TOD and what Developers Want

Most political cycles follow identically to economic cycles. However, regulatory decisions are still processed outside the political environment, and so they are off-sync with the political and economic cycles.

PHASING AND FINANCING
Cities need to understand: It does not all go in at once. Any development project has a phasing sequence that may continue for over a generation.

“Shovel-Ready” - 1 year
Short Cycle - 2-5 years (predictable)
Long Cycle - 5-10 years (unpredictable)
“Recycle” - 10-20 years (revamping what's been done)

Proposals for development will often include plans that include both short and long term elements. But the actual construction of planned future elements is contingent upon the success of the initial development. As one presenter put it, “In terms of the planning, sometimes you get a plan and it says "build this" and you say "build this and let's see if it works". The market changes so quickly. In a project planned for a 10-12 year build-out, market will change completely in those ten years. TOD requires a very intelligent, market based plan, flexible to market based changes.

DEVELOPERS AND PLANNING
Developers want planning to function as a pre-curser to development. If everyone looked at planning as a stepping-stone to development, there would be a different environment. Proper planning will yield a product that benefits both sides financially. On the development side, it's a market performance. On the municipal, it's a fiscal issue.

PUBLIC/PRIVATE PARTNERING
One panelist observed: “Jurisdictions need to be in their pitching with developers”. Jurisdictions need to be willing to no be adversarial. If you can create a situation that creates allied interests, that is win-win, will be faster, and more efficient. Jurisdictions and developers should negotiate agreements considering shared values, and what risks each is willing to trade off. For example, developers would really like cities to under-take some of the financial risk of TOD. The moderator suggested viewing capital improvement funds as a financial investment in the city. In any case, it is important to determine who is going to be responsible for each area so that things are not stumbling along, uncertain, during the development process. In public/private partnerships, each party should make commitments at the outset regarding the responsibilities each will oversee, so that each party can know that the relevant expertise is applied to the relevant area.

DEVELOPER ROLE
It is the developers job to go in an invest capital, and expect a financial return. Predictability is essential for ensuring this financial return. For developers, time is the enemy. Development occurs using borrowed institutional capital. Borrowing that capital is like assuming risk. The perceived degree of risk affects the rate at which capital is loaned to developers, and what rate of return is expected upon that investment. Because rate of return is evaluated on a yearly basis, having a development tied up in planning for a year or two is disastrous. If civic jurisdictions don’t understand the pitfalls and parameters of institutional capital, they have a hard time understanding the need for predictability. Real Estate Funds and Operators, for whom a 15% rate of return is desirable, loan institutional capital. Because of this arrangement, and so that they may ensure to prospective tenants that the promised structure will actually exist, developers seek regularity and predictability. This desire for regularity and predictability should be accommodated by cities because developers are the ones who provide public investment in a community that provides the housing and the jobs.

In order to achieve TOD, some unorthodox procedures may be necessary. What developers want and need may cause some heartburn, and at first, may not seem to be possible. Changes in regulatory rules may be required. In the case of a wetlands development case study mentioned, the solution actually required alterations to the development review code, to reduce the defined floodplain. As mentioned above, the non-synchronicity of economic/regulatory cycles presents a serious impairment to development. One panelist said: “When you start talking about the environment, you start talking about a large variety of players, all of who have as significant and growing role in the ability to regulate the environment”. Therefore, it may be necessary to consolidate the review process, and gather as many as possible of city, county and federal regulatory agencies (the people with the decision power) together in one room, and either ask them to solve the regulatory issues (and let the developer check the financial side of things) or ask the agencies to tell the developer how to solve it. The review process can be expedited in such a way that many of the traditional regulatory stumbling blocks, such as review processes, can be waived or bypassed.

ACHIEVING TOD
It is important to commit to success up front. Both private and public parties have to agree to agree, to actually want to find a solution, and lay down conditions and expectations that are necessary for the project to work. Many municipal codes actually prohibit TOD and the "transit district overlay zones" aren’t any better. These zones were adopted without developers at the table, cobbled together out of what they've seen and read. TOD is not standard development, and requires some accommodation. If the community wants a better product, some give and take is required. The jurisdiction should provide an environment/create a setting that supports mixed use, and do it in such a way that it meets what the market wants.

TOD FINANCING
Cities need to understand that for a TOD to fly, it has to be economically viable. Even if the banks will fund it, the institutional market doesn't want it. Institutional market says mixed use is only as strong as the weakest link, that if one part goes bad, then the whole thing goes under.

MARKET DEMAND FOR TOD

TOD is reinventing a market pattern. Thus it is CRITICAL that a true market demand program be implemented. (Not easy or cheap, but critical). What has been historically been built does not matter. It’s what is in demand right now that matters. Future allocation must reflect the true demand of the market. Otherwise will unlikely to be funded, or will not be what the community needs, and will be under-used, under utilized. “When we talk about TOD, we forget that their are other methods of transportation going thru, walking and cars, and TOD will remain unused unless people can get in and out”. Projects cannot be just transit based. TOD must be market real estate that is transit oriented.

PARKING
Parking is a serious issue to developers because it is extremely costly. Most parking either winds up being tucked under a building, or built on top, from $5k a space, to over $20k a space. Cities and counties need to pay as much attention to parking as we do to land use, and recognize that we need to provide a variety of answers to the “parking question”, including considering both shared parking, and on-street parking.

Developers will accept a lot of predictability, but want some flex in other areas. The zoning map looks unrestricted, but there is a lot of restriction through the rest of the code. Form-based codes, like land-based codes of the past, don't involve developers, and are not market oriented. Form based zoning should allow for some flexibility for the populations that will use that building, and allow for a mix of housing and building size through the project. To get the best use of buildings, you may not want the tallest buildings all next to the station. Potential buyers/tenants may be willing to pay more to be next to the park, rather then right next to the station. Vertical mixed are not limited to the “retail below and housing above”. Cities should allow for some office above. You may have housing or restaurant at the top. After all, cites are saying “We want a ground floor activity zone, activated thru-out the day" and office over retail is not the only pattern which can provide that.

TOD AS NEIGHBORHOOD
When successful, TOD’s are neighborhoods. They are neither sites nor stations, and act as places. Cities must recognize: No TOD is a centroid popping out of a station. A TOD may be part of several existing neighborhoods. Bring the transit to the TOD, rather then trying to create TOD way out there. Developers have learned that almost 70% of the people who choose to buy into a TOD already work/live/own businesses in the TOD area. TOD can be used as a way of linking to transit station.

DEVELOPERS AND TRANSIT AGENCIES
People say Transit Agencies should not be in the TOD business because it's a land-use issue. But if they are not at the table, nothing winds up happening. Transit agencies need to be at the table, because they assign the infrastructure development. In the future, it will be necessary to partner more with Transit Agencies. As time goes by, there is less available capital for investment and so it becomes necessary to get Transit Agencies to manage their capital better, so that those capital investments they make can be more effectively used to leverage capital for the development market. The State DOT may seem to be a most unlikely partner in Transit projects. However, consider the effects of transit upon roads. The DOT (Department of Transporation) can extend roadway life and improve air quality by improving transit. Following the presentation was a question and answer period between both members of the panel, the moderator, and several audience members. Again, I can give no sure attribution to any specific comments.

Cities who want to understand TOD and need an analysis of the market need to do a real estate market feasibility study, not a transit market study. Find a firm that understands both real estate finance and municipality finance. One panelist declared: “We try not to do any TOD that has not had a market analysis”. A market study helps you get to the point where something can be financed. A market study becomes your market plan. As you understand what the market is, you start to understand what you would be selling to. The more end users you can find, the more it becomes a “Built-to-Suit”, and so it becomes much more financeable. An effective methodology for data collection is to share both data and the costs of data collection, so when you get the market study done, you’ve not only got the data collected, but some kind of consensus built. As a city, you are not going to get all the information if you rely on the developer. One of the panelists advised “Don’t put too much forward, and expect developers to propose the undeliverable.”

Big cities are not necessarily better suited for TOD then smaller ones. Developers make their money when they sell a property, so it’s all a matter of margin. Developers will build where the money is, and the money is where the greatest difference between costs and selling price. If there is a market for TOD, or if a market for TOD will be created, developers will build TOD, no matter where it happens to be located.