Value capture: a right way and a wrong way

The idea of using some means to capture the value created by transit expansion to fund and maintain it has become a popular subject of discussion lately. It is well-known that property located on a transit line is more valuable than property that isn’t — more people can get to or from it for living or business purposes, without the owner having to waste acres of open space on parking or expend vast amounts on underground parking or a garage.

Unfortunately, many of the ideas being discussed in this country take the forms of additional taxation, which, to be blunt, is counter-productive. Most states and municipalities already have property taxes with regularly updated assessments. Additional tax burdens, even against an increase in value of 150 percent is likely to discourage development — if it occurs at all — especially since cities in this country have a way of not upzoning for transit.

Acclamations of transit systems with a rail+property model, such as Hong Kong’s MTR, often feature reminders that such a model could not work in the United States. Not only is MTR a new system, but it acquired its property holdings in Hong Kong because all the land is owned by the government, aside from the Anglican Cathedral. With their current financial constraints and (thankfully) the unwillingness of local governments to use eminent domain powers, the acquisition of a property portfolio is regarded as next to impossible.

Relatedly, some short-sighted commentators and officials have advocated that agencies sell off their land-holdings or air rights instead of leasing them. With very few exceptions that would not be a good policy.

Coincidently, Benjamin Kabak at Second Avenue Sagas put up a post today about a development in Manhattan called One Vanderbilt. Basically, the developer paid a $250 million fee to the MTA in exchange for permission to build the megatower. I think he’s right to be skeptical that the MTA could use similar fees to offset capital costs anywhere outside Manhattan, but it does point the way to what I was going to write about here.

I’ll take the MBTA here in Boston as my example, partially because it’s the system I know best and partially because the commission apppointed by Governor Charles Baker to recommend financial reforms was one of the short-sighted groups of officials recommending selling-off real estate.

Zoning in Massachusetts is in the hands of two entities: within Boston it lies within the purview of the City and outside it’s ultimately governed by the Commonwealth (and I believe the Commonwealth could ultimately override Boston’s zoning if it wanted to). Getting variances is difficult and most cities and towns were zoned to favor suburban sprawl-style development to the exclusion of all else. As a result home prices and rents have been rising as supply has failed to keep up with demand.

The MBTA is a state agency that the state doesn’t want to fully fund and the state also controls zoning and hence the key to billions of dollars of real estate investment. In essence, my idea is a simple one: the state gives the MBTA the power to unilaterally waive most zoning laws and community processes for any property they own or hold a share in within, say, 1.5 miles of a heavy or light rail station. Buying shares in buildings has been a practice of pension funds, banks and individual investors for decades. It’d be an excellent way for the T to expand its revenue without having to make too many compromises.

This would make the MBTA a huge part of the Boston area real estate market. Their air rights in Cabot Yards, Wellington Yards, Cleveland Circle, Forest Hills and elsewhere would become incredibly valuable to developers and developers throughout the area would be selling shares in their developments to the T for purely symbolic sums.

Unfortunately, it would be politically unpopular. But a man can dream.

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