Wednesday, October 09, 2013

Paying for the Hyperloop

By this time you have certainly heard about Tesla founder Elon Musk's proposal for the Hyperloop -- "...a new mode of transport – a fifth mode after planes, trains, cars and boat..." and you might be wondering, as I am, when the darn thing is going to be built already! Are we really worried about the investment? Can't smart state political and economic players come together to make this happen?

After all, it is quite hard to argue with the basic point that Musk raises -- that a high speed train between LA and SF does little to change the state's economy since it is not faster than flying (though it certainly has better environmental qualities) while the Hyperloop value proposition, reducing travel time between these two cities to 30 minutes, would fundamentally alter the state's economics.

First of all because a fast link between these two metropolitan areas will radically increase human interaction - tightly connecting the center of global technology innovation and the center of global entertainment and increasing and accelerating interaction between them. This will generate new businesses, cause new ideas to be developed, make it easier to integrate technology and entertainment and sell the results to a global market. Hyperloop will be a substantial competitive advantage for California.

Second because whichever company first perfects the Hyperloop will have an immediate global market to deliver these systems to other "high traffic city pairs that are less than about 1500 km or 900 miles apart." This too will bring an economic boom to the state of California if we can build them here first and then sell our know-how to the world.

But these are long term economic benefits and are difficult to quantify. While they (like the benefits derived from many infrastructure projects) would justify the needed investment in developing and building the Hyperloop, it is difficult to form public policy on these general economic benefits. Thus Musk has reasonably built into his analysis how much of the ticket cost would be needed, over 20 years, to recoup the development cost (about $20 per trip). But I believe there is another path to paying for the Hyperloop, one that we can easily execute on with visionary State political leadership and aspirational business leaders.

In Elon Musk's proposal he envisions a system that connects San Francisco and Los Angeles and perhaps in the future Sacramento, San Diego, Fresno, and Las Vegas. But the specific location in those cities is not considered. It stands to reason though that Hyperloop stations will be exceedingly valuable real estate -- living and working directly over a Hyperloop station eliminates the time and trouble of getting from somewhere else in that metropolitan area to the Hyperloop in order to start the journey to another city. Ending your journey at the business you want to visit eliminates the trip out of the Hyperloop station to wherever you needed to get to.

So imagine for a moment the incredible opportunity that the state has to play property developer -- what is the value of a mega-complex with shopping, offices, and homes situated directly over and around each Hyperloop station and thus connected to mega-complex locations in each of the other cities?

As a benchmark, the developer Larry Silverstein is obligated to pay $102 million per year in base rent to the NY Port Authority for the space which holds the World Trade Center. The actual lease value of the Hyperloop stations might be significantly more than that, but a construction bond sold today against a 50-year lease for two stations with combined annual income of $200 million per year in today's dollars (with increases for inflation) would generate more than enough money to build the Hyperloop. In Musk's plan he estimates construction costs at $6 billion for one tube with 40 cars. At just the World Trade Center lease value, the station real estate is worth $10 billion over 50 years.

Realistically the footprint for a Hyperloop mega-complex should be much larger than just the World Trade Center -- something more like all of downtown Manhattan at many multiples of the WTC lease value. Developers would be eager to create these new cities within the cities. In the Bay Area the old navy airbase in Alameda is available. Near Los Angeles it might be the Los Angeles Air Force Base although many other sites exist and are in public hands already, avoiding the need to use unpopular eminent domain laws (although this might also be needed).

What are we waiting for?

1 comment:

Prashant Ramars said...

The hyperloop could also become a great tourist attraction. It would take many more years for the developing world to have these for sure.
One thing i am not sure though is just by having a faster mode of transport btw LA and SFO, how new businesses would be created.