Financing Transit-Oriented Development: Understanding and Overcoming Obstacles

Document Type

Journal Article

Publication Date

2007

Subject Area

land use - transit oriented development, ridership - demand, policy - equity, economics - finance, economics - benefits, mode - mass transit

Keywords

Zoning, Vulnerability assessment, Value engineering, Value analysis, Transit oriented development, Transit, Streamlining, Risk assessment, Real estate development, Public transit, Public support, Mixed use development, Mass transit, Market demand, Local transit, Local government, Joint occupancy of buildings, Funding, Financing, Equity (Finance), Benefits

Abstract

Although the development and lending communities have become much more aware of transit-oriented development (TOD) in the past 5 years, the lending process remains highly institutionalized and compartmentalized. TOD developers still face significant challenges in obtaining financing and structuring deals. After a brief review of common sources and structures of financing, this paper details obstacles to financing that TOD developers face, starting with the increasingly high risk attached to construction lending and the Federal Deposit Insurance Corporation’s recent actions emphasizing increased bank oversight in this area. Complexity, design, and construction challenges, along with mixed-use and related lender concerns, compound the difficulties presented by the relative newness of the mixed-use, TOD product, as compared with the conventional real estate products that are more commonly underwritten and traded on the secondary market. This puts more pressure on TOD developers to present a solid equity position and prove that they have the know-how and wherewithal to carry a risky project through. Strategies to overcome these barriers to TOD financing include the structuring of uses to align with existing product categories, value engineering and the use of alternative building methods and materials, use of advanced information management systems, addition of large or experienced partners, and gain of higher-equity, patient investment. Finally, presenting the local and national market demand for TOD may help increase financiers’ understanding of the unique benefits offered by TOD, and of its potential upside. Local governments can help by developing supportive plans and appropriate zoning, building public support, and streamlining the process to create a more predictable environment for developers and lenders.

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