Developers now have a range of options from which to choose when financing projects at or near transit stops.
DEVELOPERS OFTEN have had trouble getting financing for transit-oriented mixed-use projects, which didn’t fit into one of investors’ standard product types. But times have changed, and it has become easier for enterprising developers to obtain financing for this type of project.
Transit-oriented development (TOD) typically refers to buildings at or near a commuter rail or rail transit station or stop. TOD buildings are generally located along a pedestrian route to the station, and most include a mix of uses, with ground-floor retail, restaurants and/or entertainment uses and offices or housing above. Many municipalities and transit agencies are now pressing (or at least permitting) developers to build mixed-use TOD, and those attempting to finance such projects also are benefitting from strong market demand.
Municipal Concessions, Joint Development and Public-Private Partnerships
In the planning and entitlement phase, developers should consider seeking reduced (or no) parking requirements and liberalized height and floor-to-area (FAR) limits for any TOD project, which can help make a proposal financially feasible. A developer planning to include public space or a cultural venue at a TOD site should seek to monetize that venue by using it as consideration for reduced parking or added height or density. Seattle’s incentive zoning program provides added FAR for elements such as “green streets” (those that give priority to pedestrian circulation and open space over other transportation uses), LEED certification and performing arts space. Portland, Oregon’s density bonus program has benefitted builders who included such public amenities as below-grade parking, day care facilities, preservation of historic structures, public art and theaters.
Transit authorities own air rights and, frequently, buildable land, and developers can explore joint development projects — a form of public-private partnership — with these agencies. One attractive type of joint development involves building a parking facility that is either underground or wrapped with mid- to high-rise hotel, office or residential uses and ground-floor retail space. The equity investor, the transit authority or a partnership of both may own the building or project. The developer or investor may also want to be the long-term operator. Washington, D.C.’s Metrorail system has been a leader in joint development of parking and other structures. Joint development is the tool most commonly used by U.S. transit agencies to capture, for the transit agency, part of the appreciation in real estate value resulting from transit service.
The Metropolitan Atlanta Rapid Transit Authority (MARTA) selected Atlanta-based Carter to serve as master developer of an innovative TOD on 47 acres surrounding MARTA’s Lindbergh Station in Atlanta’s Buckhead market. Carter ground-leased the land from the agency and created a vibrant, urban mixed-use plan for the site. MARTA and Bell South, the largest employer in the complex (now AT&T), invested $120 million in structured parking and site preparation. MARTA is recovering its investment largely through ground rents and sales of appreciated land. Carter initially constructed infrastructure, parking facilities, approximately 1.1 million square feet of office and retail space, and approximately 350 residential units; developers are now using conventional financing to build out additional phases of the project.
A federal-state-private partnership put together $56 million in financing to design and build the new Assembly Station in Somerville, Massachusetts, a 10-minute ride from downtown Boston. The transit station serves Assembly Row, a mixed-use and transit-oriented community, office complex and shopping destination being developed by Federal Realty Investment Trust. Federal Realty and IKEA (which once planned to build a store at Assembly Row but later pulled out) covered the budget for the early design work, catalyzing funding from the federal and state governments.
The station, which opened in September 2014, is the first new stop on the Massachusetts Bay Transit Authority’s rail system in 27 years. When completed, Assembly Row will offer up to 2,100 new residential units, 635,000 square feet of retail space and nearly 2 million square feet of offices. The city of Somerville issued a $25 million tax increment financing-type bond for other infrastructure. Federal stimulus funds and state appropriations represented another $49 million. Somerville is exploring the sponsorship of additional development next to Assembly Row that would more than double the footprint of the new Assembly Square neighborhood. According to Don Briggs, president of Federal Realty Boston, “The partnership approach was key to the success of the federal-state-city effort to improve the region’s economic future and connect the new community to the region through transit.”
Multifamily Debt Financing
The senior residential market is growing as a proportion of total housing stock, and many empty nesters are looking for an urban living environment. This suggests the possibility of developing senior residential and assisted living in mid-rise TOD, with financing from a senior living chain. The broader multifamily rental market is also doing well; according to Charles Hewlett, managing director, strategic planning, at real estate advisers RCLCO, multifamily debt financing for good projects is available with up to 70 to 75 percent leverage. “Residential over retail is no longer a problem, and even residential above grocery can be financed fairly easily, with investors doing some due diligence to get comfortable with this combination. Mixing residential and office is harder,” Hewlett added. RCLCO served as a consultant to Carter on Atlanta’s Lindbergh Station project.
Financing Expensive Land
Land at transit stops, especially in an existing urban setting, can be expensive, and with conventional financing the numbers may not work. Developers may need to consider other solutions. New Markets Tax Credits may be available if the site is in what is classified as a low-income community. Affordable housing or historic tax credits may be available. Governmental entities or the transit agency may bank the land, sell it to the developer at a discount or pay an easement amount to the developer to offset part of any extra costs the developer incurs to build TOD.
Carter ground-leased land at MARTA’s Lindbergh Center Station from the transit agency and has constructed parking facilities and about 1.1 million square feet of office and retail space around the station; the project now serves as a leading example of TOD and of joint development in Atlanta. Photo courtesy of MARTA
TriMet, the Portland-area transit system, in partnership with the state of Oregon and the city of Gresham, used all of these tools at The Crossings at Gresham Station, a TOD project that now offers 22,000 square feet of ground-floor retail space, 95 residential units and 180 parking spaces. The transit agency purchased land around the station to ensure that development would support ridership, in particular to build housing at the station, which the market would not have done on its own. The transit agency sold the land to the developer, Peak Development LLC, at a $450,000 discount and invested over $875,000 in additional funds. Total development costs were $13.5 million. Pacific Continental Bank was the construction lender and Morgan Stanley provided the permanent financing.
Using Value Capture to Finance TOD Infrastructure
Developers should look to the public sector to facilitate TOD infrastructure financing. For some big developers, this may simply be a way to improve returns, but for medium-size and small developers — and even some larger firms — this may make possible a project that otherwise would not be feasible.
Tax increment financing (TIF), mentioned above in connection with Federal Realty’s Assembly Row, is a familiar form of debt financing issued by a public body. The public entity uses the proceeds for infrastructure — which can support a specific development project — or for some other public purpose. The municipality pays off the debt by collecting revenue from the extra economic activity related to the development, usually in the form of increased property tax receipts resulting from the appreciation in property values.
A special assessment district (SAD) or special improvement district (SID) is another type of revenue-collecting arrangement. If a majority of property owners in a district agree, a municipality may impose a higher tax rate on an identified tranche of property value in the district, such as the increased value resulting from the improvements (or services) financed by the higher tax rate. The improvements could include, for example, brownfield remediation, a new transit station, streetscape renovations, street cleaning, snow removal or public safety, and are designed to catalyze and support new development.
Community development districts (CDD) and new community authorities (NCA), as well as other, similar types of entities, finance infrastructure by imposing charges on the development supported by the infrastructure. Depending on state law, these entities may be developer controlled or publicly controlled. The 2007 recession caused some of these entities to default on their debt, but a large majority weathered the turndown.
Business improvement districts (BID) operate under special local laws and collect taxes or fees to pay for services or capital improvements within the district. A BID may be a nonprofit or a quasi-public entity and typically has a governance structure with both business and public participation. A parking benefit district (PBD) also operates under local law and manages part or all of the parking in a district. Parking revenues can finance streetscape improvements and services. PBDs may also charge fees for resident parking, nonresident parking and/or off-street parking.
TIFs, SADs and NCAs are all forms of “value-capture” financing, in which a public authority collects additional revenue (used to pay debt service for infrastructure) from the additional economic activity resulting from the investments in infrastructure, and can all be used to help finance TOD.