The need for additional capital funding resources comes as we struggle at the intersection of the MTA's stratospheric construction costs (the agency just finished building the most expensive subway on earth, and proposed spending even more per-mile on phase 2 of the Second Avenue Subway) with the ongoing financial implications of the COVID-19 pandemic. For all intents and purposes, the MTA's 2020-2024 Capital Program is over. The MTA has already been given the green light to divert money from congestion charging proceeds to cover gaps in its operating budget, and with state and city tax revenues cratering, any direct financial support from them is likely to more or less vanish as well. The MTA's federal grants are probably safe (they are mostly based on formulas, anyways) and they will probably have to get by on those, plus whatever it can claw back out of congestion charging and whatever tax revenues might find their way back towards the end of the program.
Alternative funding sources are dollars that come from someplace else (either earmarked via another governmental entity or a private business) and are almost always dedicated towards a certain project.
Value capture
One alternative funding source the MTA has expressed an interest in utilizing more going forward is a concept called value capture.
Mass transit is seen as an asset or a benefit to a particular area (or, at least it was, prior to the pandemic). People like mass transit, and they conceivably like living near to it... Expanding and improving mass transit therefore increases the property value of the land proximate to the improvement. The idea behind value capture is that transit agencies are able to capture some of the new value they create by improving mass transit. The FTA estimates that transit improvements can improve adjacent land value by 30% to 40%, and as much as 150%. The idea is that transit agencies issue bonds to finance expansion projects, then after the work is done, the transit agency gets a cut of the proceeds after land values increase and use that to pay off the debt.
Value capture is not a completely new idea...it just short-circuits the process a bit. When transit improves land values, that increases the state or city's tax base...and that makes more money available for spending on other mass transit improvements. A value capture scheme cuts out the middle person.
While NYC real estate is by no means a simple and straightforward industry, these types of schemes are more familiar to the market there, you can easily find larger-scale projects that work best with value capture arrangements in the city real estate market, and the land use, planning, and taxing regimes are all managed by the city itself. Out in the suburbs, this is much more complicated... Land use and property taxing is considered a local matter. While the actual tax rolls themselves are managed at the county-level in Nassau County and the town-level in Suffolk County, each and every little municipal unit (down to the tiny special districts, library districts, fire corporations, etc.) set tax rates and policies on their own. And because very few of these district boundaries overlap consistently, you wind up with having to deal with a mess of different stakeholders and taxing entities, sometimes varying from block to block. Zoning and land use is also a local matter, with each city and village given complete authority over residential and commercial zoning in their boundaries. In unincorporated areas in Nassau and Suffolk counties, the towns are in charge of zoning. And the openness to development varies violently from village to village, town to town. The only exception is land owned by the government, which is not subject to the zoning ordinances of lower forms of government.
That means unless you are building on state- or county-owned land (like the Belmont Park redevelopment or the Nassau HUB) you are in for a giant mess of headaches and red tape, dealing with a half-dozen or more different local entities, all of which have different policies, procedures, and a willingness to play ball with developers.
While NYC real estate is by no means a simple and straightforward industry, these types of schemes are more familiar to the market there, you can easily find larger-scale projects that work best with value capture arrangements in the city real estate market, and the land use, planning, and taxing regimes are all managed by the city itself. Out in the suburbs, this is much more complicated... Land use and property taxing is considered a local matter. While the actual tax rolls themselves are managed at the county-level in Nassau County and the town-level in Suffolk County, each and every little municipal unit (down to the tiny special districts, library districts, fire corporations, etc.) set tax rates and policies on their own. And because very few of these district boundaries overlap consistently, you wind up with having to deal with a mess of different stakeholders and taxing entities, sometimes varying from block to block. Zoning and land use is also a local matter, with each city and village given complete authority over residential and commercial zoning in their boundaries. In unincorporated areas in Nassau and Suffolk counties, the towns are in charge of zoning. And the openness to development varies violently from village to village, town to town. The only exception is land owned by the government, which is not subject to the zoning ordinances of lower forms of government.
That means unless you are building on state- or county-owned land (like the Belmont Park redevelopment or the Nassau HUB) you are in for a giant mess of headaches and red tape, dealing with a half-dozen or more different local entities, all of which have different policies, procedures, and a willingness to play ball with developers.
Givebacks
Sometimes, a developer or agency will be worked into making a direct investment in mass transit as part of a proposed or ongoing project (I often refer to this process as "givebacks"). For example, as part of a new building project, the developer will install a new staircase or elevator down to a mezzanine at a station to improve passenger access. Giveback schemes can range from really small things (a new staircase, etc.) to really large or big-ticket items (e.g. a whole new station, or a significant expansion to a facility).Quite often, developers are coerced into giveback schemes as a condition for reviving approval for a project, as part of a mitigation measure for environmental impacts, or in exchange for going a few steps further on a zoning variance. For example, in exchange for including an elevator to an adjacent transit station, a developer can make their building 20 stories instead of 16...the transit agency gets a free elevator, and the developer gets 40 more apartments they can earn rent on over the life of the building.
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| The new Elmont station is being funded as part of a giveback scheme with NY Arena Partners (Photo: Executive Chamber) |
Another example of a giveback scheme is the work done at VD Yard in Brooklyn as part of the Atlantic Yards project that yielded the Barclays Center and a number of large apartment buildings in downtown Brooklyn (now branded as Pacific Park). As part of the deal, Forest City Ratner (later bought out by Greenland Group) agreed to finance a complete reconstruction of the yard, including the new west portal that opened a few years ago.
This can also work for non-transportation infrastructure too. For the Heartland Town Square development on the site of the Pilgrim State Hospital, for example, the developer there had to either cough up tens of millions to connect to the county's sewer system (which was ultimately rejected) or build on-site sewage treatment facilities.
Making tenuous relationships
While all this sounds like a very nice idea, successful value capture schemes don't come around all that often, and those that do come to fruition usually turn sour at some point in time (unless they're really simple projects, and even then...)It can be tough to predict exactly how much property values will respond to transit improvements, which can make it difficult for developers to commit to giving away certain percentages or dollar values/agree to certain upfront capital investments, or for transit agencies to commit to building a project and then have the returns be less than anticipated. This is why we have only really seen the MTA be able to negotiate them on the very large projects (like Pacific Park, Hudson Yards, or the Belmont Park redevelopment) when there is an almost certain likelihood of success, even with delays and cost overruns. They can get away with smaller improvements like staircases and elevators when developers get a lot back in return (more stories or more square footage, etc.)...but we have not really seen them on smaller-scale residential or commercial development projects.
Then there can be issues encountered during the construction phase that can leave one or both sides holding water for delays or cost overruns. On the MTA's side, as we all know, significant schedule delays or cost overruns on projects are by no means a foreign concept. If the MTA and the developer come to terms on a value capture deal and then either side of the project is delayed or canceled, then either the development gets completed and there are no transit improvements (thus making the property value much less than anticipated), or the transit improvement is made and there's no corresponding development to make use of it or pay it off. On the cost side, if the MTA and a developer come to terms to finance an improvement for a certain dollar value, and then the MTA turns around and blows the budget, the agency either has to go back and renegotiate with the developer for a bigger outlay (which almost never works) or the MTA has to cough up the rest of the money to cover the rest of the cost.
Once those delays and problems start to crop-up after the happy couple has been married, things tend to go sour pretty quickly. For example, in the Atlantic Yards deal FCR and the MTA sparred over value engineering efforts after the Financial Crisis changed the complexion of the downtown megadevelopment. The MTA ended up caving. Around the same time, the MTA also agreed to a generous change in terms with Related, the developer at the Hudson Yards site. As you might guess, the agencies and the taxpayers usually draw the short straw when these complications arise.
For example, the MTA recently completed the construction of two elevators at the Flushing-Murray Hill station for a staggeringly expensive $11.5 million. If the MTA wanted to finance that as part of a value capture deal, the new elevators would have had to generate at last $60 million in additional property value, something that would have been difficult to do in the outskirts of Flushing, nevermind the much more sparsely populated suburbs.
In a Manhattan residential or commercial building, getting the kind of extra volume to make something like this workable is not as tough, but out in the suburbs, there simply isn't the volume anywhere to make these types of schemes valuable for either side. Unless someone is given carte blanche to build at any scale that their heart desires (which is only going to happen in extremely isolated cases, like Belmont Park), you are not going to get enough volume anywhere outside the city that will generate a strong enough margin to warrant giving the MTA a cut.
There are already no shortage of obstacles to development in the suburbs, and to add the MTA with its tin cup into the mix will often end up being just another nail in the coffin for some of these projects. Going through these processes is expensive and risky enough without the MTA shaking you down for a cut of the proceeds or demanding you finance infrastructure improvements. To this end, instead of encouraging and supporting more denser, transit-adjacent development, this has the opposite effect: the MTA can make it more difficult for projects to be viable and successful.
By building certain projects only when there is external financial support, that means that the infrastructure improvements only go where the money is. This creates an equity problem, as infrastructure investment projects only happen in areas that are rich enough to support the kind of development that can make value capture schemes viable. The poorer areas, where nobody wants to build and the tax base simply isn't there to support these kinds of deals, get ignored. This also creates a death cycle in areas that are less receptive to development...transport improvements can be great catalysts for denser downtown development. But if the agency never wants to step up and kick-start the process, areas that oppose development effectively get a free pass to continue doing so.
These schemes also produce some really bad projects. Because a developer is needed to fund a project, the improvement goes where the developer wants it to go—not where it would deliver the most value or deliver the most good. Take the Elmont station as an example—that location is a terrible spot for a new station...there are three existing LIRR stations within walking distance of the Belmont Park site, and the proposed Elmont station would be just about 2,200 ft from the east end of Queens Village station, a little over 1,500 ft from the west end of Bellerose station, and only 1,750 ft (as the crow flies) from the existing Belmont Park spur station... In terms of where the LIRR needs infill stations, a new Elmont station that's within a mile of four other stations is towards the very bottom of the list. But instead of building a new station where it would expand access to mass transit to more people, it's getting built where it is because that's where the arena developers want it.
The VD Yard improvements are another example. The average LIRR train car spends more than 18 hours per day sitting around, not in revenue service. The last thing the LIRR needs is more or bigger yard facilities to encourage even more inefficient uses of its fleet. Instead of building a larger yard, these trains should be spending their time out running other trains, adding capacity and improving off-peak service. FCR and now Greenland Group spent hundreds of millions of dollars on this yard facility...but instead of spending that money on infrastructure that could support more efficient operations or directly financing more trains, FCR wanted to build on top of VD Yard, so the money was spent on a new VD Yard.
The MTA exists to deliver value to the taxpayers—all of them, not just the developer building something proximate to a mass transit line. For this reason, infrastructure dollars should be spent where they will deliver the most good to the most people...and this requires a process that's independent and objective. This should not be entirely at odds with supporting development where practicable and viable (if both the interests of a developer and the entire system as a whole could benefit from a particular project, that's great), but those decisions must be made objectively and justified as such.
The old fashioned way of doing things may not be perfect, but it works: let the builders build, let the governments tax those developments appropriately, then let the people decide how the proceeds should be spent. Everybody stays in their lane, and neither side has to deal with the risks or ill-effects of this type of dealing. If an agency thinks a transportation improvement is warranted, then it make its case to the people about why it would deliver value and should be funded...
If the MTA can only barely get value capture schemes to work in Manhattan and Downtown Brooklyn—the hottest real estate market in the country, if not beyond—on what planet would anyone think it would be a viable idea in the suburbs where hardly anybody is open to development in the first place? The MTA simply should not be allowed to insert itself into development proposals with its hand out looking for a cut.
I explored this concept in much more depth last year. Suburban rail stations are often surrounded by significant amounts of parking, taking up a lot of space that could be better used for transit oriented development. If the MTA were to find ways to better utilize its parking land by allowing a developer to come in and build apartments on land it directly controls, that that is a situation where a value capture or giveback scheme could be viable at a smaller scale. Because the MTA is removing some of the most significant complications from the process (land acquisition, zoning requirements, and taxation) there is a much straighter line for these types of deals to work. And because the MTA is not subject to local property taxes, it can work out a PILOT (Payment In Lieu Of Taxes) deal where it gets the money directly, and then ideally reimburses the localities an appropriate amount for the services they provide. As I explained last year, thinking of these as parking improvement projects can be the cleanest way of maximizing the legal latitude the MTA has. By taking a surface parking lot and turning it into a parking garage to replace that capacity and add some for commuters and residents alike, and then building a building on top to offset the cost of the parking structure, it's one of the few circumstances where this type of deal could be lower-risk and benefit everyone involved.
But like everything, timing and location is everything. Like I've said previously, building on parking land is a good strategy, but the MTA has to be careful with when and where they start, then slowly work out to other communities as the concept proves successful and more communities become amenable to it.
An example of what not to do can be seen in how the MTA is handling a proposed parking garage in Hicksville now. Like a lot of other things, while the LIRR has more or less the right idea, they are going about it in absolutely the wrong way. The MTA promised as part of the Third Track horsetrading and Hicksville's ongoing Downtown Revitalization Initiative effort to construct a new parking garage in Hicksville, one of the busiest and most parking-constrained stations on the railroad. But instead of honoring their commitment, the MTA turned around and said they would only build a new garage on town land if they could build an 8-story building on top to recover some of the costs. The MTA has subsequently been lambasted by local officials for going back on its word...in a meeting about the Downtown Hicksville complete streets effort earlier this year, this was the very first question that came up, and local officials wasted no time throwing the MTA under the bus. A meeting in early March pre-pandemic between the MTA and the Town of Oyster Bay yielded no progress towards a resolution on the dispute. While the overall idea here is right—coupling parking improvements with mixed use development both helps the parking issue and strengthens downtowns—by going about it by trying to attach strings and go back on a prior commitment, and pulling this type of stunt in one of the most development-averse towns on Long Island, this type of standoff was all but certain. And now that both sides are so entrenched (and with the fiscal impacts of the pandemic now making the situation even more bleak), this is likely to go nowhere, with the land staying as an underutilized surface parking lot until someone decides to blink. If they had put some more thought into where to first try out this effort (an unincorporated area in the Town of Babylon would have been my first idea...so like Copaigue) they might be seeing better results.
Sports arenas are generally pretty amenable to playing ball with community improvements in exchange for the generous support they get from municipalities. But sports organizations pretty much universally draw the line at paying for transit service to events. Even for significant ridership draws like the World Series, sports teams will refuse to cough up cash to cover the expense of added service.
And if raking in as much dough as one would during a World Series game doesn't inspire an organization to finance the marginal extra transit service required to bring the people to their place, then you can pretty much forget about it, even a large scale residential or commercial development wouldn't generate enough to justify covering ongoing operating expenses in perpetuity, never mind the extremely high and inefficient operating costs of the LIRR. Even during the planning process for the new Islanders arena, the team refused to agree to paying for extra service to the spur station...and so that's what led to the birth of the new Main Line station which the LIRR could serve entirely with existing trains.
Here, the same concept applies—there's no chicken and egg scenario...the MTA has to do its job and provide the transit service, and if properties become more valuable and the tax base increases, then it can argue for a share of the proceeds from that. But they won't get anyone to agree to funding extra service up front.
Issues of scale
Because of the tremendous risks related to value capture deals and the significant costs of doing just about anything the MTA touches, value capture and giveback deals only begin to become plausible at very large scale. Typically, development projects in NYC fetch at best a 20% margin (and that quickly falls during tough economic times, when the MTA would be most eager to use these types of alternative funding schemes).For example, the MTA recently completed the construction of two elevators at the Flushing-Murray Hill station for a staggeringly expensive $11.5 million. If the MTA wanted to finance that as part of a value capture deal, the new elevators would have had to generate at last $60 million in additional property value, something that would have been difficult to do in the outskirts of Flushing, nevermind the much more sparsely populated suburbs.
In a Manhattan residential or commercial building, getting the kind of extra volume to make something like this workable is not as tough, but out in the suburbs, there simply isn't the volume anywhere to make these types of schemes valuable for either side. Unless someone is given carte blanche to build at any scale that their heart desires (which is only going to happen in extremely isolated cases, like Belmont Park), you are not going to get enough volume anywhere outside the city that will generate a strong enough margin to warrant giving the MTA a cut.
Another obstacle to suburban development
To say building at scale on Long Island (or even in the Hudson Valley) is difficult is an extreme understatement. There is very little interest to support denser development or large office blocks just about anywhere you go. Unless you are dealing with state-owned land and the Governor's office shepherding and shoving the project through the planning process, getting large-scale projects like the Nassau HUB or Heartland Town Square to fruition often take many years of fighting and clawing through zoning processes, environmental reviews, and lawsuits.There are already no shortage of obstacles to development in the suburbs, and to add the MTA with its tin cup into the mix will often end up being just another nail in the coffin for some of these projects. Going through these processes is expensive and risky enough without the MTA shaking you down for a cut of the proceeds or demanding you finance infrastructure improvements. To this end, instead of encouraging and supporting more denser, transit-adjacent development, this has the opposite effect: the MTA can make it more difficult for projects to be viable and successful.
Equity problems and delivering poor value projects
My chief problem with value capture and giveback schemes is that they're just bad infrastructure planning policy... When projects are built only when a third party is willing to put money up (or even worse, if construction of any ______ projects are conditioned on external financial support), then that takes all of the objectivity and logic out of the infrastructure planning process.By building certain projects only when there is external financial support, that means that the infrastructure improvements only go where the money is. This creates an equity problem, as infrastructure investment projects only happen in areas that are rich enough to support the kind of development that can make value capture schemes viable. The poorer areas, where nobody wants to build and the tax base simply isn't there to support these kinds of deals, get ignored. This also creates a death cycle in areas that are less receptive to development...transport improvements can be great catalysts for denser downtown development. But if the agency never wants to step up and kick-start the process, areas that oppose development effectively get a free pass to continue doing so.
These schemes also produce some really bad projects. Because a developer is needed to fund a project, the improvement goes where the developer wants it to go—not where it would deliver the most value or deliver the most good. Take the Elmont station as an example—that location is a terrible spot for a new station...there are three existing LIRR stations within walking distance of the Belmont Park site, and the proposed Elmont station would be just about 2,200 ft from the east end of Queens Village station, a little over 1,500 ft from the west end of Bellerose station, and only 1,750 ft (as the crow flies) from the existing Belmont Park spur station... In terms of where the LIRR needs infill stations, a new Elmont station that's within a mile of four other stations is towards the very bottom of the list. But instead of building a new station where it would expand access to mass transit to more people, it's getting built where it is because that's where the arena developers want it.
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| VD Yard is sitting unused during the Essential Service Plan, functioning as a glorified retirement home for OOS M-3's. (Photo: Jason Rabinowitz) |
The MTA exists to deliver value to the taxpayers—all of them, not just the developer building something proximate to a mass transit line. For this reason, infrastructure dollars should be spent where they will deliver the most good to the most people...and this requires a process that's independent and objective. This should not be entirely at odds with supporting development where practicable and viable (if both the interests of a developer and the entire system as a whole could benefit from a particular project, that's great), but those decisions must be made objectively and justified as such.
Build, tax, then spend
Value capture is a nice buzzword and a clever way to get transit improvements without actually needing the agency to go come up with the cash, but I think it's simply not a viable, practical, or worthwhile way of financing infrastructure investments.The old fashioned way of doing things may not be perfect, but it works: let the builders build, let the governments tax those developments appropriately, then let the people decide how the proceeds should be spent. Everybody stays in their lane, and neither side has to deal with the risks or ill-effects of this type of dealing. If an agency thinks a transportation improvement is warranted, then it make its case to the people about why it would deliver value and should be funded...
If the MTA can only barely get value capture schemes to work in Manhattan and Downtown Brooklyn—the hottest real estate market in the country, if not beyond—on what planet would anyone think it would be a viable idea in the suburbs where hardly anybody is open to development in the first place? The MTA simply should not be allowed to insert itself into development proposals with its hand out looking for a cut.
Exception to the rule: parking land and structured parking
For all the reasons I explained above, the MTA should pretty much not even think about doing value capture or giveback schemes in the suburbs. But I think there could be one exception and a small avenue where something like this could work: parking land.I explored this concept in much more depth last year. Suburban rail stations are often surrounded by significant amounts of parking, taking up a lot of space that could be better used for transit oriented development. If the MTA were to find ways to better utilize its parking land by allowing a developer to come in and build apartments on land it directly controls, that that is a situation where a value capture or giveback scheme could be viable at a smaller scale. Because the MTA is removing some of the most significant complications from the process (land acquisition, zoning requirements, and taxation) there is a much straighter line for these types of deals to work. And because the MTA is not subject to local property taxes, it can work out a PILOT (Payment In Lieu Of Taxes) deal where it gets the money directly, and then ideally reimburses the localities an appropriate amount for the services they provide. As I explained last year, thinking of these as parking improvement projects can be the cleanest way of maximizing the legal latitude the MTA has. By taking a surface parking lot and turning it into a parking garage to replace that capacity and add some for commuters and residents alike, and then building a building on top to offset the cost of the parking structure, it's one of the few circumstances where this type of deal could be lower-risk and benefit everyone involved.
But like everything, timing and location is everything. Like I've said previously, building on parking land is a good strategy, but the MTA has to be careful with when and where they start, then slowly work out to other communities as the concept proves successful and more communities become amenable to it.
An example of what not to do can be seen in how the MTA is handling a proposed parking garage in Hicksville now. Like a lot of other things, while the LIRR has more or less the right idea, they are going about it in absolutely the wrong way. The MTA promised as part of the Third Track horsetrading and Hicksville's ongoing Downtown Revitalization Initiative effort to construct a new parking garage in Hicksville, one of the busiest and most parking-constrained stations on the railroad. But instead of honoring their commitment, the MTA turned around and said they would only build a new garage on town land if they could build an 8-story building on top to recover some of the costs. The MTA has subsequently been lambasted by local officials for going back on its word...in a meeting about the Downtown Hicksville complete streets effort earlier this year, this was the very first question that came up, and local officials wasted no time throwing the MTA under the bus. A meeting in early March pre-pandemic between the MTA and the Town of Oyster Bay yielded no progress towards a resolution on the dispute. While the overall idea here is right—coupling parking improvements with mixed use development both helps the parking issue and strengthens downtowns—by going about it by trying to attach strings and go back on a prior commitment, and pulling this type of stunt in one of the most development-averse towns on Long Island, this type of standoff was all but certain. And now that both sides are so entrenched (and with the fiscal impacts of the pandemic now making the situation even more bleak), this is likely to go nowhere, with the land staying as an underutilized surface parking lot until someone decides to blink. If they had put some more thought into where to first try out this effort (an unincorporated area in the Town of Babylon would have been my first idea...so like Copaigue) they might be seeing better results.
Value capture for operations
The only thing less viable than using value capture for capital expenses is trying to use it for operating expenses... Building a particular thing, and then paying off that thing over time during the life of the project is something people can wrap their heads around...but trying to put someone on the hook for ongoing operating costs in perpetuity almost never works. There are just far too many variables and risk for something like that to work.Sports arenas are generally pretty amenable to playing ball with community improvements in exchange for the generous support they get from municipalities. But sports organizations pretty much universally draw the line at paying for transit service to events. Even for significant ridership draws like the World Series, sports teams will refuse to cough up cash to cover the expense of added service.
And if raking in as much dough as one would during a World Series game doesn't inspire an organization to finance the marginal extra transit service required to bring the people to their place, then you can pretty much forget about it, even a large scale residential or commercial development wouldn't generate enough to justify covering ongoing operating expenses in perpetuity, never mind the extremely high and inefficient operating costs of the LIRR. Even during the planning process for the new Islanders arena, the team refused to agree to paying for extra service to the spur station...and so that's what led to the birth of the new Main Line station which the LIRR could serve entirely with existing trains.
Here, the same concept applies—there's no chicken and egg scenario...the MTA has to do its job and provide the transit service, and if properties become more valuable and the tax base increases, then it can argue for a share of the proceeds from that. But they won't get anyone to agree to funding extra service up front.
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