California Forever and Hong Kong’s Rail + Property Model

This video from the Flying Moose is from several months ago, but it’s the best explainer I’ve seen on Hong Kong’s rail + property model of developing the MTR subway network. What they are clear about is that you can’t just prop up this type of system overnight, it takes decades of planning and lessons learned to get to where they currently sit in terms of fiscal and operational sustainability.

But it also got me thinking about city building and who is on the receiving end of profits from development and who is left holding the bag. During Mpact two weeks ago I was asked by a friend what I thought about California Forever, a development project set between the Bay Area and Sacramento funded by billionaires which would create a whole new city from scratch. Now the program is looking to be annexed by proximate local cities, taking advantage of their current fiscal pain.

My initial and visceral reaction is to oppose it, no matter how good the planning or urban design. It was hard for me to come up with a reason until now that wasn’t just “I don’t like rich people spending a billion dollars to buy land for a city because they don’t like voters in theirs”.  But slowly it’s come into focus as my thinking on common wealth and value capture evolve.

The first reason for disliking the current plan is transportation. The city will likely be built with new urban principals and be walkable, but it will need to be connected by public investments in infrastructure to the rest of the state. In the eyes of these developers, that doesn’t mean being part of a high speed rail link between Sacramento and the Bay Area or extending BART to the community. It’s more likely that highways will be expanded as this place will be a commuter town. More VMT, more cars on the road, less actual value and more status quo thinking.

That’s just a minor quip compared to my next point however. New towns and new places from scratch should be a product of public policy and like the rail + property development program of the MTR, the value created by them should not go to land developers alone but rather back into the community, whether that’s transportation or housing investments over the long term.

I know California Forever has a community benefits agreement planned of over $500m, but that’s pocket change when it comes to the amount of value this land will generate over the long term if you built a whole new city on it. It’s a “bread and circuses” type of gesture.

Thinking back to our discussion with Daniel Wortel-London about growth and running government like a business, the decision in New York City was made to make public investments that primed private development that could be taxed.  But that taxation was subject to the boom and bust cycles of development rather than the city being the private steady developer creating value on land it owned. And those private profits didn’t go back to the public who had invested in creating value, they just absorbed the losses when they happened.

The results of the MTR rail + property model is proof that if we are going to embark on creating new towns and neighborhoods, the developer or majority stake must be a public entity that can absorb and distribute the value created. But we don’t need only to look to Hong Kong to see where this works, though the example is very illustrative.

On a micro scale, we see this type of process work with affordable housing today in places like Montgomery County Maryland. A government agency, the Housing Opportunities Commission, makes investments in new development by private developers, but since they are the majority owner, the “profit” is used to subsidize affordable housing in a market rate building.

And this way of looking at city building could be a way for an entity like the State of California to think differently about the housing and accessibility crisis than just changing zoning codes and rules for housing elements or building public housing buildings. California could be the majority investor in new places rather than a bunch of unaccountable billionaires, some of whom subscribe to some pretty nutty theories on how the world should operate and would probably be ok if the venture ultimately failed.

Public entities have a strong incentive to get the basic structures of cities right from the start. Decisions made hundreds of years ago on street layouts for example still have impacts today. If new cities is a direction we wish to go, it’s possible to start over and think about them from a different perspective, one where the public wins, not a group of rich individuals.

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