hold its value. They’re also interested in education around TOD. They see our markets coming back in two years.
Chris Leinberger: Discounted cash flow is how banks make their investment decisions. TOD deals with projects that have 40-year time lines. They don’t fit accounting standards. The people making these longer-term investments are old families who are worried about investing for the next generation.
Scott Bernstein: The incentives built into accounting and the government around public private partnerships relies on public investment. These projects need long-term investments that can draw private capital.
Third question: Is Value Capture a solution in the short-term?
Chris Leinberger: The market will find out. Developers will pay if transit is worth it.
We need patient equity in TOD and land acquisition to help the developer ride out the downturn. It’s key because of the risk and complexity of the deals involved in TODs and walkable urbanism. It would help if federal credit enhancement could be brought to bear. Something like a National Infrastructure Bank could help with patient capital if it is set up to serve a market that’s not being served now. If it doesn’t just displace a program that already exists, it could be a big help. Someone has to prime the pump. If you make it someone’s fulltime job you will create a system that will deliver value.
Brian Pater: Low Income Investment Fund is doing this on a smaller scale. The risk capital upfront is a key issue.
TOD can be promoted by bringing down the rates for financing a project. We’re creating a fund of about $40 million to 60 million that can provide long-term loans. Support from broader range of funding partners can help to enhance and leverage these funds.
Scott Bernstein: Do debt for equity swaps systematically. The railroads are finding these partnerships and coming up with capital. Mortgage underwriting standards should take transportation costs into account. Also look to rediscover historic funding partnerships, for instance with the utilities. One hundred years ago 25 percent of all electricity went to transit and electric companies helped to finance transit. Transit doesn’t just increase property values it also increases sales tax revenue. That too could be an avenue for value capture.