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54 payable when a lessee meets or exceeds stan- dards; the ultimate disposition or transfer of the leased property on the termination of the lease; and a right or option to purchase the property ei- ther during or at the end of the lease.690 An important question for a private partner or investor is whether the lease is a lease for federal income tax purposes. Depending on the term of the lease, as discussed in Section IV.E.2.b, a lease in substance may be a sales contract. Whether the lessee is a constructive owner âdepends on whether the benefits and burdens of ownership of the subject property have been transferred.â691 If the agreement conveys possession of the property to the taxpayer for substantially all of the remaining economic life of the property in exchange for a lump-sum payment that approximates the price for which the property could be purchased, the agreement should be treated for federal income tax purposes as a transfer of beneficial ownership of the property even though the agreement prohibits the transfer of legal title to the taxpayer.692 Whenever long-term leasing is to be used in structuring a PPP, all parties may want to take advantage of âsophisticated lawyeringâ to assess the tax implications and other risks of an agree- ment.693 XII. PPPS AND TRANSIT-ORIENTED DEVELOPMENT AND JOINT DEVELOPMENT A. Defining Transit-Oriented Development and Joint Development The terms âTODâ and âjoint developmentâ gen- erally refer to development that supports tran- sit.694 PPPs are being used for TOD and joint de- velopment in proximity to a new or existing transit facility. Thus, many transit agencies âare partnering with the private sector in order to promote real estate development in and around transit facilities.â695 It should be noted that, in 2011, the Transportation Research Board pub- 690 DELMON, supra note 189, at 116â23. 691 Tax and Financing Aspects of Highway Public- Private Partnerships, supra note 166, at 27 (citing Rev. Rul. 55-541, 1955-2 C.B. 19). 692 Id. 693 Collins, supra note 415, at 58. 694 Forming Partnerships to Promote TOD and Joint Development, supra note 198, at 1. 695 FTA Report to Congress on PPPs, supra note 5, at 2. lished a study on legal issues involving TOD and joint development that includes case studies.696 APTA defines TOD as development âinitiated by a transit agency that has some level of FTA investment in the land or infrastructure that is physically and/or functionally related to the TOD,â whereas â[j]oint development can refer to a broader set of public-private real estate develop- ment partnerships.â697 In contrast to TOD, for which a transit station is usually a âgiven,â698 joint development generally means real estate devel- opment near transit, usually on publicly owned land.699 FTA defines joint development âto include commercial and residential development; pedes- trian and bicycle access to a public transportation facility; construction, renovation, and improve- ment of intercity bus and intercity rail stations and terminals; and renovation and improvement of historic transportation facilities.â700 A TOD or joint development may involve âde- velopment of a larger project that incorporates both transit facilities and private developmentâ or may serve another development purpose.701 Both types of development may be used to improve a transit facility, increase ridership, and generate revenue.702 PPPs may be used to âmonetizeâ excess or under-performing government-owned prop- erty.703 696 JOHN L. RENNE, KEITH BARTHOLOMEW & PATRICK WONTOR, TRANSIT-ORIENTED AND JOINT DEVELOPMENT: CASE STUDIES AND LEGAL ISSUES (Legal Research Digest No. 36, Transportation Research Board, 2011). 697 Forming Partnerships to Promote TOD and Joint Development, supra note 198. 698 Id. at 12. 699 Capturing the Value of Transit, supra note 10, at 26. 700 Id. According to FTA a joint development must meet certain criteria: The public transportation improvement must (i) Enhance economic development or incorporate private investment; (ii)(a) Enhance the effectiveness of a public transportation project and relate physically or functionally to that public transportation project, or (b) establish new or enhanced coordination between public transportation and other transportation; and (iii) provide a fair share of revenue for public transportation that will be used for public transportation. Id. (quoting 72 Fed. Reg. 5788, 5790 (Feb. 7, 2007)). 701 Capturing the Value of Transit, supra note 10, at 26. 702 Collins, supra note 415, at 14; Forming Partner- ships to Promote TOD and Joint Development, supra note 198, at 5. 703 STAINBACK, supra note 130, at 21.
55 APTA has published practice guides for transit agencies partnering with businesses and commu- nities to promote TOD and joint development.704 Successful partnerships for TOD and joint devel- opment need leadership, written agreements, pub- lic involvement, effective communication, suffi- cient staff resources, and effective implementa- tion.705 A development project may require a mul- tidisciplinary team that includes specialists in real estate, planning, engineering, finance, and operations.706 B. Federal Law Supporting TOD and Joint Development TOD and joint development are not âdiscrete programsâ of the DOT; however, FTA grantees may use FTA financial assistance for TOD and joint development activities.707 Federal legal sup- port exists in a âmixâ of congressional enactments, executive orders, and FTA policies.708 Federal transit law in 49 U.S.C. § 5301, et seq., references TOD. If a proposed TOD involves federal partici- pation, land, or facilities, the FTA must be con- sulted and has to approve the transfer of the asset and any development agreement.709 The FTAâs Innovative Financing Initiative (IFI) of May 9, 1995, provides âexplicit support for joint development using section 3 and section 9 fund- ing,â as well as funding under other programs.710 Under the IFI, the FTA âmay provide § 5309 (for- merly § 3) and § 5336 (formerly § 9) capital grants for enhancements to transit stations, park-and- ride lots, transfer points incorporating community service and customer service facilitiesâ¦, safety elements, sidewalks skyways and access road- ways, and other transit related improvements.â711 Although a local match of 20 percent is required for all IFI grants, âassets previously acquired with 704 Forming Partnerships to Promote TOD and Joint Development, supra note 198, at 1. 705 Id. at 2â3. 706 Id. at 3. 707 FTA, TOD in Statute and Regulation and Joint Development, at 1, hereinafter referred to as âFTA- TOD-Joint Development,â available at http://www.fta.dot.gov/12347_6935.html. 708 Collins, supra note 415, at 15. 709 Forming Partnerships to Promote TOD and Joint Development, supra note 198, at 6. 710 Collins, supra note 415, at 16. 711 Id. FTA funds may be used forâ¦joint development purposes.â712 FTAâs definition of a capital project in § 5302(a)(1)(G) makes certain joint development activities eligible for funding under federal transit law.713 SAFETEA-LU amended the definition of capital project to permit âFTA to issue public transportation grants âfor the construction, reno- vation, and improvement of intercity bus and intercity rail stations and terminals.ââ714 Section 1117 of SAFETEA-LU made TOD and capital pro- jects eligible for federal funding and gave âpriority consideration to state and local preservation of development plans, including transit-oriented de- velopment plans.â715 When evaluating New Starts projects, FTA considers existing land use, transit supportive plans and policies, corridor policies that support transit, the management of growth, zoning regu- lations near transit stations, and tools to imple- ment land-use policies.716 Planning for develop- ment during system planning or the Alternatives Analysis/Draft Environmental Impact Statement process may enhance an applicantâs land-use rat- ing and its submission for funding for a New Starts project.717 MAP-21 establishes a new discretionary pilot program for grants for TOD planning in corridors with new rail, bus rapid transit, or core capacity projects and authorizes $10 million for FY 2013 and $10 million for FY 2014. The grants are to âassist in financing comprehensive planning asso- ciated with an eligible project.â718 An eligible pro- ject includes a new fixed guideway capital project or core capacity improvement project as defined in 49 U.S.C. § 5309 for capital investment grants and New Starts.719 The pilot program emphasizes the enhancement of âeconomic development, rid- ershipâ; facilitation of âmultimodal connectivity and accessibilityâ; an increase in âaccess to transit hubs for pedestrian and bicycle trafficâ; enable- ment of âmixed-use developmentâ; identification of 712 Id. (quoting FTA Innovative Financing Handbook (undated)). 713 FTA-TOD-Joint Development, supra note 707, at 1. 714 Id. 715 Id. 716 Id. 717 Forming Partnerships to Promote TOD and Joint Development, supra note 198, at 1, 4. 718 FTA Summary of MAP-21, supra note 15, at 4 n.2. 719 Id.
56 related âinfrastructure needsâ; and inclusion of âprivate sector participation.â720 When a transit agency is considering TOD or joint development, it is important to be familiar with FTAâs Grant Management Guidelines;721 FTAâs Joint Development Guidelines, including a 2013 proposed circular on FTA Guidance on Joint Development;722 and NEPA and state environ- mental requirements, as well as applicable state and federal procurement rules.723 A 2004 Transit Cooperative Research Program report discusses public involvement and the âvisioning processâ that facilitates the realization of TOD and joint development projects, and also includes case stud- ies.724 Finally, the Center for Transit-Oriented Development, a national nonprofit organization created by SAFETEA-LU, is dedicated to provid- ing information on best practices and other sup- port for market-based TOD.725 C. TOD and Joint Development Agreements Written agreements for TOD and joint devel- opment should set forth the partnersâ âaims and purposesâ and their obligations, expectations, means of communication, and timeframe, and even include a schedule for follow-up meetings.726 As discussed in Section IV, a transit agency will want to evaluate the âlegal frameworkâ that ap- plies to the agency, as well as the risks and oppor- tunities inherent in TOD and joint develop- 720 Estell & Washington, supra note 14, at 9. 721 FTA, Grant Management Guidelines, available at http://www.fta.dot.gov/legislation_law/12349_4114. html. 722 FTA 2013 (Proposed) Circular, Guidance on Joint Development, available at http://www.fta.dot.gov/ documents/2013-03-07_Proposed_Joint_Development_ Circular_(FINAL)_(2).pdf. 723 Forming Partnerships to Promote TOD and Joint Development, supra note 198, at 6. 724 Forming Partnerships to Promote TOD and Joint Development, supra note 198, at 4, 9â12, 14â15. 725 FTA-TOD-Joint Development, supra note 707, at 1. CTOD is to develop standards and definitions for transit-oriented devel- opment adjacent to public transportation facilities; system plan- ning guidance, performance criteria, and modeling techniques for metropolitan planning agencies and public transportation agencies to maximize ridership through land use planning and adjacent development; and research support and technical assis- tance to public transportation agencies, metropolitan planning agencies, and other persons regarding transit-oriented develop- ment. Id. 726 Id. at 3. ment.727 A final agreement for a TOD or joint de- velopment may be preceded by a preliminary agreement, such as an exclusive dealings agree- ment, a nonbinding letter of intent, or a memo- randum of understanding (MOU).728 Preliminary agreements may be used to clarify the partiesâ objectives and, of course, to affirm their intention to negotiate and conclude a final agreement.729 A Master Development Agreement (MDA) may be used to provide a team with access to multiple sites along a transit corridor (to avoid issuing multiple RFPs to find developers), to promote âlarger scaleâ projects, and to be more responsive to market conditions.730 A joint development agreement may provide for cost-sharing or revenue sharing. Cost-sharing agreements usually involve cooperation to pay for infrastructure that helps to integrate transit with surrounding development. Revenue-sharing agreements distribute the revenues that result from development among joint development partners. Examples of revenue- sharing agreements include ground lease revenues, air rights payments, or in some cases direct participation in rents or other revenues from development.731 Some transit agencies have issued guidelines that are applicable to TOD and joint development. In 1994, New Jersey Transit issued TOD guide- lines entitled Planning for Transit Friendly Land Use: A Handbook for New Jersey Communities.732 In 2005, BART adopted a âpolicy documentâ for its TOD program, one feature of which is an access policy that âguides planning for replacement park- ing and other access strategies.â733 WMATA, an agency particularly experienced in joint develop- ment, has adopted a new set of comprehensive guidelines for its joint development program.734 WMATA revised its policies in 2008 so that its 727 Id. 728 The terms of a Letter of Intent or MOU could pro- vide, however, that the terms are binding. 729 Forming Partnerships to Promote TOD and Joint Development, supra note 198, at 6. 730 Capturing the Value of Transit, supra note 10, at 28. 731 Id. at 26. 732 Available at https://www.som.com/project/new- jersey-transit-planning-transit-friendly-land-use- handbook-new-jersey-communities. 733 Forming Partnerships to Promote TOD and Joint Development, supra note 198, at 15. 734 Id. at 6 (see id. at 64 for a summary of the WMATAâs goals).
57 program would be more responsive to âdevelop- ment opportunities and market conditions.â735 D. The Use of TIF and Special Assessment Districts for TOD TIF is one source of public funding because TOD and joint development projects often result in added tax revenue generated by a develop- ment.736 Some states (e.g., Maine, Maryland, Pennsylvania, and Texas) have specific provisions authorizing the use of TIF for TOD.737 However, some form of interim financing may be needed because of the âtiming gapâ between construction of a transit facility and an increase thereafter in developed properties and an increase generally in property values and tax revenue.738 Examples of TIF and special assessments being used to fund TODs include the Denver Southeast Corridor T-Rex project, costing $879 million with TOD estimated at $4.25 billion, of which $1 billion was estimated at the Broadway Station alone;739 the Fruitvale Village project in Oakland, the funding for which consists of $4.0 million in TIF; and the Mockingbird Station in Dallas with TIF supporting 5 percent of the expansion cost.740 TIF for TOD was or is being used also for the Elm- hurst Station in Chicago and the Grossmont Trol- ley Station in La Mesa (San Diego).741 E. TOD and Affordable Housing On January 9, 2013, FTA gave notice of proposed policy guidance to sponsors of New Starts and Small Starts projects.742 The proposed 735 Capturing the Value of Transit, supra note 10, at 27. 736 Forming Partnerships to Promote TOD and Joint Development, supra note 198, at 13. See U.S. Environ- mental Protection Agency, Infrastructure Financing Options for Transit-Oriented Development (Jan. 2013), (noting their use for corridors and stations in Stamford, Connecticut, Atlanta, and Dallas), available at http://www.epa.gov/smartgrowth/pdf/2013-0122-TOD- infrastructure-financing-report.pdf. 737 Jim Erkel, Minnesota Center for Environmental Advocacy, Tax Increment Financing for Transit- Oriented Development, at 9, hereinafter referred to as âErkel,â available at http://www.tctod.org/pdf/ TIFforTOD.pdf. 738 Alternative Transit Funding Sources and Fi- nance, supra note 278, at 12. 739 Erkel, supra note 737. 740 See App. A. 741 Erkel, supra note 737, at 8. 742 Proposed New Starts and Small Starts Policy Guidance, supra note 19, at 2038. guidance describes the âparticular measuresâ that FTA intends to apply when evaluating projects seeking New Starts and Small Starts funding.743 The proposed guidance accompanies the final rule published on the same date on the evaluation criteria and rating process established by MAP-21 for New and Small Starts.744 Among FTAâs criteria for evaluating and rating a proposed project are the effects of a project on economic development and land use.745 FTA will evaluate plans consistent with existing practice but will examine them also on the basis of their preservation of or increase in the supply of affordable housing units in a transit corridor.746 Among the means for maintaining or increasing affordable housing are low-income housing tax credits (LIHTC), as well as TIF and other value- capture strategies. Section XII.F discusses three federal tax credits that may be important to a PPP for a transit pro- ject and a private partner selected for its proposal that also preserves or increases affordable hous- ing units. A 2009 report by the GAO on affordable housing in TOD and joint development states that federal tax credits are being used to encourage development of affordable housing units near transit facilities.747 The states administer Federal LIHTCs and provide them to developers pursuant to state Qualified Allocation Plans (QAP).748 Al- though â[t]here is no statutory requirement that a state incorporate proximity to transit into its QAP,â749 some states award âincentive pointsâ to a developer if a development project is within a cer- tain distance of public transit or is within or part of a TOD or joint development.750 The points are 743 Id. 744 FTA, Major Capital Investment Projects (final rule setting âa new regulatory framework for FTAâs evaluation and rating of major transit capital invest- ments seeking funding under the discretionary âNew Startsâ and âSmall Startsâ programsâ), supra note 19, 78 Fed. Reg. 1992 (Jan. 9, 2013), available at http://www.gpo.gov/fdsys/pkg/FR-2013-01-09/pdf/2012- 31540.pdf. 745 Id. at 1992â93. 746 See, e.g., id. at 2025. 747 GAO, Affordable Housing In Transit-Oriented De- velopment, Key Practices Could Enhance Recent Col- laboration Efforts Between DOT-FTA and HUD, at 22 (Sept. 2009), available at http://www.gao.gov/new. items/d09871.pdf. 748 Id. 749 Id. 750 Id.
58 an incentive for developers to propose projects that will earn additional points because of a pro- jectâs âproximity to transit.â751 In some instances, Department of Housing and Urban Development (HUD) programs, including project-based Section 8 funding and the Housing Choice Voucher Program, have been used to sup- port affordable housing in TODs.752 Although in 2005 FTA and HUD began to collaborate on the promotion of affordable housing in TODs, the GAO states that their ârecommendations and strategiesâ have had âlittle impactâ on the supply of affordable housing in TODs.753 F. Low Income and Other Tax Credits for TOD One source declares that PPPs are a âpremier exampleâ of the use of LIHTCs.754 In any case, three federal tax credits may be available to pri- vate partners in transit PPPs to preserve or in- crease the supply of affordable housing near tran- sit facilities, the first being the LIHTC. 1. Low-Income Housing Tax Credit The LIHTC, established by the Tax Reform Act of 1986, âfacilitate[s] the creation of affordable housing for eligible Americans by providing tax credits to private sector developers of qualified projects.â755 The LIHTC program is authorized by Internal Revenue Code Section 42 and sponsored by the Treasury Department. 2. Rehabilitation Tax Credit The Rehabilitation Tax Credit (RTC) provides incentives for the rehabilitation and reconstruc- tion of certified historic structures.756 This incentive offers a credit against total fed- eral taxes owed, which is taken for the year in which the renovated building is put into service. 751 Id. at 23. 752 Id. at 25. 753 Id. at 34, 38. 754 Enterprise Community Partners, Inc., Issue Background: Low-Income Housing Tax Credit (July 20, 2012), available at http://www.enterprisecommunity. com/low-income-housing-tax-credits-policy. 755 Kenneth Weissenberg & Aninda Dhar, The Met- ropolitan Corporate Counsel, Real Estate Investments Made Sweeter by Tax Credits (Apr. 5, 2010), hereinaf- ter referred to as âReal Estate Investments Tax Cred- its,â available at http://www.metrocorpcounsel.com/ articles/12388/real-estate-investments-made-sweeter- tax-credits. 756 Id. The qualified rehabilitation credit is equal to 20 percent of renovation or construction costs, with pre-1936 buildings in nonresidential income- producing use qualifying for a 10 percent credit. The credit is well suited to complement brown- field developments, and property tax abatements and low interest loans are the most commonly used companion incentives.757 Qualifying lessees under the Internal Revenue Code may be able to claim the RTC as well.758 3. New Markets Tax Credit A third tax credit of interest is the New Mar- kets Tax Credit (NMTC). The primary users of the NMTC are groups referred to as âCommunity De- velopment Entitiesâ (CDEs) that must be certified by the Treasury Departmentâs Community Devel- opment Financial Institutions Fund.759 CDEs may be nonprofit or for-profit companies that âserve as intermediaries between the Treasury Depart- ment, investors and businesses in the targeted communities.â760 Under the program, an investor may claim a tax credit that is taken over a 7-year period and that is worth 39 percent of an inves- torâs investment in a CDE.761 However, taxes on capital gains or profits may reduce the value of the tax credit to 26 percent.762 There is a âleverageâ feature to the NMTC that permits CDEs to raise capital for investment in distressed areas without federal tax liability.763 In 757 Council of Development Finance Agencies, Fed- eral Historic Preservation Tax Incentive Program, available at http://www.cdfa.net/cdfa/cdfaweb.nsf/ordre direct.html?open&id=historicpresfactsheet.html. A re- habilitation project must satisfy all 10 standards set forth in the Secretary of the Interiorâs guidance for re- habilitation projects. 758 Real Estate Investments Tax Credits, supra note 755. See also IRS, Rehabilitation Tax CreditâReal Es- tate Tax Tips, available at http://www.irs.gov/ Businesses/Small-Businesses-&-Self-Employed/ Rehabilitation-Tax-Credit-Real-Estate-Tax-Tips. 759 Real Estate Investments Tax Credits, supra note 755. See U.S. Department of the Treasury, Community Development Financial Institutions Fund, New Mar- kets Tax Credit Program, at 9, hereinafter referred to as âNew Markets Tax Credit Program,â available at http://www.cdfifund.gov/what_we_do/programs_id.asp? programid=5. 760 Real Estate Investments Tax Credits, supra note 755. 761 Id. 762 New Markets Tax Credit Program, supra note 759, at 9. 763 Id. at 10.