A 10-Part TOD Finance Plan

The basic concept of transit-oriented development (TOD) is to combine residential, retail and commercial uses with public open space near transit. A TOD allows people direct access to transit and to live, work, play and shop in a pedestrian-friendly environment. Development around transit also promotes compact development, mixed-uses and enhanced auto, pedestrian and bicycle connections. Most TODs are located within 1,500 to 2,500 feet from a transit station or stop. From the perspective of transit agencies and government, TODs are clearly a proven way to:

• Increase ridership.
• Reduce traffic congestion.
• Reduce environmental pollution.
• Reduce the demand for oil.
• Enhance tax revenue from increased land value and expanded development.

• They capture premium rental rates and price points.
• Increase density of development.
• Increase net proceeds from the refinance, and/or sale of the TOD.
• Increase retail sales from access to transit riders.
• Increased productivity.

TODs are Generating Premium Rental Rates and Price Points
The Center for Transit-Oriented Development recently completed a study that revealed that the demand for housing within walking distance of transit will more than double by 2025. The center went on to state that currently, properties within a five- to 10-minute walk to a transit station are selling for 20 to 25 percent more than comparable properties further away — a price premium that is likely to increase as traffic jams worsen. According to a study by the nonprofit Congress for New Urbanism, while less than 25 percent of middle-aged Americans are interested in living in dense areas, 53 percent of 24 to 34 year olds would choose to live in transit-rich, walkable neighborhoods, if they had the choice.

According to the Urban Land Institute (ULI), residential properties for sale near commuter rail stops in California consistently enjoy price premiums, including a 17 percent advantage to properties in the San Diego region. A study completed by California State University at Fullerton indicate that “…there are premiums of 4 to 30 percent for office, retail and industrial buildings located near rail transit in Santa Clara, Dallas, Atlanta, San Francisco and Washington, D.C.”

Yet many governments and private developers have failed to capitalize on the economic and development potential of transit investment. Therein lies the need for this proposed 10-part approach to structuring finance plans for TODs.

A Ten-Part Approach to Structure Public/Private Finance Plan for TODs
The ten-part approach to successfully structuring public/private finance plans for TODs should be helpful to private developers to convert a TOD which is financially infeasible to a project, which is attractive to the equity and debt capital markets. Equally important, this 10-part approach allows transit agencies to achieve a competitive return on their investments in land located around stations, infrastructure and the transit system. This return on investment (ROI) can be used by transit agencies or operators to cover all, or a portion, of the cost of transit stations and possibly a significant portion of the transit system. In order to cover a substantial portion of the cost of the transit system, transit agencies will need to leverage the non-tax income and tax revenue generated by all of the TODs along the entire transit alignment.

Part 1: Private Partner Equity and Debt
Equity
Private developers and/or private investors provide at-risk cash, referred to as equity for projects. These investors expect a return on their investment. That return is dependent on their investment goals, the source of funds and the level of risk in the project. Equity investors are also the owners of the development. The primary reason the returns on an equity investment are high when compared to the interest rate on a construction loan is that equity investors are the last to be paid. They share in the funds available after expenses and after debt service payments. The amount of equity required for a project is most often determined by the construction lender or the provider of the permanent loan. The equity portion of development financing typically ranges from 10 to 25 percent or more. The balance is financed with debt.