I applaud the city both for considering development of this parcel, and for seeking to use its revenue towards future transit needs. Now is definitely a good time for Phoenix to leverage some of its accrued assets to spur smart urban growth. While Phoenix may never be able to use real estate development the way Hong Kong MTR or New York/New Jersey Port Authority does for their transit funding, real estate needs to be looked at as a functional tool in specific locations to help fund our public transit infrastructure.
This is the perfect TOD site for the city to recapture its value added inputs from the light rail system, and re-invest that money into enhancing the network. However, as I alluded to in Part 1 of this post, I feel the city should continue to be the controlling party of the transit center as to not inhibit present or future transportation options. Ultimately, this is why I think a joint development project would be the best for this site.
I hope by now it is self evident why a simple land sale should be taken off the list of options for the transit center. In a land sale the city would lose control of transit functions and lose out on any future earning potential. While the City of Phoenix appears to be good at inflation and valuation adjusted land lease deals (Renaissance Square is a good example), a simple long term lease may not be the best option for retaining some control over the transit functions. Again, I am not only concerned about the current functions but the citys 30-100 year possible needs. Obviously, the city could lease air and subterranean rights while working with the developer to integrate the transit center into the design, but project finance and project risk may severely limit this as an option.
In my opinion this leaves a well structured joint development PPP as the best option (2). However, due to the complexity and forethought needed for such an arrangement, I again feel that holding off on the RFP until the institutional capacity and structures can be built seems the smartest path. While the model below is what I suggest, there are hundreds of nuanced ways to structure such a deal.
First the city should create a special purpose vehicle with the directive to maintain, develop and operate any parcels that the City Council deems as ‘Transit Centers’ (1). I will call this Phx-Trans-Co for simplicity. This organizational structure would be similar to The Downtown Phoenix Hotel Corporation but without the ability to issue bonds. The SPV (Phx-Trans-Co) helps dissipate some legal risk, helps mandate earnings toward transit functions, and helps create a buffer from political variance over long project cycles. The transit properties can be used as collateral, and the citys involvement diffuses some of the developers financial risk and borrowing costs.
The Phx-Trans-Co should then look for a Design Build Finance Operate deal with any potential developers of this site. A DBFO makes Phx-Trans-Co the building owner but contractually the annual profits would go to the developer, less an appropriate percentage for transit connectivity. The intent being that taxpayers would recoup the value lost by not selling the land within 5 years of substantial completion, but all income would be directed toward mass transit projects. After the developers project payback period est. 30 years, Phx-Trans-Co should be allowed to receive a much higher profit share or buy out the contract.
The developers key asset in this deal is the contract with the Phx-Trans-Co, which could be sold; with stipulations and any remaining debt, to other parties should they see financial need. With the ability to use the land as collateral at no upfront cost, and heavily implicit city backing, financing the project becomes easier for the developer. The developer would also not be responsible for property tax as the entire project is officially owned by a city entity. Although, the tax value is serendipitously being collected through the profit sharing agreement and funneled directly into transport functions.
In conclusion, I feel this would be the best way to deal with project finance and risk. This arrangement also deals with future transit center control issues while still earning the developer and city profit. Let me be clear this is a funding source, not a funding solution, and the potential income from this is minuscule when compared to the Light Rail operating budget. However, considering a land sale may only bring in enough money to fund one or two new stations, I believe this is a much smarter long term investment. This also creates a model and organizational capacity for future deals.
(1) This keeps the corporation from being able to buy or sell city land without City council oversight
(2) For more information on Joint Development in Transportation Infrastructure see
Jeffery is a native Phoenix area resident and lives in the Downtown Evans Churchill neighborhood. He has a Masters in Globalization and Development from The University of Sussex – Institute of Development Studies and a Political Science B.A. From A.S.U. He currently works as a Project Manager for a Phoenix based small business. All opinions are strictly his own. All rights on written and creative ideas are reserved