Reforming the MTA

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Please feel free to view my Capstone:

Bridging the Transportation Finance Gap: Planning Beyond Boundaries for a Connected 21st Century

Please also feel free to view my Senior Honors Thesis:

(Re)New Your City, New York City: Transporting Transformation Hubs

New York’s Metropolitan Transportation Authority (MTA) is constantly running trains, but it is also constantly running a deficit. Unlike profitable transportation companies, such as the Hong Kong Mass Transit Railway (MTR), the MTA has few valuable real estate assets which could be adequately transformed into transit-oriented and transit-owned joint development hubs. Similar to other U.S. public transportation agencies, space for pragmatic and profitable commercial activities – including shops and offices operating on agency-owned land – is limited to a few select stations, yards, concourses, and passageways, because most profitable assets from private predecessors were sold decades ago. However, while the MTA’s ability to remain revenue-positive or self-sufficient through real estate development is stymied, the MTA has been capitalizing upon its few existing assets for additional revenue. This process, however, in coordination with the City of New York in order to develop value capture mechanisms, is lengthy and cumbersome. The MTA has not developed the resources needed to develop property. This Senior Honors Thesis elucidates how the MTA can overcome organizational barriers in order to contextually ‘transport’ the MTA’s limited portfolio of assets into ‘transformation hubs’, and in order to do so, advocate for a privatized, profitable, and independent real estate development division of the MTA, chartered for real estate development. While there is ‘room’ for improvement, institutional barriers ranging from NIMBYism and a fear of density to antiquated zoning laws, financing requirements, and a lack of communication among the City, State, MTA, and developers would need to be transcended through coordinated reformation efforts. The MTA’s collective mindset must be renewed for a 21st century narrative, in which the MTA also considers itself a top tier real estate developer.

 

Additional capstone literature review…

SUMMARY: America’s public transportation agencies cannot be profitable in the 21st century due to a political economy that isolates these agencies from municipal zoning and land use policies, and from forming value capture mechanisms – from tax increment financing to joint development and the transfer of development rights. This siloization of zoning, land use, taxation, and transportation operations is largely due to American fears of density alongside protections of private property, but it limits the potential for transit-oriented and transit-owned joint development, and it hinders the formation of public-private partnerships. Local, state, and federal structural reforms are necessary in order to streamline value capture processes, such as up-zoning transportation assets and relaxing land use requirements, in order to facilitate T.O.D. While value capture will provide marginal financial benefits due to the limited assets that U.S. agencies possess, it literally stands on its own merits as a vehicle through which the urban fabric can be renewed and enhanced. Transportation agencies cannot be profitable, but they can be organized more efficiently, if given the resources necessary to effectively practice value capture.

America’s public transportation agencies cannot be profitable. There are not enough riders to offset the high costs of maintenance and operation, and furthermore, America’s political economy limits the real estate potential of these agencies, which, nevertheless, have limited assets. The country’s formerly private, profitable passenger railways had to compete with vehicular transportation and airlines, and they could no longer stay afloat. Yet arguably unlike today’s public agencies, America’s former railroads avidly developed real estate. Pennsylvania Railroad built New York Penn Station and developed nearby Hotel Pennsylvania. New York Central Railroad built Grand Central and developed Terminal City atop its rail yards. The Hudson and Manhattan Railroad built the Hudson Terminal in Lower Manhattan, which is the predecessor to the World Trade Center. Elevated railroads connected Manhattan with Coney Island, building resorts at their terminals. Similarly glamorous hubs with offices, residences, and retail were built throughout the country. But then came suburbanization, the Interstate, and the Jet Age. White Americans moved to the suburbs and divested from cities. Most remaining assets were sold off, and public transportation agencies now lack the real estate expertise and the incentives to develop. Zoning and land use restrictions also inhibit public-private development.

Because of limited assets, T.O.D. will have a marginal impact on finances on American agencies, unlike in Hong Kong, where the Mass Transit Railway (MTR) is a profitable, privatized transportation company, partly because of all of the real estate that it develops. While this system works in China because the central government leases land to the MTR and technically owns all land, it would not work in the U.S. or other Western countries because they rightly have strong private property laws and a democratic process. Indeed, “if Britain’s rather fragile means of ensuring that local authorities account for their decisions works, it is because of the distance that exists between local authorities and central government, and the de facto independence that inspectors are bale to establish from both”; indeed, “Hong Kong has had difficulty in trying to model a system of appeals on British administrative practice because there is no such separation” (Booth 1996, 140). Even land that is already owned by public authorities has often not been developed in a similar fashion in the U.S., largely due to bloated bureaucratic regulations, which discourage cooperation with the private sector.

The New York Metropolitan Transportation Authority (MTA) provides service for one-third of the transit riders in America, covers an area of approximately 5,000 square miles (MTA Transportation, 2015), and moves the largest regional economy in the richest country in the world by moving 8.7 million customers a day with 67,000 employees (MTA Capital Program, 2014). One in three transit rides in the U.S. are on the MTA network, and MTA ridership exceeds the next 16 largest U.S. transit networks combined. Still, while fares and tolls provide a significant amount of revenue for the public authority, it is far from enough for self-sufficiency, let alone profitability. The MTA needs subsidies and support from local, state, and federal sources. Moreover, because the state agency operates New York City’s subways, funding is constantly being negotiated between the City and State, especially for capital plans (Flegenheimer, 2015). The M.T.A. already owes $34 billion, more than the national debt of dozens of foreign countries (Flegenheimer, 2015). According to Crains New York Business:

The MTA collects two types of taxes from property sales in the city: the mortgage-recording tax (consisting of two separate taxes on mortgages recorded in the MTA’s 12-county service area) and the urban tax (imposed on commercial-property and apartment-building transactions in the five boroughs). Those taxes, in addition to an array of other state, regional and local taxes, subsidies and fees, and fare and toll collection, comprise the MTA’s revenues. (Hawkins, 2015)

In 2015, the MTA received $202.4 million from the mortgage-recording tax, which is 11.3% more than the MTA’s budget allotment of $181.8 million. Also, the MTA received $530.1 million from the urban tax, or 56.4% more than the $338.9 million originally budgeted. Finally, the “MTA received $130.7 million in total real estate tax revenue just in the month ending in mid-June, or 50.6% more than originally expected” (Hawkins, 2015). However, the MTA is wary of these fluctuations, and is not planning on using the increased funds to restore eliminated subway and bus routes, because a new downturn could leave the agency without the resources needed to sustain operations. After all, in 2005 and 2006, the urban tax surged, resulting in $900 million in 2007, which was nearly twice the amount anticipated by the MTA. Then, after the economy collapsed, annual revenue plunged by more than $1 billion and the urban tax received $149.7 million in 2009 (Hawkins, 2015). Clearly, this system is unstable and even in good times, the MTA needs additional funds to continue operations and expansion. Financing is vastly different for Hong Kong’s MTR because it is an independent corporation, and not a public authority, so while the government serves as majority shareholder, the MTR “has the freedom to develop real estate, to hire and fire who it will, and to take business-minded decisions—whereas other transit systems, including the one in New York, must deal with union contracts and legal restrictions” (Padukone, 2013). Indeed, according to Professor Vuchic at the University of Pennsylvania:

Many extensive rail and bus transit systems in Hong Kong and Japan operate successfully under private ownership. Population densities are extremely high in Hong Kong and Japanese cities such as Tokyo and Osaka. Use of automobiles in these cities is not only limited by space, but it is more expensive than in the U.S. and most European cities. Car travel is less subsidized by direct and indirect measures, such as tax exemptions for many trip categories, company car ownership, cheap or free parking. Land uses, including major activity centers, are planned with rail transit lines and located around their stations. In Japan, many regional rail companies own housing complexes, department stores, shopping centers, amusement parks, and other commercial developments whose income is used for partial support of transit operations. Although privately owned, many transit companies have various arrangements for cooperation, financial support or guarantees by the government. (Vuchic 2005, 435)

Yet even if U.S. systems cannot be profitable in our political economy, T.O.D. (literally) stands on its own merits, as it creates more dynamic places for people to live, work, and play, and supports sustainable livelihoods by reducing emissions. Still, often, accessibility to transportation improves the value of real estate, and agencies themselves do not capture this value. When an agency develops its property in coordination with a private developer to build and own or lease shopping centers, offices, and apartments, it is termed joint development, a form of value capture, which is, itself, a form of transportation finance.

This literature review will explore this particular type of value capture in depth, but it will also explore additional transportation finance tools and techniques. Moreover, the review will touch upon factors that hinder value capture, and it will explore policy and planning solutions that can assist with streamlining the development process. The review will focus on development processes and finance mechanisms, rather than particular cities and case studies, and it will utilize a collection of books, journal articles, news articles, and websites concerning transportation planning, transit-oriented development, and transportation finance. Sources were collected with the assistance of Tisch Library resources at Tufts University in Medford, Massachusetts. Concept maps for research were crafted using the Tufts Libraries Classic Catalog, BLC WorldCat, JumboSearch, Harvard Libraries Catalog, Ulrich’s Periodicals Directory, and ProQuest. RSS feeds and search alerts were also utilized for database research.

To begin, there are various tools and techniques that can be used in order to implement value capture (Levinson, et al., 2009). Special assessment districts levy an additional tax on land parcels that receive a direct benefit from transit. Transportation utility fees are fees assessed on beneficiaries of transit infrastructure based upon how likely these beneficiaries will be using transit, thereby, for instance, reflecting the building’s density or parking capacity. Tax increment financing is a tax policy that captures the incremental difference in tax revenue after construction of transit facilities, in order to pay for the financing costs. Development impact fees are one-time fees assessed to developments, and are determined formally through policy. Negotiated extractions also are one-time fees assessed to developments, but they are negotiated on a case-by-case basis. Joint development is a public-private partnership between a developer and a public agency. And, last but not least, air rights are the sale or lease of air rights above a transit facility. Often, these tools and techniques are used together in order to complete a project; for instance, a developer may be using tax increment financing in order to practice joint development, while using air rights in order to increase density bonuses.

Yet most of these tools cannot be implemented by transportation agencies themselves. American public transportation authorities do not control zoning and land use laws, and they also operate amidst a sea of privately-owned land. Public transportation accessibility can dramatically improve the value of land, which rarely benefits these transportation operators directly. Perhaps the increased property taxes will be siphoned back to the transportation agency, but more often than not, developers benefit the most, and municipalities divert the increased property tax revenue from the agency that made it all possible. Indeed, landowners and developers may even be charged impact fees and taxes by the municipality for future development; however, according to the U.S. Government Accountability Office (GAO), since most transit agencies do not have taxing authorities, it is usually difficult for the agency to capture the value imparted on surrounding properties by their facility (GAO, 2010). This is not a sustainable practice, because most of our public transportation agencies are deeply indebted and cannot build, enhance, and expand.

America’s land use laws are arguably reflected by its Leadership in Energy & Environmental Design (LEED) incentives. The LEED Neighborhood Development Rating System rightly incentivizes LEED construction in transit-oriented communities by prioritizing an access to quality transit, with seven (7) points for a project that is nearby public transportation. LEED also provides one (1) point for transit facilities and two (2) points for transportation demand management (TDM) practices. But many of these boons cannot be built or enhanced solely by a developer; they require effort beyond buildings themselves. LEED continues this political economy infrastructure by rewarding developers for their proximity to transit and for their own transit facilities and TDM practices, while not incentivizing developers to assist transportation agencies directly. Sustainable buildings should not just be environmentally sustainable, but socially and economically sustainable as well, requiring an investment in the community and its transportation infrastructure.

Unfortunately, transit agencies have little ability to partake in transit-oriented development (T.O.D.) because they do not control zoning and land use, and because they are controlled by onerous financial regulations. Yet T.O.D. can increase agency revenue, increase its ridership, and improve its assets. It can improve air quality, decrease traffic congestion, increase the supply of housing, create jobs, and increase tax revenue. Still, while state agencies do not need to follow municipal regulations, public agencies nevertheless do not have a profit motive and they are controlled by transportation boards, with members appointed by politicians who are swayed by NIMBYists. Ideally, municipalities should provide (joint) developers with generous floor-area-ratio (FAR) bonuses if the developer renovates the station platforms below their buildings, and incorporates the station entrances into their two sites.

In order to begin the joint development process, a financial feasibility analysis would need to be conducted. This would include the cost of decking and the land value based upon existing physical, demographic, and market conditions for relevant properties and parcels. It would also include relevant zoning, land use, and air rights laws, resolutions, and amendments. A development scenario would also need to be designed, showing the placement of buildings, amenities, entrances, ventilation, clearance, and circulation; access, egress, traffic, parking, terrain, and environmental review processes would intersect these scenarios. The concept and site selection would also be coupled by site assembly, site planning, and an organization of the management structure. A marketing strategy would also need to be implemented, and demand generators – factors such as renters, buyers, anchor stores, trade areas, market capture, and foot traffic – would need to be calculated based on market demand. Advocates, facilitators, lenders, owners, users, realtors, managers, tenants, architects, contractors, and brokers would all need to be involved with the transportation authority in order to produce the best program and form, full of flexibility, activity, and density. They would need to find the gross, find the net, find the cash flow, find the tax credits, find the appraised values, and find the assessed values. They would need to deal with permits, retail space, community space, open space, financial structuring, incentives, risks, rents, and leasing, as well as the hard costs, soft costs, fees, equity, and debt service. Then, there’s mortgages, loans, and operating expenses. No wonder there are so many professionals involved in the development process (Nelson, 2014).

Private railroads tried to stay afloat by selling their assets in the mid-20th century, thus creating Madison Square Garden above the contemporary Pennsylvania Station, and the Pan Am Building above Grand Central Terminal in New York. The destruction of Pennsylvania Station sparked the beginnings of a preservationist movement which saved the nearby beaux-arts Grand Central Terminal from complete destruction. However, the movement was too late to preserve the dominance of the Helmsley Building on Park Avenue. New York Central Railroad, which owned Grand Central Terminal and the Helmsley Building, sold air rights for the construction of the Pan Am Building (now known as the MetLife Building) above the terminal. Donald Trump bought the Penn Yards on the Upper West Side for the construction of Trump Place. Indeed, the Jet Age had arrived alongside the Interstate Highway system, and unfortunately, no air right revenue streams were enough to keep Pennsylvania Railroad and New York Central Railroad afloat, even after they merged together to become Penn Central. Trucks took freight revenue, and premium high-speed train travel became the lore of airlines. When the US Post Office decided to no longer ship mail on the railroads, it was the last straw. When Penn Central filed for bankruptcy a few years later, intercity passenger routes were to be transferred to Amtrak and freight routes were to be transferred to Conrail, a nationalized freight carrier. Around this time, public transportation authorities were also being formed in metropolitan regions, such as New York’s Metropolitan Transportation Authority (MTA).

These transactions were made possible by the 1961 Zoning Resolution, which the Department of City Planning (DCP) drafted as the first and last update to the 1916 Zoning Resolution. While numerous amendments have since been added to the document, the core tenets of the 1961 resolution remain in effect, today, in 2015. Mayor Robert Wagner and DCP Chairman James Felt’s Zoning Resolution divided the city, for the first time, into residential, commercial, and manufacturing areas, and introduced incentive zoning and floor-area-ratio (FAR). FAR was a revolutionary concept that made building setbacks irrelevant, as it regulated height through a ratio that measured the area of a parcel occupied by the building, and dictated height through that ratio. For instance, an FAR of 1 could be a one-story building occupying the entire parcel, or a two-story building occupying half of the parcel, and so on and so forth. Furthermore, the resolution also introduced most regulatory tools associated with a Transfer of Development Rights (TDR), colloquially known as air rights. Amendments have been passed in order to use TDR to preserve green space and historical landmarks without interfering with the financial rights of property owners. But air rights were also used in order to sack Pennsylvania Station in 1963, and use its air rights for the development of Madison Square Garden and Penn Plaza, while moving the station entirely underground. Today, this cavern lacks circulation, light, and common sense. Air rights were also used atop highways. The Port Authority’s George Washington Bridge and Bus Terminal funneled vehicles along the Trans-Manhattan Expressway, below the Bridge Apartments. The 4,000 residents of these four aluminum-sheathed high-rises deal with noise and exhaust every day, but like most urban dwellers, they deal with it, and it is arguably better than leaving a gaping hole.

According to the American Planning Association (APA), air rights go back to early English common law, with its basis in the Latin legal maxim: cujus est solum ejus est usque ad coelum et ad inferos — to whomever the soil belongs, he also owns to the sky and to the depths. Though the air is now a public aviation highway, the practice remains utilized. The 1961 Zoning Resolution defines railroad or transit air space as “space directly over a railroad or transit right-of-way or yard, which right-of-way [is] open, except for structures accommodating activities incidental to its use as a right-of-way or yard, and not otherwise covered over by any building or other structure at the effective date of this amendment”. According to the Resolution, the City Planning Commission could now permit development in air space for any use permitted by the applicable district regulations, as long as the area only includes the portion of the right-of-way which will be covered by a permanent fireproof platform, and as long as adequate access to streets is maintained. While today’s public authorities are state agencies, thereby limiting their legal need to comply with municipal rules, agencies oblige nevertheless in order to appease politicians and Not In My Back Yard (NIMBY) activists.

The United States was founded in 1776, as Adam Smith published The Wealth of Nations. America was one of the world’s first democracies in order to protect “life, liberty, and estate”, as prescribed by John Locke’s Two Treatises of Government in 1689. Far from the agricultural society that wrote the US Constitution, cities in the early 20th century had to find means through which zoning could be legally enforced. The 10th Amendment of the US Constitution did grant general police powers to the States and to local governments, and government had the right to enforce order, protecting general welfare, morals, health, and safety. But the 5th Amendment of the US Constitution declared that no American shall be deprived of life, liberty, or property, and that no private property shall be taken for public use without compensation. Moreover, the 14thAmendment, approved after the Civil War, expanded equal protection of the laws, applicable to former slaves and rebels, upholding their ability to rein supreme over their private property. Zoning was able to become a legal instrument, first implemented in New York City following the construction of the Equitable Building in 1916. Since then, zoning has been used in order to exclude groups of people from neighborhoods, and decrease density by artificially regulating demand and supply near transit stations.

Today, less than two percent of passenger movements are conducted by public transportation in the United States (Guess 2008, 378). These agencies “cannot be profitable because when service increases, fixed costs increase by a greater amount, including debt service, operations, supplies, maintenance, and salaries” (Guess, 2008). Indeed, “fares rarely will provide more than half of total revenue, and they are usually not market-rate, so as to provide a service to the poor and so as to relieve congestion” (Guess, 2008). According to Simon Hakim in Privatizing Transportation Systems, publicly-controlled transportation removes the incentive to control costs, and removes consumer choice, allowing for organized labor to take control of the system and destroy any semblance of competition (Hakim, 1996). However, despite the potential for public-private contracts, and the “belief that the private sector can perform more efficiently than the public sector” (Hakim 5, 1996), public transportation cannot currently be competitive and profitable in the United States, just as the Interstate Highway System cannot be profitable.

Public transportation authorities were designed to operate transit, but not to own the assets that had been developed by prior companies. The grandeur of railroad terminals arguably decreased as taking flight became the transportation mode of the elite, and as white flight became the response to the Great Migration of African-Americans to New York and its subways. For instance, highways and airlines today also require government funds, yet funding for these systems are termed ‘investment’, whilst funding for transit and national railroad systems are termed ‘subsidies’ (Vuchic 2005, 184). Moreover, “‘in European communities, public transportation is not viewed as a ‘social service’ for people who are unable to afford private means of transportation… Instead, it is regarded as a solution to protect and preserve the environment, to reduce automobile use and traffic congestion, and to improve mobility of the overall population’” (Vuchic, 2005, 184). This highlights the stigma against public transportation in the United States, according to Vukan Vuchic, UPS Foundation Professor of Transportation Engineering and Professor of City and Regional Planning at the University of Pennsylvania.

Yet no such stigma exists in Hong Kong, where the Mass Transit Railway (MTR) Corporation is a profitable transportation company, privatized with the government owning the majority of shares. By building offices, apartments, and stores directly above stations, the MTR is able to use value capture mechanisms in order to actually be profitable (Loo, 2010). Due to Hong Kong’s density, the percentage of residents who ride mass transportation is the highest in the world (Suzuki, 2013). This equitable, sustainable, and feasible efficiency (Zhao, 2011), coupled by the fact that the government technically owns all land and leases it only for certain periods of time, makes it relatively easy for the MTR to acquire parcels for transit-oriented joint development atop station entrances. Chinese leasehold systems allow for the MTR to then sell or lease these properties to other developers. Furthermore, unlike American public transportation authorities, the MTR is privatized and operates on commercial principles, whilst being controlled by the public vis-à-vis majority shareholdings by the local government.

Public-private partnerships (P3s) require immense resources which are difficult to synergize (Enoch, 2002). Often, the public sector does not know how to regulate the private partner, and the private partner cannot think in political terms (Davis, 1986). In Hong Kong, the MTR is private itself, so this issue is irrelevant. The Rail + Property (R+P) program has begun to design P3 pedestrian-friendly environments, increasing the value of property. Indeed, “often missing was a high-quality pedestrian environment and a sense of place”, and “most first-generation R+P projects featured indistinguishable apartment towers that funneled pedestrians onto busy streets and left them to their own devices to find a subway entrance” (Suzuki 2013, 63). This program accounts for more than half of all income to the company, with an average of 35,000 additional passengers during the week at R+P stations, and housing prices increased by 5-30 percent (Cervero, 2009). However, the general MTR strategy would be difficult to achieve today in the United States or Britain, because the land use system is now entirely different.

Yet in the late 19th century, when transportation systems were privately owned and operated, joint development projects were commonplace. The private sector involvement in infrastructure investment in the 19th century overshadowed all other economic developments of the period (Grimsey, 2004). The U.S. government also granted land to railroad companies in order for railroads to span the continent. But once public agencies became owners, it became difficult to coalesce opportunities; numerous regulations made it mutually disadvantageous to form public-private partnerships (Keefer 1985, 334). According to the Wall Street Journal:

For decades, city and county transit agencies have leased out kiosks or small storefronts in their rail stations to businesses such as newspaper stands and coffee shops. Now, agencies are far more ambitious, developing large-scale, rent-producing developments, including hotels, apartment buildings and shopping malls, around their rail hubs. Transit officials expect real estate to become an increasingly important revenue source, amid stagnant federal funding and rising costs of upkeep for aging systems. (Dulaney, 2014)

When the development process involves a public agency, with limited expertise and resources, and with transportation as a core business, P3s clearly become paramount. They allow for the expertise and efficiencies of the private sector to be juxtaposed with the public sector. A small public transportation agency, for instance, may contract out its operations to a private operator, theoretically because the private sector brings skills that the public agency cannot provide at similar costs. The agency would regulate the private operator, making sure in its contract that it does not cut service to cut costs. However, these P3s often fail because the public sector does not know how to regulate the private sector, and because the private sector cannot think in political terms. According to Perry Davis, author of Public-Private Partnerships: Improving Urban Life, language is extremely important in order to craft an effective PPP, which are not a new phenomenon. In fact, “one hundred and fifty years ago Alexis de Tocqueville cited extra-governmental associations as America’s legacy to democracy” (Davis 1986, 1). These partnerships can be implemented for public transportation’s sake because “a crumbling social infrastructure – just like a deteriorating physical infrastructure – makes a poor environment in which businesses and business markets can thrive” (Davis 1986, 2). Yet “as partnerships require novel business approaches to civic needs, so does government require a fresh view of its role” (Davis 1986, 2). Arthur Nelson’s Foundations of Real Estate Development Financing: A Guide to Public-Private Partnerships further elucidates the challenges of P3s.

Even though redevelopment generates higher rates of investment return to investors, numerous obstacles have to be overcome. Some of these involve changing planning and development codes to be more responsive to redevelopment opportunities. Others are expensive in the near term because infrastructure has to be upgraded – though it would probably have to be upgraded eventually anyway. Many involve land assembly brownfield remediation. Still others are related to the complexity of modern real estate financing, especially when it involves multiple land uses (Nelson 2014, 4).

Public-private partnership models should be being implemented throughout the U.S., but people continue to fear density and displacement, and zoning and land use policies have become 20th century artifacts. Cities need to streamline joint development procedures, allowing for developers to build if they contribute funds towards renewing, enhancing, and expanding the systems that benefit their bottom lines. If affordable housing requirements and parking requirements make decking unfeasible, they should be exempt from these rules. Also, while the price of parking is almost always bundled as part of the rent, typically, a transit pass or subsidy is not included. But these changes require tackling NIMBYists so that transportation agencies can take on risk without being booed away from development. Alternatively, transportation agencies should be allowed to dispose of their properties, or lease them to a developer, as agencies are not experts at development. According to Arthur Nelson, a P3 for joint development would involve each party contributing what it does best, such as:

For the public sector, this can include planning and zoning activities that can recast the overall development vision of the area, upgrading infrastructure, expanding mobility options through sidewalks, bikeways, road improvements, and transit, as well as acquiring property and preparing it for redevelopment and assisting with financing. For the private sector, it can include market analysis, construction financing, construction management, procurement of long-term financing, and project leasing, as well as property management (Nelson 2014, 5).

Moreover, according to Vuchic:

The main goal of the public agency should be providing services the city and its residents need, rather than focusing only on optimal financial results of operations. Considerable economies of scale can be achieved by consolidation of many different lines, vehicle fleets, company managements, into a single agency. Network integration allows profits from heavily used lines to be used to support lightly used lines that are essential for area coverage, social, or other reasons. Governmental public policies can be better coordinated and subsidies controlled with a public agency than with many private companies. (Vuchic 2005, 433)

There are ample risks and ample rewards in a P3. For the public sector, perceived or real conflicts of interest, alongside a fear of the misuse of funds and resources, are compounded by land use conflicts (such as dislocation, relocation, or fair market value disagreements), public opposition, and worries that the private partner may fail (Monty, 2014). Meanwhile, the private sector is often concerned about excessive costs, time-consuming regulations, and accusations from the public; moreover, concerns that changes in key public or political leadership will derail partnerships are often concerns, alongside fears of market failures (Monty, 2014). Yet there are also plenty of rewards. For the public sector, of course, a P3 can provide for economic development, increased tax revenue, and improved public infrastructure and quality of life, whilst creating jobs and advancing the city’s image; perhaps, politicians would also be reelected due to their performance (Monty, 2014). For the private sector, a public partnership allows for resources to sustain their organization, and hopefully, the P3 is profitable, creating value, whilst enhancing their reputation and building their market niche (Monty, 2014).

The public sector can alleviate most of its concerns by following five rules: first, establishing a jurisdictional constitution; second, separating the analysis, evaluation, administration, and oversight agencies; third, ensuring that the bidding process is competitive; fourth, maintain caution, especially for projects with long life cycles, due to contract renegotiation concerns; and fifth, avoid stand-alone private sector shells with limited equity (Siemiatycki, 2006). All of these rules are essentially about effective communication and trust, which can be aided by transparency. This commits partners to the project terms, be it private partners that would otherwise seek to limit their responsibilities, or public partners that would otherwise waver under political pressure (Siemiatycki, 2006).

For the Massachusetts Bay Transportation Authority (MBTA), a P3 was necessary in order to manage the authority’s real estate assets. The internal department had to maintain the tenant ledger, collect rents, negotiate lease agreements, sell surplus properties, and respond to requests from developers (Flier, et. al., 1997). The T did not have the necessary resources, expertise, or profit motive in order to conduct these processes, so it contracted Transit Realty Associates (TRA), a consortium of firms, in order to outsource the T’s real estate division. Firms included: AW Perry, specializing in ownership, management and permitting; K.C. Donnelley and Company, specializing in brokerage; The Development Group, specializing in public property development and financing; and, Antrum Management, an engineering firm specializing in parking garages (Flier, et. al., 1997). According to Buzz Constable, a principal at TRA, the TRA had to organize hundreds of lease agreements, many of which dated back to the early 1900s, and were not cataloged at all (Monty, 2014). 80 percent of the T’s leased assets were non-performing; indeed, the T did not even have the time to collect rent or update property agreements, one of which dated to 1910 (Monty, 2014). The TRA instituted market procedures and marketed properties for new lease opportunities, allowing for the MBTA to receive, from $3.5M per year in 1996, to $14M per year in 2014 (Monty, 2014). While this is a marginal impact and the T is still deeply indebted (Kane, 2009), the TRA was nevertheless successful, having also created a Land Tracker system with GIS, allowing for the organization of the authority’s portfolio. The GIS based system catalogs basic information including location, size, assessed value, rail line and station, use, zoning restrictions and environmental information.

According to Joseph Monty, a Tufts University alumni who wrote his thesis on the MBTA’s joint development practices, the potential for value capture to significantly offset operating and/or capital deficits of transit systems is not lost on most transit agencies:

A U.S. Government Accountability Office (GAO) report found that 32 of 55 transit agencies surveyed had used some form of joint development as a source of funding and the bulk of these developments were concentrated on mature systems which operate heavy rail transit such as the Los Angeles Metro, Washington Metro, and Metropolitan Atlanta Rapid Transit. Furthermore, the GAO (2011) characterized agencies likely to utilize value capture as those which have formal joint development policies, real estate expertise, and developable land holdings. (Monty, 2014)

Due to the lack of profit incentives in the public sector, America finds itself with “obsolete equipment, strong unions, and difficulties in contracting out services” (Hakim 1996, 20). In denser countries without a friendly atmosphere of car ownership, such as Japan, rail service is profitable and attractive (Hakim 1996, 18), and this was also the case 100 years ago in New York. Most American cities today, which are oriented towards the automobile, cannot cover investment and operating expenses, requiring direct or indirect financial assistance (Vuchic 2005, 435), but this was not true of New York in the early 20th century. The city helped to fund subway systems, and contracted their operation to private companies. However, the city’s regulations kept the private companies from raising fares, eventually spiraling into bankruptcy:

The consolidation of the Manhattan Elevated Railway Company, the Metropolitan Street Company, and the IRT created a monopoly of fixed-rail rapid transit. This provided the rationale for the dual contract to fix the fare at five cents. The consequent constraints caused by a politically expedient fixed fare and wage inflation led maintenance to be deferred. The fixed fare destroyed the incentive for the companies to invest in quality, or even to maintain quality. The fixed fare also prevented expansion in that only those lines with very high ridership can be profitable if the fare is set too low. Lines which would have been economical at higher prices were not built. The transfer of ownership into the public sector compounded the problems. The incentive to control costs was removed and was replaced by the political need to placate an organized labor force (Hakim 289, 1996)

Today, the MTA’s funding shortfalls are due to a lack of political will – such as an unwillingness to raise fuel taxes – but the MTA’s budget is not the only transportation budget in dire straits. Nearly 25 percent of the nation’s 596,570 bridges are considered deficient, with “eight percent of urban interstates and 30 percent of urban arterials in poor conditions”, a consequence of a national transportation funding problem (Staley 2009, 169). Labor unions and their monopolistic powers force “excessively high wages and inefficient labor practices”, while agency management may allow for technological obsolescence, “defeating the advantages of providing good service as the dominant goal” (Vuchic 2005, 433). Indeed, according to Michael Bernick and Robert Cervero in Transit Villages in the 21st Century:

America’s cityscape has increasingly turned its back on new mass transportation investments. Too many recently built light rail, heavy rail, and commuter rail systems in the United States feature stations enveloped by parking lots, vacant parcels, open fields, warehousing, and marginal activities. This stands in marked contrast to the colorful streetcar suburbs that sprung up along trolley lines around a century ago, or to much of urban Europe where apartments, shops, cinemas, and offices continue to cluster around rail transit stops (Bernick 1997, XI)

American railroads used to be financed privately, even in Los Angeles, where the Pacific Electric Railway system, owned by Henry Huntington, was built because “Huntington believed he could increase his fortune by coupling streetcar expansion with real estate investment – namely, purchasing inexpensive land on the metropolitan fringe and increasing its value through the provision of rail transit services” (Bernick 1997, 20). In Brooklyn, New York, many railroads were owned by developers before they were eventually subsumed by the City and State, and these developers constructed giant hotels and resorts on railroad property in Coney Island, where the masses retreated. Vukan Vuchic, transportation expert, writes that since the 1980s, public agencies have been adopting “some forms and practices of private companies for greater operational efficiency” (Vuchic 2005, 299), and to reduce “political pressures and achieve competitive pricing, public agencies contract some sections of transit services to private operators” while retaining control “to ensure that public interest is not subjugated to short-term economic efficiency” and eliminate “competition, which tends to disintegrate transit networks and lower the quality of services (Vuchic 1999, 299).

Many cities are returning to transit, such as Los Angeles, because transit has “great significance for reducing traffic congestion, offering alternative means of travel, and contributing greatly to the quality of urban life” (Vuchic 2005, XIII). Still, Americans tend to demand less public transportation funding than peer countries, partly due to existing suburban densities and lifestyles, partly due to the lower economic and ethnic homogeneity of the population in urban areas, and partly because a “large segment of the population, along with many political leaders and decision makers, has never seen or experienced the modern, efficient transit services that exist in many peer countries” (Vuchic 1999, 171). As such, American cities, with a stronger individualistic and market-focused emphasis, face problems of “economic inefficiency, environmental deterioration, and unsatisfactory quality of life” due to “the inefficiencies and other impacts of urban transportation systems” (Vuchic 1999, XVII). Value capture cannot work without accessible transit in dense areas and without coordination between land use and transportation planning. In contrast, subways in Tokyo and Hong Kong are profitable because of high densities and associated benefits, unlike sprawling American cities.

According to Joseph Monty, “one key to success may be pursuing value capture opportunities before a transit facility is built” (Monty, 2014); for instance, “looking at a potential new rail transit corridor in Louisiana, it was predicted that if zoning regulations were to allow between 25 and 60 dwelling units per acre in the areas served by the new transit, approximately 10,000 to 20,000 new residential units would be constructed over the course of 30 years” (Monty, 2014). If just 1% of the market value of that new development was captured, it could potentially match and offset the predicted deficit of the rail system (Renne, 2010). Yet in the United States, a country where 85 percent of work and non-work trips are via the automobile compared to 50 percent in Europe (Buehler, 2014), it is difficult to coordinate between various institutions. Older European cities, built for density prior to the mass ownership of the automobile, suffered after World War II, while America had ample resources and ample land to construct penetrative highways (Buehler, 2014). Corresponding land use and zoning standards allowed for vastly different urban fabrics across the pond, leading towards stronger support for public transit in Europe, as compared to the individualistic-oriented United States. These problems are faced throughout the United States, and especially in New York. Nonetheless, the MTA has been working with the New York City Economic Development Corporation (EDC) and Department of City Planning (DCP), as well as with developers, in order to dispose of MTA property. However, it is an entirely different story in Hong Kong.

Nevertheless, T.O.D. stands on its own as a way to reshape New York into a more livable, sustainable city, and the revenue provided will still help with the MTA’s maintenance and expansion costs. The MTA does not have the resources needed to develop property. The authority also has to deal directly with the public and with a fear of density, as well as antiquated zoning laws, financing requirements, and a lack of communication between the City, State, and MTA. The legal hassles that the MTA would need to pass in order to develop residential property, for instance, would far outweigh the benefits. Governments tend not to do a good job at speculative development, with additional regulations and costs obliged, such as union labor. Moreover, most of the MTA’s yards and bus depots are active assets and cannot be shut down in order to be rebuilt or overbuilt. Only a few – such as the Hudson Yards – were built with enough room between the tracks for support structures, and still, it is expensive to move around machinery on an active yard and deck the site. In far-flung locations in the outer boroughs, the real estate is just not valuable enough to pay for decking. Even if it was, zoning would need to be changed, because most of the MTA’s assets are in manufacturing districts, which limits the height of buildings and lowers the land value.

The MTA Fulton Center, a transportation hub built with eminent domain in Lower Manhattan, one block from the World Trade Center, is only four stories tall. While air rights may be transferred, the MTA could have developed a taller building in the heart of Lower Manhattan, only a few blocks from their 2 Broadway Headquarters, for which they spent billions to locate and renovate. Moreover, the Fulton Center was completed in 2014, and the retail outlets there, managed under a P3 contract, have yet to even open, signifying the extreme lack of a profit motive at the MTA. Of course, the authority may not have known if Lower Manhattan’s real estate would resurge after the terrorist attacks of September 11th, 2001, and the authority may not have wanted to compete with the Port Authority’s World Trade Center offices and retail. After all, the World Trade Center had serious vacancy problems for decades, and as a public authority, the MTA may not have wanted to deal with the outcry of the public. But these are excuses. If the authority was concerned about vacancy, it could have built its own headquarters atop the Fulton Center, as had been done historically by private railroads; indeed, the Hudson and Manhattan Railroad, the predecessor to the Port Authority’s PATH, built Hudson Terminal atop its terminal station, which is the predecessor to today’s 21st century World Trade Center.

Because railroads have fixed costs, railroad profitability rises with increased ridership, which increases with increased density. Today’s railroad hubs often do not follow the example of hubs built by private companies, leaving these opportunities for airports, which strive to be self-sustainable and self-sufficient, using commercial real estate and airline fees for revenue, instead of relying on a local tax base (Prokop, 2014). But once all of these factors are corrected, comprehensive designs for hubs with joint development and light can be designed once again in New York City, which arguably rivals the density of Tokyo and Hong Kong. Yet the political economy of these Asian cities is vastly different. In Japan, for instance, “to accelerate economic growth after World War II, the Japanese government adopted a policy of constraining consumption, encouraging savings, and reducing labor costs”, catalyzing the growth of public transit (Vuchic 1999, 156). According to Transit Villages in the 21st Century:

A century ago, America’s vast urban railway networks were built by entrepreneurs who packaged transit investments with real estate development. In Japan, and especially the Tokyo metropolitan area, this is still commonly practiced today. Nearly all suburban rail lines in greater Tokyo have been privately built, typically by large consortiums that link transit and new town development. In the United States, we have tried the model of publicly led transit and privately led land development over the past 50 years with disappointing results. (Bernick 307, 1997)

The United States is not Japan or China, and our political economy is vastly different. Public transportation is seen as a subsidy rather than an investment. Yet Danielle Dai, who researched Chicago’s joint development policies, has provided solutions:

…Adopting formal, yet flexible, joint development guidelines or policies; supporting private sector participation through workshops; exploring opportunities within the zoning ordinance to encourage more investment in transit; encouraging the new transportation authorization bill to incorporate policies for joint development, value capture, public-private partnerships in transit, and transit-oriented development; and open public forums to foster communication about joint development deals (Dai, 2011)

In the end, value capture and joint development are not new ideas. This method was applied in London when the Metropolitan Railway Company bought undeveloped parcels along its planned extensions (Enoch, 2002). Moreover, King’s Cross Station, built in 1852, is the oldest surviving terminus in London. It stands essentially across from St. Pancras, which was built twenty years later from 1865 to 1876. King’s Cross “was the largest railway station that had yet been built” (James 265, 2014) until George Gilbert Scott designed the Midland Grand Hotel and St. Pancras for the Midland Railway twenty years later (James 2014, 266). The “hotel’s Gothic revival façade gives a decorous public face to the terminal behind”, and “the combination of hotel and train station proved both convenient and profitable, but it required a very different architecture from that of King’s Cross – one that promised both cultivation and comfort” (James 2014, 266). The real estate value of the site also allowed for the space beneath the station to be used as storage for beer. Joint development had created a destination onto itself. Recently renovated, St. Pancras is the terminal for Eurostar trains to the Continent.

Privatized subways in Tokyo and in Hong Kong are profitable due to high ridership. Parts of Manhattan are denser than Tokyo and Hong Kong, but sections of New York’s outer boroughs are less dense than Los Angeles. In Hong Kong, the subway, the MTR Corporation, acts as a real estate developer and transit operator, funneling riders into its trains through its malls, apartments, and offices. New York subways were simply not built below company-owned shopping centers, and China operates under a lease-hold system, with the Hong Kong central government leasing land to the MTR for development. In America, with private property rights, this practice cannot be emulated. While the MTA cannot ‘transport’ ideas, it can ‘translate’ them. Transit-oriented development will have a marginal impact on the MTA’s finances, just as joint development could not save private railroads from bankruptcy. The political economy of the country has changed, and the MTA operates a 100-year-old system with high costs.

In conclusion, America’s public transportation agencies cannot be profitable in the 21st century due to a political economy that isolates these agencies from municipal zoning and land use policies, and from forming value capture mechanisms, from tax increment financing to joint development and the transfer of development rights. This siloization of zoning, land use, taxation, and transportation operations is largely due to American fears of density alongside protections of private property, but it limits the potential for transit-oriented and transit-owned joint development, and it hinders the formation of public-private partnerships. Local, state, and federal structural reforms are necessary in order to streamline value capture processes, such as up-zoning transportation assets and relaxing land use requirements, in order to facilitate T.O.D. While value capture will provide marginal financial benefits due to the limited assets that agencies possess, it literally stands on its own merits as a vehicle through which the urban fabric can be renewed and enhanced. Transportation agencies cannot be profitable, but they can be organized more efficiently, if given the resources necessary to practice value capture.

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