Transit Public-Private Partnerships: Legal Issues (2014)

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40 which the indebtedness was incurred upon the retirement of such indebtedness; and (5) the corporation must have been approved by the state or a political subdivision thereof, either of which must also have approved the specific obligations issued by the corporation.497 One of the important tests that a 63-20 non- profit corporation must meet is that the govern- ment agency must have “a beneficial interest in the corporation while the indebtedness remains outstanding.” A governmental unit may acquire a beneficial interest by: (1) using 95% of the facility, or (2) having the right to pay off the obligations and acquire the facility at any time. In addition, the governmental unit must acquire the prop- erty when the obligations are paid off. In order to satisfy the beneficial interest requirement, an organization must have a close tie to the government.498 …. Only a governmental unit or a corporation tightly con- trolled by a governmental unit can issue bonds that will be treated as tax exempt by IRC 103.499 As stated, a nonprofit corporation must have a “close tie” to or be “tightly controlled” by the gov- ernmental agency.500 To maintain sufficient con- trol, in addition to other contractual provisions, the government entity may have the right to ap- point members of the board of directors or have its own representatives serve on the board.501 Another reason to maintain control is that a 63-20 corporation “has no long-term equity inter- est in the project.”502 Nevertheless, a nonprofit issuer of tax-exempt bonds may own a facility fi- nanced with tax-exempt bonds under Revenue Ruling 63-20 until the retirement of the bonds, when the facility must become the property of the government agency.503 As one source explains, the ruling requires that “the state or a political subdi- vision thereof must have a beneficial interest in the corporation while the indebtedness remains outstanding and it must obtain full legal title to the property of the corporation with respect to 497 Internal Revenue Service Ruling 1963-20, avail- able at http://www.charitableplanning.com/document/ 675768. 498 Kawecki & Friedlander, supra note 423, at 268. 499 Id. at 269. 500 Id. at 268, 269; Revenue Ruling 63-20. 501 Nossaman, supra note 493 (unnumbered) (see text under caption “issues for governmental unit: contract v. liability”). 502 Id. 503 Id. which the indebtedness was incurred upon the retirement of such indebtedness.”504 Transit assets that are funded by federal grants also must continue to be used for transit service for the life of the asset.505 As noted, the governmental unit must approve both the nonprofit corporation and the specific obligations to be issued by the corporation.506 In accordance with Revenue Procedure 82-26, the IRS on request will issue an advance ruling on whether a nonprofit corporation’s issuance of obli- gations will qualify.507 The availability of the use of 63-20 nonprofit corporations for the issuance of tax-exempt bonds applies to a wide range of projects, including transportation projects. The government agency must have a specific need; there must be a non- profit corporation for the issuance of tax-exempt bonds to facilitate the financing, construction, op- eration and/or management of the project; and there must be a contractor to build the facility.508 IX. CREDIT FACILITIES AVAILABLE THROUGH THE TRANSPORTATION INFRASTRUCTURE FINANCING INNOVATION ACT, STATE INFRASTRUCTURE BANKS, AND OTHER SOURCES A. Transportation Infrastructure Financing Innovation Act The Transportation Infrastructure Financing Innovation Act (TIFIA) authorizes the USDOT to provide credit assistance in the form of secured (direct) loans, loan guarantees, and standby lines of credit for eligible surface transportation pro- jects of regional or national significance. TIFIA funds, therefore, are “loans and must be re- paid.”509 In 2012, MAP-21 made significant changes to the structure and terms and conditions of 504 AASHTO Center for Excellence in Project Fi- nance, Non-Profit 63-20 Corporations, available at http://www.transportation-finance.org/funding_ financing/legislation_regulations/state_local_ legislation/63_20_non_profit_financing.aspx. 505 Collins, supra note 415, at 17. 506 Rev. Proc. 82-26, 1982-1 C.B. 476. 507 Kawecki & Friedlander, supra note 423, at 269 (discussing Rev. Proc. 82-26, 1982-1 C.B. 476). 508 Jim Miara, Leveraging Models: the 63-20 Process (Mar. 1, 2010), available at http://urbanland.uli.org/Articles/2010/MarApr/Miara. 509 Midwest Regional Rail Initiative Project Note- book, supra note 201, at 9-5.

41 TIFIA.510 TIFIA continues to be a source of credit assistance for surface transportation projects, such as transit projects, intercity passenger bus or rail facilities, and vehicles and facilities for in- termodal interchange or transfer.511 TIFIA fi- nances development-phase activities, construction costs, and necessary financing costs.512 Under TIFIA, projects secured by the same revenue stream may be considered eligible.513 MAP-21 in- creased the authorized amount of credit assis- tance, changed the maximum potential for TIFIA credit from 33 to 49 percent of the total cost of development, introduced a new rolling application process, and authorized the use of tolls and user fees as sources for repayment of TIFIA’s forms of credit assistance.514 In regard to guidance on TIFIA since MAP-21, a USDOT/FHWA Web site, updated as of Septem- ber 12, 2013, advises that “the TIFIA letter of in- terest process has been adjusted to reflect changes authorized in MAP-21.”515 USDOT states that the department “will review TIFIA letters of interest to assess project eligibility, creditworthiness, and its inclusion in the TIP and STIP,” and that “[r]eview of the project's creditworthiness will in- clude a Departmental request for an indicative rating on the TIFIA loan and the financial plan for the project.”516 Furthermore, the department advised that “[p]ending a successful outcome to this process and a determination that the project meets all statutory eligibility requirements, the project sponsor will be permitted to submit an application for TIFIA credit assistance.”517 510 U.S. DOT, Notice of Funding Ability and Request for Comments, Letters of Interest for Credit Assistance under the Transportation Infrastructure Finance and Innovation Act (TIFIA) Program, 77 Fed. Reg. 45411 (July 31, 2012), hereinafter referred to as “Letters of Interest for Credit Assistance under the TIFIA Pro- gram,” available at http://www.fhwa.dot.gov/ipd/pdfs/ tifia/fy2013_tifia_nofa_073112.pdf. 511 FHWA, MAP-21—Moving Ahead for Progress in the 21st Century, TIFIA Questions & Answers, herein- after referred to as “TIFIA Questions & Answers,” available at http://www.fhwa.dot.gov/map21/qandas/ qatifia.cfm. 512 Id. 513 Id. 514 Letters of Interest for Credit Assistance under the TIFIA Program, supra note 510, at 45413. 515 TIFIA Questions & Answers, supra note 511. 516 Id. 517 Id. On July 16, 2012, a USDOT notice of funding availability and request for comments regarding TIFIA credit assistance advised that the “notice outlines the process that project sponsors must follow in seeking TIFIA credit assistance” and that USDOT is publishing the notice “to give pro- ject sponsors an opportunity to submit Letters of Interest for the newly authorized funding as soon as possible.”518 Moreover, although the notice pro- vides guidance on “how DOT will implement some of the changes made by MAP–21…it does not pro- vide comprehensive guidance about how DOT will implement all of the changes made by MAP–21” that would become effective on October 1, 2012. The notice explained that: The TIFIA regulations (49 CFR part 80), which provide specific guidance on the program requirements, were last updated in 2001, and have not been updated to reflect changes enacted in SAFETEA–LU and MAP–21. Because such existing rules have not been updated, MAP–21 should be the basis for up-to-date guidance. The primary document that the TIFIA program has used in recent years to provide supplemental program guidance has been a ‘‘Program Guide’’ published on the TIFIA Web site. DOT expects to update the TIFIA Program Guide on the TIFIA Web site to reflect changes made by MAP–21.519 For additional guidance, USDOT encourages applicants to check the TIFIA program Web site regularly for updated programmatic and applica- tion information.520 To qualify for TIFIA credit assistance under § 602(a)(5)(A) a project must have eligible project costs that are reasonably anticipated to equal or exceed the lesser of $50,000,000 or $25,000,000 for a rural infrastructure project and “33 1/3 per- cent of the amount of Federal highway assistance funds apportioned for the most recently completed fiscal year to the State in which the project is lo- cated.”521 An eligible project for TIFIA assistance is any surface transportation project that is eligible for federal assistance under Title 23 or Chapter 53 of Title 49 of the United States Code; a project for intercity passenger bus or rail facilities and vehi- cles; or a project composed of related highway, surface transportation, transit, rail, or intermodal capital improvements otherwise eligible for assis- tance that meets the “eligible project cost thresh- 518 Letters of Interest for Credit Assistance under the TIFIA Program, supra note 510, at 45411. 519 Id. at 45414. 520 Id. 521 23 U.S.C. § 602(a)(5)(A)(i) and (ii).

42 old under § 602.”522 Eligible projects receive assis- tance as long as funds are available, and if funds are exhausted, eligible projects may receive fund- ing in the succeeding year when funding is avail- able again. Eligible costs include substantially everything paid by or on account of an obligor for a project, such as the costs of the development phase;523 construction, reconstruction, rehabilitation, and replacement;524 acquisition of real property (in- cluding land relating to the project and improve- ments to land);525 environmental mitigation;526 construction contingencies;527 acquisition of equipment;528 capitalization of interest necessary to meet market requirements;529 reasonably re- quired reserve funds;530 expenses for the issuance of capital;531 and other carrying charges during construction.532 TIFIA authorizes USDOT to provide credit as- sistance in the form of secured (direct) loans, loan guarantees, and standby lines of credit for eligible surface transportation projects of regional or na- tional significance.533 MAP–21 authorized $750 million in funding for fiscal year (FY) 2013 and $1 billion in funding for FY 2014. It is estimated, however, that each dollar authorized for TIFIA leverages approximately $10 in lending capac- ity.534 Thus, the authorized budget authorization for FY 2013 and FY 2014 may support approxi- 522 Id. § 601(a)(1) and (a)(8). See also FTA, TIFIA Program Guide, at 2, available at http://www.fhwa.dot. gov/ipd/tifia/, hereinafter referred to as “TIFIA Program Guide.” See Midwest Regional Rail Initiative Project Notebook, supra note 201, at 9-6. 523 E.g., planning, feasibility analysis, revenue fore- casting, environmental review, permitting, preliminary engineering and design work, and other preconstruction activities. 524 23 U.S.C. § 601(a)(1)(B). 525 Id. 526 Id. 527 Id. 528 Id. 529 23 U.S.C. § 601(a)(1)(C). 530 Id. 531 Id. 532 Id. 533 FTA, Transportation Infrastructure Finance and Innovation Act (TIFIA) Program, hereinafter referred to as “FTA–TIFIA Program,” available at http://www. fta.dot.gov/grants/12861.html. See also Akintoye & Beck, supra note 2, at 204; Midwest Regional Rail Ini- tiative Project Notebook, supra note 201, at 6. 534 TIFIA Questions & Answers, supra note 511. mately $6.9 billion in lending capacity for FY 2013 and $9.2 billion for FY 2014.535 An applicant for credit assistance under TIFIA may be a state, local government, public author- ity, PPP, or any other legal entity undertaking a project authorized by the Secretary of Transporta- tion.536 A project must meet the planning and pro- gramming requirements of §§ 134 and 135 of Title 23.537 The Secretary must determine, inter alia, not only that financial assistance for a project will foster, if applicable, partnerships that attract pub- lic and private investment for the project but will also enable a project to proceed at an earlier date, as well as reduce the level of federal grant assis- tance for the project.538 Moreover, project sponsors “should provide quantitative or qualitative infor- mation about the public benefits that their pro- jects will achieve.”539 When there is a request for credit assistance, USDOT must determine that the project is cred- itworthy,540 which includes having the required investment grade rating.541 As described by USDOT, [p]rior to execution of a TIFIA credit instrument, the sen- ior debt obligations for each project receiving TIFIA credit assistance must obtain investment grade ratings from at least two nationally recognized rating agencies, and the TIFIA debt obligations must obtain ratings from at least two nationally recognized rating agencies, unless the to- tal amount of the debt is less than $75 million, in which case only one investment grade rating is required for the 535 Letters of Interest for Credit Assistance under the TIFIA Program, supra note 510, at 45412. 536 23 U.S.C. § 602(a)(4). See also Mallett, supra note 25, at 14 (discussing modifications to TIFIA by SAFETEA-LU). 537 23 U.S.C. § 602(a)(3); Letters of Interest for Credit Assistance under the TIFIA Program, supra note 510, at 45413. See also Midwest Regional Rail Initiative Pro- ject Notebook, supra note 201, at 9-6. 538 23 U.S.C. § 602(a)(9)(A)-(C). 539 Letters of Interest for Credit Assistance under the TIFIA Program, supra note 510, at 45413 (stating that “[e]xamples of public benefits include objectives speci- fied in Section 101 and 49 U.S.C. 101(a) and 5301, other DOT grant or credit assistance programs, relevant Fed- eral, state, or local transportation laws or plans, and other public benefits that can be achieved through transportation investments”). 540 Id. “DOT will also utilize a report and recommen- dation from an independent financial advisor and any other information it needs to determine a project’s cred- itworthiness.” Id. 541 23 U.S.C. § 602(a)(2)(iii).

43 senior debt obligations and one rating for the TIFIA debt obligations.542 It is important to note that no TIFIA funding will be “obligated” if a project has not received an environmental categorical exclusion, a FONSI, or a ROD under NEPA.543 Title VI of the Civil Rights Act of 1964 and the Uniform Relocation Assis- tance and Real Property Acquisition Policies Act of 1970 also are applicable to the TIFIA pro- gram.544 As noted, secured loans are one of the forms of credit assistance authorized by TIFIA. The Secre- tary of Transportation may enter into agreements with one or more obligors to make secured loans to finance the eligible costs of a project selected under § 602 of TIFIA.545 TIFIA’s funding also may be used to refinance existing federal credit in- struments for rural infrastructure projects or to refinance other long-term obligations or federal credit instruments “if the refinancing provides additional funding capacity for the completion, enhancement, or expansion of any project” se- lected or otherwise eligible under § 602.546 A secured loan provided under TIFIA must be payable in whole or in part from tolls, user fees, or payments owing to the obligor pursuant to a PPP or from other dedicated sources of revenue that also secure the project’s senior obligations.547 The proceeds of a secured TIFIA loan may be used for any nonfederal share of project costs under Title 23 or Chapter 53 of Title 49 if the loan is repay- able from nonfederal funds.548 The total federal assistance provided on a project receiving a TIFIA loan may not exceed 80 percent of the total project cost.549 All repayments of principal and interest on a direct loan are to commence not later than 5 years after the end of the period of availability specified in subsection (b)(6) and conclude with full repayment 25 years after the stated period of 542 Letters of Interest for Credit Assistance under the TIFIA Program, supra note 510, at 45414. 543 23 U.S.C. § 602(c)(2). 544 Id. § 602(c)(1)(A) and (C). 545 Id. § 603(a)(1)(A). 546 Id. § 603(a)(1)(D)(i)-(ii). For limitations on refi- nancing of interim construction financing, see § 603(A)(2). See also Akintoye & Beck, supra note 2, at 204. 547 Id. § 603(b)(3)(A)(I)-(IV). 548 Id. § 603(b)(8). 549 Id. § 603(b)(9). availability,550 but there are other provisions that permit a deferral of payments.551 The second type of credit assistance that TIFIA authorizes is a loan guarantee instead of a se- cured loan pursuant to which the Federal Gov- ernment guarantees a borrower’s repayments to a nonfederal lender.552 Third, TIFIA authorizes the Secretary to enter into agreements to make available to one or more obligors lines of credit “in the form of direct loans to be made by the Secretary at future dates on the occurrence of certain events” for a project selected under § 602.553 The line of credit may be drawn upon to pay debt service for financing the eligible costs of a project, to pay the costs of extraordinary repair and replacement, to pay the expenses of operation and maintenance, and to pay the costs arising out of unexpected federal or state envi- ronmental restrictions.554 TIFIA lines of credit may assist projects to attain an investment grade bond rating and secure bond insurance by provid- ing a secondary source of capital for the first 10 years following the completion of a project.555 The total amount of a line of credit may not ex- ceed 33 percent of the reasonably anticipated eli- gible costs of the project.556 Furthermore, a project that receives a line of credit under § 604 may “not receive a secured loan or loan guarantee under section 603 in an amount that, combined with the amount of the line of credit, exceeds 49 percent of eligible project costs.”557 As with a secured loan, a line of credit made available under TIFIA is to be paid in whole or in part from tolls, user fees, pay- ments owing to the obligor under a PPP, or other dedicated sources of revenue that also secure the project’s senior obligations.558 The statute pro- vides that the full amount of a line of credit pro- vided under the section is to be available during the 10-year period beginning on the date of the substantial completion of the project.559 550 Id. § 603(c)(2). 551 Id. § 603(c)(3). See also TIFIA Program Guide, su- pra note 522, at 2. 552 Id. § 603(e). See also TIFIA Program Guide, supra note 522, at 2. 553 Id. § 604(a)(1). 554 Id. § 604(a)(2). See also Winstead, supra note 376, at 14. 555 Financing Capital Investment: A Primer for the Transit Practitioner, supra note 461, at 45. 556 23 U.S.C. § 604(b)(2). 557 Id. § 604(b)(10). 558 Id. § 604(b)(5). 559 Id. § 604(b)(6).

44 Two TIFIA loans were obtained for the Miami Intermodal Center, the first for $269 million (June 2000) and the second for $170 million (April 2005; later increased by $100 million in August 2007). In July 2006, the Florida DOT prepaid the first loan and replaced it with one obtained through the State Transportation Trust Fund be- cause the terms were more favorable.560 Between 1999 and 2012, TIFIA provided $1.23 billion in credit assistance for transit projects, including credit assistance for the Denver Union Station Project Authority, a public-private devel- opment; the Reno Transportation Rail Access Cor- ridor (ReTRAC); the Staten Island Ferries and Ferry Terminal Project; the Tren Urbano Rapid Rail Project in Puerto Rico; the Transbay Transit Center in San Francisco; and the Washington Metropolitan Area Transit Authority (WMATA) Capital Improvement Program.561 However, as of May 2013, for the Dulles Metro- rail Silver Line that will be operated by WMATA, there is a recommended preliminary TIFIA alloca- tion of $1,979,610,270 for a project that is ex- pected to cost $5,998,819,000.562 B. State Infrastructure Banks Section 350 of the National Highway System Designation Act of 1995 created a pilot program for up to 10 participating states to establish a State Infrastructure Bank (SIB). A SIB is “a type of revolving infrastructure investment fund that can offer loans and credit assistance to public and private sponsors of certain highway construction, transit or rail projects,” the effect of which is to expand the capacity of investment for transporta- tion.563 560 MIC, Fact Sheet, Transportation Infrastructure Finance and Innovation Act (updated May 2008), avail- able at http://www.micdot.com/news_room/MIC_kit/3_ TIFIA_Fac_Sheet.pdf. 561 For details, see FTA–TIFIA Program, supra note 533. See App. A for discussion of ReTRAC. 562 See Fairfax County (Virginia) Board of Supervi- sors, Transportation Committee, Dulles Metrorail Sil- ver Line: Status Report and Transportation Infrastruc- ture Finance and Innovation Act (TIFIA) Funding Update (May 7, 2013), available at http://www.slideshare.net/fairfaxcounty/1-dulles- metrorail-silver-line-project-and-funding-update-bo-s- trans-comm-5-7-13-final-dmb. 563 Knowledge Center, State Infrastructure Banks (July 5, 2011), hereinafter referred to as “State Infra- structure Banks,” available at http://knowledgecenter. csg.org/kc/content/state-infrastructure-banks. Under the program, FTA and FHWA initially signed cooperative agreements with nine states for the purpose of making loans and providing other assistance to eligible public and private en- tities.564 In 1991, ISTEA “authorized states to pro- vide loans or other forms of credit enhancements utilizing federal funds a state has received,” a program that was continued under TEA-21.565 SAFETEA-LU expanded the SIB program to all states and territories. Projects must be consistent, to the maximum extent feasible, with comprehen- sive plans of local metropolitan planning organi- zations and local governments and conform to state law.566 As of 2012, 39 states had created SIBs, 21 states had established transit accounts, and 8 states had completed transit-oriented loans.567 SIBs may include a state-funded account that is capitalized by state money and bond proceeds that may make loans for capital costs.568 At least five states, Florida, Georgia, Kansas, Ohio, and Virginia, have established banks or accounts within their SIBs that are capitalized solely with state funds.569 A SIB permits a state to use as its “initial capi- tal” its federal-aid highway and FTA allocations, as well as nonfederal funds, “to provide loans and other financing arrangements.”570 Thus, federal funds can be used as “seed capital” or equity, and other nonfederal funds may be transferred di- rectly to the bank.571 The sources of capital for revolving loan funds include “dedicated taxes and user fees, government grants, legislative appro- priations, bond proceeds, loan repayments, inter- est earned from loan operations, and interest on cash balances.”572 As stated, a SIB is a revolving loan and credit enhancement program. SIBs in some states have 564 Collins, supra note 415, at 54. 565 Midwest Regional Rail Initiative Project Note- book, supra note 201, at 9-9. 566 Florida DOT, State Infrastructure Bank, herein- after referred to as “Florida DOT-SIB,” available at http://www.dot.state.fl.us/officeofcomptroller/PFO/sib. shtm. 567 FTA, State Infrastructure Banks (SIBs), hereinaf- ter referred to as “FTA-SIBs,” available at http://www.fta.dot.gov/grants/12862.html. 568 Florida DOT-SIB, supra note 566. 569 State Infrastructure Banks, supra note 563. 570 Midwest Regional Rail Initiative Project Note- book, supra note 201, at 9-9. 571 Id. 572 Id.

45 two separate accounts that may be used to lever- age funds. SIBs enhance the feasibility of projects by providing loans and other credit assistance to public or private entities having projects that are eligible for assistance under federal and state law.573 Because a SIB is a revolving fund—lending funds for projects while receiving loan repay- ments—it is able to finance more projects. Conse- quently, SIB funds may be “turned into much lar- ger credit lines, multiplying transportation investment capacity.”574 As one source explains, “a leveraged loan fund increases its available resources by using the loan repayment stream and/or the initial capital base as collateral for a bond issue,” funds that “[t]he state leverages…by placing the capital into a re- serve fund and then issues bonds against the fund, potentially tripling the amount of money it is able to lend.”575 Thus, a SIB may “leverage its initial capitalization by providing loan assistance, by using loan repayments as dedicated revenue to sell bonds in the bond market and by providing additional loan assistance with the proceeds of the bond.”576 SIB funds may be utilized in a variety of ways to assist in the financing and development of transit projects. A SIB may lend to public and pri- vate applicants and projects for any “revenue- generating facility.”577 A SIB may lend to states or to transit operators.578 A SIB may provide credit enhancements, serve as a capital reserve for bond or debt financing, subsidize interest rates, issue letters of credit, finance purchase and lease agreements, provide debt financing security, or provide other forms of financial assistance for the construction of projects quali- fied under the federal-aid highway program and transit capital projects.579 A SIB may provide simple or leveraged loans and increase the size of the fund through princi- pal and interest payments.580 The SIB, not the United States Treasury, receives interest and lease payments.581 Credit provided by a SIB may 573 Florida DOT-SIB, supra note 566. 574 State Infrastructure Banks, supra note 563. 575 Midwest Regional Rail Initiative Project Note- book, supra note 201, at 9-9. 576 State Infrastructure Banks, supra note 563. 577 Midwest Regional Rail Initiative Project Note- book, supra note 201, at 9-9. 578 Collins, supra note 415, at 54. 579 Midwest Regional Rail Initiative Project Note- book, supra note 201, at 9-9. 580 Id. 581 Collins, supra note 415, at 54. be used so that projects may begin before the transit agency receives grant money.582 Financing provided by a SIB may be used to “round-out” the financial plan for a project. Credit provided by a SIB may lower the overall cost of debt for a pro- ject by providing loans at a lower rate, by guaran- teeing loans, or by paying the premiums for bond insurance.583 A SIB may use “funds to guarantee bonds issued by cities, counties, public-private partnerships and other entities…. Loan guaran- tees can be particularly beneficial in reducing in- terest rates on projects in states with cities, coun- ties and special districts that have limited financial capacity.”584 Although a SIB may provide credit assistance in several ways, loans provided by a SIB are the most popular source of assistance.585 For example, in Florida three loans from the SIB helped fund the PPP for the Miami Intermodal Center pro- ject.586 SIBs are a “flexible source of financing” and a way to secure more capital for a transit pro- ject.587 C. Bank Financing Another form of private financing is the use of commercial loans for private partners or conces- sionaires via commercial banks or the capital markets. A project’s assets or revenues may be required as security for a loan.588 A “club” of lend- ers may be needed for a large infrastructure pro- ject.589 According to FHWA, large financial com- panies in the United States are competing with major international financial companies for the financing of PPPs for the transportation sector.590 Although not a transit project, a PPP for the Port 582 FTA-SIBs, supra note 567. 583 Id. 584 State Infrastructure Banks, supra note 563. 585 Id. 586 See App. A. 587 Midwest Regional Rail Initiative Project Note- book, supra note 201, at 9-10 (noting that “[i]n a turn- key or build-operate-transfer (BOT) project, the project company could receive a loan for a portion of the cost of the project and repay the loan through revenues gener- ated by land development, lease payments, payments from operating agreements, or fare revenues”). 588 Winstead, supra note 376, at 15. 589 Availability Payment Mechanisms for Transit Projects, supra note 289, at 12. 590 FHWA User Guidebook on Implementing PPPs, supra note 23, at 68.

46 of Miami Tunnel reportedly is financed partly by a group of banks.591 D. Private Funding As recently as 2009, no New Starts program us- ing one of two alternative project delivery meth- ods had obtained any private financing.592 MAP- 21 requires FTA to document private enterprise participation in public transportation and im- provement programs under 49 U.S.C. §§ 5303(i)(6), 5306(a), and 5307(c). Private equity investment may make it more likely that a project will be able to proceed as planned. The private sector may be willing to as- sume risks that other sources of funding are un- able or unwilling to do.593 For example, for the Portland MAX Airport Extension, Bechtel Enter- prises paid $28.2 million in advance in exchange for the rights to develop a 120-acre parcel adja- cent to the airport. Moreover, in providing 23 per- cent of the project’s capital, Bechtel’s contribution reduced the amount of the public contribution needed for the project.594 The inclusion of private investment may serve to lower the overall high cost of capital for a pro- ject. “This combining of equity and debt capital is not done in the public ownership model where all debt capital structure is utilized. The benefit of leverage is that the more debt that is utilized the lower the overall cost of capital.”595 Another benefit of private investment is that “at risk” investors are likely to monitor or “disci- pline” a project,596 insist on adequate security for a project, demand that a project have “current income and low volatility,”597 and require financial penalties for default.598 A private investor may be unable to meet its own financial obligations if cer- tain “milestones” for the project or scheduled payments, respectively, are not met or made. Attracting private capital, which may have been borrowed, may be difficult. 591 Project Profile—Port of Miami Tunnel, supra note 115. 592 Public Transportation: Federal Project Approval Process Remains a Barrier, supra note 170, at 1. 593 Availability Payment Mechanisms for Transit Projects, supra note 289, at 12. 594 FTA Report to Congress on PPPs, supra note 5, at 11. 595 MALLETT, supra note 25, at 1. 596 Rosenau, supra note 7, at 100. 597 Generating Private Sector Financing, supra note 132, at 3. 598 Rosenau, supra note 7, at 100. Private partners want to ensure that a project can pro- vide a reasonable return on invested capital, whether debt or equity, net of design and construction, operation and maintenance, reserved for coverage funds, tax cost, and any sharing of revenues proceeds for the project. Therefore the results of private financial analyses for PPP projects focus on the internal rate of return (IRR) on invested capital and/or the net present value (NPV) of the net proceeds from the project over the term of the con- tract.599 Equity holders have the lowest priority and do not receive distributions unless a “company” has a profit.600 However, transit operations typically are “revenue negative.”601 To attract private equity, there are certain “equity investment drivers,” such as a predictable and reliable stream of future cash flows (e.g., comparatively stable fare box revenue), as well as a demonstrated value for money.602 For transit PPPs, one form of equity investment driver may be periodic payments by a transit agency (e.g., availability payments dis- cussed in Section V.C) to subsidize a project to attract private, long-term equity.603 For the Oak- land Airport Connector project, for instance, BART retained most of the risk for ridership and fare revenue. BART agreed, however, to make a monthly payment to the private partner for opera- tion and maintenance. Part of the payment was “tied to project fare revenues” to incentivize the consortium to establish and maintain a facility that would be “attractive to riders.”604 Even assuming that there is available, signifi- cant, private funding for investment in public in- frastructure, it is estimated that only a small per- centage of such funding is likely to be devoted to the transit sector.605 Most transit agencies re- sponding to the survey had not funded or financed a PPP with bank financing or private investment financing. However, the City of La Crosse Mu- nicipal Transit Utility reported using private in- vestment and financing, as did the Pioneer Valley Transit Authority, the latter in the amount of $1 million. SEPTA stated that for one project, in ad- 599 FHWA User Guidebook on Implementing PPPs, supra note 23, at 39. 600 DELMON, supra note 189, at 66–67. 601 FTA Public-Private 3P Program, supra note 56, at 2. 602 Generating Private Sector Financing, supra note 132, at 10. 603 H.R. REP. NO. 110-24, Hearings on PPPs, supra note 9, at 83. 604 FTA Report to Congress on PPPs, supra note 5, at 16. 605 MALLETT, supra note 25, at 1.