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From page 43... ... 46 Background Investment bankers, regional banks, rail financial advisors, and railroad applicants were contacted to provide the user's experience with state and federal public rail funding programs. The individuals surveyed represented a broad mix of interests and experience with passenger and freight projects. They shared individual perspectives about rail transactions and the application process. This survey was not statically significant but common themes were identified. I. Transactions Respondents reported that transactions vary by client. Experiences included freight rail projects, passenger rail projects, privatization of publicly owned Short Line railroads, municipal rail projects, railroad bridges, freight transloading operations, and port logistics facilities. In general respondents felt freight projects are more difficult to fund than passenger projects, due to the difficulty of valuing the assets. Short Line railroads have the most diverse business needs which can include rail car and locomotive purchases, network maintenance, bridge reconstruction and business development projects such as new buildings or facility enhancements. Class 1 railroads have used the TIGER program but typically do not use state rail funding programs even though they would be eligible to receive funding in most states. Some railroads use project finance when there is sufficient equity available. The TIFIA program, private activity and municipal bonds, loans and grants were all mentioned as typical instruments used for rail projects. The use of grants reduces the need to finance the project through debt. Projects with grant funding can accept a lower rate of return because there is less debt to service. Loans must be evaluated based upon creditworthiness, costs and conditions. Government loans vary in how they compensate for risk. In some cases, private loans can be a more cost effective funding mechanism if a public agency has high risk avoidance. Private activity bonds are typically inexpensive for the private sector and a favorable tool. Federal programs typically provide subsidy if the private sector applicant will assume the risk. Municipal Bond interest rates often do not cover the cost of capital. Municipal Bond applicants must determine how to calculate the project's cost of capital and identify the source of the subsidy. Investment grade loans from bands and off‐shore markets can also be used to fund rail project enhancements. The number of transactions handled by firm varies based on the, client, type of project and the funding instrument used. Smaller specialized firms may only complete 1‐2 projects per year, while larger firms may complete 7‐8 projects per year. The number of transactions completed per year is typically correlated to the level of market activity, and is not a function of financial size or project complexity. Client readiness and pre‐planning can have a significant impact on the time it takes to complete a transaction. INVESTMENT PERSPECTIVES Read the entire page →
From page 44... ... 47 II. Applicant Profile Rail projects can be completed by rail line owners, rail authorities, public agencies, port authorities, and/or private companies. Companies interviewed indicated that sixty percent of the applications are typically with Short Line railroads. Large Class 1 railroads often do the majority of finance work in‐house, they often mix specific projects or groups of projects into a funding portfolio, versus developing funding options for specific stand‐alone projects. Class 1 railroads typically do not apply for state rail programs for funding. Class 1's have partnered with a public sponsor to secure federal grant funding for a large capital project, such as Chicago CREATE and multi‐state corridor projects funded by TIGER grants. This type of partnership is often undertaken when the project has significant public benefits, even though project may not have surfaced on the carrier's internal priority list, yet still provides performance enhancing attributes for the Class 1. Passenger rail operators have different program needs than freight rail operators. Freight rail applicants are typically entrepreneurial and seek creative ways to fund growth. Many short lines have struggled to secure bank loans due to the difficulty of valuing their assets. Most private sector businesses (shippers and receivers) Read the entire page →
From page 45... ... 48 of societal objectives. In terms of program application and transaction there are some differences between freight and passenger rail projects. Passenger projects don't necessarily differ from freight projects in terms of the professional services required. There is a perception that high‐speed rail projects are encouraging more public private partnerships. It is difficult for passenger rail projects to generate revenue to pay for capital expenditures such as terminals and rolling stock. Nearly all passenger rail projects require a subsidy for development. A government or corporate entity is typically the backstop these programs, because they are positioned to support the public benefit these projects create. Public agencies need to determine the project value compared to the subsidy they must contribute before they can commit to the project. For rail car funding applications, an analysis of the rolling stock's residual value must be completed. Depending on the service and commodity hauled, comparable values are often difficult to ascertain. Passenger rail car funding without public agency backing are harder to complete. States often object that the rail car funding programs do not cover the life of the asset. Rail cars by nature depreciate, and there is a very limited secondary market for these assets, making valuation difficult. Few states want to take on the rail car refurbishment risk. Public agencies are often concerned about the repayment system. Grant programs don't solve the long‐term replacement concern or the risk of ridership shortfalls. The TIFIA program was developed to mitigate the risk between public and private sector owned equipment. Freight projects typically have a source of funding generated by freight revenue; typically, these projects have a high fixed cost. To be eligible for public funds, there must be an identified public policy benefit. Projects are typically identified based in public program objectives. Freight rail typically needs a smaller subsidy than passenger rail. The project scope is typically limited by the highest and best use of freight rail assets. V. Typical Projects Projects are formed to respond to program criteria, program eligibility and funding levels. Large projects are typically passenger rail projects which include a State Department of Transportation with a long‐term public private partnership using current state owned assets. There are no "typical" small projects. The project list can vary widely between rolling stock, network maintenance, property acquisition, facility expansion, and new business development. Each project tends to be different based on the region, freight, customers and business objectives. Small projects tend to grow into larger ones based on success. Most projects "do not end the way they start." These remarks indicate that program flexibility is essential. An opportunity to leverage prior projects is beneficial. Bundling projects can help stretch matching funds but may limit competitive grant awards. The use of benefit cost metrics help large projects demonstrates economies of scale. VI. Primary Barriers Rail funding program barriers include concern over public sector support of private ownership, the ability to value assets given a limited number of transactions and setting realistic expectations. Read the entire page →
From page 46... ... 49 Neighborhoods have a strong voice and can limit freight and passenger rail development. One of the biggest barriers to rail expansion is the neighborhood concern over increased traffic, or increased safety risks. It is difficult to get public funding if local stakeholders and agencies object. On a broader scale, it is often difficult to get state governments to overcome public objection to funding private sector rail assets without some form of service commitment. In some states, funding of privately owned assets is precluded. Public education is needed to describe the benefits of rail, especially freight rail, for successful projects and ongoing funding programs. User expectations of passenger rail operations and the level of service provided are often exceedingly high. Setting realistic expectations is essential early in the process. Investment in freight rail infrastructure often includes a slow ramp‐up process for users to take advantage of the new investments. Freight rail volume increases may be slow to materialize. Realistic expectations of new volume projections and new service introduction are important, especially early in the process. Rail assets, especially Short Line rail assets are often undervalued, if other assets such as land, equipment, accounts receivable, inventory, cash or facilities are involved. Funding programs typically have a preference for a single asset type which often ignores the value of the other assets. It is difficult to integrate funding programs and synergies to attract matching funds when multiple assets are required to complete a project. Banks and bond holders are interested in surety that a revenue stream will exist in future years, this can be difficult for Short Line rail projects when the average Short Line customer turnover is once every seven years. It is often hard to find funding programs and collateral for smaller projects, planning and engineering work is often a requirement for the project applicant which can be expensive if the project is not selected for a funding program award. Funding Program processes need to be shortened and structured to appeal to matching programs. Many state programs are awarded on an annual basis and are not responsive to mid‐term awards to meet prospective site selection requirements. A structured payment stream is essential to project success. Typical cash metrics are not easily applied to Short Line railroads. Many short lines lack knowledge of capital finance. Lender's also admit difficulty in valuation of the rail and project components due to the limited turnover of rail property. Finance people have limited training and few benchmarks to estimate the network or competitive market value of a rail project. States approach funding programs in different ways and any given year may have different funding priorities. This makes bi‐state railroad projects exceedingly difficult. This jurisdictional barrier in concept jeopardizes the development of regional rail network benefits and corridor development. While many barriers exist, freight and passenger rail operators are finding ways to overcome these limiting conditions. Many state programs and particularly the TIGER and FAST Act programs are oversubscribed, which illustrate that determined carriers can find funding. Read the entire page →
From page 47... ... 50 VII. Time Horizon of the Transaction Timing can have a significant impact on project delivery. Many applications require matching funds. The time it takes to coordinate funding sources and complete a funding transaction can have significant impact on the success of a project. Some state programs have revolving rail funding programs and can make program funding decisions within a few months. Other states announce an application process and award funding once a year. Being able to respond to industry needs is essential, especially when multiple funding sources are brought together. Federal programs such as TIGER or FASTLane grants have specific application windows with a short lead time. One investor mentioned a general rule of thumb is that it will take 18 months per project to complete a transaction, however this timeline can vary depending on the number and type of permits required the purpose for which the rail is used, and how the payment stream is structured. Each program is different. Timelines can be extended if there is a missing capital commitment, or missing regulatory agency permits. Many projects bring multiple funding sources together, the more funding sources involve the longer it can take to complete the transaction. Merger and Acquisition transactions can range from 3‐4 months depending on due diligence reviews. Typical Programs:  USDA programs for short lines have been done in as few as 1‐2 months. Read the entire page →
From page 48... ... 51 expense for most short lines, which typically operate on 115lb rail. Some low density short lines many have legacy 60 pound rail segments which were the standard 100 years ago. Bridges are a challenge to fund, especially when they cannot be rebuilt. Short lines don't have the same financial base that Class 1 railroads. Short Lines also have limited access to capital based on their debt structure. The Short Line Tax Credit for Class II and III railroads often is not reauthorized until weeks away from year end. This uncertainty impacts short line reinvestment planning and the overall condition of the short line network. Short Line Funding Perspectives on Current Rail Funding programs:  TIGER Grants can be expensive to prepare. Applications become public documents and provide financial disclosure which can reveal competitive information. Applicants feel that successful grants require congressional support which benefits regions with strong congressional representation. Some states limit the number of applications, which can preclude applications for smaller projects.  RRIF loans could be more successful if the administrative component was simplified, many RRIF loans take nearly a year to process, often requiring expensive bridge loans. Credit risk premiums increase the cost of these projects often making them non‐competitive compared to other financing options.  The underpinning of any successful grant program should balance of the public and private benefits. Good funding programs develop projects which become the basis for public private partnerships.  The current cost of rail is $500,000 per mile, not including ties or ballast. Some state program funding programs have not kept up with rail building costs, requiring multiple funding programs to complete a project.  The ideal grant program would be an ongoing program, with an open consistent approach, where matching fund requirements and objectives are clearly defined. Programs which are offered once and not repeated are hard to integrate into the planning process.  Establish clear guidelines about how to measure public benefits.  TIFIA – forgiveness cycle is attractive.  A match requirement ensures there is a need for the project.  Grant administration needs to be simple.  Washington State's PCC received a Commerce Grant ($4 million) – Based on Economic Development benefits i.e. more carloads amount to more revenue.  FRA or Tax Credits.  All short lines are eligible for tax credit; these programs put the short line in control, which makes the program desirable.  Most loan programs have no process to redeploy capital once is it repaid.  Flexibility is important for all loan and grant programs.  All sizes are equal, in other words, not all short lines have the same abilities due to their small business nature.  Programs should reward good behavior.  The most desirable have limited application costs to prepare application. Read the entire page →
From page 49... ... 52 Passenger Transportation Supplier Perspective Background: Financing experts speculated that the next round of funding will separate public and private benefits at the program level. Benefits might include P3 Partnerships, freight and passenger items. Public private partnerships require a clear and transparent bid process. Show stoppers include program complexity, and any lack of clarity concerning program commitments and authority. Many large PPP's require $2‐3 million to complete the application process which may include engineering plans, permits and professional services. Passenger Program Preferences:  State supported routes, unbundled services.  PRIIA "209" was a game changer‐ allowed states to own services with federal guidelines. Read the entire page →
From page 50... ... 53  States have different revenue sources which may impact the project scope, or require the project scope to be tailored to meet state program objectives.  Consider structuring programs to allow local banks to take first position, allowing the state to take second position.  The use of 63‐20 nonprofit corporations in infrastructure facility development can facilitate the qualification of the project to receive public funds, since the revenues of the project do not inure to any private party.  Consider multiple strategies when deciding how to create an ability to complete, many valid projects are going unfunded.  Programs need to be flexible and tie back to public benefits, some PPP's have been undertaken to prop up bad ideas. If a freight railroad can't sustain operations, then no state can or should bail out a failing railroad.  A great program is defensible, measureable and produces public benefits.  Programs should not create inefficiency due to the time or cost required to apply. Public Private Partnerships  Union Pacific has developed five basic principles for approaching public private partnerships: 1. Partnerships must be voluntary for all parties. 2. Read the entire page →

From page 43...

... 46 Background Investment bankers, regional banks, rail financial advisors, and railroad applicants were contacted to provide the user's experience with state and federal public rail funding programs. The individuals surveyed represented a broad mix of interests and experience with passenger and freight projects. They shared individual perspectives about rail transactions and the application process. This survey was not statically significant but common themes were identified. I. Transactions Respondents reported that transactions vary by client. Experiences included freight rail projects, passenger rail projects, privatization of publicly owned Short Line railroads, municipal rail projects, railroad bridges, freight transloading operations, and port logistics facilities. In general respondents felt freight projects are more difficult to fund than passenger projects, due to the difficulty of valuing the assets. Short Line railroads have the most diverse business needs which can include rail car and locomotive purchases, network maintenance, bridge reconstruction and business development projects such as new buildings or facility enhancements. Class 1 railroads have used the TIGER program but typically do not use state rail funding programs even though they would be eligible to receive funding in most states. Some railroads use project finance when there is sufficient equity available. The TIFIA program, private activity and municipal bonds, loans and grants were all mentioned as typical instruments used for rail projects. The use of grants reduces the need to finance the project through debt. Projects with grant funding can accept a lower rate of return because there is less debt to service. Loans must be evaluated based upon creditworthiness, costs and conditions. Government loans vary in how they compensate for risk. In some cases, private loans can be a more cost effective funding mechanism if a public agency has high risk avoidance. Private activity bonds are typically inexpensive for the private sector and a favorable tool. Federal programs typically provide subsidy if the private sector applicant will assume the risk. Municipal Bond interest rates often do not cover the cost of capital. Municipal Bond applicants must determine how to calculate the project's cost of capital and identify the source of the subsidy. Investment grade loans from bands and off‐shore markets can also be used to fund rail project enhancements. The number of transactions handled by firm varies based on the, client, type of project and the funding instrument used. Smaller specialized firms may only complete 1‐2 projects per year, while larger firms may complete 7‐8 projects per year. The number of transactions completed per year is typically correlated to the level of market activity, and is not a function of financial size or project complexity. Client readiness and pre‐planning can have a significant impact on the time it takes to complete a transaction. INVESTMENT PERSPECTIVES

Read the entire page →

From page 44...

... 47 II. Applicant Profile Rail projects can be completed by rail line owners, rail authorities, public agencies, port authorities, and/or private companies. Companies interviewed indicated that sixty percent of the applications are typically with Short Line railroads. Large Class 1 railroads often do the majority of finance work in‐house, they often mix specific projects or groups of projects into a funding portfolio, versus developing funding options for specific stand‐alone projects. Class 1 railroads typically do not apply for state rail programs for funding. Class 1's have partnered with a public sponsor to secure federal grant funding for a large capital project, such as Chicago CREATE and multi‐state corridor projects funded by TIGER grants. This type of partnership is often undertaken when the project has significant public benefits, even though project may not have surfaced on the carrier's internal priority list, yet still provides performance enhancing attributes for the Class 1. Passenger rail operators have different program needs than freight rail operators. Freight rail applicants are typically entrepreneurial and seek creative ways to fund growth. Many short lines have struggled to secure bank loans due to the difficulty of valuing their assets. Most private sector businesses (shippers and receivers)

Read the entire page →

From page 45...

... 48 of societal objectives. In terms of program application and transaction there are some differences between freight and passenger rail projects. Passenger projects don't necessarily differ from freight projects in terms of the professional services required. There is a perception that high‐speed rail projects are encouraging more public private partnerships. It is difficult for passenger rail projects to generate revenue to pay for capital expenditures such as terminals and rolling stock. Nearly all passenger rail projects require a subsidy for development. A government or corporate entity is typically the backstop these programs, because they are positioned to support the public benefit these projects create. Public agencies need to determine the project value compared to the subsidy they must contribute before they can commit to the project. For rail car funding applications, an analysis of the rolling stock's residual value must be completed. Depending on the service and commodity hauled, comparable values are often difficult to ascertain. Passenger rail car funding without public agency backing are harder to complete. States often object that the rail car funding programs do not cover the life of the asset. Rail cars by nature depreciate, and there is a very limited secondary market for these assets, making valuation difficult. Few states want to take on the rail car refurbishment risk. Public agencies are often concerned about the repayment system. Grant programs don't solve the long‐term replacement concern or the risk of ridership shortfalls. The TIFIA program was developed to mitigate the risk between public and private sector owned equipment. Freight projects typically have a source of funding generated by freight revenue; typically, these projects have a high fixed cost. To be eligible for public funds, there must be an identified public policy benefit. Projects are typically identified based in public program objectives. Freight rail typically needs a smaller subsidy than passenger rail. The project scope is typically limited by the highest and best use of freight rail assets. V. Typical Projects Projects are formed to respond to program criteria, program eligibility and funding levels. Large projects are typically passenger rail projects which include a State Department of Transportation with a long‐term public private partnership using current state owned assets. There are no "typical" small projects. The project list can vary widely between rolling stock, network maintenance, property acquisition, facility expansion, and new business development. Each project tends to be different based on the region, freight, customers and business objectives. Small projects tend to grow into larger ones based on success. Most projects "do not end the way they start." These remarks indicate that program flexibility is essential. An opportunity to leverage prior projects is beneficial. Bundling projects can help stretch matching funds but may limit competitive grant awards. The use of benefit cost metrics help large projects demonstrates economies of scale. VI. Primary Barriers Rail funding program barriers include concern over public sector support of private ownership, the ability to value assets given a limited number of transactions and setting realistic expectations.

Read the entire page →

From page 46...

... 49 Neighborhoods have a strong voice and can limit freight and passenger rail development. One of the biggest barriers to rail expansion is the neighborhood concern over increased traffic, or increased safety risks. It is difficult to get public funding if local stakeholders and agencies object. On a broader scale, it is often difficult to get state governments to overcome public objection to funding private sector rail assets without some form of service commitment. In some states, funding of privately owned assets is precluded. Public education is needed to describe the benefits of rail, especially freight rail, for successful projects and ongoing funding programs. User expectations of passenger rail operations and the level of service provided are often exceedingly high. Setting realistic expectations is essential early in the process. Investment in freight rail infrastructure often includes a slow ramp‐up process for users to take advantage of the new investments. Freight rail volume increases may be slow to materialize. Realistic expectations of new volume projections and new service introduction are important, especially early in the process. Rail assets, especially Short Line rail assets are often undervalued, if other assets such as land, equipment, accounts receivable, inventory, cash or facilities are involved. Funding programs typically have a preference for a single asset type which often ignores the value of the other assets. It is difficult to integrate funding programs and synergies to attract matching funds when multiple assets are required to complete a project. Banks and bond holders are interested in surety that a revenue stream will exist in future years, this can be difficult for Short Line rail projects when the average Short Line customer turnover is once every seven years. It is often hard to find funding programs and collateral for smaller projects, planning and engineering work is often a requirement for the project applicant which can be expensive if the project is not selected for a funding program award. Funding Program processes need to be shortened and structured to appeal to matching programs. Many state programs are awarded on an annual basis and are not responsive to mid‐term awards to meet prospective site selection requirements. A structured payment stream is essential to project success. Typical cash metrics are not easily applied to Short Line railroads. Many short lines lack knowledge of capital finance. Lender's also admit difficulty in valuation of the rail and project components due to the limited turnover of rail property. Finance people have limited training and few benchmarks to estimate the network or competitive market value of a rail project. States approach funding programs in different ways and any given year may have different funding priorities. This makes bi‐state railroad projects exceedingly difficult. This jurisdictional barrier in concept jeopardizes the development of regional rail network benefits and corridor development. While many barriers exist, freight and passenger rail operators are finding ways to overcome these limiting conditions. Many state programs and particularly the TIGER and FAST Act programs are oversubscribed, which illustrate that determined carriers can find funding.

Read the entire page →

From page 47...

... 50 VII. Time Horizon of the Transaction Timing can have a significant impact on project delivery. Many applications require matching funds. The time it takes to coordinate funding sources and complete a funding transaction can have significant impact on the success of a project. Some state programs have revolving rail funding programs and can make program funding decisions within a few months. Other states announce an application process and award funding once a year. Being able to respond to industry needs is essential, especially when multiple funding sources are brought together. Federal programs such as TIGER or FASTLane grants have specific application windows with a short lead time. One investor mentioned a general rule of thumb is that it will take 18 months per project to complete a transaction, however this timeline can vary depending on the number and type of permits required the purpose for which the rail is used, and how the payment stream is structured. Each program is different. Timelines can be extended if there is a missing capital commitment, or missing regulatory agency permits. Many projects bring multiple funding sources together, the more funding sources involve the longer it can take to complete the transaction. Merger and Acquisition transactions can range from 3‐4 months depending on due diligence reviews. Typical Programs:  USDA programs for short lines have been done in as few as 1‐2 months.

Read the entire page →

From page 48...

... 51 expense for most short lines, which typically operate on 115lb rail. Some low density short lines many have legacy 60 pound rail segments which were the standard 100 years ago. Bridges are a challenge to fund, especially when they cannot be rebuilt. Short lines don't have the same financial base that Class 1 railroads. Short Lines also have limited access to capital based on their debt structure. The Short Line Tax Credit for Class II and III railroads often is not reauthorized until weeks away from year end. This uncertainty impacts short line reinvestment planning and the overall condition of the short line network. Short Line Funding Perspectives on Current Rail Funding programs:  TIGER Grants can be expensive to prepare. Applications become public documents and provide financial disclosure which can reveal competitive information. Applicants feel that successful grants require congressional support which benefits regions with strong congressional representation. Some states limit the number of applications, which can preclude applications for smaller projects.  RRIF loans could be more successful if the administrative component was simplified, many RRIF loans take nearly a year to process, often requiring expensive bridge loans. Credit risk premiums increase the cost of these projects often making them non‐competitive compared to other financing options.  The underpinning of any successful grant program should balance of the public and private benefits. Good funding programs develop projects which become the basis for public private partnerships.  The current cost of rail is $500,000 per mile, not including ties or ballast. Some state program funding programs have not kept up with rail building costs, requiring multiple funding programs to complete a project.  The ideal grant program would be an ongoing program, with an open consistent approach, where matching fund requirements and objectives are clearly defined. Programs which are offered once and not repeated are hard to integrate into the planning process.  Establish clear guidelines about how to measure public benefits.  TIFIA – forgiveness cycle is attractive.  A match requirement ensures there is a need for the project.  Grant administration needs to be simple.  Washington State's PCC received a Commerce Grant ($4 million) – Based on Economic Development benefits i.e. more carloads amount to more revenue.  FRA or Tax Credits.  All short lines are eligible for tax credit; these programs put the short line in control, which makes the program desirable.  Most loan programs have no process to redeploy capital once is it repaid.  Flexibility is important for all loan and grant programs.  All sizes are equal, in other words, not all short lines have the same abilities due to their small business nature.  Programs should reward good behavior.  The most desirable have limited application costs to prepare application.

Read the entire page →

From page 49...

... 52 Passenger Transportation Supplier Perspective Background: Financing experts speculated that the next round of funding will separate public and private benefits at the program level. Benefits might include P3 Partnerships, freight and passenger items. Public private partnerships require a clear and transparent bid process. Show stoppers include program complexity, and any lack of clarity concerning program commitments and authority. Many large PPP's require $2‐3 million to complete the application process which may include engineering plans, permits and professional services. Passenger Program Preferences:  State supported routes, unbundled services.  PRIIA "209" was a game changer‐ allowed states to own services with federal guidelines.

Read the entire page →

From page 50...

... 53  States have different revenue sources which may impact the project scope, or require the project scope to be tailored to meet state program objectives.  Consider structuring programs to allow local banks to take first position, allowing the state to take second position.  The use of 63‐20 nonprofit corporations in infrastructure facility development can facilitate the qualification of the project to receive public funds, since the revenues of the project do not inure to any private party.  Consider multiple strategies when deciding how to create an ability to complete, many valid projects are going unfunded.  Programs need to be flexible and tie back to public benefits, some PPP's have been undertaken to prop up bad ideas. If a freight railroad can't sustain operations, then no state can or should bail out a failing railroad.  A great program is defensible, measureable and produces public benefits.  Programs should not create inefficiency due to the time or cost required to apply. Public Private Partnerships  Union Pacific has developed five basic principles for approaching public private partnerships: 1. Partnerships must be voluntary for all parties. 2.

Read the entire page →

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