Development

What Drives TOD?

High gas prices, traffic congestion, and long commutes increase the desire for transit-oriented developments.

Americans may have a love affair with their cars, but their relationship isn't as sweet as it once was. Rising fuel prices, frustrating traffic congestion, and exhausting commutes make the idea of walking to work sound pretty good. Add to that Americans' growing desire for vibrant town centers with a defined sense of place instead of sprawling subdivisions and retail strips, and what do you get? Factors that, combined with other changing demographics, are fueling the need for well-planned, accessible transit systems in markets of all sizes. And where transit systems and their riders go, commercial real estate opportunities are soon to follow.

While transit-oriented developments, or TODs, are gaining a lot of attention in the industry, the idea is not new. Urban dwellers long have traveled without cars, relying on mass transit systems for mobility. Now the idea is taking hold outside of city centers in suburbs and smaller towns as communities seek new ways to counter big issues such as urban sprawl. The mixed-use projects clustered around rail stations and bus transfer centers make it easy and appealing for residents to use mass transit. And most of these developments include a strong combination of retail, office, and multifamily space. Many even offer green spaces, cultural attractions, and entertainment venues.

As a result of increasing TOD, commercial real estate professionals are finding creative ways to get involved. For instance, Regina L. Emberton, CCIM, director of corporate services for CB Richard Ellis in South Bend, Ind., leases commercial space for Transpo, South Bend's transportation agency. In 1998, Transpo built South Street Station, a mixed-use development that includes the city's rail depot, to better serve riders and to help spur development in the surrounding area. The station boasts 1,948 square feet of customer area as well as 16,000 sf of office and retail space.

Development and leasing opportunities are likely to increase as small to mid-size metropolitan areas continue to focus on implementing transit systems. Cities such as Salt Lake City, Sacramento, Calif., and Charlotte, N.C., recently have emerged as leading TOD markets, and Portland, Ore., has been considered a TOD trailblazer. Suburbs near many large metropolitan areas also are developing around commuter stations.

Why TODs Make Sense

Issues such as urban sprawl, traffic congestion, and even air pollution have sparked public interest in improving transit. Public transportation ridership has increased 22 percent in the last six years, according to the American Public Transportation Association. Taxpayers also are more willing to pay for better transit: Nationwide, 42 out of 53 ballot initiatives for public transportation or with a public-transit component were passed in 2004, according to the Center for Transportation Excellence in Washington, D.C.

But quality-of-life arguments for TOD increasingly are coupled with economic concerns, says Shelley Poticha, president of the Center for Transit Oriented Development in Oakland, Calif. "There's increasing recognition from the business community that the combination of uncertainty about how to get [people] to work and the difficulty of attracting people to congested regions ... is a problem," she says.

"What started out as being an environmental philosophy is becoming the bailiwick of big-business and chamber of commerce groups around the country," Poticha says. Such groups are pushing for investment in transit infrastructure as well as housing and job centers near stations "for people to get to work on time and for a greater variety of housing choices."

CTOD is an initiative of Reconnecting America, a national nonprofit organization that works to integrate transportation networks with their communities. The center released a study last year showing that by 2025, 14.6 million households will seek housing in "transit zones," or areas within a half-mile of fixed guideway transit stations. This is an increase of 8.5 million over the 6.1 million households that lived in transit zones in 2000.

No Two TODs Are Alike

While some characteristics, such as mixed-use components and pedestrian-friendly areas, are similar among TODs, each project is unique and varies in scope. For instance, CityCenter Englewood was built in suburban Denver in 1999 on a defunct shopping mall site. With the extension of a light-rail line to the area, the city of Englewood and a team of private partners developed the project, which includes a light-rail station; a 400-bus-a-day transfer station; and more than 350,000 sf of retail space, 50,000 sf of office space, and nearly 500 apartments.

In the case of South Street Station, Transpo actually owns part of the development, and the rents it receives from tenants help to offset the need for public subsidies, according to Mary McLain, Transpo's general manager in South Bend. The terminal also has helped to increase ridership and polish the agency's image within the community. "When we announced plans to build, we said, 'OK, good, bad, or indifferent, we're going to do things a lot more publicly,'" she says. "It really served us well. People in the community started being more familiar with us. We changed our view of the customer from [being] the person who stepped on the bus to the entire community. Building a showcase - a very visible passenger terminal - makes a statement," McLain says.

TOD also is making inroads in a state long recognized for its auto dependence: California is home to a wide variety of TODs. In San Diego, for example, several rail and light-rail lines serve the city and surrounding county, and a trolley line runs downtown and out to Mission Valley, a major retail center.

Michael R. Dyer, CCIM, vice president of Burnham Real Estate in San Diego, is involved with two projects in the area. Currently he is working on market analyses and strategies for a Solana Beach train station development along the Coaster, a rail line that runs from downtown San Diego to Oceanside, the northernmost town in San Diego County. The Solana Beach station serves the Cedros Design District, a neighborhood of businesses related to home design and furnishings. California's North County Transit District owns the station's land and plans to lease the ground to the developer, Sedona Pacific. The new project, which will sit on the 4.7-acre site of the station's current parking lot, will feature nearly 150 rental apartments and 25,000 sf of retail space over a 500-space parking garage and a separate 35,000-sf retail and office building. One of the anchor tenants will be a community theater.

The rental units will attract North County residents who work downtown and commute on the Coaster, Dyer says. He expects that businesses also will take an interest in the location, since employees who live in San Diego's burgeoning downtown easily can travel north.

Dyer's other TOD project is along a Sprinter rail-line station in San Marcos, Calif. The project will have 345 condominium units, 70,000 sf of ground-floor retail, and a 9,000-sf office building. The station will provide transit for local college students, and a bridge will connect the station to the school, where commuters can link up with the bus system.

The Coca-Cola Co. sold the land to a developer, and the city "was interested in working with a developer who would entertain the challenge of rezoning the property to a residential mixed-use development. The problem there was that it required a change in the specific plan for the property and an environmental impact report," Dyer says. He represented Coca-Cola in the sale and assisted the developer in the project's conceptual plan and entitlement process. Dyer expects to have approvals complete by year-end.

States such as California are making it easier for developers to get involved in TOD projects by providing online resources. For instance, California's Department of Transportation boasts a searchable database that includes information on land uses, implementation processes, financing, facilities, zoning, and transit services at http://transitorienteddevelopment.dot.ca.gov for some 21 different developments. Other regional sites, such as the Transit Oriented Development Advocate (www.todadvocate.com/todresources.htm), provide case studies and specific information about TODs in the Pacific Northwest. In addition, the American Public Transportation Association's site (www.apta.com) provides numerous case studies, background information, and other resources for states and cities around the country.

Surmounting the Roadblocks

Not surprisingly, most TOD projects face numerous development challenges. Zoning restrictions can be a barrier as developers often face change-of-use issues and density regulations that restrict multifamily use.

Parking is another significant issue. Municipal parking codes often require that certain numbers are met for specific uses, which can drive up development costs. Yet TOD proponents argue that these developments actually allow parking-space requirements to be trimmed. "We're gathering all kinds of evidence showing that as a transit system grows, people use it more, and they don't have to have as many cars," Poticha says. "Parking standards can be reduced. Maybe not wholesale right away, but [a reduction] creates an enormous cost saving for any developer."

Parking also presents a TOD design challenge. Traditional wide-open parking lots aren't particularly pedestrian friendly and use land that otherwise could be occupied. Some developers, such as those working on the Solana Beach project, tackle that problem with underground parking; others opt for multideck garages.

TOD developers sometimes encounter community groups that fear these dense, multi-use projects will bring noise and congestion to their neighborhoods. Dyer cites one other location-specific concern for the Solana Beach project: blocking prime ocean views. One solution is to involve community groups in the process as early as possible, he says. This provides an opportunity to get their input as well as to explain TOD's benefits. "Any infill development is being faced with concern by local residents. It really takes strong leadership at the local level - by the mayor and city council - to get beyond that or to frame the opportunity in a positive light," Poticha says.

TOD advocates also can come up against transit agencies who "shy away from land development matters on the grounds that it is not central to their mission of delivering safe and efficient transit services," according to Transit-

Oriented Development in the United States: Experiences, Challenges and Prospects, a recent Transportation Research Board report. "So getting to know who the players are and their receptivity is really the key," Poticha says.

McLain concurs, although she thinks the situation is improving. "People are reaching out to cross that void," she says. "At one point in my career, [transit agencies] didn't speak to developers. Now it's moved to where developers should contact transit early on, and transit systems, if they know of something that's being developed, shouldn't wait to see what it is - they should try to find out and contact the developer. The earlier that's done, the better."

Transpo takes an active role in selecting tenants for the South Street Station terminal, which takes longer than leasing standard retail or office space. From a broker's perspective, "decisions are slower," Emberton says of her leasing work with the transit agency. "Transpo takes a very close look at who the user is, how it's going to affect ridership, if it will be beneficial to them and to the public. They're very selective," she adds.

Agencies also do their homework when selecting leasing agents. "We look at the creativity of the leasing agency as well as the prospective tenants," McLain says. "We try to work up a good dialogue and review their business plans to see if it makes sense." South Street Station's 6,600-sf second floor has a long-term lease with a state social services agency; elsewhere in the terminal, there's a call center. Other tenants have included a coffee shop and a temporary-services company.

Paying Their Way

TOD project financing structures are as varied as the developments themselves. "It can be complicated," Poticha says. "The master developers who have experience working with the public sector to pull funds from different sources are probably going to be the most successful right now. But I'm seeing a lot of projects starting to happen where the public sector is aware that they need to be making contributions to the project," she adds. Such contributions are for parking garages, streetscapes, and other infrastructure.

Local agencies or municipalities also might be more willing to partner with private developers if a project can help leverage federal funds. The Federal Transit Administration's New Starts program supports local transit investments, and "increasingly, land use - economic development - is an important factor in evaluating these projects," Poticha says. "What FTA looks for is concrete evidence that the development community is interested in these properties, is willing to make investments, and is going to be there when the transit system comes in."

Debra Saunders, first vice president at Ambac Assurance Corp., in New York, recommends visiting the New Starts Web site to see what agencies have obtained New Starts grants, where these projects will be located, and the projects' specific criteria. (See sidebar.)

Saunders also works with tax increment financing districts around transit developments. TIF districts can be very useful in developing parking or housing, where strictly private financing might be difficult to obtain.

Kane McKenna & Associates, a Chicago-based public finance advisory company, performed financial analyses for a TIF district planned in conjunction with a suburban TOD project north of Chicago. The company assisted in securing the TIF designation as well as projecting returns for the developments proposed within the district. The TOD replaced a number of industrial properties in the village's downtown with residential and commercial uses, and TIF money offset the land acquisition costs and infrastructure work.

On the other hand, South Street Station in South Bend was built entirely with public money; 80 percent of the cost came from congressionally designated federal funds. "We had to do a lot of convincing," McLain says. "We had to convince our delegation and our delegation had to convince others from across the country." The other 20 percent were local funds that came from Transpo's budget.

The Solana Beach project near San Diego is all private financing, "and the tricky part of this is the fact that it's on a ground lease. Most of the institutions in California are more comfortable financing fee-simple [projects], so the ground-lease aspect of it makes it an additional challenge," Dyer says.

However, financing is growing easier as TODs' popularity increases. "There's a much greater awareness now of [TODs] than two years ago because throughout most major cities, you're starting to see infill development that mirrors TOD," Dyer says.

Developers must keep TOD projects' economics at the forefront of their minds, says Philip McKenna, president of Kane McKenna & Associates. "What's the rate of return you really need? It can be achieved by mechanisms like TIF - or by density or architecture - but you've got to know it and then stay with it," he says.

And TODs can pay off: "The weight of evidence to date shows that development near transit stops enjoys land value premiums and generally outperforms competitive markets," according to the Transportation Research Board report. However, the report also notes that "the payoffs are not automatic and quite often a number of preconditions must be in place." Preconditions can include a healthy economy with a demand for real estate, public policies such as zoning bonuses, and transit development sites located in neighborhoods "free from stagnation or distress."

"Savvy developers increasingly recognize that profiting from TOD is a long-term process," the report adds. "More and more, developers are using long-term pro formas when evaluating the potential payoff of TOD."

Catching the Train

So what's the best way for commercial real estate professionals to get involved in TODs? The first step is to talk to transit agencies to learn where the big opportunities are, Poticha says. "The transit agencies have pretty substantial land holdings - some is being used for parking lots and some is just excess property that they bought when they built the lines," she says. "So they're really becoming aware that they could be capturing value from [the land], and they're looking for partners."

The second step is to "talk to the cities, because increasingly cities really see that the area - not just immediately around the station, but the half-mile radius around it - as places where they're trying to provide incentives for higher-density infill," Poticha adds.

As with any public/private partnership, commercial real estate professionals who work with TODs urge patience. "Always plan on it taking longer than your original schedule," Dyer says. "My experience thus far is that if you think you can get it all done and entitled in 18 months, count on at least 50 percent more, because the entitlement process almost always involves some zoning changes or interpretations that may involve public hearings. I think five years from now it will be a much easier process than it is now, but we're just in the process of making that successful transition."

For all parties involved in the transaction, "know the objectives as well as you can," McKenna says. "A lot of times people will latch on to one methodology. So if you get the objectives down on paper, everybody's got a big advantage in terms of figuring out the right mechanisms to deal with. And it also keeps you on course."

Finally, many experts think TOD's potential is just being realized. "There's a confluence of factors that is creating a tremendous opportunity, and there's a receptivity that I haven't seen ever in this field on the part of local jurisdictions and transit agencies," Poticha says.

"But the key to tapping into that is to frame your project in terms of what are the benefits to the community and how can I help make a better life?"

Sarah Hoban

Sarah Hoban is a business writer based in Chicago.

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