I could understand how the transit and land holdings are mutually complementary. That is evident. By more lucrative, I mean is there a significant economic spread between the revenues, costs and profits of land and transit?

This may not happen in Hong Kong or Japan, as even these private companies have governments involved with a vested stake in the financial success of both.

A similar regime can’t be ported to the United States. America’s on the brink of another civil war over the trillions funneled into back-stopping the FIRE sector (and the automobile sectors). Even under ideal conditions, we have the fiduciary duty problem.

If there is a significant spread between the land and transit units, investors want to seize that difference for themselves. Assuming that there’s no government interference — such as a franchise law or public-carrier requirement for favorable tax laws — stockholders are free to order a sale or reorganization of the business if they perceive it in their best interest.

This is a very likely possibility.

A similar scenario would have been the Pepsico reorganization. Pepsi, besides its drink line, had a slew of mutually complementary businesses: heavily salted snack treats and fast food.

Pepsico shareholders decided that they wanted to get rid of the fast food business line. It was made into a new company, and the sale generated more cash for Pepsico.

Now the fortunes of the two companies are separate. Both seem to be well-off.

The logic at the time was probably that Pepsi fountains were a mutually complementary business to KFC and Pizza Hut. Seems logical enough. Yet when the fast food chains were spun off, Pepsico chose to take a sale rather than continue to collect revenues and liabilities.

The one tie they share is that Yum Brands, the corporation that owns the fast food spin-off, has a lifetime contract to serve Pepsi drinks.

The same would also be true of development and transit. Even in the U.S., where public transit agencies would almost never get to see the upside of added value to development near transit, studies have shown that higher property values correlate positively with proximity to rail transit. (I’m not aware of a similar study for buses, but there might be much smaller or zero correlation, unless quantity of service is a factor.)

The correlation is global, as the same effects are evident in MTR-like transit-development businesses.

Yet just because transit and development are mutually beneficial, it doesn’t mean they have to be under the same umbrella unless they’re legally compelled to stay united.

The split is likely to happen if the arrangement is a success or a failure.

If successful, the shareholders may choose to split the company because they sense that either the transit or the land component would fetch a premium on the market and use the sale to bolster the remaining business unit.

If declining, the shareholders may decide to cut the losses on a moribund unit by either liquidating it or finding another buyer willing to accept a lower return on investment.

Land is almost always going to be the more valuable business unit than transit. Why? Real estate has a smaller and wealthier market of buyers, sellers and tenants. It’s easier to manage than millions of people who depend on you for mobility. Real estate also offers a better return on investment when accounting for expenses and risk. Also, real estate is more liquid. A property deed is easier to unload than a portfolio of stations, guideways and vehicles that have no other use but to provide public mobility.

Then of course, there’s the danger of who gets to buy a public transit system. You can have a life-imitating-art “Roger Rabbit conspiracy” of competitors who only seek to enhance their position by eliminating competition. You can also see private equity funds buy the transit system. What happens when these groups come in ends up looking like an exurban McMansion after tweakers came looking for copper pipes and fixtures.

The U.S. doesn’t really have a mechanism to prevent such shenanigans. Even if it’s a matter of making laws more favorable for private developers to also make money from transit, the easy availability of automobiles, the abundance of land, and legally sanctioned beggar-thy-neighbor competition among local governments makes such an arrangement unfeasible in the U.S.

Cost-management is the best we could do for at this time.

I’m willing to defer to you on that and I think your right. My guess is that given the density level in Hong Kong, the company would be able to charge more if it wanted to. Transit fare’s in Hong Kong are considered pretty cheap and a good value. (unlike almost anything else)In Hong Kong and New York, transit competes with walking on many trips.

From what I’ve been reading, property development is hardly a side business. It’s a very important part of the whole company structure at least in terms of it’s Hong Kong operations.

There are two key points here.

A) We have established that it is possible to make money on transit alone or at least break even on it and that a number of global transit systems either achieve this or come close.

B) We can see the strong “mutually complementary” relationship between transit and urban type development.

C) We can see that these relationships once existed in the U.S. and inspired the early American mass transit systems.

I invite anyone to show any kind of mutually complementary relationship between large scale highways and urban type development. With transit, you pay for the transit and that’s it- period but with roads, one still has traffic issues, noise, delays and the need for vast amounts of parking– a cost most cities in the U.S. force on property owners with parking mandates or subsidize with tax dollars.

John, the MTR is majority government-owned, but it’s run as a private company; at any rate, Hong Kong politics is literally plutocratic, and there would be no pressure to hold fares down. The government-owned company acting as a private business is quite common in some countries, especially Singapore and Dubai (not so much Hong Kong). In Japan there are some such companies, too, for example Tokyo Metro, but they tend to be companies in the process of full privatization.

“MTR Corporation has always been reliant on developing properties next to railway stations for its profits (although the rail lines are profitable themselves); many recently built stations are incorporated into large housing estates or shopping complexes.”

The Wikipedia entry also say’s the company is still majority owned by the Hong Kong government. My guess, is that this is still a bit of a political issue and that the company is under pressure to keep fares lower than than the market might allow.

Anyway, my hope and eventual expectation is that the government’s general lack of funds and the obvious success of transit related development around the world will get more people interested in linking transit and development.

In the Midwest, a lot of transit lines would likely go through old industrial and underused infill areas like The Strip. At sub minimum, one should be able gain support for tax value capture near the lines.

This is the general problem of government involvement. I mean, who even thinks about these things. Who really has an incentive to think of the economics of a line, or routes and costs. It’s just a political issue.

The biggest obstacle to the property development form of paying for transit is that the land is already owned by someone else in the private sector. It either has to be purchased or condemned. Although the Supreme Court has ruled that municipalities can use eminent domain for economic development purposes, there is an enormous stigma (rightly so in my view) and many state level obstacles to doing this in many places. Plus the existing land owners would likely secure such high compensation that it would adversely affect the economics of the project.

And I don’t understand what’s illegal about a transit company owning real estate in the US.

It’s not a prohibition of transit agencies owning land or ancillary for-profit businesses.

The problem comes under the way the American investment world works right now.

An American equivalent of MTR would be if, say, First Transit or Veolia were incorporated as an REIT.

This REIT’s business model would rest on having an impressive portfolio of land holdings, as well as a network of highly patronized transit routes and government-granted powers including a franchise for the service area.

Now, an REIT has a responsibility to distribute a set percentage of its earnings to its shareholders. Even this dividend is not much of a burden.

The REIT/transit system does everything right: It controls its costs, it generates more revenue than it knows what to do with, and it even has a respectable debt outlook.

So why would there be any reason that shareholders would be upset at this arrangement?

Well, the financials show that the land holdings portfolio is several times more lucrative than the transit component. Its earnings growth is faster, far more stable, and its costs are lower.

Worse, they could find that some of the profits from the land holdings are going to shore up loss-leading services in the transit network.

If the shareholders think they can get a better deal by dismantling or spinning off the transit component, they have the right to make the company’s executives implement their decision. Management, though, has the obligation to carry out the investors’ wishes.

It doesn’t matter if the transit component provides a necessary service or even that it’s key to ensuring the profitability of the land portfolio. If the investors don’t want their money going into public transit, the company has no choice but to obey the investors’ wishes.

Still, it’s doubtful that the transit component can generate >100% operation and capital recovery through the collection of fares alone. That’s the case where riders are really paying their own way.

It does in Tokyo and Singapore, and I think also in Seoul and Taipei.

And I don’t understand what’s illegal about a transit company owning real estate in the US.

But, as I said, in Hong Kong itself it makes a profit through real estate development.

In other words, it’s subsidized.

In this case, it’s the investors of MTR stock and bonds, rather than the populace as a whole.

It’s feasible in Hong Kong, because owning land there is a de facto license to print money. Second, Hong Kong is very wealthy and poverty is no obstacle to owning a car. The biggest obstacle is Hong Kong itself. A car is a sign of status, but its carrying costs make ownership and operation more trouble than they’re worth.

Still, it’s doubtful that the transit component can generate >100% operation and capital recovery through the collection of fares alone. That’s the case where riders are really paying their own way.

What works in Hong Kong won’t work in the U.S. We have too much undeveloped land, too many regimes that can make an end-run around value-captive land (suburbs can poach cities’ value-generating enterprises by dangling out lower costs), and we invest so much money and knowledge into the sale, operations and throughput of vehicle traffic.

If we were to somehow overcome this, there’s one other problem with an MTR-like business arrangement in the U.S.: It’s illegal. Fiduciary duties are the cornerstone of American capitalism, and investors will have no tolerance for an unprofitable transit system on a corportation’s balance sheets that’s only taking away money that in the eyes of the law, is theirs.

Lind is one of a few pro-transit conservatives, but he hasn’t been successful in bringing his side around. For the most part, conservatives’ default position is the one of the think tanks, and the think tanks themselves entrust Wendell Cox and Randall O’Toole to do the dirty work.