When governments and transit-oriented developers meet: Part 1

By Chet Shah |

Good public transit does more than move people from A to B. It determines how cities grow and develop, too. If we’re going to have urban centers that are functional and attractive places to live and work, government and developers need to work together. We believe it can be done.

In our new and evolving world, reducing carbon emissions and promoting true live-work-play environments will be a prime objective. Achieving them will depend largely on getting more gas-burning vehicles off our roads. To coax people out of their cars, we’ll need to provide them with something better. As we’ve known for some time, good, affordable, convenient transit—the movement of people by train, bus, subway, and LRT—is the linchpin. So the conversation now becomes how to get people living comfortably and enthusiastically in a world where traveling that way is the norm.

Moving people is just the beginning. Mass public transit plays an important part in determining how cities grow and develop, too. Most urban areas want plans that span fifty years or more. Developing and implementing them will depend on an ongoing and effective confluence of government and developers working together. We believe it can be done.

Here are three things that government decision makers should know about developers—and how to manage them—when the name of the game is transit-oriented development.

  1. Developers are quick to act. The instant a government announces its intention to build a transit line, private developers begin to amass lands along the corridor in question. Prime locations are within an 800-metre radius of the planned transit node, the “direct influence area” where land and access is most valuable. But without the right commercial mentality or focus, government will struggle to get any real share of the increased value ‎that’s created through its transit investment. Often, its take won’t go beyond standard development charges and traditional taxation.

    What can government do? Be proactive. Slowly amass and zone land within the direct influence area well before announcing a transit project. In sophisticated markets, governments hire independent agents to buy land on their behalf so the acquisitions aren’t readily attributable to them.

    If land acquisition is not possible, government may boost returns on its transit investments by claiming compensation for any additional demand that’s created by the presence of the transit. This can be a percentage of gross sales or a “per-door” contribution. Include any development in the influence area beyond what would reasonably have been expected if the transit infrastructure had not been added.
  2. Developers will partner with infrastructure constructors. But not easily. Government often tries to get conventional infrastructure constructors and commercial developers to partner around transit hubs. The hope is that together, they’ll achieve better design and physical integration of public and private assets. Not always. These two groups manage very different types of risks—and they’re often conflicting. Infrastructure constructors want to minimize issues related to integration; they focus on simplicity of design. Developers want to offer the most user-friendly forms of integration. They’ll often try to innovate with respect to design and access. Delivering an infrastructure asset is frequently tied to a rigid timeline that government sets for implementing its transit program. This can be at odds with a developer’s strategy, which is usually based on maximizing profit by bringing a product to market when demand is greatest.

    What can government do? Consider issuing a joint RFP for the development of infrastructure, and include lands that are slated to evolve into mixed-use commercial development in the procurement. This will provide a mechanism for infrastructure constructors and commercial developers to form teams and bid together. Government should take a disciplined approach to developing the functional, operational, and delivery specifications of its transit infrastructure assets. Doing so gives the infrastructure constructors the basis to accurately price, schedule, and assign risk to the project.

    On the other hand, governments shouldn’t try to influence the design of the transit asset or the ensuing commercial development. That will hinder the innovation that becomes possible when the infrastructure constructors and developers collaborate. Nor should government impose delivery schedules or stipulate the type of use (office, residential, retail) to be built on the site. That approach significantly de-risks the project for bidding consortiums.

    Development around a transit hub generally encourages a mix of uses, and the greatest and broadest economic benefit for the influence zone evolves naturally over the long term. If government wants input into design, it can run an open competition to generate interest and understand the design applications for the site.
  3. Contrast long-term property managers with those who build and sell. Increasingly, developers in North America build for the rental market, particularly those specializing in high-density residential properties. Being invested in the asset for the long term, they’ll want to guide the evolution of the broader transit-influence area. But their long-term interest also means that their return-on-investment will be recouped much more slowly. It’s unlikely they’ll pay as much for the land as a traditional developer would. Developers of rental buildings are also more amenable to unique ownership structures like ground leases, since owning the land doesn’t affect their cash flow.

    What can government do?
    Carefully define and prioritize its objectives for the development. Examine ownership considerations, land sale amounts, and the larger economic impacts of development. All must be clearly communicated to the private sector so development teams can plan appropriately and enable a process that is fair and impartial. The objectives should also be clearly reflected in the evaluation process of the transit-oriented-development procurement, with appropriate weighting given to the highest priority goals.

There are more ways that government and private developers can work together for the good of all concerned. Hatch’s advisory group is helping to spark the conversations, driving brainstorming and discussions about financial structuring, how to pay for transit development, and creating the right conditions to attract the private sector’s contributions. Stay tuned for Part 2.