P3 Projects Fill Gaps in Budget Holes

April 21, 2014

A wave of public-private partnerships is filling a void in mass transit, solving a headache for local governments and creating opportunities for private investment. Government leaders, construction companies, operations managers and real estate developers should join an innovative movement that stretches from Washington, D.C. to Denver.

The state of Maryland is embarking on a $2.2 billion light rail line as a public-private partnership, or P3. Plans for the purple line call for 21 stations along 16.2 miles running through the University of Maryland and Silver Springs, with connections to Washington’s Metrorail system at four stops.

The new line is designed to take thousands of cars off crowded streets and highways, reduce pollution and noise, and improve quality of life. The social benefits may extend to enlivening neighborhoods around the rail stations with residential and commercial development that generates business activity and tax revenues.

To finance the project, the state is seeking a $732 million federal loan, private activity bonds, and private investment of $500 million to $900 million. Investors will be repaid as construction milestones are reached and through a payment plan stretching 30 years.

The purple line represents a new, innovative way to solving an infrastructure problem at a time when federal government is contributing less to public transportation. In recent years, the U.S. Department of Transportation has cut capital funding of projects to 50 percent from 80 percent. This year, Congress passed only a two-year funding for the DOT, down from the traditional six years.

Less money and less certainty in federal support is shifting the burden for public transportation to local governments, pushing them to seek investors.  In Denver, $450 million in private funding is making possible the $2.2 billion Eagle P3 project now underway. A total of 36 miles of commuter rail lines, including a link between the city’s airport and main rail station, will be completed in 2016.

Projects like Eagle P3 and the Purple Line take public-partnerships to a new level. Most transportation projects are highways and tunnels that attract road builders and toll operators. Light rail systems open the door to rail car manufacturers, transportation system operators, and a class of construction companies skilled at snaking rail lines through metropolitan areas and erecting stops along the way.

Mass transit projects also open up real estate development opportunities that simply don’t exist along interstate highways, bridges and tunnels. Developers can build residential and commercial properties around stations to tap into the growing number of people who use and live near stations. These locations hold potential for income and appreciation as commuter activity clusters around each stop.

In some cases, local governments own or control the land around stations, creating greater opportunity for public and private sectors to work together. Case in point: The Boston Redevelopment Authority is creating a master plan for the new Fairmount Commuter Rail line to encourage residential and commercial development. The city owns several large lots that it wants to see put to use.

Similarly, the new Warwick Station Development District at the city’s rail-air-car transport hub was designed to encourage development. The city wants to see as much as 1.5 million square feet of office, retail, hotel and residential space built on the 95-acre site.

The good news is that where light rail stations pop up, tenants usually follow. A 2011 Jones Lang LaSalle study conducted in New Jersey found that of 52 office leases of 100,000 square feet or more, 22 were at transit hubs. The same study found that commercial vacancy rates were under the market average and rents were above in areas surrounding light rail stations.

Before the private sector steps up with capital and real estate investment, P3 mass transit projects need support from local government in the form of accelerated permitting, low-cost access of right of ways, multiple sources of return on investment, and low-cost, long-term financing. Government agencies must step out of the bid-build mindset and partner with the private sector on creative ways to make projects happen.

One approach is to think of the federal government as less of a piggy bank and more as a lender. While cutting direct funding, Washington has stepped up financing through the Transportation Infrastructure Finance and Innovation Act. TIFIA, as it is better known, provides direct loans, loan guarantees and lines of credit for project, including $280 million for Denver’s Eagle P3 project, $42 million for Warwick’s transportation hub. The Railroad Rehabilitation and Improvement Financing program, or RRIF, offers direct loans and loan guarantees only for railroad systems. It provided $155 million for the Denver Union Station tied to Eagle P3.

Local governments can and should go further than mass transit by providing incentives for real estate developers that build – or rebuild – neighborhoods around stations. Agencies can reduce risks by streamlining project approvals and assisting with financing. The combination of better transportation and increased business activity will benefit commuters and communities. 

Al Maloof is the managing director of GJB Consulting LLC (GJBC), affiliate of the Genovese, Joblove & Battista law firm