It's time to cover the costs of transit investments by capturing the rising value of adjacent land.
With transit funding so hard to come by, some city agencies have turned to a concept called "value capture." The basic idea is that a city should reap some benefit from the fact that public transit investments often make adjacent land more valuable to private developers. Through various strategies — selling development rights in the area, for instance, or collecting new taxes on the land — the city can "capture" this new value and put it back into the transit system.
It's a feedback loop that looks a little like this:
Value capture is standard practice in Asia, but in the United States it's rare. Even when U.S. agencies do use the approach, they don't use it particularly well. The Metropolitan Transportation Authority in New York, which often sets the tone for transit practices around the country, recently missed three great opportunities to capture some value for the billions it's investing in subway expansions.
Take the first phase of the Second Avenue subway line in Manhattan. During a recent talk, former MTA chief Jay Walder said his old agency could have captured the "tremendous amount of value" that will occur along the multi-billion-dollar line to pay for subsequent phases of the expansion. Walder would know; he left New York to run the MTR Corporation in Hong Kong, whose methods of value capture have been a phenomenal success.
Here's what Walder told a Harvard audience in late September (via Dana Rubinstein of Capital):
Will it reshape ... the Upper East Side of Manhattan? Yes it will reshape the Upper East Side of Manhattan. But we don’t have any mechanism to capture that back. And so we're sitting here today, as we're making progress on the first phase of the Second Avenue Subway, wondering about how we fund the second phase and how we fund the third phase and how we keep this going.
In picking up that story, transit blogger Benjamin Kabak of 2nd Ave. Sagas pointed to another New York value capture oversight: the Fulton Street Transit Center. Though it won't open until next summer, the $1.4 billion center is reportedly driving up real estate values in Lower Manhattan. Kabak believes the MTA could have made a value capture killing by selling development rights above the station:
Imagine the revenue that could have been realized with a comprehensive plan to develop a Time Warner Center-like building with high-end retail on the lower levels and residential higher up atop a very popular subway station.
New York is trying to capture value created by the extension of the 7 line into the new Hudson Yards neighborhood. The city arranged is financing the project with a form of value capture called "tax increment financing." A TIF collects future tax revenue collected, based on expectations of rising property values, to pay for current development.
But things aren't quite going as planned. On his blog, Columbia University planning scholar David King notes that TIF revenue has fallen short of expectations. Meanwhile, the city has issued one developer a $328 million exemption to build a skyscraper in Hudson Yards. As King writes, subsidizing private development on a site where property value will rise is "exactly the opposite" of capturing that rising value for the public good.
So New York is no master of value capture just yet, but there's no reason it (or other U.S.) cities can't become one in time. "There are, in various places, barriers we put up to do that, but those barriers are movable and changeable in thinking about it," said Walder in his recent talk. If the first step toward new way of thinking is recognizing problems with the old way of thinking, at least we're making some progress.