Thursday, February 13, 2014

Creative Financing: Two Potential Ways of Demolishing a Highway and Building a City

Yes, 'creative financing' can have a bad connotation, particularly after the housing bubble.  But after said bubble has burst, it's also necessary for creative ways to rebuild.  Ideally, more constructively towards lifting all boats rather than carving a bigger piece of the pie for one particular industry.  Call it, creative capitalism in the truest sense of the term 'create' rather than extractive capitalism.

Along those lines, I've been thinking for some time exactly how the financial possibilities and necessary mechanisms at work that can finance the 345 tear-out and rebuild.  The question was posed specifically yesterday:  TxDOT doesn't have two nickels to rub together.  How can we build anything without Putin dropping $50 billion for a poorly conceived and horrifically corrupt design?  I'm not certain we would put up with that kind of grift and graft.  We already have, in reality, and we can afford it no longer.

Well, the first point is that we've overbuilt a certain type of infrastructure.  As infrastructure throughout time is wont to do (see: railroads, streetcars, airports, and highways).  And as we've seen, the value of any new already overshot form of infrastructure, approaches zero Return on Investment.  Therefore, all new infrastructure has to be value-added.  And I hate that term because like virtually any buzzword in the city building world it has lost meaning. Too many people using it in too many and usually inaccurate contexts.  But, when it's true it actually has meaning.

I'll get to ways we can finance a tear-out and rebuild later, but first we have to understand the dire straights we're in.  Money was for nothing.

Overshoot typically comes about via some combination of irrational exuberance turned into bureaucratic inertia.  Repeating the same (and increasingly antiquated) solution or idea over and over too long.  A fractal gone haywire and the self-organized system devolves into entropy and chaos.  We have over-built over-scaled roads, highways, and a systemically 'dumb' hierarchical road network that has spread out, divided, and disconnected us through over-repetition of tired, old, and flawed formulas.  Thus, forcing us into cars.

More cost on the user, more cost on the public sector via this over-built infrastructure, which in turn, means more cost back on the user, the taxpayer.  Repeating the same solution, more capacity in a corridor actually means less functional capacity in the network, is the definition of insanity.

By way of heavily leveraged new construction and deferred maintenance due to the increasing proportion of the budget that goes to debt service, TxDOT is now $35 billion in debt.  Hearing that number blew me away.  I thought $18B was high.  $35 billion is more than $1100 per Texan.  And that number is growing.

We can raise revenue via a variety of taxes and user fees, but does more revenue into a broken system fix anything in a time of decreasing more necessary basic services on the Maslow Hierarchy of Needs for a just, fair, functional society?

Or, we can be creative.

One of the many basic impulses of the highway tear-out is to rectify these disorders and imbalances.  We can reduce our public agencies' long-term cost and maintenance burden by reducing the amount of state and federal level roads (what we've over-built) and reducing the demand load on our roads (what we've induced via the inefficient structure of our cities as operating systems).

Luckily for us, we can kill two birds with one stone if you replace the funnel (the dendritic road network) with targeted, new filters (a highly interconnected, robust, fully integrated, multi-modal grid network).

Furthermore, since TxDOT debt is taxpayer debt belonging ultimately to the state of Texas, we can shift infrastructure from state and federal levels (which disperses tax base away sociofugally) to local hands via land use intensification.  The increased density and urbanity has 1) tax base to afford the infrastructure because 2) the quality of said streets is necessary for the very demand instilling that new density, thus 3) there is an upward pressure towards maintenance, upkeep, and uplift of the quality and safety of the new gridded city street network.

After a recent presentation, somebody asked completely seriously, "could we use eminent domain and condemn" a structure that is antiquated, kills ours cities, and our citizens?  It's a thought that has occurred to me.  It may not be possible to condemn UP the jurisdictional flagpole, but it would be a fun symbolic statement.

These land sales can off-set some of that debt.  New revenue without new taxes!  Huzzah!
So exactly how would those land transfers work?  This is where we have to be both logical and creative, using the two sides of our collective brains.

Like any investment, the long-term return finances the initial down payment.  In this case, the return is so high the down payment is essentially the full cost of tear-down, grid rebuild, and open space creation as centerpieces for the new neighborhoods.  Ideally, those returns should come as close to the source as possible, from who is actually reaping the gains.

The state of Texas's cut is coming by way of the land sales, which might put a bit of a dent in the deep hole dug by overshoot.  So, we don't want to cut into that considering lowering that debt burden helps all the taxpayers.

The other two options are either from the private sector to finance it entirely or the city via the increased tax base.  Perhaps even a new TIF dedicated strictly to the area.  I'm not sure that is ideal, because the long-term property tax returns are so great that we would want to spread that benefit beyond just the boundaries of the study area.  In essence, the TIF is the entire city so who needs a more targeted TIF?

Option 1 would mean the investors and developers who are getting high quality, valuable land, ripe for high-intensity, high margin development handle the bill entirely.  However, there would still need to be a public agency involved to ensure the best possible development and infrastructure for the city as a whole.

The profit margins for the investors and developers would come primarily down to what price they can get the land for and that comes down to said city redevelopment agency's negotiation with the state.  For the private market to cover the costs, they need the land price to not be market (see: if via auction or RFP -- we'll get to that in option 2), but deflated.  In San Francisco's highway tear-outs, CalTrans quit-claimed the right-of-way to the state, which then deeded it over to the city for $1.  I don't think Texas will do that.  The needs are too great and the empty pockets too hungry.

To cover costs, investor margins would have to increase by another 5%.  Specific numbers don't really matter at this point, but the results of quick calculations tell me the land price would have to be free or at least, virtually free.  It works to some extent, because everybody involved is getting something out of the deal.  State and TxDOT gets reduced maintenance/cost burden, city tax base, and investors get 'free' land in exchange for upfront capital for the tear-down.

On the other hand, land sales alone could cover the full cost of the tear-down once we reach 40-50 dollars/foot, which could easily be a bargain for said ripe, downtown adjacent land.  Remember, downtown and Deep Ellum land use intensification ISN'T happening because land costs are already too high.
That's one option.  Personally, I like the idea of an auction or RFP process, which would allow some oversight into phasing, capability of delivering on promises, and quality control.

Restrictions could be set such as no investor can get more than a set amount of acres to empower the many hands pulling in the same direction.  The overall plan would also include phasing with variable time limits for delivery.  For example, see CityPlace for smart phasing in terms of delivering increasing quality that builds upon each individual success into an eventual whole that is greater than the sum of its parts.

Those that go after the later phased land for an early and consistent price with the rest of the properties can make a killing if they can cover their basis for the 10-15 years while early phases are delivered, increasing value throughout.  They take on a bit more risk, but in all likelihood a greater margin of returns, at the additional cost of having to sit on the land until the phasing clock starts ticking on that property (or the redevelopment agency can hold the land and sell at higher price -- in my mind, it's all about whatever direction leads to the best and most predictable implementation).  Taxes can be deferred on the land during this waiting period.

The nice thing about this option is that the land price would find its equilibrium or true value and the savviest investors and developers will get the highest returns.  It's how we 'right the ship' of downtown real estate.

This option puts the onus for financing the initial highway demolition and grid reconstruction on the city and its hypothetical redevelopment agency (and whatever grants, see: TIGER) that can be won.  We have calculated various scenarios showing between $4 and $5.5Billion in potential investment as well as $110 million per year in new property tax revenue to the city of Dallas (at year 0+15 and 95% build-out).  The city can easily borrow all they need to get this going with those kinds of returns (for the city, its citizens, and investors).  When you get urbanism right, you get the economics right.