Innovative financing at New York’s Hudson Yards
New York City is using the value of land to develop Manhattan’s last frontier.
Less than a mile west of Times Square along the shore of the Hudson River, workers are transforming Manhattan’s last frontier of developable land into millions of square feet of office, residential, and commercial space — one of the largest private real estate projects in U.S. history.
At Hudson Yards, a massive, 37,000-ton platform will cover dozens of acres of live train tracks. The development, 45 square blocks of rail yard and industrial land between 30th to 42nd streets, will surely be studied for its planning, design, and engineering, but one of the most innovative aspects of the project is its financing.
New York City is redeveloping Hudson Yards with the understanding that public actions such as regulatory changes or infrastructure investment can generate large increases in the value of land. Large private development has been made possible by the rezoning of the area, beginning in 2005, from mostly industrial to mixed use. The city also funded the first addition to the New York subway system in 26 years, an extension of the number 7 line to the new 34th Street–Hudson Yards Station, which opened in fall 2015.
These two actions alone are projected to generate billions of dollars in increased land value. Through a policy approach known as land value capture, the city will recover some of the new land value and use it for public benefit — for the subway extension itself, as well as the reconstruction of a street, the development of affordable housing, and the provision of green space.
Much of the up-front capital to pay for the public investments will come from $3 billion in bonds sold to investors. The bonds will be repaid through revenues tied to the increase in land value, and other sources. One of the largest revenue sources to repay the bonds will be property taxes distributed through a mechanism similar to tax increment financing. The city established boundaries around the Hudson Yards district, inside of which property taxes from new or newly renovated buildings are set aside for infrastructure within the district.
Additional revenues will come from bonuses paid by developers for the right to build at greater density than would otherwise be allowed, and from the sale of development rights to builders of commercial buildings along a planned boulevard and park. Some developers can also become eligible to build more square footage by building a portion of the boulevard and park. Finally, residential developers that purchase bonuses are required to set aside a portion of their projects for affordable units, or pay fees for the construction of affordable housing elsewhere in the neighborhood.
All of this is coordinated through a complex legal and financial framework that includes two independent development corporations established by the city, which work in collaboration with the Metropolitan Transit Authority and other public agencies.
The project has not been free from criticism. The property tax revenues are partly limited by tax breaks given to entice office developers, who make payments in lieu of taxes (PILOTs), discounted up to 40 percent, for 19 years. The city also had to spend more than expected from its general fund during the project’s early years to help pay interest on the bonds, compensating for a slower than expected pace of development, and thus slower growth of land-based revenues. Still the project is instructive for cities looking to capitalize on the land value generated by public actions, which often escapes completely as private windfalls.
This blog post originally appeared at the American Planning Association blog, as part of a series published in the run-up to the APA’s National Planning Conference in New York City. It was authored by Lourdes German, director of international and institute-wide initiatives for the Lincoln Institute, who previously worked with the City of New York on the Hudson Yards project while at Edwards Wildman (now Locke Lord, LLP) and Fidelity Investments. She will lead a session, Financing NYC’s Hudson Yards, at the 2017 National Planning Conference, part of a track organized by the Lincoln Institute on Fiscal Analysis, Municipal Finance, and the Economy.