Issues that Emerge When Public Entities Acquire a Real Property Interest in Rail Lines (2016)

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4III. THE TRANSACTION A. Type of Interest to Acquire The first issue to address in any real estate trans- action is to determine the type of interest the rail- road will be willing to convey. The analysis begins with determining the nature of the railroad’s inter- est. Does it have fee simple title? An easement? A mix of interests that varies from parcel to parcel throughout the corridor? Potential buyers should not rely solely on the language of the deed to ascer- tain the scope of the railroad’s real property inter- est. Language that appears to convey a fee simple interest could, nonetheless, be construed under state law as granting only an easement.4 Similarly, the agency should confirm whether the land to be con- veyed includes a federally granted right-of-way. Some of the statutes relating to such right-of-way restrict the rail carriers’ ability to transfer the prop- erty or an interest in it to third parties.5 The next question is whether the railroad plans to continue operating freight service. If it does not, then to avoid the possibility of entanglement with the fed- eral rail regulatory structure administered by the Surface Transportation Board (STB),6 the transac- tion should require completion of “abandonment” proceedings at STB7 prior to closing on the sale.8 If the railroad does plan to continue operation, the parties should negotiate an arrangement by which the freight carrier retains a freight easement and the accompanying common carrier obligation. At the same time, the parties should determine the extent of the rights that each party will retain with respect to the conduct of rail operations on the line. As discussed in the annotations to the Annotated Term Sheet at the end of this digest, the extent of the acquiring agency’s involvement with the federal reg- ulatory process will be determined by the extent of the rights it acquires.9 In addition, and as discussed more fully in the following section, if the agency plans to remain outside the purview of the federal rail regu- latory scheme, the transaction documents should first ensure that the freight railroad retains the ease- ment at the outset rather than having the agency transfer the easement after it has acquired the entire interest in the right-of-way.10 Second, the transaction documents must reflect with specificity the rights and obligations that the acquiring agency is receiving and those that will remain with the railroad. In the early stages of planning a transaction, if the railroad wishes to retain the option to operate in the corridor that the public agency wishes to acquire, the parties should also pause to examine whether there might be existing alternative routes available in the vicinity that the railroad could use. Although not always an option—financially or operationally— the parties could benefit from taking the time to con- duct the analysis of the comparative cost of improv- ing a nearby rail line to permit the freight carrier to conduct its operations, while giving the passenger operator the ability to serve the population centers that are the target of its initial routing determina- tion. In some circumstances, the improvements to another line may be less expensive than the capacity enhancements on the line the railroad is currently using. In large metropolitan centers, where duplica- tive infrastructure is more common than not due to the complicated commercial history of those cities and the complex chain of rail mergers over time, this analysis could present a solution to some obstacles that the railroad may perceive to the implementa- tion of the transaction as initially proposed. B. Taking Amtrak into Account Amtrak’s use of a line that is under consideration changes the dynamic of the discussion about the line’s acquisition, although the degree of impact on the proposed new operation depends initially on the extent of Amtrak’s operation there. The statute that gives Amtrak the right to use rail lines in the United States applies to lines owned by freight railroads as well as by public agencies.11 Although Amtrak’s right to use the line for its intercity rail passenger service12 does not preclude the operation of com- muter service on the line, Amtrak’s statutory right to use the facilities and to have priority in dispatch- ing13 might impact the value of the line to the agency; 4 See discussion at note 8 in attached Annotated Term Sheet. 5 See, e.g., The General Right of Way Act of 1875, 43 U.S.C. § 934; 43 U.S.C. § 912. See also Marvin M. Brandt Revocable Trust v. United States, 134 S. Ct. 1257 (2014) for discussion of the federal government’s retention of interests in rights-of-way that were granted under the 1875 Act and that have been abandoned by the rail carrier. 6 49 U.S.C. § 10101, et seq. 7 49 U.S.C. § 10903. 8 Abandonment of an active rail line may trigger the exercise of reversionary interests under state law, so agencies contemplating a transaction that involves aban- donment should carefully analyze potential state law implications, as discussed in more detail in this digest. 9 See Annotated Term Sheet notes 7 and 9, and accom- panying text. 10 See Annotated Term Sheet notes 2 and 5, and accom- panying text. 11 49 U.S.C. § 24308. 12 49 U.S.C. § 24102(4). 13 49 U.S.C. § 24308(c) gives “intercity and commuter rail passenger service operated by Amtrak” priority over freight transportation. The statute does not specifically address the priority as between intercity and commuter service.

5that is, the presence of Amtrak’s intercity operations has an impact on the capacity of the corridor. If Amtrak is present, the agency will be required to accommodate Amtrak’s operation on the line. As the agency acquires the real property interests in the line, it can either receive an assignment of Amtrak’s agreement with the railroad or enter into a new agreement to address Amtrak’s operations. C. What to Acquire—If Freight Service Will Continue Bearing these questions in mind, the agency must next determine the property interest that will satisfy its needs for the operations it proposes and, at the same time, allow the railroad to satisfy its continu- ing objectives (if any) in that market. As noted previ- ously, because agencies cannot exercise their accus- tomed eminent domain power over the lines, unless they can make a case for adverse abandonment (as discussed more fully in the following section), an acquiring agency will generally have to accept the type and scope of interest the railroad is willing to give. Negotiation is possible, and sufficient compen- sation may overcome substantial objections. The bar- gaining leverage may not be equal, however, because of the bar against the exercise of eminent domain, and the agencies may find themselves in a position of accepting the interest the railroad is willing to give. One option that is available to agencies wishing to pursue acquisition of a line that remains part of a rail- road’s network and subject to STB jurisdiction is to pursue so-called “adverse abandonment” pursuant to 49 U.S.C. § 10903 and 49 C.F.R. Part 1152. Typically, a railroad that owns a line but no longer wishes to pro- vide service on it proposes the abandonment, and the STB can approve it upon a showing that the public convenience and necessity no longer justify or require the railroad’s continued authority to operate common carrier service on the line.14 When a third party, such as a local government, however, believes that a rail line has fallen into disuse, and the public interest would justify termination of STB’s jurisdiction over the line in order to permit the exercise of eminent domain authority, STB may grant an “adverse aban- donment,” that is, an abandonment that is “adverse” to the interests of the owning railroad.15 The public agency’s interest, however, in claiming a corridor that appears underutilized for the purpose of benefiting the community is not always a suffi- cient determinant of the “public convenience and necessity.” STB is reluctant to grant adverse aban- donment when there is a rail carrier that claims it is ready, willing, and able to provide service, and there is a shipper that claims to want service.16 If success- ful, though, the adverse abandonment proceeding removes STB jurisdiction from the line, facilities, or other rail property, and the public agency is then free to exercise its traditional eminent domain authority. If the transaction is properly structured, an agency can acquire a fee simple interest in an active freight line and the selling railroad can continue its freight operations. For example, the Florida Department of Transportation (FDOT), in one of the earliest trans- actions in commuter rail development in the country, acquired a fee simple interest in 1988 from CSX Transportation, Inc., on CSX’s coastal corridor from a point north of West Palm Beach to Miami.17 In that transaction, CSX retained an easement that gave it the exclusive right and authority to provide freight service on the corridor. These transactions are struc- tured to allow the selling freight railroad to retain the essential rights and obligations necessary to continue its freight operations. As noted previously, in order to be successful in regulatory proceedings that seek a ruling that the public agency remains outside the scope of the jurisdiction of STB, the selling railroad must retain an operating easement in the initial con- veyance to the agency, rather than having the agency acquire the railroad’s entire interest in the line and then transfer an easement back to the railroad. The agency can acquire some degree of control over the selling railroad’s operations, so long as the agency does not acquire sufficient rights and obliga- tions that would allow it to interfere with the rail- road’s ability to fulfill its common carrier obliga- tions.18 Arrangements that STB may accept include: 14 49 U.S.C. § 10903. Note that the statute also provides for “discontinuance” of rail operations, relief that is appro- priate for a rail carrier that has lease or operating rights on a segment of track but is not the owner of the line on which it operates. As is the case with the owner, however, these rights remain in place until extinguished by STB. Thompson v. Texas Mexican Ry., 328 U.S. 134, 145 (1946). 15 Thompson, 328 U.S. at 145 (1946); Consolidated Rail Corp. v. Interstate Commerce Comm’n, 29 F.3d 706, 708– 09 (D.C. Cir. 1994); New York Cross Harbor R.R. v. STB, 374 F.3d 1177, 1185–86 (D.C. Cir. 2004). 16 New York Cross Harbor R.R., 374 F.3d at 1183–86; Salt Lake City Corp.—Adverse Abandonment—In Salt Lake City, UT, STB Docket No. AB-33 (Sub-No. 183), slip op. at 5, 7–8 (Service Date Mar. 8, 2002). 17 See Florida Dep’t of Transp.—Acquisition Exemp- tion—Certain Assets of CSX Transp., Inc., STB Finance Docket No. 35110 (Service Date Dec. 15, 2010) (decision provides historical background of original transaction while announcing a ruling on the transfer of maintenance and dispatching obligations from CSXT to FDOT and the South Florida Regional Transportation Authority). 18 STB and its predecessor the ICC have concluded, and subsequently elaborated on the conclusion, that pub- lic agencies can acquire interests in rail corridors without necessarily acquiring a common carrier obligation on that corridor. See State of Maine, DOT—Acquisition and Opera- tion Exemption—Maine Central R.R. Co., 8 I.C.C. 2d 835 (1991). See also cases cited in Annotated Term Sheet note 2.

61) establishing operating windows for freight and passenger traffic that limit the freight operations to specific times of day;19 2) giving the agency authority to dispatch rail operations on the corridor as long as it does not have discretion to materially impede freight movement or operation;20 and 3) providing right-of-way or signal maintenance by the public agency rather than the freight railroad.21 STB, how- ever, will not grant a request for a determination that the public agency is not acquiring common carrier obligations if the agency has acquired the right to force the rail carrier to seek abandonment authority or to otherwise cease providing freight rail service on the corridor.22 D. What to Acquire—If Freight Service Will Not Continue If the railroad does not wish to continue to operate freight on the line, then the parties will need to agree on the approach to secure approval for abandonment of the freight service on the corridor. 49 U.S.C. § 10903 and the regulations at 49 C.F.R. Part 1152 set forth the procedures and approaches available for parties to follow when the carrier seeks to abandon its oper- ating authority and attendant obligations. That said, the mere cessation of operations by the railroad is not sufficient. Until the railroad with operating authority secures and affirmatively exercises abandonment authority,23 the line remains subject to STB’s jurisdic- tion and to the common carrier obligation that accom- panies the authority to operate a line.24 When considering how to accomplish the termina- tion of STB’s jurisdiction over a line, the preferred approach is often to postpone closing on the acquisi- tion until the railroad has secured abandonment authorization from STB and consummated the aban- donment. This simplifies the regulatory process for the acquiring agency. One provision of the statute that relates to abandonments, however, presents a possible speed bump in the process. That is, 49 U.S.C. § 10904 permits a party that is a “financially respon- sible person” and wishes to “preserve freight rail ser- vice” to file an Offer of Financial Assistance (OFA). This process allows for the offeror, upon an expres- sion of willingness to either provide a subsidy for the ongoing freight operations or to purchase the line outright (at a price that STB will establish if the potential offeror and the owning railroad cannot reach agreement), to potentially disrupt a proposed transfer of a line for use as a transit operation. To manage this risk, the railroad can seek waiver of the OFA process when submitting its request for aban- donment authority, arguing that the public’s interest in the proposed transit operation provides a valid reason for denying the offeror’s request.25 Agencies do have choices about how to approach a transaction where the railroad seeks to cease opera- tions altogether. One involves closing the transaction but placing the deeds in escrow pending completion of the abandonment so that the agency will never fully have control of the property until STB has approved the abandonment. The agency will need to complete a two-step regulatory process: first, advising STB of its acquisition of a beneficial ownership interest in the property, even though ownership of the property has not yet been fully conveyed,26 and second, securing authorization, in its capacity as beneficial owner, for abandonment of the common carrier obligation.27 Another alternative approach involves closing the transaction, completing the conveyance, and securing the regulatory authorization that accompanies an acquisition of a line by a noncarrier.28 Upon comple- tion of that phase of the process, the agency then seeks abandonment authorization. The agency completes these steps sequentially, not simultaneously. Although the agency may include a statement in its acquisition pleadings of its intent to secure abandonment author- ity immediately upon completion of that § 10901 pro- cess, standard practice is for sequential pleadings. Although this sequence gives the agency control over 19 Mass. Dep’t of Transp.—Acquisition Exemption, Cer- tain Assets of CSX Transp., Inc., STB Finance Docket No. 35312, slip op. at 12 (Service Date May 3, 2010). 20 State of Michigan Dept. of Transp.—Acquisition Exemption—Certain Assets of Norfolk S. Ry. Co., STB Finance Docket No. 35606, slip op. at 5 (Service Date May 8, 2012). 21 Id.; Mass. Dep’t of Transp., slip op. at 13. 22 Southern Pacific Transp. Co.—Abandonment Exemp- tion—Los Angeles County, CA, 9 I.C.C. 2d 386 (1993). 23 Section 10903 also contemplates “discontinuance” authority. A carrier that has trackage rights or other authority to operate on a line it does not own must secure “discontinuance” authority. If more than one carrier has the right to operate on a line that a public agency wishes to acquire, all must secure the requisite abandonment and/or discontinuance authority (depending on the nature of their interest in the line) in order for the freight com- mon carrier obligation to be fully extinguished. 24 49 U.S.C. § 11101 describes the railroad’s common carrier obligation. 25 Union Pacific R.R. Co. Abandonment Exemption— In Kane County, IL, STB Docket No. AB-33 (Sub-No. 105X) (Service Date Apr. 29, 1997) (OFA exemption granted in light of valid public purpose in plans for railbanking line). 26 49 U.S.C. § 10901; 49 C.F.R. pt. 1150. 27 49 U.S.C. § 10903; 49 C.F.R. pt. 1152. 28 49 C.F.R. pt. 1150, subpt. D. This discussion assumes that because the acquiring agency will not be conducting, or hiring a third party to conduct, freight operations on the line, the entity to be created will be a “Class III carrier” as defined in STB’s regulations, a classification based on revenue of the railroad and not the quality of its track and infrastructure or any other operating characteristics. See 49 C.F.R. pt. 1201, subpt. A, General Instructions.

7the abandonment process, an agency that pursues this approach may face the risk that the government will treat it as a rail carrier that provides transporta- tion subject to the jurisdiction of STB, if even for a brief period of time. This characterization has implica- tions for coverage under the Railroad Retirement Tax Act,29 Railway Labor Act,30 and the range of federal regulations affecting rail carriers. Undoing that sta- tus may be time-consuming and may cost the agency in administrative expenses, legal fees, and potentially higher personnel costs pending determination that the agency is not a rail carrier subject to the jurisdic- tion of the STB. E. Due Diligence Issues As with any transaction, the acquiring agency will need to conduct due diligence to confirm that the railroad has the ability and right to transfer the property interests the agency wishes to acquire and that the property does not come with burdens the buyer does not wish to bear. 1. Title The first question relates to the quality of the title that the railroad is able to convey. State real property law varies from state to state with respect to the interpretation of the rights conveyed in the deed trans- ferring the property to the railroad. Despite the perva- sive federal regulation of railroads that is designed to ensure uniformity of rights and obligations across a railroad’s operating system, state law governs matters of title to real property. Here, the issue does not arise during the period when the railroad is conducting operations on the corridor, because federal preemption precludes states and holders of reversionary property rights from exercising rights vis-à-vis the property so long as the railroad remains subject to STB’s jurisdic- tion.31 If the line is removed from STB’s jurisdiction as a result of an abandonment proceeding, however, and Section 10501 no longer applies, the state law determi- nation of the rights originally conveyed will control. Particularly where the right-of-way was originally con- veyed as a qualified fee simple interest such as “fee simple for railroad purposes,” state courts may have interpreted the railroad’s interest to be an easement rather than fee simple title.32 Accordingly, as is prudent in any real property transaction, the acquiring agency should obtain a title report as part of its due diligence review in order to analyze the nature and quality of the selling railroad’s title. The acquiring agency that wishes to eliminate any deficiencies relating to title in the property it acquires may seek to perfect its title by commencing a quiet title action. If that does not resolve all out- standing questions because a person claiming rights in the property comes forward, the agency will then need to exercise its right of eminent domain to extin- guish any reversionary or other residual interests and vest fee simple title in the agency. 2. Environmental The ground beneath rail corridors is rarely clean. Public agencies, like any other buyer, will want to know whether the corridors they seek to acquire present any environmental degradation as a result of fuel spills, commodities that have been transported, or cleaning or other activities that the railroad or its shippers may have conducted. Not only will the buyer want to know what lies beneath the corridor it is buy- ing, but a funding agency will require information about the condition of the property to ensure that its resources are not used to address an issue that a pre- vious owner may have created. A Phase I environmental report will reveal docu- ments relating to reported environmental condi- tions. An acquiring agency will not likely be able to go further than a Phase I review, however, without committing to the railroad, prior to undertaking any invasive testing in the right-of-way, that it will fully indemnify the railroad for the cost of any mitigation or restoration that may be required even if the transaction does not go forward. Negotiation of the allocation of risk in the event of a release should involve the possibility of participation in a state vol- untary clean-up program.33 In addition, railroads will typically require any findings arising from environmental due diligence review to remain confidential. Agencies should eval- uate the degree of confidentiality state open records laws will allow them to provide. A public purchaser can often only promise to preserve the confidential- ity of the results of an environmental investigation “to the extent permitted by applicable law.”34 29 45 U.S.C. § 231, et seq. 30 45 U.S.C. § 151, et seq. 31 49 U.S.C. § 10501. 32 The presence of the terms “fee” or “in fee simple” in the deed may not in fact determine that the right-of-way is granted in fee rather than as an easement. Chevy Chase Land Co. v. United States, 733 A.2d 1055, 1062, 1063 n.4 (Md. 1999) (citing City of Port Isabel v. Missouri Pacific R.R. Co., 729 S.W.2d 939 (Tex. Ct. App. 1987)). 33 E.g., Maryland Department of the Environment Vol- untary Clean Up Program. See http://www.mde.state. md.us/programs/Land/MarylandBrownfieldVCP/mapping/ Documents/Revised_03_VCPdoc_Section_Overview.pdf. 34 In some states, review of materials generated during the environmental review may be shielded from disclosure by keeping the materials in the hands of third-party con- sultants who conduct the review, prepare a report, and sub- mit it to the funding agency. Because the consultant is an agent of the public agency for the purposes of conducting the analysis, however, state law most frequently regards infor- mation acquired by the consultant as being in the hands of the state and thus subject to public disclosure requirements.

83. Holders of Other Rights on Railroad Property The railroad or its predecessors in interest are likely to have granted leases, licenses, or easements to such entities as utilities or billboard companies. The acquiring agency will typically desire all such encumbrances to be extinguished prior to taking title, but should evaluate whether there are advan- tages to assuming the railroad’s interest in such arrangements. For example, though the encum- brances may place some limitation on the uses or ability to expand uses of the corridor, there may be financial benefit to the owner of the burdened prop- erty as well. In addition, the selling railroad may wish to retain its interest in certain encumbrances, such as utility licenses. The existence of such inter- ests demands a case-by-case analysis and can pro- vide a basis for negotiations. A rail corridor that is burdened by trackage rights or other operating obligations held by a freight rail carrier other than the selling railroad will remain subject to that burden unless and until STB terminates those rights and obligations through the discontinuance process.35 The nature of the operations, both of the other user and of the potential purchaser, will determine whether the burden on the corridor is one that the acquiring agency wishes to remain. If all freight rail carriers on the line are willing to structure their operations to permit the passenger service,36 then the acquir- ing agency may well be content to allow that addi- tional use to continue. In addition, the lease of trackage rights can provide a substantial revenue stream that the agency can apply to track mainte- nance or other operating costs. F. Operations and Maintenance Following the Transaction 1. Commencement of Passenger Rail Operations Passenger operations on a railroad line require maintaining the line to a higher standard than freight operations require because of both the higher speeds (in most cases) and the comfort of passengers. As a result, the purchasing agency will have the incentive to maintain the corridor to a level that is suitable for passenger operations. Although STB may have no jurisdiction over the line if it is dedicated exclusively to commuter passenger service, FRA’s jurisdiction will remain unless the line is part of an electric, interurban transit system that is not connected to the general freight network.37 The absence of STB jurisdiction occurs because that agency has jurisdiction only over rail carrier (and some water carrier) transportation that is between states, between places within a state if the transportation is part of the interstate rail net- work, between a place in the District of Columbia and a state, or between a state and a foreign nation.38 STB’s statute states that the definition of “rail carrier” does not include “…street, suburban, or interurban electric railways not operated as part of the general system of rail transportation.”39 Even though STB will not assert jurisdiction, FRA will, unless the line falls within the “electric interurban—not connected to the general system of rail transportation” exception that is part of the definitions under both the Interstate Commerce Commission Termination Act (ICCTA) and the rail safety acts. As noted, FRA asserts jurisdiction over safety on fixed-guideway transportation sys- tems. A complication may arise if there is any con- nection to the “general system of rail transporta- tion.” Even limited connections to the national rail network may provide the basis for FRA to assert jurisdiction, including a shared at-grade highway crossing; a location where tracks used for transit only cross over a freight line; or a shared corridor where the tracks do not intersect but the tracks are close together. Under the “limited connection” scenario, or in circumstances where a light rail transit system will use the same tracks as freight or traditional commuter or intercity passenger rail systems, FRA will consider granting waivers to its other- wise applicable rules. As a starting point, though, in the current operating environment, FRA will expect transit systems that use “noncompliant” vehicles, that is, vehicles that do not comply with FRA’s rail equipment standards,40 to adopt a 35 See note 14, supra. 36 Considerations relating to the shared use of the cor- ridor by freight and passenger operations include whether the passenger equipment conforms to Federal Railroad Administration (FRA) requirements or whether temporal separation of operations or a waiver of FRA rules is required. See 49 C.F.R. pt. 209, app. A. 37 See 49 U.S.C. § 20102(1)(B). In its policy statement explaining its exercise of jurisdiction over joint use of rail corridors by traditional railroads and light rail or other non-FRA-compliant forms of transportation, FRA stated: …[W]ith the exception of self-contained urban rapid transit systems, FRA’s statutory jurisdiction extends to all entities that can be construed as railroads by virtue of their providing non-highway ground transportation over rails or electromagnetic guideways, and will extend to future railroads using other technologies not yet in use. 49 C.F.R. pt. 209, app. A (emphasis supplied). 38 49 U.S.C. § 10501(a)(2). 39 9 U.S.C. § 10102(5). 40 49 C.F.R. pt. 238.

9program of temporal separation between the non- compliant transit vehicles’ use of the line and the freight or other passenger systems’ use of the line.41 FRA’s waivers, when granted, require both careful attention to the details of compliance with rules that FRA either elects not to waive, or can- not waive due to statutory requirements, and peri- odic renewals. An agency purchasing a corridor from a rail carrier, however, should not assume that the sell- ing railroad will allow noncompliant transit opera- tions to coexist in the corridor just because FRA’s rules contemplate shared use in some circum- stances, and do not apply when transit and rail operations share the corridor but are sufficiently separated and share no grade crossings. Although there is no statutory or regulatory basis for a prohi- bition by the selling carrier, freight railroads have required purchasing agencies to commit that they will not use noncompliant vehicles on adjacent cor- ridors without implementation of other safety mea- sures, such as the use of crash walls, track-intru- sion detection devices, and other means of maintaining physical separation of freight and pas- senger operations. 2. Post-Transaction Management of the Corridor If the agency and the railroad will share use of the corridor following the transaction, the transac- tion documents will need to include allocation of responsibility for the following:42 1. Maintenance of way, or the ongoing effort to keep the track in a consistent state of good repair. 2. Maintenance of signal and communications systems. 3. Dispatching (i.e., controlling the movement of rail traffic along the corridor). 4. System safety and security. 5. Shared facilities (other than tracks and corridor). 6. Clearing wrecks. In addition, the parties will need to agree on allocation of responsibility for implementation and management of positive train control (PTC) on the corridor.43 G. Other Legal and Regulatory Issues These transactions have many unique attributes because of the rail regulatory overlay that must inform the broad array of issues previously dis- cussed. Each one also presents all of the issues that arise in any real estate transaction. Some, such as liability allocation (discussed in the following sec- tion), demand special rules because of the rail envi- ronment, but are in other ways quite similar to the elements present in any real estate deal. 1. Consideration No transaction is valid without the exchange of consideration. Parties agree on the adequacy of the consideration exchanged and, in a nonpublic agency transaction, that agreement may be sufficient. In a transaction that involves a public agency using pub- lic funds, however, a statement that the parties agree upon and acknowledge the adequacy of the consideration may not be sufficient. The purchasing agency must respond to requests from federal agen- cies that are providing funds, or local governing boards or constituents whose tax dollars will sup- port the transaction, with confirmation that the pay- ment for the transaction is reasonable. Even with- out individualized local or state rules prohibiting gifts of public funds, good government practices require careful valuation and confirmation that the payment to the railroad is reasonably related to the value of the property that the agency will receive. Furthermore, the consideration need not be lim- ited to a cash-for-property exchange. The value of improvements constructed or reimbursed by the agency is often a significant component of the agen- cy’s payment. The railroad’s retention of operating rights, or right to priority of operations in some cir- cumstances, could form a portion of the consideration, as could the agency’s agreement to fund specified improvements to the infrastructure that will benefit the freight railroad operations. The parties’ creativity 41 FRA has not yet addressed the question of whether it will ease its emphasis on temporal separation once Positive Train Control (PTC) technology is fully in place and operational. See 49 U.S.C. § 20157. FRA’s regulations regarding implementation of PTC are located at 49 C.F.R. pt. 236 subpt. I. 42 The assumption of any of these responsibilities by themselves will not cause STB to conclude in a State of Maine proceeding, discussed at note 18 and accompanying text, and infra pp. 18–19, that the agency has assumed responsibility as a carrier providing transportation sub- ject to the jurisdiction of STB. 43 PTC is a system of automatic train control mandated by Congress in the Rail Safety Act of 2008 (codified at 49 U.S.C. § 20157) for certain freight lines and all lines carry- ing intercity or passenger commuter rail traffic. As of the date of publication of this digest, all affected railroads are required to have completed installation and commissioning of PTC on their lines by Dec. 31, 2018, with a further exten- sion to Dec. 31, 2020, in limited circumstances. A detailed discussion of PTC requirements and the range of issues they present is beyond the scope of this digest. Agencies should be aware that PTC may be required on the track or corridor they share with freight traffic, independent of the presence of passenger operations, and should seek to allocate costs attributable to PTC accordingly.

10 to identify alternatives to up-front cash payments by providing other benefits to the selling carrier is not limited, as long as the railroad understands that the agency will, in almost all circumstances, be restricted to providing benefits or improvements within that agency’s jurisdiction that will benefit the taxpayers who are supporting the transaction. 2. Insurance and Indemnification The negotiation of insurance and indemnification issues is likely to occupy a significant portion of the effort involved in a transaction to acquire freight railroad property. The freight railroads are con- cerned about the expensive liability associated with the injuries or death of people. The public agencies are concerned about placing public funds at risk by assuming liability when the freight carrier either has some measure of control over the circumstances that led to the incident that triggered the liability, or when one of the railroad’s employees engages in dan- gerous conduct that causes an incident. The freight railroads may argue that “but for” the presence of the passenger operations (whether commuter rail or light rail), they would have no risk, and the entity that brings that risk should bear the cost of it fully. The agencies may argue in response that they are willing to accept that risk except for circumstances in which the rail carrier knew or should have known that its employees’ actions would cause the damages, or where the employee acted with knowledge of the potentially dangerous consequences. The federal statutory cap on liability to passen- gers, currently $200 million and indexed to infla- tion,44 should provide the agencies and the railroads with a basis for agreeing on liability limitations between them. In addition, the parties will need to account for payment for damages to third parties, the right-of-way, and the freight carrier’s equipment and personnel. Because the Federal Employers’ Lia- bility Act45 establishes the allocation of liability for injuries incurred by railroad employees in the course of their duties, and because the railroads may already have insurance or other arrangements in place to address that liability, the acquiring agency may reasonably request the railroads to apply that coverage to the injuries or death of its employees. Subject to the rights delegated to that agency under state law, the public agency may be able to manage its risk by acquiring insurance. The cost of such insurance may fluctuate. Many commercial general liability policies include an exclusion for activities within 50 ft of a railroad right-of-way. If the agency cannot secure an endorsement that removes that exclusion, then it will be required to secure rail- road protective liability insurance, a product designed to address the risks associated with nonrailroad per- sonnel who work in or near the right-of-way. 3. STB Proceedings As discussed previously, STB reviews transactions in which a rail carrier sells a line of railroad, whether to a noncarrier46 or to an existing carrier.47 These so- called “State of Maine” proceedings allow for a public agency to acquire an active railroad right-of-way and associated physical assets but not the common car- rier obligation for the line, which remains with the railroad that conveys the property to the public agency.48 To approve a State of Maine transaction, STB must determine that: 1) the selling freight rail carrier would retain a permanent, exclusive freight rail operating easement, together with the common carrier obligation on the line; and 2) the terms of the sale would protect the carrier from undue interfer- ence with the provision of common carrier freight rail service.49 The previous discussion enumerates the types of controls over the operations on the right-of- way that the agency can acquire without crossing the boundary set by STB for preserving the argument that the transaction is not subject to its jurisdiction. Of course, a decision by the selling rail carrier to abandon the line (not just curtail or temporarily cease operations but to fully “abandon” in accor- dance with the applicable statute and regulations50) prior to closing makes the STB regulatory process much simpler. As with adverse abandonment pro- ceedings, abandonment proceedings remove STB jurisdiction from the line, facilities, or other rail property, easing the path forward for the transac- tion and otherwise allowing the public agency to exercise its traditional eminent domain authority. 4. Interim Trail Use If the rail carrier has decided to abandon the line, the agency may decide to “railbank” it. In creating the Rails-to-Trails program,51 Congress envisioned a network of corridors on which freight service is suspended, pending reactivation in the event that the demand for freight service revives, rather than totally 44 49 U.S.C. § 28103. Congress recently increased the cap, tying it to inflation. Fixing America’s Surface Transporta- tion (FAST) Act, Pub. L. No. 114-94, § 11415 (Dec. 4, 2015). 45 45 U.S.C. § 51, et seq. 46 49 U.S.C. § 10901. 47 49 U.S.C. § 11323(a). 48 See State of Maine, 8 I.C.C. 2d 835. 49 See, e.g., Mass. Dep’t of Transp.—Acquisition Exemp- tion—Certain Assets of CSX Transp., Inc., Finance Docket No. 35312, slip op. at 5 (Service Date May 3, 2010). 50 49 U.S.C. § 10903; 49 C.F.R. pt. 1152. 51 16 U.S.C. § 1247(d).

11 removed from the interstate rail network via consum- mation of an STB-approved abandonment. Railbanked corridors can be used for trails, rail transit, or other public purposes, as long as the interim trail user acknowledges in a Statement of Willingness to Assume Financial Responsibility, which is required by STB regulations,52 that it will stand aside in the event that a bona fide proposal is made by a rail carrier to resume service on the line.53 Congress’s intent in adopting the Rails-to-Trails program was to permit interim use of rail corridors for these public purposes in the event of a decrease in demand for freight rail services. The effect of securing railbanking authorization is to pre- vent holders of residual property interests in the cor- ridors from exercising them in a way that destroys the integrity of the rail corridor. The Rails-to-Trails provi- sions ensure that railbanking will forestall full aban- donment of the corridor, so that a line that is rail- banked remains under the jurisdiction of STB and is not abandoned under federal law.54 An agency that is considering railbanking, however, should carefully evaluate the potential use of the corridor and whether such use would constitute continued rail use under state law. Each state’s law is different on the subject of whether use of a rail corridor for transit purposes is sufficient to prevent the exercise of reversionary rights by successors to the original property owners. If an agency’s state law permits that substitution, then the agency need not consider use of railbanking to fore- stall exercise of those rights by the property owners. 5. Environmental Review Requirements If the selling railroad does not abandon the cor- ridor and the transaction requires review by STB, then the parties must comply with STB’s environ- mental review requirements. STB has published its rules governing the environmental process at 49 C.F.R. Part 1105. These regulations detail the envi- ronmental reporting requirements for various categories of actions, including acquisition and abandonment proceedings that will result in opera- tional or environmental changes that exceed certain levels provided in the regulations. Parties should review the regulations carefully to determine the classification the rules provide for the transaction55 and build the time for environmental review of the transaction into the implementation schedule. In addition, if the acquisition uses federal fund- ing or is occurring as part of a project that will receive federal assistance, then the environmental review requirements of the funding agency, most often the Federal Transit Administration (FTA), will also apply and will often determine the timing and sequence of various activities in connection with the property transfer. 6. The Use of Federal Funds for the Acquisition Although each federal agency has its own rules governing the environmental review process that it will require all grantees to complete, anyone who acquires a corridor or facilities using federal funds will be required to complete an environmental review. All federal programs require an environmen- tal review because the requirements of the National Environmental Policy Act (NEPA) are triggered by a “major federal action,”56 and acquisition of a rail cor- ridor and related facilities using federal funds is a “major federal action.” It is beyond the scope of this research digest to catalogue the requirements of the different agencies, but it should be said that it is important to determine early in the process the scope and extent of environmental review that will be required by the federal funding partners. Several aspects of the FTA requirements that relate to property acquisitions are as follows. First, FTA requires that an acquiring agency possess a sufficient interest in the property being acquired to permit FTA to determine that the buyer has control during the period required in the grant agreement. Second, the Uniform Relocation Assistance and Real Property Pol- icies Act of 1970 (Uniform Act)57 requirements that govern the purchase of properties for a federally funded project will likely apply and involve a unique two-step appraisal process. Analysis is required to determine whether a proposed transaction is subject to the Uniform Act.58 The protections of the Uniform 52 49 C.F.R. § 1152.29(f). 53 STB, for example, has rejected a proposal to per- mit a company that proposed to operate service on a line acquired by a collection of public agencies in King County, Wash., for trail, transit and other uses because it conclud- ed that the proponent did not present a bona fide proposal. GNP Rly, Inc.–Acquisition and Operation Exemption– Redmond Spur and Redmond Subdivision, STB Finance Docket No. 35407 (Service Date June 15, 2011). 54 16 U.S.C. § 1247(d). 55 49 C.F.R. § 1105.6. 56 Macht v. Skinner, 916 F.2d 13, 15–16 (D.C. Cir. 1990). 57 42 U.S.C. §§ 4601 et seq. Implementing regulations for the Uniform Act are found at 49 C.F.R. pt. 24. 58 FTA’s guidance on the application and interpretation of 49 U.S.C. § 5324(c), which was included as Section 3024 of the Safe, Accountable, Flexible, Efficient Transporta- tion Equity Act: A Legacy for Users (SAFETEA-LU), Pub. L. No. 109-59 (Aug. 10, 2005), provides that [i]f the railroad ROW is to be acquired with the use of FTA funds, or if the future project that will use the rail- road ROW is to be Federally assisted, then the applica- ble requirements of the Uniform Relocation Assistance and Real Property Acquisition Policies Act and its imple- menting regulation at 49 CFR Part 24 must be followed. FTA Final Guidance on the Application of 49 U.S.C. § 5324(c) to Railroad Right-of-Way Acquisition, Apr. 30, 2009.

12 Act apply to people who are displaced from homes, businesses, or farms as a result of a transaction for which federal funds are applied. Exceptions include transfers between public entities. In addition, if the railroad will continue operations on the corridor, then it will almost certainly not be eligible for Uniform Act assistance, even though property owners near the cor- ridor may receive those benefits. The purchase of real property to be used as part of a federally assisted project typically cannot occur until the completion of environmental review under NEPA. Acquisitions to preserve or create right-of- way that will be used in the project, however, may be permitted to proceed under abbreviated review pro- cedures prior to the conclusion of the project’s broader NEPA review.59 7. Buy America Requirements FTA and the Federal Highway Administration (FHWA) each has its own regulations for imple- mentation of domestic procurement requirements under the Buy America program. The FTA regula- tions can be found at 49 C.F.R. Part 661 and the FHWA regulations at 23 C.F.R. § 635.410. FRA’s Buy America requirements are found in each pro- gram’s authorizing statutes.60 A detailed discussion of relevant Buy America programs is presented in National Cooperative Rail Research Program Legal Research Digest 1, Buy America Requirements for Federally Funded Rail Projects, published in February 2015. This digest presents a high-level view of relevant domestic procurement issues. Although the domestic procurement rules vary slightly for each unit of the U.S. Department of Transportation (USDOT), they generally require all steel and manufactured products used in a federally assisted project to have been produced in the United States using domestic materials. Waivers of these requirements may be granted at USDOT’s discre- tion in limited circumstances. If reimbursement of a railroad’s cost to make improvements to its own facilities is a component of the consideration for the acquisition of rail property, the railroad’s procurement must conform to the Buy America requirements. Accordingly, project propo- nents should include a discussion of the Buy America requirements in the negotiation of any construction reimbursement that is offered as part of the transac- tion. In addition, utility relocation work for which costs are reimbursed as part of the project will also be subject to Buy America. Many utilities will need to accommodate these requirements within their established procurement programs, so early coordi- nation with utilities is necessary to ensure that they provide materials and products that are compliant with the Buy America requirements. Project propo- nents may wish to consider seeking assistance from their FTA regional office or state FHWA office to educate utility companies about this requirement. 8. The Americans with Disabilities Act The Americans with Disabilities Act of 1990 (ADA),61 as amended by the ADA Amendments Act of 2008,62 which became effective on January 1, 2009, applies to the transit services provided by the acquiring agency, and its requirements could impact the construction of platforms and other facilities within or adjacent to the right-of-way. The Depart- ment of Justice has regulations regarding the imple- mentation of the ADA,63 and each governmental agency is responsible for ensuring compliance in all matters that come within its jurisdiction. USDOT has issued its own ADA regulations.64 In 2011, USDOT issued rules regarding level boarding at commuter rail stations.65 This rule acknowledges the potential conflict between ADA-compliant high- level passenger platforms, on the one hand, and freight operations that might involve dimensional equipment (i.e., equipment that would encroach into the area occupied by a high-level passenger plat- form) on tracks adjacent to platforms, on the other hand, by permitting commuter rail operators to use alternative means to provide disabled passengers with access to each car on a train.66 FTA has issued guidance for public transportation providers to assist them in complying with the ADA, and an acquiring agency will need to address its obligations under the ADA in any negotiation with a freight railroad if the railroad’s operations will continue.67 9. Tax Because most public agencies are not required to pay sales or other taxes associated with land sale transactions in their own jurisdictions, the tax implications of these transactions will not normally 59 49 U.S.C. § 5323(q); 23 C.F.R. § 771.118(d)(4). 60 See, e.g., 49 U.S.C. chs. 244, 246; § 24405 (High Speed Rail Program). 61 Pub. L. No. 101-336, 104 Stat. 327 (1990), currently codified at 42 U.S.C. ch. 126 and 47 U.S.C. ch. 5. 62 Pub. L. No. 110-325. 63 42 U.S.C. § 12134; see 28 C.F.R. pt. 35. 64 42 U.S.C. § 12164; see 49 C.F.R. pts. 37 and 38. 65 Transportation for Individuals with Disabilities at Intercity, Commuter, and High Speed Passenger Railroad Station Platforms; Miscellaneous Amendments, 76 Fed. Reg. 57924 (Sept. 19, 2011) (DOT Final Rule amending 49 C.F.R. pts. 37 and 38). 66 49 C.F.R. § 37.42(c). 67 FTA Circular FTA C A710.1, Americans with Dis- abilities Act (ADA) Guidance, Nov. 4, 2015.

13 be front-of-mind for the acquiring agency. The sell- ing railroads may look, however, for ways to mitigate their tax exposure for the sale of assets. To that end, railroads often request a statement in the agree- ment from the acquiring agency that the transfer of its property to the agency has occurred “under threat of condemnation.” Each agency should make its own determination as to whether it is willing to include that language in its agreement. H. Other Related Agreements Although a detailed discussion of ancillary agree- ments is beyond the scope of this digest, an agency entering into a transaction with a railroad should be aware that railroads will require agreements to address the following issues: 1. Design and Construction of Passenger Rail Facilities The railroad may likely demand broad rights to review and approve the acquiring agency’s engineer- ing designs if the passenger operations will occur on shared or adjacent track. The railroad will expect to have its standards apply and may require conditions in the context of the transfer agreement, such as set- ting conditions for passenger service operations (whether light rail or commuter rail) within proxim- ity to its freight operations. In addition, when the railroad requires the opportunity to review and com- ment on design documents, it may want the acquiring agency to bear the costs associated with that review (wages, benefits, and indirect employee costs; other direct costs incurred in reviewing the documents). 2. Other Shared Facilities When an agency acquires a corridor from a rail- road, it will often need to also secure an interest in some adjacent property or the ability to use some of the railroad’s light-density track to reach a repair facility. The railroad and the acquiring agency can make various forms of agreements—whether leases, easements, trackage rights agreements, or other docu- ments that will achieve the desired utilization on the part of the acquiring agency—to achieve the desired results. The nature of required regulatory approvals and environmental review, if any, will depend on the nature and scope of the property interest acquired, the status of the acquiring agency at the time of acqui- sition, the interests of federal or state funding part- ners in the transaction, and the factors previously described with respect to the main transaction. 3. Operating Agreements Although beyond the scope of this digest, the parties will likely negotiate operating agreements to govern their respective rights and responsibili- ties with regard to ongoing operations on the corridor in parallel with the design, construction, and property transfer agreements necessary to effect the transaction. a. Rules and Standards.—In any transaction, the acquiring agency will need to take into account rules and standards that are specific to the rail industry. The selling railroad will often be specific about its expecta- tions and requirements, and the agency facilitates the discussions with the railroads if it has reviewed and is familiar with the following requirements: 1. FRA rules that govern track standards,68 sig- nal systems, equipment, operating practices, and hazardous materials. 2. Other applicable FRA rules, such as work- place safety. 3. The engineering standards published by the American Railway Engineering and Maintenance of Way Association (AREMA). AREMA’s standards, along with the FRA rules, constitute the railway industry standards with which all participants in a transaction involving a rail corridor can expect, at a minimum, to comply. 4. If the railroad is retaining any interest in the line, and is planning for continued operations, it will require compliance with its existing standards due to concerns about safety and liability. The com- bination of FRA, AREMA, and the individual rail- road’s standards will guide the construction and implementation of the proposed project develop- ment and related improvements in the corridor. 5. The agency should ensure that any consul- tants or other contractors that require access to the railroad’s right-of-way or other property carry their own insurance for such purposes and enter directly into any right-of-entry or other access agreements the railroad may require. The rail- roads will specify in the access agreement the level and types of insurance coverage the agency will need to require of its contractors. 6. Unless a federal law intervenes that preempts the application of state procurement laws, the acquiring agency will remain obligated to comply with those laws. Issues may arise if the selling rail- road requires that it have approval rights over con- tractors or materials used in the construction. The agency can address these issues by giving the rail- road the right to approve specifications for materi- als, designs for construction of improvements, and criteria for selection of contractors, coupled with a certification from the agency that it will not enter into a contract that does not meet those specifica- tions or criteria. 68 49 C.F.R. pt. 213. The FRA’s regulations are collected at pts. 200–299.