Public Transportation: Federal Role in Value Capture Strategies for Transit Is Limited, but Additional Guidance Could Help Clarify Policies
Released: 2010-07-29T00:00:00

Letter

Background

Numerous local communities are seeking to expand housing opportunities and other amenities located near transit by promoting transit-oriented development—commonly defined as compact, mixed-use, walkable neighborhoods located near rail stations or other permanent transit facilities. Many transit agencies view such development as a way to accomplish multiple goals, including promoting transit-supportive land use near stations and increasing ridership. In addition, research generally shows that land and housing values tend to increase with proximity to a transit station. While the magnitude of these increases can vary, residents place a premium on living near public transportation, retail development, and other amenities such as parks and sidewalks commonly found in transit-oriented developments.

Both the private and public sector entities benefit financially from these increases in value; private parties through increased land values and rents and public-sector agencies through increased revenue from property or other taxes. For the purposes of this report, the term “value capture” generally refers to strategies that allow local governments or transit agencies to dedicate to transit either a portion of the increased tax revenue, or additional revenue through assessments or fees based on value expected to accrue as a result of public improvements or investments. While many of these strategies are used in the United States to fund or finance infrastructure improvements, such as water, sewer, and other utility systems, this report focuses on the use of these strategies specifically to fund or finance transit or transit-related facilities or improvements. The four strategies that are the focus of this report are as follows: Joint development is generally defined as a real estate development project that involves a cooperative arrangement between public and private sector partners, often as part of a transit-oriented development. Joint development arrangements can take a number of forms, including a lease of land, air rights, or space to a developer; sale of land for specific types of development; joint construction of a transit facility and private development; and others. Public and private partners can share costs, revenues, or financial risk depending on the particular arrangement. Any joint development using federal funds to make capital improvements must follow FTA’s joint development guidance and meet the statutory definition of an eligible capital project. See figure 1.

Special assessment districts designate a formal boundary in which taxes or fees are assessed on properties expected to see a projected benefit due to the geographic proximity of a new transit facility or other unique amenity. The revenue collected is then used to help pay for such facility or amenity. See figure 2.

Tax increment financing is a public financing technique used by local entities to encourage economic development. Typically, a public-sector agency issues a special bond to finance the infrastructure necessary to support new development and then uses the incremental increase in property value within a formally designated tax increment financing district to fund repayment of the bonds for the development-related costs, including the costs of transit infrastructure improvements. See figure 3.

Development impact fees are one-time charges collected by local governments from developers to help defray the cost of new or expanded infrastructure and services associated with new development, including capacity-increasing transit projects. See figure 4.

The use of value capture strategies may be authorized by the state, and can be limited or restricted by state governments. For instance, state legislatures generally provide the authority to public entities to establish special assessment districts or tax increment financing districts and to use the revenue generated from the districts for specific purposes. State and local governments also play a role in creating the environment needed to optimize the value created by transit projects or improvements. For example, local governments create the zoning environment, which may, for example, allow developers to build mixed-use developments at higher densities. The implementation of any of the above strategies requires coordination among a number of key public and private sector entities. Their principal roles are summarized as follows.

Local transit agencies, such as transit authorities or transit operators, are responsible for building, maintaining, and operating transit systems. These transit systems can include fixed-guideway transit systems—such as light or heavy rail, streetcars, ferry systems, and some bus rapid transit— and local bus service. Transit agencies may be direct recipients of federal transit funds, particularly in major urban areas.

State and local departments of transportation and metropolitan planning organizations develop transportation plans and improvement programs; build, maintain, and operate transportation infrastructure and services; and distribute federal funds to local entities for specific projects.

Local county and city governments are typically responsible for assessing and collecting property taxes, development impact fees, or special assessments. In addition, local governments, through agencies such as county or city planning departments or redevelopment agencies, have control over land use planning, which includes zoning and growth management policies.

Private developers decide on and create developments and build and manage housing units and commercial developments. In some cases, private developers enter into sale or lease agreements with transit agencies or other public-sector entities when undertaking joint developments.

Property owners, in addition to paying property taxes, sometimes agree to enter into formally established districts and pay assessments to local public-sector entities for the purpose of funding new transit projects, other infrastructure (e.g., sidewalks, utilities), or improvements to existing transit services.

In general, FTA plays no role in the direct implementation of most value capture strategies. However, transit agencies must follow a number of federal requirements if, for example, a joint development includes land that was purchased as part of a federally funded transit project or receives federal funds. In 2007, FTA issued guidance on joint development requirements that clarified the eligibility of joint development activities for federal capital funding. Transit agencies must receive FTA concurrence to sell or lease federally funded property for joint development purposes. To use program income or FTA grant funds for a joint development improvement, a local transit agency must demonstrate that the improvement provides economic and public transportation benefits, raises revenue for public transportation, and covers a reasonable share of costs (if applicable).

While FTA does not have formal policies or programs related to forms of value capture for transit other than joint development, FTA programs fund capital transit projects—a key step in creating a transit-oriented development and of creating value. FTA’s New Starts program—its major capital investment program for new, and extensions to, existing fixed- guideway transit systems—awards funds to individual projects through a competitive selection process, which applies ratings to potential projects based on local financial commitment and project justification criteria, including cost effectiveness, land use, operating efficiencies, environmental benefits, economic development effects, and mobility improvements. FTA also provides funding to state and local governments, and metropolitan planning organizations through a num of other programs, that may be used for transit, including: Transit Capital Assistance (Recovery Act) the Congestion Mitigation and Air Quality Improvement Program Transportation Investment Generating Economic Recovery Discretionary Transit Formula and Discretionary Programs In addition, the federal government also currently has two programs designed to offer credit assistance to states for surface transportation projects. The Transportation Equity Act for the 21st Century established the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA), which authorized DOT, who later delegated this authority to the Federal Highway Administration (FHWA), to provide credit assistance, in the form of direct loans, loan guarantees, and standby lines of credit, for projects of national significance. A similar program, the Railroad Rehabilitation and Improvement Financing (RRIF) program, offers loans to acquire, improve, develop, or rehabilitate intermodal or rail equipment or facilities.

DOT has recently begun to emphasize livable communities. For example, DOT has refocused the goals of some existing programs and entered into the Sustainable Communities Partnership with the Department of Housing and Urban Development and the Environmental Protection Agency. This partnership is intended to help American families gain better access to affordable housing, more transportation options, and lower transportation costs by coordinating and leveraging federal programs. FTA also introduced funding opportunities for fiscal year 2010 for urban circulator and bus-related livability projects that promote livability, sustainability, economic development, and the leveraging of public and private investments. In addition, FTA grant program funds can promote livability by funding eligible expenses, such as joint developments, bicycle and pedestrian access, and other amenities near transit stations.

Use of Joint Development and Other Value Capture Strategies Has Been Limited but Is Sometimes Critical in Funding and Financing Transit

The Few Transit Agencies with Extensive Joint Development Experience Have Common Characteristics

According to data collected from 55 transit agencies, experience with joint development varies widely, both in quantity and type. More than half of the transit agencies we collected data from (32 of 55) have used joint development, while one-fifth (11 of 55) have used joint development extensively (6 or more joint developments). Moreover, the 11 agencies with extensive joint development experience were responsible for 115 of the 166 reported developments, and just 3 agencies (Los Angeles Metro, Washington Metro, and Metropolitan Atlanta Rapid Transit) were responsible for 58 of the 166 reported developments. These developments varied greatly in size and type. For example, while joint developments are often small and on a single parcel of land near a transit station, a few transit agencies have completed neighborhood-scale transit-oriented joint developments. For instance, Atlanta’s Lindbergh City Center will eventually encompass 47 acres of mixed-use development near a Metropolitan Atlanta Rapid Transit station. Joint developments also varied in the types of uses; while many joint developments include housing, offices, and retail space, they sometimes include hotels, youth services, clinics, or other civic uses.

We found that transit agencies that have used joint development extensively typically share certain characteristics. Specifically, these transit agencies generally operate older, larger fixed-guideway systems; have formal joint development or transit-oriented development policies; have in-house real estate expertise; and have developable land holdings on which to build joint developments.

According to state and local transit officials we spoke with, the permanency of stations along fixed-guideway systems makes station areas on these systems more attractive for joint development than station areas along bus lines or other non-fixed-guideway systems. Although joint development is more often undertaken on fixed-guideway systems, King County Metro in Seattle has implemented a number of joint developments at permanent intermodal transit centers and park-and-ride lots along its bus routes.

Most transit agencies with extensive joint development experience also have formal joint development or transit-oriented development policies and in-house real estate expertise. State and local transit officials we spoke with told us that formal policies allow transit agencies to prioritize joint developments and align them with broader agency and community goals. Based on our review of transit agencies’ joint development policies, we found that these policies often have common goals, which include increasing transit ridership; reducing automobile dependency; generating revenue to support transit operations; and partnering with local communities to achieve intensive, high-quality development near transit stations.

In addition, state and local transit officials we spoke with emphasized the importance of having an in-house real estate office, along with outside consultants, dedicated to managing their agency’s real estate assets, including its joint developments. For instance, Maryland Department of Transportation (MDOT) officials told us the department’s Office of Real Estate has a $3 million bi-annual budget and several in-house staff dedicated to transit-oriented development. The officials further estimated that the Office of Real Estate spends about $300,000 a year on outside real estate consultants to assist its in-house staff in managing MDOT-owned property. According to MDOT officials, transit-oriented joint development is unlikely to take place unless state and local transit agencies have an office dedicated to managing agency-owned properties in ways that promote transit-oriented development.

Also, transit agencies with extensive joint development experience are also likely to have developable land holdings on which to build joint developments and transit-oriented developments. Many state and local transit officials we spoke with told us their agency made land available for joint development by converting expansive, underutilized surface park- and-ride lots at their stations into transit-oriented developments with structured parking garages. Several of these transit agencies have also constructed a number of joint developments on land holdings they originally acquired for construction staging purposes during their system’s initial construction and subsequent expansions.

Joint Development Revenue Is Generally Small Relative to a Transit Agency’s Annual Operating Expenses

Although several transit agencies have generated millions of dollars in annual revenue from joint development, this annual revenue is generally small when compared with an agency’s annual operating expenses. 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 fiscal year 2008, while their total operating expenses for fiscal year 2008 ranged from $374 million to $1.3 billion. Specifically, each agency’s fiscal year 2008 annual joint development revenue—when compared with the agency’s total annual operating expenses—amounts to no more than 1 percent. See table 1.

State and local transit officials we spoke with told us that joint development revenue goes into either a set-aside joint development fund or the agency’s general fund. Whereas general fund revenue is used by transit agencies for operations and maintenance as well as capital projects—including joint developments—set-aside funds target funds for specific purposes. For example, Santa Clara Valley Transportation Authority officials told us that revenue from the agency’s joint developments is placed in a set-aside fund, rather than its general fund, and used to fund the continued operation and development of the agency. Moreover, revenue from one phase of a joint development can also be used to fund a later phase of the same development. For example, MDOT transferred approximately 10.2 acres of state-owned land adjacent to one of its commuter rail stations to a developer for a transit-oriented development at the station. The developer considered this land contribution (valued at $3.3 million) a credit toward the construction of a commuter garage on the transit-oriented development site.

A majority of transit agency officials we spoke with told us that, for a variety of reasons, they prefer to lease agency-owned land rather than selling it when entering into joint development agreements. Agencies often favor leasing because it allows them to maintain direct control over land use and receive an ongoing revenue stream. For instance, Los Angeles Metro officials told us that leasing land generates significant revenue for the transit agency, and allows the agency to require “attractive” developments and hold developers accountable if they walk away from a failed development. But several transit agencies told us that, in some cases, selling land makes sense. For example, Washington Metro officials told us that although the transit agency’s board members prefer to lease agency-owned parcels, the agency may sell the parcel if it needs upfront money to build a parking structure on the development site. Furthermore, if a planned joint development includes for-sale condominiums, Washington Metro officials stated they may sell the parcel rather than lease it because the agency does not have the authority to own land where condominiums are sold.

Other Value Capture Strategies Have Not Been Widely Used to Fund or Finance Transit

According to transit agencies that we collected data from and relevant literature that we reviewed, special assessments, tax increment financing, and development impact fees (other value capture strategies) have not been widely used as a source of funding for transit. Nineteen of the 55 transit agencies that we collected data from reported that one or more of these strategies was used to fund transit projects on their system. Five of the 55 reported that at least two of the three other value capture strategies had been used to fund transit projects on their system. These transit agencies reported that special assessment districts had been used in 17 instances, tax increment financing in 13 instances, and development impact fees in 22 instances. See table 2.

In addition, according to literature on value capture strategies that we reviewed, public entities more often use special assessment districts, tax increment financing, and development impact fees to fund public infrastructure improvements—such as water and sewer systems, roads, schools, or parks—than they do to fund transit or transit-related projects. However, state and local transit officials we spoke with told us about several major transit infrastructure projects funded by one or more other value capture strategies. For example: Local governments in the Washington, D.C., region have generated revenue for two major projects on Washington Metro’s system through special assessment districts: the Dulles Corridor Metrorail Project, which is extending the Washington Metro system 23 miles, including a station at Dulles International Airport, and the New York Avenue Metro Station project, which is the agency’s first infill station built without discontinuing passenger service.

The cities of Seattle and Portland have constructed several new streetcar lines using value capture strategies. Seattle’s South Lake Union streetcar capital costs were funded in part through a special assessment district, and Portland has funded portions of its 4-mile streetcar line using special assessment districts and tax increment financing.

Sacramento County is planning to dedicate a portion of a development impact fee to fund three proposed bus rapid transit lines in the county.

The Transbay Joint Powers Authority (TJPA) in San Francisco is using tax increment financing revenue to fund repayment of a TIFIA loan it received for the construction of a planned new multimodal transit center in the city’s downtown.

The city of Atlanta established a tax increment financing district to pay for a majority of the costs associated with the proposed Atlanta Beltline project, a 22-mile transit loop that will run along existing underused rail corridors.

In addition, transit agency and local government officials we spoke with informed us that other value capture strategies are being used to fund basic infrastructure and streetscape and station improvements at several transit-oriented developments. Several of these transit-oriented developments also include a parcel (or parcels) that is being jointly developed by a transit agency and a private sector partner: Contra Costa County, California, is using combined revenue from special assessments and tax increment financing to construct a variety of public infrastructure improvements at the Pleasant Hill transit-oriented development. These improvements include backbone infrastructure, such as roads and drainage systems; place-making infrastructure, such as parks and plazas; and a new structured parking garage to replace the station’s existing surface parking lot.

The city of Dallas, Texas, has recently established a transit-oriented development tax increment financing district that includes seven station areas along Dallas Area Rapid Transit’s light rail system. According to Dallas Area Rapid Transit officials, funds generated by this tax increment financing district can be used to help pay for basic infrastructure improvements—such as streets, water and sewer systems, and a portion of structured parking garages—at the transit-oriented developments.

In Baltimore County, Maryland, locally administered tax increment financing revenue will be used to pay for two state-owned structured parking garages at the planned Owings Mills transit-oriented development. MDOT officials told us that a special assessment district will also be established to help fund operation and maintenance of the state-owned structured parking garages, roads, and other on-site improvements. In addition, revenue generated through the special assessment district may be used to help pay bond debt if the tax increment financing district is unable to generate sufficient revenue to cover debt service payments.

Revenue Generated by Other Value Capture Strategies Has Varied, and in Some Cases Has Been Critical to Projects’ Feasibility

Based on our review of financial data for several major transit infrastructure projects and transit-oriented developments that have been (or are being) funded in part by other value capture strategies, these strategies have generated—or are projected to generate—between $20 million and $1.7 billion—or between 4 percent and 61 percent of the total project costs—for nine major transit infrastructure projects; and between $14 million and $750 million for the construction of parking garages, parks, and other place-making and basic infrastructure at five transit-oriented developments.

Tables 3 and 4 provide additional information about these projects and developments, including their status and the types of value capture strategies used.

Although revenue generated from other value capture strategies varies— and typically represents one of multiple sources used to fund a transit project or the infrastructure supporting a transit-oriented development— this revenue can be critical to the financial feasibility of these projects and developments. Several state and local transit officials we spoke with told us that the use of one or more other value capture strategies was critical to the feasibility of their project or development, typically because it filled a funding gap. For instance: Washington Metro officials told us that the New York Avenue Metro station project would not have happened without nearby property owners’ financial support through a special assessment district. According to a key private sector partner for the project, the local government’s financial situation at the time prevented it from funding the entire nonfederal share of the station’s construction costs. As a result, nearby property owners voluntarily agreed to provide the remaining $25 million needed for the station’s construction through a special assessment district.

Seattle Department of Transportation officials explained that a special assessment district was critical to funding the city’s South Lake Union streetcar line because the city of Seattle does not have a stream of money dedicated to large capital transit projects.

Local transit officials in Portland explained that special assessment districts and tax increment financing have played a major role in funding the city’s streetcar system because, unlike many other cities, Portland does not have a sales tax dedicated to transit. An official from one local government also noted that Portland’s lack of a sales tax may explain why residents are more supportive of tax increment financing than residents of other cities.

MDOT officials told us that tax increment financing is being used to pay for the construction of structured parking garages at several new transit- oriented developments throughout the state. According to MDOT officials, finding a way to pay for the construction of structured parking garages represents the biggest hurdle for all jurisdictions undertaking transit- oriented developments.

Several Factors Can Facilitate or Hinder the Use of Joint Development and Other Value Capture Strategies to Fund or Finance Transit

Public-Sector Coordination and Private-Sector Support Can Facilitate Implementation of Transit Projects Using Value Capture Strategies

Coordination among public-sector entities can facilitate the implementation of projects using value capture strategies because such projects generally require the involvement of multiple public entities with different authorities. Specifically, transit agencies are responsible for building, maintaining, and operating transit, but need to coordinate with local and state governments that generally have authority over taxation, land use, and development. For instance, when tax increment financing is involved, transit agencies—which generally do not have taxing authority— often have to coordinate with local taxing authorities to help establish a tax increment financing district and dedicate a portion of the tax increment toward a transit project. In addition, because high-density zoning around transit stations helps optimize the value available for capture, transit agencies often work with local zoning authorities to modify zoning regulations to allow for higher-density development. Zoning regulations may also need to be modified to allow for mixed-use development, particularly in joint developments.

Some transit agency officials told us that they have successfully coordinated with local governments when using value capture strategies, while others have faced challenges. For example, officials told us that transit projects have been successful because of effective coordination with local governments to rezone areas surrounding the transit project to allow for more dense development, while effective coordination with redevelopment agencies helped dedicate some of the tax increment collected from the urban renewal area to transit projects and transit- oriented developments. Moreover, some transit agencies in California have created joint powers authorities—partnerships with local jurisdictions, which allow multiple public entities to operate collectively. Through such authorities, officials told us that the partners can collaborate to establish common goals and ensure that the design for the transit project is integrated with the surrounding development. Conversely, officials from other transit agencies said it was challenging to convince local governments to allow for higher-density development near transit and they are working to improve their relationships with local governments. An official from one transit agency that operates a transit system through a large metropolitan area told us the agency has not yet been able to capitalize on some joint development opportunities because of disagreements between the transit agency and some local governments about the level of density a new development should have.

Transit agency and local government officials told us that support from private developers advances the implementation of projects that incorporate the use of value capture strategies. For instance, private or nonprofit developers or other public sector partners must have an interest in partnering with a transit agency to develop the area around a transit station for joint developments to occur. Several officials from transit agencies and local governments that we spoke with emphasized that the support of private developers, typically financial support, was critical to implementing their projects or developments. For example, officials from a few transit agencies said that the upfront funds provided by the private developer for one of its joint developments helped fund the transit infrastructure, including the parking structure and other transit station improvements. Another official from a different transit agency said that in-kind land contributions (paid in lieu of a monetary development impact fee) will be critical to implementing a planned transit project. Furthermore, an official from one county government noted that substantial interest from developers has allowed the county to be more selective about which transit projects it undertakes because it can focus on projects with the highest priority and revenue generation potential. Some officials stressed that the private developer’s long-term support was critical to the success of their joint developments because publicly funded infrastructure projects may take longer than a typical developer is accustomed to.

According to several transit agency and local government officials, the support of private property owners in the vicinity of their transit project was critical to the establishment of a special assessment district, which in turn was critical to the financial feasibility of the project. In one instance, the special assessment district—which was established while the transit project was still in the planning stage—could have dissolved at two points because of delays in acquiring other funding. However, the property owners petitioned to maintain the district and the fees. Without this support, a sizeable funding source for the project would have been eliminated. Another local agency official told us that the support of one property owner, who was a majority owner in a proposed special assessment district, was critical to bringing a project to fruition. In contrast, officials from another transit agency told us that opposition from property owners surrounding a planned transit station prevented the establishment of a special assessment district. The transit agency then had to downsize the project because the available funding was less than anticipated.

Transit Project Location and Design Influence How Much Value Can Be Captured

Transit project location and design—including zoning and parking requirements—affect the feasibility of using value capture strategies and the amount of revenue that can be generated. Based on our review of literature and the views of transit officials, we found that some metropolitan areas—and locations within these areas—have the potential to raise more revenue than others through value capture strategies. For example, officials from one transit agency told us their agency cannot generate as much revenue from its joint developments as other metropolitan areas in the country, such as the Washington D.C., metropolitan area or San Francisco, California, because ridership and density are not comparable. Furthermore, an individual with expertise on value capture strategies told us that land in locations that are deemed regionally significant—areas that are important to a region’s economy, and include employment, commercial, and residential areas—as opposed to locations that are mostly residential in nature, can generate more value, or revenue, through new transit infrastructure or improvements to existing transit service. Also, as previously discussed, the extent to which land and housing values increase depends on several project characteristics. The quality of transit service and the project’s proximity to neighborhood amenities, such as retail services, parks, and schools can generate larger increases while lower relative incomes and higher crime rates have been found to negatively affect the increase in property values. One transit agency official added that a good transit system with a lifestyle level of service—beyond simple commuting—is essential for successful use of value capture strategies and transit-oriented development.

In addition, several officials, as well as an individual with expertise in the area of value capture strategies that we spoke with stated that for value capture strategies to be useful, it is critical that the project be designed with land use zoning that allows for high-density development. High- density zoning is needed around transit infrastructure because it encourages private development—particularly joint development—by increasing the project’s revenue potential, which in turn helps optimize the value available for capture by the public sector. On the other hand, the need to replace parking in joint developments can limit the benefits of using joint development. Commonly, joint developments involve replacing surface parking with structured parking on a portion of the former surface lot to allow space for new development. Several officials and experts that we spoke with acknowledged a need to replace at least a portion of the existing parking spaces, but emphasized that the construction of structured parking—needed to maintain parking capacity and to free up space on the parcel for new development—can limit the amount of value that can be captured because such construction can substantially increase a project’s cost, thereby reducing the revenue raised through the use of the value capture strategy.

Unfavorable Economic Conditions Can Hinder the Use of Joint Development and Other Value Capture Strategies

Unfavorable economic conditions can hinder the implementation of transit projects that incorporate the use of value capture strategies, as well as the ability of value capture strategies to raise revenue. Most transit agency, state and local government, and FTA officials that we spoke with told us that the current economic downturn has negatively affected the use of value capture strategies to fund transit. For instance: Several joint developments have been recently stalled or terminated because of the current weak economy. For example, an official from one transit agency told us that one joint development project is on hold until the developer can obtain financing for construction of the development. In addition, this agency has identified other parcels that it would like to use in joint developments, but the head of the agency’s economic development department said the agency is currently waiting until the economy improves before issuing requests for proposals for projects.

The use of tax increment financing is hindered by difficulty in selling bonds on the market at a favorable interest rate due to a weak local economy. Specifically, officials from several governments told us their transit projects are (or were) delayed or postponed until the agency is able to issue bonds at a favorable interest rate.

Revenue raised through development impact fees is directly dependent on new development projects. Because new development generally slows down during a weak economy, development impact fees may yield little or no revenue. For example, officials from one county government told us their timetable for collecting the total revenue needed to fund their transit project will likely be longer than originally expected because of the weak economy and lack of new development.

Special assessment districts are more difficult to establish, and the assessments are more difficult to collect during a weak economy. Property owners in the vicinity of transit may be less likely to voluntarily contribute fees toward a project if they see a decline in their property value. On the other hand, another official told us that the strong economic conditions that preceded the current downturn helped facilitate implementation of a project that was funded in part by a special assessment district.

State Laws Can Authorize but May Also Limit Use of Value Capture Strategies

Some state laws specifically authorize the use of value capture strategies for transit purposes. For example, a California law passed in 1968 specifically allows the board of directors of any rapid transit district to establish special assessment districts for the purpose of raising revenue for transit. In Maryland, legislation passed in 2009 allows revenue generated from special assessment districts to fund infrastructure improvements, and related operations and maintenance, located in or supporting a transit-oriented development. By contrast, some states do not have laws authorizing the use of certain value capture strategies, which effectively precludes their use of these strategies. For example, Arizona does not have a law authorizing the use of tax increment financing.

Furthermore, in some states, revenue generated through special assessment districts or tax increment financing districts cannot be used for funding operations and maintenance of the transit system. For example, in California, a state statute permits the Southern California Rapid Transit District to establish a special assessment for financing a rail transit station or related facility. However, the statute specifically limits the revenue generated from that assessment to the financing of the facility for which it was levied—the revenue cannot be used for any other purpose, including transit, transportation, or operating expenses. Additionally, in Maryland, state statutes authorize the use of tax increment financing for development projects, including transit-oriented developments, but do not allow revenue from bond proceeds to be used to operate and maintain projects.

Some officials we spoke with also reported that state laws have sometimes indirectly hindered the use of value capture strategies. Some states limit the amount of revenue that can be raised or the locations from which it can be raised. For example, California’s Proposition 13, which amended the Constitution of California, caps local property tax increases by limiting the annual real estate tax to 1 percent of a parcel of property’s assessed value (which can only be increased by 2 percent annually absent a change in ownership). An official in California told us that this cap can limit the amount of revenue that can be raised through tax increment financing until or unless a property changes ownership. Also, in both California and Oregon, tax increment financing can be used only in areas that are “blighted” and are designated as redevelopment or urban renewal areas, respectively. Moreover, in Oregon, the amount of land that can be established as an urban renewal area is capped by state law—as little as 15 percent of the total land area or 15 percent of the total assessed property value for municipalities with a population over 50,000 and 25 percent of each for municipalities with a population under 50,000.

Stakeholders Report That Uncertainty over FTA Policy Can Hinder the Use of Joint Development

Transit Agencies Say FTA’s Joint Development Policy Is Confusing and Impedes Joint Development

A number of transit agency officials told us that following FTA’s joint development guidance and requirements is confusing, burdensome, and time consuming, which can impede the transit agency’s use of joint development. These agencies are required to follow the FTA guidance when joint development revenue is collected using land purchased as part of a federally funded transit project, or improvements are being built as part of the development using federal funds. Transit agency or local government officials identified specific FTA joint development guidelines they find confusing or burdensome. For example: These officials have had difficulty understanding FTA guidance on which types of developments are eligible to become joint developments and which types of structures can be constructed using federal transit funds. Some officials told us that, in their view, confusion partially exists because the flexibility provided by FTA’s joint development guidance does not necessarily seem consistent with federal statutes cited in the guidance. Specifically, these officials told us that the flexibility in FTA’s joint development guidance that allows for ancillary development to support the overall vision of a transit project is not consistent with the law that prohibits the use of federal transit funds for private use or benefit. Both transit agency officials and FTA regional officials told us that as a result of confusion over eligibility of certain uses and developments, increased interaction between FTA officials and transit agency officials is often necessary, which lengthens the approval process. These officials told us that the guidance seeks to allow the maximum flexibility under the law, and they are working internally to clarify which uses are eligible and whether statutory changes are necessary for certain developments to be eligible. FTA regional officials noted that interaction between FTA and transit agencies earlier in negotiations could help ease the joint development approval process. Sometimes transit agencies first contact FTA about a potential joint development when negotiations between the transit agency and the private developer are already too far along to allow changes to the design without significantly disrupting or delaying the development’s implementation. In 2007, FTA helped clarify certain uses that are eligible by eliminating a requirement for transit agencies to find the “highest and best transit use” for a joint development—a requirement that transit agencies told us was challenging for transit agencies because appraisers could not properly define projects in these terms.

These officials are unclear to what extent FTA requires parking replacement in joint developments, particularly when they plan to convert existing surface park-and-ride lots into transit-oriented developments. FTA’s joint development guidance does not provide examples of shared parking, but does address parking replacement. In response to a concern raised by a commenter, FTA stated that “FTA does not require [transit agencies] to replace parking spaces on a one-to-one basis if those spaces are used for joint development purposes and using them for such purposes will not decrease public transportation trips to and from the station.” In addition, FTA officials told us that shared parking arrangements are allowed with complementary uses such as theaters, so long as there is an agreement in place that spaces will be available primarily for transit purposes—which typically involves transit riders using park and ride lots between mornings and afternoons, Monday through Friday. However, several local government officials told us that FTA required that the agency replace all existing parking spaces, and did not allow shared use even though arranging a shared parking agreement with the new development, or reducing the total number of spaces, was preferable to replacing all existing surface parking with parking garages at great cost. Another agency interested in constructing a joint development on an underutilized surface park-and-ride lot told us the joint development guidance is unclear as to whether FTA would allow the agency to replace all the current parking spaces or whether FTA would ask for the agency to return the funds invested by FTA to purchase the land for the park-and- ride lot because the parking spaces were not used to support transit—the original intent of the FTA investment.

Transit agency officials told us that federal laws require they receive highest possible return value for the sale of property through a competitive bidding process and these requirements can be burdensome in certain circumstances. FTA requires transit agencies to receive the highest possible return from the sale of property purchased using federal grant funds. Transit agency officials told us this requirement can stall negotiations with developers and limit flexibility, which transit agencies need to create incentives for investment in transit-oriented joint developments because these developments can be more expensive to build than traditional developments. One agency cited competitive bidding requirements as an obstacle to a proposed joint development in which the developer plans to develop transit-agency-owned-land as part of a larger adjacent development—an arrangement that would give this developer a competitive advantage. Transit agency officials told us that in this case, when the outcome is likely predetermined, the requirement could add time and cost to the efforts of both the public and the private sector. FTA officials highlighted that there are established procedures to potentially grant a waiver from this requirement. In addition, such requirements promote full and open competition.

One transit agency official told us that federal requirements to maintain continuing control over property purchased with federal funds can be confusing and burdensome. Specifically, if a property purchased with federal transit funds is sold for joint development, FTA requires that the grant recipient maintain effective continuing control of the use of the project property. The transit agency official told us that although the joint development guidance describes several methods of maintaining effective continuing control, FTA regional officials require a deed restriction—and monitoring of the property indefinitely to ensure the land is being used as specified in the deed restriction is a long-term burden for the agency and an impediment to creating a transit-oriented development . FTA officials told us these requirements reflect governmentwide procurement or excess land disposal requirements, and FTA regional officials said they do their best to help transit agencies solve these types issues within the law.

Transit agency officials noted that federal restrictions on the use of revenues generated by joint developments can be a hindrance for transi agencies. Per statute, the proceeds of a sale or lease of land purchase d with federal dollars must go back to FTA or be applied toward other eligible capital transit projects. Some transit agency officials stated tha FTA’s requirement to use joint development revenue for capital transit purposes precludes the use of these funds for operations or maintenance, or to acquire land for future transit-oriented joint development. F stated, however, that transit agencies are permitted to use joint TA has development revenues for these purposes in certain circumstances. A one agency, officials told us they would like to see their agency’s joint development revenue (for projects with a federal interest) go into a transit-oriented development fund. In this official’s view, FTA’s requirements prioritize earning revenue from joint developmen than as a catalyst for transit-oriented development and livable communities.

While FTA guidance is confusing or burdensome to many transit agen officials, a few others with extensive joint development told us their experience using the guidance has helped clarify the process and lessen the burden. Officials from one transit agency told us that although the requirements are initially confusing, they have learned through experience t to anticipate and work through significant issues. According to officials a these agencies, joint development guidance issued by FTA in 2007 is an improvement over past versions, and FTA regional officials have been helpful in clarifying FTA’s requirements. However, according to some o these officials, additional clarification and guidance on which typ developments and structures are eligible for joint development, particularly given recent policy changes due to DOT’s livability in could help ea developers. se the process and potentially entice more private FTA officials told us they are aware of ongoing confusion, and noted that additional issues have arisen because of recent policy changes due to the current administration’s livability initiative. These officials also told us that a task force is clarifying activities that are eligible for support through the provisions and applications of FTA’s joint development requirements, including whether transit funds can be used to purchase land and how to dispose of land or release it to other government entities, such as housing authorities or regional governments. In addition, FTA’s 2007 joint development guidance indicates that FTA intends to consolidate guidance on the eligibility of joint development improvements currently appended to three circulars (guidance for new Major Capital Investments, Grants Management, and Formula Capital Grants), as a stand-alone FTA Circula r titled The Eligibility of Joint Development Improvements under Federal Transit Law. As of July 2010 this Circular has not been issued.

FTA Is Not Directly Involved in the Use of Other Value Capture but Some Strategies, Federal Programs Can Affect the Use of These Strategies

According to FTA officials, FTA has no authority on the use of other valu capture strategies because they are administered by local governments. FTA’s role is primarily to provide the federal share of capital constructio and land acquisition costs when a local share is funded through a value capture strategy. FTA officials told us that i value capture strategy as a source of local funding for a transit project, t they evaluate the viability of the revenue source and the likelihood tha revenue projections will be met in the future the same as they would for any other proposed local funding source. f a transit agency proposes a However, transit agency officials told us that past New Starts project selection criteria and program requirements limited the competitiveness of some transit projects that promote economic development—an important element to the successful use of value capture strategies. For example: Several transit agency officials told us that the New Starts program’s past s emphasis on cost effectiveness favored less expensive routes over route that better incentivize economic development. For example, the cost- effectiveness criterion favors travel time savings, which puts streetcar o light rail projects at a disadvantage because they are often designed frequent stops to promote economic development and create value for property owners. Furthermore, features of a transit-oriented development such as parks, bike access, and pedestrian amenities add costs and potentially make them less competitive. Several officials representing potential project sponsors with a planned contribution fr value capture strategy, told us their projects will not be competitive for New Starts funding because frequently stopping trains, designed to generate economic development, do not necessarily generate the travel time savings needed to meet federal cost-effectiveness requirements.

Similarly, transit officials told us that the New Starts cost-effectiven criterion limits the potential for joint development by deterring land acquisition near transit stations because costs for extra land purchases potentially reduce the cost effectiveness and competitiveness of a potential New S tarts project. According to several transit agency officials, this requirement in effect allows transit agencies to acquire land to attract riders through surface parking lots, but not through transit-oriented joint developments.

Other New Starts program requirements can also limit transit agencies’ us of joint development and other value capture strategies.

Some transit agency and local government officials told us that ridership forecasting models generally used to determine cost-effectiveness for New Starts projects limit longer-term transit-oriented development opportunities by creating unrealistic requirements for parking spaces stations. For instance, officials at one transit agency told us the results of their forecasting models require that they purchase land to construct park and-ride lots near six proposed stations, even though they expect to attract riders through high-density transit-oriented developments arou nd the transit stations once construction of the transit system is completed. However, according to these officials, the New Starts process does not effectively take into account the effects of future high-density transi oriented developments (which are in-line with FTA’s livability goals) on parking when seeking funds for transit capital projects. In effect, the need to purchase land for the park-and-ride lots significantly increases a project’s cost, which reduces the project’s cost-effectiveness. Moreover, the transit agency pursues transit-oriented joint development in the future parking replacement requirements—in this case imposed by other local governments—could create a challenge to constructing transit-oriented joint developments on the sites of the parking lots built for the new lin e. FTA officials explained that FTA does not have parking requirements in the New Start program and that project sponsors assume a number of parking spaces in their ridership models based on the design of their proposed project. FTA requires that the ridership estimates for the project be consistent with the number of parking spaces the project sp intends to build. However, without accounting for future high-density development around the station in the forecasting model—which a transit agency cannot do until these effects are taken into account in metropolitan planning organization travel forecasts—the results of the onsor model would likely include a ridership level that does not generate enough benefits to make the proposed system competitive in the New Starts grant evaluation process.

According to officials at a few transit agencies and local govern length of the New Starts grant approval process can erode the effectiveness of value capture strategies. For example, one local government official told us that during the multiyear review of a proposed New Starts project, construction costs for the project more than doubled, while the contribution from a special assessment district remained fixe through an agreement with affected property owners. As a result , the proportion of the local share of the project paid for using special assessment district revenue was significantly lower than anticipated, forcing the local government to draw from other local revenue source complete funding for the project. In addition, another transit agency official noted that private developers often work with narrow timelines an effort to open the development during favorable market condition Developers calculate the feasibility of a development over about 12 months, whereas transit projects can take several years to plan and develop. FTA noted that the New Starts process includes multiple st that are required by law, and shortening the process would require legislative changes. In addition, FTA officials cited a number of reasons that a project could be delayed during preliminary engineering or final design that are outside FTA’s control such as changes to a project changes in local political leadership, or the loss of local financial commitment. s. ’s scope, DOT and FTA have recently implemented and proposed several changes to the New Starts program and procedures. In 2009, FTA revised the weights given to each of the project justification criteria in accordance with direction in the Safe, Accountable, Flexible, Efficient, Transportation Equity Act: A Legacy for Users (SAFETEA-LU) Technical Corrections Act of 2008 that they be “…comparable, but not necessarily equal….” As part of this, according to FTA, the weight given to cost effectiveness was lessened and the land use and economic development criteria were split apart and each assigned specific weights rather than being considered together as had previously been the case. In January 2010, the Secretary of Transportation announced that transit agencies are no longer required to have at least a “medium” cost-effectiveness rating for their project to be recommended in the President’s budget for New Starts funding. In addition, FTA issued a request for comments in an Advance Notice of Proposed Rulemaking in June 2010 to seek input on how to improve its calculation of ‘‘cost effectiveness’’ and input on how FTA should evaluate economic development effects and environmental benefits in the evaluation and rating process for the New Starts grant program, among other things. This rulemaking follows FTA’s change to consider economic development separate from land use. Prior to July 2009, the project justification rating was split evenly between cost effectiveness and land use. These changes have encouraged some transit agencies that are considering the use of value capture strategies, however the overall effect is still unclear. For some transit agencies officials, the removal of the medium cost-effectiveness rating requirement may affect planned transit projects, but one transit agency official noted that regardless of the change, the routes will still need to be cost effective because finding funds for the local match will always limit how much additional land or other user-friendly amenities the agency can buy. One agency official told us that planned transit routes would be aligned differently if spurring economic development becomes a heavily weighted criterion in the New Starts process. Another agency official said that changes are not going to alter where the agency plans new projects; however, the elimination of a minimum cost-effectiveness rating certainly might influence agency plans to acquire additional land in station areas. FTA officials told us they are not sure how the recent and proposed changes to New Starts project evaluation criteria will affect the number or cost of projects seeking funding under the program. Transit agencies could have more flexibility to purchase land for joint development, or additional parking to help meet ridership projections, which has been a challenge in the past. However, FTA also noted that local transit agencies will still need to fund the local match, which can also be a challenge.

Stakeholders See an Expanded Federal Role in Supporting the Use of Value Capture Strategies through Potential and Existing Federal Loan Programs

Some stakeholders and transit agency officials we spoke with told us that the federal government could further support the use of value capture strategies by providing financing options for projects with a value capture revenue stream. Some project sponsors and experts believe federal loans, loan guarantees, or credit enhancements could help bridge a financing gap. Several agency officials noted that the federal government could better promote livable communities and transit-oriented development if it could help agencies overcome parking replacement challenges through targeted grants or loans.

Currently, DOT provides loans for major capital infrastructure projects through the TIFIA and RRIF loan programs. However, most TIFIA projects have been used to finance highway projects, typically with user charges or another revenue source to repay loans. Transit systems farebox revenue rarely covers capital and operations expenses, so another revenue stream is necessary to repay loans. Value capture strategies are one way to create a revenue stream from a transit project to repay the loan. Two specific projects—Denver’s Union Station and San Francisco’s Transbay Transit Center—are planning to use tax increment financing to repay TIFIA and RRIF loans.

In recent years, proposals to expand federal financing for infrastructure projects have surfaced from stakeholders, including the current administration and Congress. Proposals have included creating a National Infrastructure Bank, other forms of a national infrastructure loan fund, and expanding TIFIA’s allocation limits. DOT recently announced that demand for the TIFIA program now exceeds budgetary resources, and as a result, DOT will now, among other changes, evaluate projects against criteria including livability and economic competitiveness.

Conclusions

Value capture strategies can be an effective means for the direct users and beneficiaries of a transit system to contribute to its funding, although past use of these strategies to fund and finance transit is limited. Because these strategies largely involve funding sources administered by local governments, the federal role in the use of value capture strategies is likely to remain relatively limited. However, federal transportation policies can affect local governments’ ability to use some value capture strategies, particularly when a federal grant is part of the funding for a transit project. DOT’s proposal to change how it evaluates economic development effects in the New Starts evaluation and rating process, and the removal of the requirement that projects receive a medium cost-effectiveness rating or better to be recommended in the President’s budget could enhance federal funding prospects for transit projects with contribution from a value capture strategy, as well as transit agencies’ ability to pursue joint development. However, value capture strategies are not a panacea. Funds generated through the use of value capture strategies are typically only a limited portion of the total funding needed to complete a transit project. Additionally, states may preclude or limit the use of these strategies or support may not be forthcoming from all the private- and public-sector parties whose concurrence is needed to implement the strategies.

Moreover, transit agencies’ confusion about aspects of FTA’s joint development policy hinders the use of this value capture strategy. This confusion—despite the 2007 guidance from FTA—about which types of developments and structures are eligible for joint development and how many surface parking spaces must be replaced with structured parking has contributed to project delays and potentially limited transit agencies’ ability to facilitate transit-oriented development and “livable” communities along transit corridors. Clarifying early in a project’s design phase which types of structures are eligible for joint development could streamline negotiations with developers and FTA and produce more cost-effective results for all parties. In addition, clarifying FTA’s requirements and conditions for parking replacement would reduce the potential for transit agencies to design projects with more parking than is actually needed or required and to invest money in costly structured parking that could be put toward enhancing other aspects of the project’s design, including economic development components.

Recommendation for Executive Action

To facilitate transit agencies use of joint development, we recommend that the Secretary of Transportation direct the Administrator of the Federal Transit Administration to issue additional guidance on federal joint development requirements including at a minimum, further clarification on the types of developments and structures that are eligible under current law, and further clarification on any requirements or conditions for parking replacement.

Agency Comments

We provided a draft of this report to the Department of Transportation for its review and comment. DOT agreed to consider the recommendations in this report, and provided technical comments, which we incorporated, as appropriate.

We are also sending copies of this report to interested congressional committees, the Secretary of Transportation, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact David Wise at (202) 512-2834 or wised@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals making key contributions to this report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

To address the use of value capture strategies to fund or finance transit, we reviewed (1) the extent to which transit agencies and state and local governments use joint development and other value capture strategies to fund or finance transit; (2) what 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; and (3) stakeholders’ views about the effects of federal policies and programs on the use of joint development and other value capture strategies to fund or finance transit.

We addressed four value capture strategies: (1) joint development; (2) special assessment districts; (3) tax increment financing; and (4) development impact fees. We chose to focus on these strategies because our review of relevant literature on value capture strategies and interviews with relevant stakeholders found that these four strategies were the most commonly used value capture strategies by transit agencies and state and local governments to fund or finance transit.

To determine the extent to which transit agencies and state and local governments use joint development and other value capture strategies to fund or finance transit, we requested information from the 71 transit agencies that we identified as operating a fixed-guideway system— commuter rail, heavy rail, light rail, streetcar, and bus rapid transit—and the 30 largest U.S. bus agencies. We requested information on the use of each type of value capture strategy in projects on or around any of their transit stations, including the number of projects and the lead agency of the project. In response to our request, we obtained information from 55 of the 71 transit agencies contacted. We then analyzed the information reported by the transit agencies. To ensure the reliability of the information provided, we interviewed stakeholders about the design of our information collection instrument, reviewed responses to ensure that the value capture strategies reported met our definitions of each value capture strategy, and when possible corroborated the reliability of the information through interviews or other agency documents obtained. The information we collected was deemed reliable for our purposes.

We also conducted site visits to, or interviewed officials from, transit agencies, state and local governments, and private developers in Atlanta, Georgia; Dallas, Texas; Portland, Oregon; Los Angeles, Sacramento, the San Francisco Bay metropolitan area, and San Jose, California; Seattle, Washington; and the Washington/Baltimore metropolitan area on selected transit or transit-related projects incorporating the use of value capture strategies. Using information from literature that we reviewed and information we collected from the 55 transit agencies, we selected this nongeneralizable sample of cities and metropolitan areas based on criteria we established, including locations where value capture strategies had been used or were under formal consideration for future use and geographical diversity. Where available, we collected and reviewed information obtained from transit agencies on the costs and value capture revenue for projects that used value capture strategies.

To identify facilitators of, and hindrances to, the use of joint development and other value capture strategies, we reviewed relevant literature on value capture strategies. We also interviewed transit agency, state and local government, and FTA headquarters and regional officials, as well as representatives from private developers and individuals with expertise in the area of value capture strategies. In addition, we reviewed applicable state statutes and regulations.

To identify stakeholders’ views about the effects of federal policies and programs on the use of joint development and other value capture strategies to finance transit, we interviewed federal, state, and local officials to identify ways federal policies and programs affect the use of value capture strategies. We also reviewed applicable federal regulations and statutes to determine federal requirements and program implications for joint development and other value capture strategies.

We conducted this performance audit from August 2009 to July 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Descriptions of Select Transit Projects or Developments

Major Transit Infrastructure Projects (by Percentage of Revenue Contributed by Value Capture) Atlanta BeltLine

Maryland Department of Transportation is planning to lease state-owned land to a developer to construct a transit-oriented development at the Owings Mills Metro Station in Baltimore County, MD. Project sponsors plan to use tax increment financing to help pay for the construction of two state- owned parking garages at the transit-oriented development. According to State officials, revenue generated from a special assessment will be used to pay for operations of the state-owned garages, roads, and other improvements; however it may also be used to help pay bond debt in the event that the tax increment financing revenues are insufficient.

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Raymond Sendejas, Assistant Director; Lauren Calhoun; Elizabeth Eisenstadt; Terence Lam; Matthew LaTour; Amanda Miller, Sara Ann Moessbauer; Jaclyn Nidoh; Josh Ormond; and Gretchen Snoey made key contributions to this report.