Michael Nahas
11.22.19
Wheel Deal:
I am an economist and new to transportation. I had a number of comments on the Wheel Deal, but I’ve decided to restrict my comments to the Land Acquisition Fund, because it is my area of expertise and I have a lot to say.
The Wheel Deal’s tagline for the Land Acquisition Fund says “Capturing the wealth creation effects of new infrastructure investments for the public.”
The website’s first assumption is that there is wealth created. Many transportation initiative do not get used. You may think “we’re Austin and we’re smarter than Dallas!” (or some other city), but I’m sure those other cities thought they were smart too. Even if a transit system gets used, installing it comes with disruptions. Construction will disrupt street and sidewalk traffic. Once the system is built, there may be less car traffic or less parking, which impacts business. If those negatives outweigh the positives, land value has been destroyed not created.
The website’s second (implicit) assumption is that there is no risk. The city is currently considering a change to the Land Development Code (LDC) that will drastically affect land prices. So, even if the transit system makes land more valuable, the LDC changes could make land less valuable. While the transit system would make land more valuable than it might have been, attempts to capture that wealth may fail. There are other risks to land values too: flooding, pollution, etc. One systemic risk is that the transit system could be delayed, which would delay the consumers/residents attracted by transit, causing a loss.
Even given those assumptions, I’m doubtful that the website’s method to capture the created wealth will work. Wealth, in this case, comes from the price of land changing. The price of land not only reflects the land’s current use but its future use. If we consider land near a train station, once the owner of the land knows a train station will be nearby in the future, they will demand a higher price for the land, because they know that the new buyer can charge a higher rent in the future. So, to profit from the change in price, the Land Accusation Fund would have to buy the land before the current owner knows a train station will be nearby. That will be difficult to do, because the Land Acquisition Fund cannot buy the land until after the bond has passed. Once the bond has passed, all the land owners will know the train route and can guess if a train station will be near their property. So land prices are likely to rise before the Land Acquisition Fund can buy the land, meaning the fund misses out on the wealth created.
(NOTE: The city could try to use eminent domain to buy the land at pre-bond-election prices, but I believe Texas Government Code § 2206.001 would prevent that.)
I do not believe that buying land is the best way to capture the wealth created. That method only captures the wealth on the land that the city has bought. The city has the power to tax every piece of property and having higher taxes near stations could capture nearly all of the wealth.
Next, I’d like to address the amount allocated to the Land Acquisition Fund. The Wheel Deal website tries to justify the amount by looking at a single real estate transaction which does not involve any wealth capture. That transaction is in no way representative of what Austin could expect.
Moreover, the Wheel Deal website says that the terms of “$430 million over 99 years” equates to “$4.34 million annually”. I believe that is incorrect. If Travis County received its last payment of $4.34M in 99 years, inflation would make that payment worth a fraction of what it is today. I believe the “$430 million over 99 years” is market lingo and that the payments increase over time to account for inflation. If we assume that the first year’s payment is $1.2M and that payments increase by 2.25% each year to account for inflation, then a total of $430 million is paid over the same period of 99 years. If I’m right, the Land Acquisition Fund would require 3 times as much money as stated.
The Wheel Deal website claims the purpose of the Land Acquisition Fund is to generate “new operating revenue”. This could be done without trying to do “value capture”. However, all of the schemes that I know of that create annual revenue from municipal bond sales either (1) involve financial risk, (2) will result in Austin getting sued by the federal government, or (3) are accounting tricks that do not pay for themselves. There may be other techniques I haven’t thought of, but, of the ones I know about that do not involve “value capture”, I do not recommend any of them.
To conclude, wealth creation is not assured and involves risk. Attempting to capture it by buying land after the bond has passed is not likely to succeed and does not capture all of the value. To estimate the size of the bond, the Wheel Deal website uses just a single transaction. That transaction is not representative of wealth capture. And, based on my expertise, I have reasons to believe the Wheel Deal drastically misinterprets the amount of money needed. Finally, other ways to turn a bond sale into operating revenue are not recommended.
To end on a happier note, transit can increase land values and it is possible to capture the value created. Austin should predict and measure the increase/decrease in land prices near transit stops, because it is one way to measure if the transit system is succeeding. Austin should both insure current landowners against price decreases and capture any price increases. I’m happy to talk with the Wheel Deal authors or any other transit-concerned people about how to do these things and improve transportation in Austin.
Michael Nahas
Master of Arts in Economics, UT-Austin
Member, AURA Transportation Committee