Dr Andreas Kossak examines the complexities of Transit Oriented Development and Value Capture
In 1919 the head of the planning department of the “Free and Hanseatic City” of Hamburg, Fritz Schumacher, published a Scheme of the natural development of the organism Hamburg. It reached out far beyond the political borders of the city, what would now be characterized as the “metropolitan area”. The scheme consisted of axes starting in the city centre with the backbones of the axes primarily consisting of existing and planned respectively lines of the urban and regional railways, as evidenced in Figure 1.
At the beginning of the reconstruction of the German cities after the Second World War the head of the engineering department of Hamburg was convinced that his big chance has come for realizing an automobile-oriented development of the metropolitan area.
In 1953, even though the number of cars and trucks had not yet reached the amount before the war, he declared a nonetheless severely critical state of the mobility in the city. His proposal: a network of 140km “City Autobahns” with six lanes and a width of 40m. Though this approach completely corresponded with the ideology of most traffic planners in Germany at that time it was, remarkably, not accepted by the city government and its planning department.
Despite the bombardments during the war the historic urban structure of the inner city of Hamburg had remained stable to a reasonable degree. It was perceived that this structure could not resist the pressure of an unrestricted increase of the automobile traffic. Instead of following the ideology of the “automobile-oriented city”, it was decided to concentrate on the leitmotiv of a “transit-oriented traffic system”, based primarily on urban and regional rail-systems with only few extensions. The existing rail-network was the by far largest urban/regional rail system in Germany. Based on this advantage the revolutionary decision was taken not to expand the parking space in the inner city, but to reduce it.
Following Chicago (1955) and London (1958) Hamburg became only the third city to establish a comprehensive Park + Ride System at rail stations. Another important milestone was the foundation of the world-first area-wide “Transit Association” in 1965. As a result the public transit share of the city centre traffic during peak hours reached 90 per cent – unique in those days.
A CONCEPT OF AXES
In context with the joint regional planning of the neighboring Federal States Hamburg, Lower Saxony and Schleswig-Holstein, a development plan for Hamburg and the surrounding areas was elaborated. The first draft was published in 1969. Central Components have been a “Concept of Axes” and a “Density-Model”. In 1980 the second generation of the plan was published.
The backbones of the axes are lines of the urban/regional heavy rail system. Within walking distance to the stations (<600m) it was intended to gradually increase the density of buildings, depending of the distance to the station.
The Concept of Axes has proven to be efficient, but the Density Model was only
partially successful. Because of the rising prices for the land close to the stations, in some areas the housing activities took place more on the land between axes. The notion of connecting the Concept of Axes and the Density Plan with the “profiteer pays principle” was neglected from the very beginning. That might be attributed to the comfortable state-subsidizing of public transit in Germany.
An exact replica of the connection of axes and housing density has been practiced increasingly successfully for decades all over the world. The forerunner and a remarkable example is the US metropolis Portland, Oregon where the concept has been practiced since the early 1980s based on a light rail system; the first line of the system opened in 1996.
Inside the borders of the city of Portland are 0.6m inhabitants; the population of the metropolitan area is about 2.3m. Within the next 20 years an increase of the metro area’s population by about 1m is expected, in part thanks to the city’s light rail system and its extraordinarily high standards of passenger friendliness and design , , .
The decisive difference compared to Hamburg (1.8m inhabitants inside the borders of the city, 2.5m including the “belt” of neighbouring communities, twice that figure in the extended metropolitan area) is the fact that in Hamburg an extensive urban heavy rail transit network had existed since the beginning of the 20th Century and was in full service again shortly after the end of the Second World War.
In Portland, the historic streetcar system had been suspended and then removed in the early 1950s. The implementation of a modern area-wide rapid light rail system only started in the 1980s. However, A remarkable parallel (albeit 20 years later than in Hamburg) is the fact, that the regional government in Portland took the decision in
favour of public transit being the future backbone of the traffic system instead of further supporting automobile traffic, not least by building another highway through the city.
In those days that was a very unusual and bold decision in the US. The federal money having been disposed for the respective highway was transferred to the first section of the light rail system (with agreement from the federal government). The key phrases for the concept being followed in Portland since then are:
- “Transit Oriented Development“
- “Value Capture“
Transit Oriented Development
This is the intentional integration of urban/regional development and public transit. The key point is the concentration of housing and business areas within the urban districts and along regional development axes around the stations of the primary public transit system. Remarkably the concepts in this regard are increasingly based on the modern light rail system, not on heavy rail systems; this holds true in particular for metropolises in North America and Australia.
The specific costs of building a light rail system are on average only 10 per cent compared with the building of heavy rail systems (operating mainly underground). Today there are 400 light rail networks operating worldwide, another 200 in the planning status and 60 under construction. They are proving to be an efficient instrument for avoiding urban sprawl, congestion and rising fuel costs as well as improving environmental conditions. Commuters increasingly take advantage of a comfortable and reliable ride in an attractive light rail vehicle instead of being stuck in their cars on congested roads. Of the top 10 cities on the 2012 Economic intelligence Unit’s global livability index, eight have light rail systems.
Value capture, in this context, is the participation of the incremental value of land, of the initiated economic development and of the various other benefits of the implementation of a new light rail service – aimed at co-financing the construction and the operation expenses to a reasonable amount. Today results from numerous investigations in recent years on the positive effects of light rail systems in the respective regard are available and the catalytic effect on the urban and regional development as well as publications from administrations and public transit operators addressing the respective factors.
• Portland, Oregon, USA (population metro area: 2.3m)
The operator of the light rail system, TriMet, estimates that about US$10 billion (€8 billion) have been invested in projects in walking distance to the light rail stations since the announcement of establishing the light rail system in the early 1980s.
The operation of the public transit system in the Portland area is co-financed/co-funded to a reasonable amount by the “profiteers”. That is based on a special Payroll and Self-Employment Tax to be paid by enterprises being located within the direct supply area of TriMet. The tax is collected and administrated by the finance department of the State of Oregon. In FY2015 the revenue from this tax covered 54 per cent of the total operating budget of TriMet. The share of the ticket-revenue has been only 23 per cent , .
Financing the single sections of the light rail system has been somewhat different. In general the share of the federal funds is remarkably high. A very special exception was the connection of the airport (the red line in Figure 3). In this case the federal funds had been null, 25 per cent have been paid by a real estate enterprise for getting the right to develop a certain terrain close to the airport for free, 25 per cent was paid by the airport authority and, 50 per cent came from various regional and local sources, including:
- bond measures
- additional property taxes and
- private land donations.
In 1995 the city of Portland established the Portland Streetcar Inc as a non-profit organization for planning, financing and realizing streetcar-projects in the inner city as a supplement of the MAX (Metro Area Express) light rail system. The Portland Streetcar is not a traditional, historic streetcar but more a secondary, complementary light rail system. The construction started in 1999, the operation on the first segment in 2001. Two components of financing the infrastructure are particularly remarkable:
- About 20 per cent of the construction costs are paid by the owners of the real estate adjacent the streetcar lines: they form Local Improvement Districts (LID) for this purpose. These are special tax assessment districts. Its formation isbased on the fact that the landowners take reasonable economic profit from the project.
- Additional 20 per cent are contributed by the Portland Development Center based on revenues from special taxes being implemented for supporting development projects.
• Dallas, Texas, USA (population metro area: 6.5m)
“According to research carried out by the ‘Center for Economic Development and Research’ at the University of North Texas, about a decade after it opened, the Dallas Area Rapid Transit (DART) light rail had generated developments worth US$4.26 billion” . “Property values near the DART lines are 25 per cent higher than in similar real estate elsewhere in the area”.
“Investment in DART Rail capital projects between 2003 and 2013 has generated a return of US$7.4 billion in regional economic activity, creating more than 54,000 jobs that paid more than US$3.3 billion in wages, salaries and benefits. In addition, more than US$5.3 billion in private capital transit oriented development projects have been built, are under construction, or are currently planned near light rail stations since the debut of DART Rail in 1996”. “From the beginning, part of DART’s mission has been to build a transportation system large enough to stimulate economic development. The voter-approved 1 per cent sales tax that funds DART makes that possible”.
• Minneapolis-St Paul, Minnesota, USA (population metro area: 3.1million)
“Developers have announced at least US$2.5 billion worth of new construction and redevelopment projects within a half-mile of the Metro Green Line (Central Corridor LRT Project) since engineering work began more than five years ago…’The development we’ve seen so far only marks the beginning of new opportunities in the central Corridor…For decades to come the Green Line will be a catalyst for employment and economic growth along this 11-mile route’”. “A study of Hiawatha Light Rail corridor found, that the line increased residential property value by US$47 million”. After the light-rail line was completed in 2004, prices per building-square-foot increased by about 50 per cent.
Charlotte, North Carolina, USA (population metro: 2.3m)
To date no quantified effects of the light rail project regarding the investments,
increase of property value etc are available, but numerous statements of ‘players’ being involved in the project have been published. Some examples:
- “The first leg of the Blue Line, which opened in 2007, is widely credited with kicking off the apartment boom that’s spread down South Boulevard. Now, those who planned the next phase say the US$1.2 billion is paying off.”
- “Developers are willing to pay a premium because they can charge higher rents to tenants near a busy stop.”
- “Transportation infrastructure has this powerful effect of repurposing real estate.”
- “Development coming fast to the Blue Line extension”.
• Perth, Australia (population metro: 2.0 million)
“Perth’s southern rail line raised land values around stations by 42 per cent over 5 years and could have raised 60-80 per cent of the capital if tax increment financing had been used.” This is taken as a proof for the fact that financing of light rail projects based to a reasonable amount on value capture is not only acceptable but imperative. “As soon as the route was announced, developers from around the world bought up all the best sites and now are delivering them”. ”Perth’s southern Rail Line was parodied as a complete waste of money as no-one would use it…The rail system has dramatically increased patronage…This was beyond the expectations of everyone…, .
Two extraordinary components of Transit Oriented Development
1. Portland Transit Mall , 
The Portland Transit Mall was opened in 1978 as the first of its kind in the USA. It consists of two one-way streets intended specifically for mass transit, spanning 22 blocks (29 blocks since 1994) through the high-density office and retail core of the city centre.
“The Mall immediately received international attention as a model for transit and downtown redevelopment. It was recognized for its exceptional design quality and its strategic and operational innovation…the Mall was celebrated as a prototype for redeveloping an urban center using transit as a major catalyst.”
In the centre of the mall all light rail lines are meeting around just one block at the Pioneer Courthouse – see figures 4 and 5. On Pioneer Square in front of the Courthouse there was an eight-storey car park that was demolished to make way for the Mall and replaced by an attractively designed meeting place. The Portland Transit Mall has set a new standard for urban design and was honoured with the highest architecture awards.
Figure 4: Portland Transit Mall
Figure 5: MAX Light Rail (left) and Portland Streetcar on the Portland Transit Mall
2. Orenco Station, Hilsboro, Oregon
“Orenco Station is a new transit-oriented community of 1,800 homes, a town center, office, retail and nearby employment on 209 acres in the town of Hillsboro, west of Portland, Oregon. Extending out from the light rail and town center is a grid of walkable, tree-lined streets and parks, featuring cottages, condominiums and row-homes in a broad range of sizes and prices.The site of Orenco Station was designated a ‘Town Center’ under Portland‘s 2040 regional plan, one of a number of Town Centers along a new light rail line. As the most ambitious and most successful such community to date, it has become a closely studied laboratory of new ideas in the battle against sprawl.” (Figure 6)
Figure 6: Logo of the “Orenco Station” project 
Some critics put forward that light rail is too expensive compared to Bus Rapid Transit (BRT) while the latter fulfills the same function even better, , . In fact there are examples to be found where the notably higher positive efficiency of light rail systems in terms of attracting passengers, increasing property values and stimulating urban development has not been proven to date or does not actually exist.
However, the critics mostly use tired, misleading arguments and have been known to intentionally misinterpret figures and facts, or are, at best, comparing apples and oranges. Their arguments are retorted as follows: “It’s not just a question of trams versus busses – it’s really an issue of rail-based versus road-based urban development. The former can attract private financing, while the latter does not.”
Nevertheless it is highly recommendable to check thoroughly in every concrete project if the intended effects are to be expected to come true under the specific conditions of the actual project. That will generally be the more the case the more the rail project is systematically and functionally integrated in a convincing urban/regional development and transport concept (based on a clear preference for public transit).
Targeted and distinct Transit Oriented Development has, over the last few decades, proved to be an efficient instrument for developing and renewing cities and metropolitan areas in compliance with the changing mobility attitudes of the citizen and the requirements of an attractive urban environment. The main focus in this regard is increasingly on modern light rail systems as the backbone of the transit system, not least because the tracks are mostly on the surface they are highly attractive for the passengers and can be an decisive image factor for the whole supply area.
Taking into account the manifold available proven examples of reasonable positive economic effects of modern light rail systems (investments, property values, etc) it is not only acceptable, but logical to capture a reasonable part of the induced value in order to be able to co-finance the construction and operation of the light rail systems as well as being in the position of keeping the ticket prices low in order to attract additional demand for public transit.
Dr Andreas Kossak is the founder of Kossak Consulting, based in Hamburg, Germany