Value Capture Session Overview

by Mamiko Kim

A few weeks ago, on June 26 th , JITI held a joint session with the American Public Transportation Association (APTA) titled “Revenue Opportunities from Value Capture” as part of APTA’s 2019 Rail Conference. In the early 2010s, JITI held programs in Chicago and California. However, this was the first JITI event held in Canada since its inception. Due to the distance from our home base in Washington, DC, and the fact that our regular audience members may not have gotten a chance to attend this session, I hope to relate more details about this event’s subject and the discussion that took place to our readership.

We had speakers from Japan and North America, which diversified the experiences shared

For those unfamiliar with the term “value capture,” particularly in regards to rail, it refers to instances where rail companies are able to create capital through infrastructure and land investments above and around stations and rail lines. These investments create revenue opportunities as people are enticed to shop and spend money in these locations, and in turn increase ridership to and from stations. We had presentations by Yuji Murakami of the East Japan Railway Company (JR East) and Kantaro Yamaguchi of the Tokyu Corporation (Tokyu) who both shared illustrations of success stories in Japan where consistent cash flow came into their organizations by utilizing value capture. It is important to note that most rail systems in Japan are operated by private companies, and do not receive financial assistance from governments. In fact, these private companies own real estate and businesses that are separate from the rail sector (such as shopping centers as opposed to station properties), and the rail system is sustained by both ridership and money pulled from these businesses and real estate owned by the company.

There are particular challenges in the US and Canada to utilize value capture due to the fact that most rail systems are operated by the public sector, and thus construction and operation are usually funded by state, local, and federal governments. This in turn means that there is more restriction on the type of development that rail systems are able to make, with much of the revenue from real estate around stations being pulled into private businesses rather than returning to the rail system. Heather McKillop of the Denver Regional Transportation District (RTD) and Kevin Desmond of the South Coast British Columbia Transportation Authority (Translink) presented their own successful models of how they are able to combat these challenges. This included Denver’s achievement of partnership and collaboration with multiple players in order to accumulate some 14 different funding sources to revitalize the Denver Union Station, which they did with such success that they were able to pay off all loans 21 years early. Mr. Desmond described how they have levied property taxes on real estate around stations, doubled property values through pre-development work before disposition, through commercial partnerships, and how they will begin imposing development cost charges in 2020 as another way to fund stations.

Panelists consisted of leaders in organizations with success in value capture

There were two main discussion points that the moderator, Sasha Page of IMG Rebel, introduced to the panel discussion. The first question was how rail companies are able to manage real estate risk. Mr. Murakami explained that JR East’s goal is to add value to the areas around the station as well as to run trains smoothly in those areas. This could mean that they find areas of interest to work with. For example, there is a famous temple in Nagano. By creating a rail line to this temple, it gives people an attractive option to get there. This intrinsically benefits the rail line and the area around it. Mr. Yamaguchi, acknowledging that their goals are similar to that of JR East, added that with changes in the real estate market due to gentrification and an aging population, Tokyu is working with municipal governments to try to minimalize risk. In Denver’s case, Ms. McKillop elaborated that to mitigate risk, Denver took out a large credit risk premium. Now that there has been a precedent set, she believes that it will be easier to work with the US Department of Transportation in the future. Finally, Mr. Desmond explained that at Translink they have a revolving land account, where they buy and sell land for strategic acquisition. As introduced earlier, they have begun doing pre-development of the land to increase land value before the sale. In the future they are looking into doing more joint developments as well, which carries less risk than creating developments alone.

In addition, Mr. Page asked each of the panelists on how their organizations deal with the affordable housing issue. Gentrification, which we are also familiar with in the DC Metro area, is especially a problem around rail stations as it pushes out the very residents who need public transportation the most. Mr. Desmond relayed that this was particularly an issue in 2017 in the Vancouver area, as not only were middle- and lower-income buyers priced out of real estate, but there was a lack of rental properties being built around rail. Since then, municipalities have been working to resolve this problem. He emphasized that policies need to begin at the municipal level. Translink, as they begin joint development ventures, are looking to make sure that areas they control have affordable housing. Ms. McKilllop echoed Mr. Desmond’s points, as she noted that land-use decisions are made by municipalities. She spoke of the power of rail companies to negotiate with municipalities, such as a recent example of an affordable housing unit next to a station which was unable to build due to parking requirements from the city. RTD was able to negotiate for limiting the number of parking the housing unit needed as both RTD and the city of Denver hoped to encourage people to use public transit.

The situation in Japan is rather different. Mr. Yamaguchi revealed that like the United States and Canada, land use is determined by municipalities. However, Mr. Murakami explained that in Japan there are strong social programs that protect individuals in middle- and lower-income brackets. In fact, because municipalities have successfully made these efforts, JR East has never been asked to include affordable housing in their developments. Mr. Yamaguchi said that Tokyu does do work to help renovate older properties along their rail lines, which attracts younger people, single mothers, and the elderly. They also expand their bus services so that those who live farther away have access to the stations.

The speakers of our session stood together for a group shot

The discussion continued with questions from the audience, which I will not cover here. However, I do encourage you to view the full videos or to listen to the audio we have on our website. I hope this report gives the readers a taste of the session, which covers much more information than written here. The major takeaway was that each of the rail systems represented strives to be the world’s best, but there are unique challenges that impact them differently. However, all of the speakers spoke of their common goals to commit to best practices, to build and maintain efficient, convenient, and reliable rail systems, and to sustain these activities through sound business methods, such as value capture discussed in this event. This joint session may not have covered or resolved every issue that rail companies face as they seek to utilize value capture, but we believe that it is one step towards opening up a discussion so that all may benefit internationally. We will continue to follow this topic closely in the future, and hope that you can join us in our next event.