New York real estate soaring near the Second Avenue subway station points to a new MTA financing model

As officials prepare to break ground on the next leg of the Second Avenue subway in East Harlem, a big question arises: Is there enough money to pay for it?

Finally, the Metropolitan Transportation Authority’s revenue, which has more than $6 billion on the hook, has slumped during the Covid-19 pandemic as concerns about remote working and crime weighed on ridership.

The MTA projects a budget deficit of $1.4 billion in 2025, a date when construction of the new subway — a continuation of the Upper East Side’s Q line — is expected to be well underway.

One promising funding strategy worth looking at, often referred to as “value creation,” has a simple premise: Those who benefit most from newly launched subway services should pay the most. The biggest winners from subways are often builders and developers, who calculate the value of their properties based in part on ease of access.

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This premise is confirmed by a new one Crains.Analysis comparing price patterns in buildings along the new Q Corridor to similar ones along Line 1 on the Upper West Side. Values ​​rose by about a third on average, taking into account broader market factors.

But those millions of dollars in newly created value failed to provide adequate financial support for the costs, according to critics of the existing funding model, which instead often places the taxpayer at large, and commuters who use the rail, on the shoulders of the taxpayer as a whole of service expansion at most of the cost.

“We know there is a real correlation between improved transport access and higher property values. We just need to be more conscious of how we capture that value,” said Thomas Wright, president of the Regional Plan Association, an advocacy group that found that every minute saved traveling to New Jersey’s train stations is in the Garden State An additional $3,000 in home value based on prices at the time of the study in the early 2000s.

Possible approaches

According to economists, transport advocates and urban planners, there are two main ways to get landlords to get more involved.

Under the first model, developers would pay specifically for the privilege of building in subway-served zones, similar to the approach taken by the city’s business development districts, which charge landlords for sidewalk cleaning and other services.

However, this fee model, which has been used to pay for transit projects abroad, could be controversial as it can be difficult to calculate which buildings will actually benefit from a new subway station. Are you hooked when your building is four blocks away?

The second option is probably more attractive: do not charge the landlord any fees. Instead, collect the extra tax revenue the subways bring in (as they increase property value) to cover the cost of the project.

As the value of land adjacent to the transit increases, property taxes also increase. But instead of putting this newfound money into the typical all-purpose pot, officials would direct it to one specific place: pay off the subway’s construction debt, likely by redeeming bonds.

This type of “tax hike funding,” or TIF, which emerged in California in the 1950s, was used in 2015 to extend Train 7 to the Hudson Yards development, and it may be key to the eventual completion of the Second Avenue subway. a project first proposed a century ago.

The approach isn’t always seen as a win-win, as TIF essentially siphons off money that officials wish to spend on other priorities. The structure can also be risky. A market-wrecking pandemic, for example, could depress real estate values ​​to the point where the financial benefit of the new buildings evaporates.

Before we focus on worst-case scenarios, it would be helpful to quantify how much value a move can add. There is not much research on the exact size of wealth gains, and what does exist does not appear to have been methodically conducted.

Part of the problem is that New York so rarely builds subway lines. And when it does, as with the Q in Yorkville in 2017, analysts often only examine gains on buildings along the line. But it stands to reason that prices in Yorkville, like other parts of the city, may have improved over the past decade for reasons unrelated to the subway.

Without a control group — a neighborhood with similar characteristics that already had subway service — it can be difficult to know if Yorkville’s gains were just the product of a booming real estate market.

So a new one Crain’s analysis took a broader look and compared the price patterns in the Q corridor to those along the 1 line on the Upper West Side – be sure to look at a similar set of buildings in both locations.

The never-before-performed study relies more on statistics than anecdotes and concludes that value is indeed closely linked to proximity to the subway. And when this value increases, it is significant: by about a third on average.

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The results seem clear and convincing.

Along the new Q-path — a 28-block stretch in Yorkville from East 68th to East 96th Streets and from First to Third Avenues — values ​​rose an average of 32% after the subway opened, according to the analysis based on sales data compiled by StreetEasy, the residential property website. (Office buildings also enclose subway lines, but the Crains Study was interested in costs on the housing side. Most of what lies along the Q is apartments.)

At some co-ops and condominiums, the gains were even more striking. At 225 E. 79th St., a pre-war co-op near Second Avenue where units traded at an average price of $470,000 in the years leading up to the Q’s debut, the median shot up to $1.35 million. At 345 E. 81st St., a 20-story 1960’s skyscraper, the median before the subway was $508,000 compared to a median after the subway of $942,500.

Overall, the average sales prices in eight of the ten multi-family houses increased in the period analyzed Crainswhile two buildings saw their values ​​decline.

The West Side, which shared similar characteristics but had existing subway service, fared very differently. Prices there mostly declined from 2014 to 2020. Average prices in apartment buildings in the 24-block corridor between West 72nd and West 96th Streets, between Amsterdam and West End Avenues, fell by an average of 8%, according to the data.

Within this group, some declines were notable. 220 W. 93rd St., a pre-Q tan brick condo on Broadway, had an average selling price of $2.6 million in the pre-Q period. After 2017, the median fell to $2.07 million — a 20% loss.

At 255 W. 90th St., a pre-war brick and limestone co-op on Broadway, the median fell from $2.59 million to $2.09 million.

Of the 10 buildings in the 1 train corridor, the medians are down in six and up in four — a scenario that might have happened to Yorkville if the Second Avenue subway had never been built.

“I’m always a little cautious when comparing different places, but I didn’t expect to see such clear results,” said StreetEasy economist Nancy Wu. “This is the most compelling cut we can have from this type of data.”

In defining the “before” time Crain chose the period from 2014 to 2016 because it represented a time when the subway transitioned from a project that could fail to a safer bet.

There had been reasons to doubt it. The Second Avenue subway has broken ground several times since its proposal in 1929, but none of the earlier efforts made it to completion. Even the most recent go-around was clouded by doubts. Shortly after the Q’s groundbreaking in 2007, the Great Recession hit, delaying the project while also weakening its budget.

For the “after” period, the analysis went from 2017 to early 2020 to rule out the pandemic, which rattled property values.

It was also important to ensure that the buildings selected reflected their market – yielding a broad cross-section: co-ops and condominiums; pre-war and post-war units; Apartments in boutique buildings and high-rise units with many amenities; Apartments on busy avenues and units on quiet side streets. But there was one constant: every building had to show at least some sales activity before the Q hit the market.

To be fair, not every Yorkville building whose previous nearest subway line was the 6 line at Lexington Avenue benefited from a closer stop. At 1760 Second Ave., a meager condo that opened about two decades ago, the median selling price has actually fallen between 2014 and 2020, from $1 million to $952,500.

Conversely, not all of the Upper West Side had its downsides. At 2373 Broadway, a large 1990’s building, the median went from $963,000 to $1.15 million.

For whatever reason, some of the selected buildings turned out to be unmarketable. These addresses were less considered in the overall results.

For people who have observed Yorkville energized by the Q, the positive correlation between closeness and value makes sense.

“The subway has brought better accessibility but also a better vibe,” said John Patrick Hanley, 33, who bought his apartment on East 81st Street, near First Avenue, in 2015 when tunnels were still for the Q were drilled.

For the morning commute at the time, Hanley, a consultant, would hike seven blocks to Lexington Avenue and East 77th Street to catch a number 6 train to Midtown, a journey that could take 45 minutes. But since 2017, he can snag a Q at Second Avenue and East 83rd Street, halving his commute.

That time saving might have given his apartment, a two-bedroom co-op with a balcony, a boost. In 2015, it cost $620,000. But today it could fetch $835,000 based on a 2020 estimate. That means his home will be about 35% more valuable in seven years.

“It used to be taboo to be all the way East,” said Daniella Leon, an agent at Compass who has frequently worked in Hanley’s building. “Now you pay a premium to live here.”

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