October 2020
Joint development is a process by which public agencies partner with private developers for the purpose of a real estate development project. Common joint development arrangements include air-rights development, ground leases, right-of-way use agreements, station interface or connection improvements, cost-sharing arrangements, and incentive agreements. Joint development agreements have been used for a wide variety of public facilities and services including transit, highways, parking facilities, and schools.
Joint development is a type of public-private partnership related to the development of real estate. The real estate development project might include commercial space, residential space, or infrastructure facilities. In a joint development project, both the public agency and the private developer contribute resources. The parties may share costs, revenues, or both. This contrasts with many public projects in which public agencies direct and pay for the projects, and the private contractors are merely paid for providing specified products and services.
Typically, publicly provided resources include land or air rights that are associated with an existing or proposed infrastructure facility. Public resources might also include grant funding, loans, or loan guarantees. Private developers provide real estate design expertise and construction capabilities. They may also provide equity capital and access to debt financing. The ability to provide public resources in conjunction with a real estate development project will be governed by State and local law. If Federal funds are being used, Federal-aid or other Federal requirements will also be applicable.
In many cases, a public agency will sell or lease public land (or air rights) to a developer as part of the deal. In exchange for providing land or air rights for private development, a public agency may seek some or all of the following:
In many joint development projects, the primary resource that a public agency provides is real estate. To the extent that public land or air rights (and access to nearby public infrastructure) provides value to a private development, obtaining a fair return for that publicly provided resource represents value capture.
Joint development projects are intended to benefit both public and private parties and may lead to: increased revenue for real estate owners, decreased costs for operating or constructing transportation facilities and services, complementary infrastructure, increased transit ridership, or enhanced amenities for transit riders, motorists, cyclists, or pedestrians.
If a public agency controls land or air rights adjacent or near to valuable public infrastructure (e.g., highway interchange, transit station, central business district), and if there is a demand for private commercial or residential development there, then there might be an opportunity to facilitate the development of the land or air rights in a way that is complementary to (or at least not in conflict with) the existing or proposed infrastructure facility. Similarly, companies seeking routes for cable conduits might find value in utilizing transportation rights-of-way such as roadways, transit tunnels, or sewers.
In some cases, there might be an opportunity for a private developer to build or improve the public infrastructure facilities as part of the private real estate development project. Yet another opportunity might entail the utilization of public land or rights-of-way for solar power generation.
No.
Almost anything. However, if a public facility has negative externalities (e.g., sewage treatment plant or trash transfer station), it might be difficult to find a demand for private space (commercial or residential) that would want to co-locate there. Even though airports have significant negative noise externalities, they can be excellent locations for warehouses, intermodal freight facilities, and perhaps other industrial facilities. In addition, the airport terminals themselves provide opportunities for a variety of retailers and food vendors.
The economic vitality and character of a jurisdiction, as well as the imagination of its public officials and private developers, will ultimately determine what combinations of public facilities and private development make sense.
Absolutely. Market conditions will determine the value of the public real estate and other resources that a public agency brings to a joint development deal. Market conditions will also determine the necessity for and utility of a public infrastructure facility. And market conditions will determine the character and economic viability of the private development to co-locate within public land or air rights near a particular public facility.
Depending on market conditions and the size and nature of the adjacent public infrastructure, the scale can range from having a private developer pay for the entire cost of a public facility to no deal whatsoever. This range of possibilities is illustrated by the following single example.xx
In 1995, the private owner of a defunct, 235-acre railroad yard (Potomac Yards) in Alexandria, Virginia, offered to pay for the entire cost of a new Metrorail transit station adjacent to the yard. This offer was made because the landowner was unable to obtain a development permit for a mixed-use development unless the site provided rail transit access. (The only road providing access to the project was already over capacity during rush hour, thereby causing the host jurisdictions to deny development permits without transit access.) Designing and constructing the station, estimated at approximately $20 million in 1995, was deemed to be a worthwhile expenditure in light of the revenues to be generated from the completed development.
However, when residents on the opposite side of the congested road reviewed the mixed-use development proposal, they feared that it would still generate too much auto traffic. The residents lobbied their local representatives to down-zone the site, and they succeeded. Due to the reduced development density, allowable development could no longer generate enough revenue to pay for the cost of the transit station. Consistent with the new zoning, the landowner then developed a complex of big-box retail stores with acres of parking - generating much more auto traffic than the original mixed-use development proposal.
Now, more than 25 years later, the landowner and the City of Alexandria are seeking to intensify the development of the site in conjunction with the creation of a new Metrorail transit station. The station, now estimated to cost about $320 million, will be paid for by a combination of special assessments, tax-increment financing, and Federal and State grants and loans.xxi
Typically, joint development is not subject to voter approval. The ability of a public agency to engage in a joint development project depends upon its property management powers under the State and local laws and regulations governing the agency’s authority to acquire, manage, and dispose of real estate. In some cases, such laws and regulations may require legislative review or approval of the disposition of public lands. Additionally, if public land or air rights were acquired with Federal funds, Federal review and approval may also be required as specified in the relevant Federal regulations.xxii
Joint development is subject to the laws and regulations governing an agency’s authority to acquire, manage, and dispose of real estate. In addition to State laws and regulations, requirements that may apply to joint development of land acquired with Federal highway funds can be found in 23 U.S.C. §§ 129(b), 137(a), 142(a), 142(f), and 156. See also 23 CFR part 710 and 49 CFR §§ 18.25 and 18.31. Joint development of land acquired with funds administered by the Federal Transit Administration (FTA) is addressed in FTA guidance updated on August 14, 2020.xxiii
At a minimum, it is important that a public agency determine the value of the resources that it is contributing to the project. Aside from simply being necessary as a duty to taxpayers, where federally acquired land or air rights are in play, this is required pursuant to 23 USC §156, as mentioned above. Where federally acquired property is not in play, State and local law may have similar provisions. Also, if the agency will impose unusual requirements on the private developer that will reduce the net income of the project, the developer will seek a commensurate reduction in payment for the public resources. To determine a fair and reasonable price for public resources, the agency will need to evaluate the extent to which such requirements will reduce the net income to the developer.
The time frame depends on the size, complexity and duration of the project. If there’s a lot of land or air rights to be developed, the project might be accomplished in phases over many years.
In terms of the receipt of public revenues, the disposition of public land or air rights can be accomplished in two ways, subject to applicable laws and regulations. Public land or air rights can be sold to a developer or they can be leased. Private developers will not develop real estate if a project is subject to a short-term lease. Therefore, leases for this purpose are typically for terms lasting between 50 and 99 years. These two approaches to public real estate disposition have the following consequences:
A capital improvement plan (CIP) is a State or local planning document containing all the individual capital projects, financial plans, and major studies for a State or local government. A CIP looks beyond a federally required fiscally constrained plan and includes projects outside of the fiscally constrained Plan. Construction and completion schedules can also be included. The plan provides a working blueprint for sustaining and improving the community’s infrastructures. It coordinates strategic planning, financial capacity, and physical development.
A transportation improvement program (TIP) is a four-year, fiscally constrained document required for metropolitan planning organizations (MPOs). The TIP lists all transportation projects in an MPO's metropolitan planning area that use Federal transportation funding. Detailed requirements for TIPs and the MPO transportation planning process are located in 23 CFR part 450. There are similar requirements for State Transportation Improvement Programs (STIPs) in 23 CFR part 450.
In the event that a public agency provides land or air rights solely for a private development, such a project would probably not appear in the capital improvement plan. However, if a project entails construction of or improvement to a public facility, then that aspect of the project and its source of funding would be included in the capital improvement program.
I-395 Air Rights (Washington, DC): In 2012, a private developer obtained air rights over a portion of a depressed freeway (I-395) in the heart of downtown Washington, DC.xxiv As part of the deal:
High Street Cap (Columbus, Ohio): This joint development air rights project entailed creating a retail development featuring “main street” design on air rights above I-670.xxv Federal funds were used to acquire the real estate as part of the original I-670 construction. Therefore, FHWA regulationsxxvi governed the disposition of this right of way and the amount and utilization of any revenues obtained from it. Restrictions on the use of the air rights platform made determining fair market value complex. FHWA agreed to an unconventional base rent with a profit-sharing component.
Reconstruction of the Navy Yard Metrorail Station Entrance: In the early 2000s, the District of Columbia was building a new baseball stadium about one mile south of the Capitol. There was already a Metrorail Station entrance one block away. The station entrance, of standard design, was not capable of handling the volume of passengers who would use this entrance to attend ballgames and other stadium events. This entrance was located in an open, undeveloped area adjacent to the sidewalk on one side and to a bus parking lot and bus garage on the other side. This entire area was owned by the Washington Metropolitan Area Transit Authority (WMATA). A private developer entered into an agreement with WMATA to expand the Metrorail station entrance and to construct an office building adjacent to and on top of the expanded station entrance. The developer purchased the land and air rights adjacent to and above the station entrance from WMATA.xxvii
For additional examples, see the National Cooperative Highway Research Program’s Report 873, Guidebook to Funding Transportation through Land Value Return and Recycling.
Public agencies and private developers have different types of financing tools available to them. If the project generates revenues, then the party entitled to the revenue can use that revenue (or a portion of it) it to support any type of loan or financing instrument that this party is eligible to receive. Of course, public agencies do not necessarily require project revenues to be eligible for various financing mechanisms. Some public financing tools are based on the anticipated receipt of formula grants or on the dedication of a portion of general revenue for debt service. Depending on the nature of the project, a public agency might be eligible for Federal loans or loan guarantees such as Transportation Infrastructure Finance and Innovation Act (TIFIA) or allocation of Transportation Private Activity Bonds.
For more information about U.S. DOT’s financing programs, visit: https://www.transportation.gov/buildamerica/financing.
FHWA EDC-5 Value Capture: Capitalizing on the Value Created by Transportation
https://www.fhwa.dot.gov/innovation/everydaycounts/edc_5/value_capture.cfm
FHWA Center for Innovative Finance Support (CIFS) - Value Capture
https://www.fhwa.dot.gov/ipd/value_capture
FHWA CIFS - Joint Development Resources
https://www.fhwa.dot.gov/ipd/value_capture/defined/joint_development.aspx
i Joint Development is a type of public-private partnership (PPP). Many joint development benefits are related to the benefits of PPP. See FHWA ’s Center for Innovative Finance Support in its discussion of PPP projects at https://www.fhwa.dot.gov/ipd/p3/defined/new_build_facilities/. See also FTA Circular 7050.1B regarding joint development at: https://www.transit.dot.gov/sites/fta.dot.gov/files/2020-08/Joint-Development-Circular-C-7050-1B.pdf
ii FHWA, Value Capture Implementation Manual, Sections 8.1.1 and 8.1.7. See https://www.fhwa.dot.gov/ipd/value_capture/resources/value_capture_resources/value_capture_implementation_manual/ch_8.aspx.
iii Id., at Section 8.1.3.
iv Id., at Section 8.1.3.
v Id., at Sections 8.1.6 and 8.1.7.
vi Id., at Section 8.1.7.
vii Id., at Section 8.1.7.
viii See FHWA Center for Innovative Finance Support in its discussion of PPP projects at https://www.fhwa.dot.gov/ipd/p3/defined/new_build_facilities/.
ix Id.
x Id.
xi Id.
xii Joint Development is a type of public-private partnership (PPP). Many joint development challenges are related to the challenges of PPP. See FHWA Center for Innovative Finance Support in its discussion of PPP projects at https://www.fhwa.dot.gov/ipd/p3/defined/new_build_facilities/ . See also FTA Circular 7050.1B regarding joint development at https://www.transit.dot.gov/sites/fta.dot.gov/files/2020-08/Joint-Development-Circular-C-7050-1B.pdf.
xiii Id.
xiv Id.
xv Id.
xvi Id.
xvii Id.
xviii Id.
xix Rick Rybeck, “Financing Infrastructure with Value Capture: The Good, The Bad & The Ugly” Feb 20, 2018 at https://www.strongtowns.org/journal/2018/2/20/financing-infrastructure-with-value-capture-the-good-the-bad-the-ugly/.
xx Rick Rybeck, “Using Value Capture to Finance Infrastructure and Encourage Compact Development,” Public Works Management & Policy Journal, Vol. 8 No. 4, April 2004, p. 251.
xxi City of Alexandria, “Potomac Yard Metrorail Station FAQs,” page updated 11/5/19, https://accesspotomacyard.com/faqs
xxii See 23 U.S. Code 156 and 23 CFR 710.
xxiii FTA, Guidance on Joint Development, Circular FTA C 7050.1B, revised 8/14/20, https://www.transit.dot.gov/sites/fta.dot.gov/files/2020-08/Joint-Development-Circular-C-7050-1B.pdf.
xxiv FHWA, Value Capture Implementation Manual, August 2019, https://www.fhwa.dot.gov/ipd/value_capture/resources/value_capture_resources/value_capture_implementation_manual/appendix.aspx. Transportation Research Board, Guidebook to Funding Transportation through Land Value Return and Recycling, National Cooperative Highway Research Program Report 873, http://www.trb.org/Main/Blurbs/177574.aspx.
xxv Urban Land Institute, “ULI Development Case Studies: The Cap at Union Station,” https://casestudies.uli.org/wp-content/uploads/2015/12/C035010.pdf. See also TRB, Guidebook to Funding Transportation through Land Value Return and Recycling. NCHRP Report 873, Appendix B, Example 7.
xxvi 23 CFR part 710.
xxvii https://www.wmata.com/business/real-estate/Navy-Yard-West.cfm. See also WMATA Joint Development Overview at https://www.wmata.com/business/real-estate/joint-development.cfm
and WMATA Joint Development Program Guidelines at https://www.wmata.com/business/real-estate/upload/Joint-Development-Program-Guidelines-1.pdf.