Our country is facing a public transit crisis.  State and local governments would like to increase investment in public transit and build new transit systems to ease congestion and support transit-oriented development, which the Government Accountability Office (GAO) defines as “compact, mixed-use, walkable neighborhoods located near rail stations or other permanent transit facilities.”

In the meantime, existing public transit systems are struggling to keep running.  Around the nation, transit agencies are raising fares and cutting services, which further detracts from ridership and revenue.  Revenue from other traditional funding sources like sales taxes has also dropped off.

Yesterday, in response to this crisis, the GAO released a report yesterday (PDF)  on alternative strategies to fund public transit. More specifically, the report focuses on “value capture strategies,” which are designed to take advantage of the increase in property value — for both private and public property — around public transit to help fund further investment in public transit infrastructure.

WHAT ARE VALUE CAPTURE STRATEGIES?

Value capture strategies are administered at the state and local level, but the federal government influences the cost, design, and routing of transit systems, which determine the viability of value capture strategies.  And recent Federal Transit Administration (FTA) has aimed to make policies for transit-oriented development initiatives more flexible and change how projects are evaluated (for cost-effectiveness, economic development effects and other factors) for the FTA New Starts grant program for transit guideway infrastructure investments.

The GAO reviewed the following value-capture strategies:

1. Joint development: A transit agency partners with a private entity to create development at a transit station. This often generates revenue through the lease or sale of publicly owned land for transit-oriented development.
2. Special assessment districts:  Set a boundary within which taxes or fees are assessed on properties expected to increase in value because of their proximity to a new transit facility or transit amenity.
3. Tax increment financing:  Public sector agency issues a special bond to finance the transit infrastructure to support new development; the incremental increase in property value  is then taxed to fund repayment.
4. Development impact fees: One-time charges collected from developers to help pay for new or expanded infrastructure and services.

The GAO set out to answer the following questions:

To what extent do transit agencies and state and local governments use joint development and other value capture strategies to fund or finance transit?

What have selected stakeholders and literature identified as facilitators of, or hindrances to, the use of joint development and other value capture strategies to fund or finance transit?

What have stakeholders said about the effects of federal policies and programs on the use of joint development and other value capture strategies to fund or finance transit?

To answer these questions, the GAO analyzed data from 55 transit agencies in cities around the country; conducted interviews with federal, state, and local transit officials to find out about how federal policies influence value capture strategies; and analyzed relevant federal and state laws.

USE OF VALUE CAPTURE STRATEGIES LIMITED, BUT SOMETIMES CRUCIAL

Here are some main points from the report:

• Joint development is the most common value capture strategy for transit agencies. 32 of 55 reporting agencies reported joint development projects, and Washington, D.C., Atlanta, and Los Angeles had the most, by far. Agencies using joint development shared characteristics: most were older, larger fixed-guideway systems; had formal joint development or TOD policies; had in-house real estate expertise (real estate office and consultants); and had developable land holdings available for joint developments. Joint development projects are more common along fixed-guideways because they’re permanent and therefore more attractive to developers than bus stops, for instance.
• Joint development revenue is generally small relative to agencies’ annual operating costs. “For example, the three transit agencies with the most joint development experience — Los Angeles Metro, Washington Metro, and Metropolitan Atlanta Rapid Transit — generated between $184,000 and $8.8 million in revenue from their joint developments in the fiscal year 2008, while their operating expenses for fiscal year 2008 ranged from $374 million to $1.3 billion.” Agencies also prefer to lease land, rather than selling it, because it allows them to control land-use and provides a constant revenue stream.
• Other value capture strategies have not been widely used to fund or finance transit. Among the 55 reporting agencies, only 19 reported using special assessment districts, tax increment financing, and development impact fees.  Washington, D.C. used special assessment districts for two projects — the Dulles Corridor Metrorail Project and the New York Avenue Metro Station project. Still, revenue from these three value capture strategies has generated — or is projected to generate — between $20 million and $1.7 billion, or between 4 percent and 61 percent of total project costs for major transit infrastructure projects.
• Public-sector coordination and private-sector support can facilitate the implementation of transit projects using value capture strategies because these projects often need the involvement of various public entities with different authorities.
• Transit project location and design — including zoning and minimum parking requirements — influence how much value can be captured.  Projects can capture more value near many services and amenities such as schools, shops, and health services, and in denser urban areas; they capture less where incomes are lower and crime rates are higher. In addition, joint development projects need to happen in areas with high-density zoning around transit infrastructure, and lower minimum parking requirements.
• A weak economy weakens value capture funding projects.
• State laws sometimes help — but often hurt — value capture opportunities for transit funding. For instance, Arizona does not have a law allowing for the use of tax increment financing, and in some states revenue from special assessment districts or tax increment financing cannot be used to fund operations or maintenance.
• Stakeholders report that confusion over FTA’s joint development policy hinders joint development projects. Transit agencies have difficulty understanding what kinds of development are eligible for joint development projects under FTA regulations, and federal regulations — including a law requiring agencies to receive the highest property return value for the sale of a property through a competitive bidding process — can stall negotiations with developers and impede joint development projects. Agencies also cited regulations such as a requirement to maintain continuing control over property purchased with federal funds, and restrictions on the use of revenue from joint development projects, as burdensome and confusing.
• FTA policies also influence other value capture strategies: For instance,  agencies complained that in the past, the federal New Starts program has placed too much emphasis on cost-effectiveness of projects, rather than supporting projects that potentially promote economic development.
• Stakeholders see an expanded federal role in supporting value capture strategies through new and existing federal loan programs.

FINAL RECOMMENDATIONS

The GAO suggested that the FTA issue further guidance on federal joint development requirements to build awareness of and clarify the 1) types of developments and structures eligible under current law, and 2) clarify the requirements and conditions for parking replacements. Both recommendations for executive action — still in process — affect the Department of Transportation.