Transit-Oriented Development

OVERVIEW

Many cities focus their real estate investments to encourage greater use of mass transit—a strategy better known as “transit-oriented development” or most often, simply “TOD.” The idea behind TOD is to build greater densities near rail stations and major bus lines in order to encourage transit use and reduce traffic congestion and pollution. Of course, to the extent the development succeeds, real estate around the station can become very valuable, with the city or transit system earning millions of dollars in direct lease revenues. By combining real estate development and public transit, a municipality can raise significant non-tax revenue through such enterprising government activity. In addition to the direct financial benefit from lease payments or parcel sales, transit-oriented development also increases the number of passengers (frequently leading to an increase in fare revenues that is greater than the direct lease payments received) and expands the tax base through commercial developments centered near transit stations. In other words, transit-oriented development can be an important part of a community wealth building strategy by helping cash-starved cities and counties raise revenue without raising tax rates and by concentrating economic development in specific corridors, thereby reducing sprawl and increasing the efficiency of public service delivery. Cities that make extensive use of transit-oriented development include San Francisco, Portland (Oregon), Dallas, Atlanta, and Washington, D.C.

While “TOD” is a relatively new term, organizing development around transit nodes is a very old concept and was the norm in U.S. cities before World War II. Ironically, modern-day transit-oriented development is a product of the automobile. Because cities such as San Francisco and Washington built transit systems after World War II and needed to transport commuters from the suburbs, they acquired considerable land around transit stops to provide for surface parking lots. As Elisa Hill of the Washington Metropolitan Area Transit Authority (WMATA) explains, “When we started, we got larger plots. In many areas, they wouldn’t subdivide, so it was all or nothing. It turned out to be a good investment. [At one station] in Greenbelt, we got 78 acres plus a huge yard.” Even as early as the 1970s, entrepreneurial transit officials realized that if surface lots were replaced with stacked parking, the surplus land could be used for high-density residential and commercial development, increasing income to the transit system directly through land leases or sales and indirectly through increased rider fare revenue.

Washington D.C.’s Metro system provides the nation’s leading example of transit-oriented development. As of 2003 the Washington D.C. Metro system was collecting over $6 million a year in lease payments. Additionally, approximately 10 percent of total ridership (roughly 90,000 daily riders) comes from the development of high-density residential and commercial projects in the vicinity of Metro stations.

Arlington County, Virginia was one of the first to fully exploit the potential of TOD, having focused real estate and commercial development in transit station areas since the mass transit system began operating in the 1970s. Located across the Potomac River from Washington, over 50 percent of the county’s tax base is now concentrated in transit corridors. Office space in these areas has increased from 4.1 million square feet in 1969 to 30 million in 2003, while housing in the immediate vicinity has increased from 4,300 units to 34,000. The effect of this development on local government revenues is significant. As Robert Brosnan, Planning Director for Arlington County explains, “We have the lowest tax rate [in the region]. The tax burden is high, but the rates—we’ve been lowering them. We have AA bond rates. We can float bonds for schools, parks. You get a lot of service without raising taxes.”