When governments and transit-oriented developers meet: Part 2
The big cities of the world are changing. Inhabitants of mega metropolises are becoming increasingly aware of the environmental effects of the transportation choices we make. This awareness is taking us out of gas-burning cars and onto public transit as a primary means of travel. To enable this, the modern consumer looks for housing that is close to transit and other retail and commercial amenities. Recognizing this, the development community is shifting gears, moving from a primary emphasis on suburban residential communities to an approach that’s more concerned with high-density, transit-focused development opportunities.
The economic factors of supply-and-demand will result in high-density buildings being constructed around transit. However, to truly capitalize on this unique point in the history of a city, governments have a responsibility to work with developers. Together, they need to ensure that these transit-oriented developments truly promote a live-work-play, pedestrian-friendly environment centered around community amenities and integration.
As government agencies begin interacting with private sector developers on the topic of transit-oriented development (TOD), here are some things that they should keep in mind:
Developers place little premium on government land next to transit. Except in cases where government owns unique or strategic parcels like waterfront property, it is fair to say that developers do not place a huge premium on land immediately adjacent to transit lines and stations. What developers do value is design and delivery flexibility when they're trying to integrate transit and development. Innovation in these categories allows them to create unique and iconic sites that demand market sale premiums. In some cases, government wishes to withhold zoning as a negotiation tool. Then the presence of a master plan or an impending zoning bylaw agreement can help to decrease risk for the private sector while still providing enough incentive for them to submit high-quality proposals.
What can governments do? Be flexible. In most transit-oriented developments, governments’ primary objective is to ensure the rail infrastructure functions optimally, and service is not compromised by the presence of commercial development. Governments should be rigid in how they specify the functional requirements of their transit infrastructure, but not about how they define the design elements of the overall development.
Governments can also focus on creating broad-based zoning categories that allow developers to be more flexible in terms of implementing various types of products. Developers understand commercial demand better than governments. So they will be able to tailor a final product that best aligns with demand at the time of delivery.
Developers are increasingly interested in multiple revenue streams. The line between residential and commercial developers is beginning to blur. Many developers are now interested in simultaneously building residential properties and owning and operating parking facilities and long-term care facilities. They are also increasingly partnering with technology companies and retail chains. So governments need to be fully aware of the revenue streams that may be indirectly facilitated by such a partnership when they’re negotiating with developers.
What can governments do? Zoom out. Too often, government-led, TOD procurement processes narrowly focus on the construction schedule, project delivery, and the balance-sheet strength of bidders. While vital, in order to maximize value, governments should take a disciplined approach to understand a deal’s commercial implications from the perspective of a developer. Structured market soundings, commercial confidential meetings, and regular comminution with the local economic development agency can help to inform precedent transactions, revenue potential, and deal value. Going through the exercise prior to procurement will help government create market-level bid documents and maximize the total value envelope of a transaction.
Governments should also consider including innovation and/or alternate revenue clauses into procurement documents as a mechanism to force bidders to divulge some of the ancillary revenue opportunities.
Developers need to see expert, capable partners in government to add legitimacy to the project. Governments need to know when and where to reasonably ask for more from developer partners. They also need to know how to ask for more, without letting “the perfect” be the enemy of “the good.” Immense value can be created through win-win situations that benefit communities, developers, and the broader public. Productive negotiations and great outcomes will result from knowledge and willing partners on both sides. It is important that developers don’t overdesign and force things that are not market-friendly.
What can governments do? Bring in the right people. Developers will have the best consultants and technical experts to study the art of the possible when analyzing a site. Governments need to be equally prepared with technical, urban realm, and financial experts helping to support government staff to define their objectives and maximize the potential of the site. Bringing these experts in well ahead of the public announcement of the project will help government to define, in a very disciplined and informed way, the development and commercial potential of the site. It will also help government to prioritize objectives so that decision making is more fluid when tradeoffs need to be made with developers.
Government, where possible, should also identify TOD leads within major business units who have autonomy and decision-making power. Developers are keen to engage and work with government on integrating TOD into the fabric of the community. Sometimes, that consistent point of contact is the little difference that can make all the difference.
About the author
Chet Shah
Director, Infrastructure Planning & Advisory
Chetak Shah provides strategic advice to Hatch clients looking to make large infrastructure investments. In his role, Chetak helps them evaluate investment rationale and objectives, and guides them in translating these goals into actionable plans. He also advises on transit-oriented development, financial structuring arrangements, and P3 contracting-and-delivery methods.