Guide to Value Capture Financing for Public Transportation Projects (2016)

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54 I Overview and Description The Denver RTD, created in 1969, incorporates parts of eight counties and 2,377 square miles, serving a population of 2.7 million, about 55% of the total population of Colo- rado. The RTD is governed by a 15-member board of directors. The RTD system includes 35 miles of light rail serving 37 stations, 621 RTD-owned buses and 439 buses leased to private operators, park-and-ride facilities, and a number of special services such as shuttles and paratransit. In order to better serve its growing population, in 2004 RTD embarked on a major ser- vice expansion, called FasTracks. The FasTracks plan called for 122 miles of new light rail and commuter rail, 18 miles of BRT, 31 new park-and-ride facilities with over 21,000 new spaces, an enhanced bus network with transit hubs, and the redevelopment of the historic Denver Union Station (DUS). Due to declining sales taxes, the FasTracks program was scaled back from $7.9 billion in 2008 to $6.9 billion in 2013. Funding for RTD included a 1.0% sales tax, of which 0.4% was approved in 2004 to finance the FasTracks transit improvement program. II Project Overview Built in 1881 and remodeled in 1914, historic DUS was well located to serve as a regional transportation hub, yet by the 1990s only two daily Amtrak trains used the station. The City and County of Denver (CCD) sought to redevelop the site to better serve the needs of the commu- nity. Project goals included historic preservation and sustainable development as well as support of transportation. RTD acquired the 19.5-acre station site in 2001 and cooperated with the Colorado DOT, the Denver Regional Council of Governments (DRCOG), and the CCD to implement a master plan to redevelop the station into a multimodal transportation facility bringing together light rail, commuter rail, intercity rail, bus, parking, taxi, pedestrians, and bicycles. The vision for the sta- tion was that of a mixed-use TOD that would become a hub of urban activity including office, retail, and residential uses. Figure 19 identifies major DUS elements including the station building, commuter rail facili- ties, bus terminal, and light rail terminal. The plan’s public elements, expected to cost $488 million, included accommodation of vari- ous transportation modes and multiple capital investments in buildings, rail and bus facilities, and public spaces (as shown in Table 12). A p p e n d i x C Denver Union Station, Denver, CO

denver Union Station, denver, CO 55 III Capacity, Organization, Coordination, and Partnership Development of DUS was carried out through partnership between four public entities and a developer, as identified in Table 13. IV Regulatory Considerations IV.A Master Planning, Zoning, and Environmental Impact Statement RTD conducted a 2-year master planning process that included public participation and outreach and engaged a 60-member technical advisory committee and the 96-member Union Station Advisory Committee (USAC), representing the interests of 36 stakeholder groups. The effort resulted in a master plan, a strategic vision for DUS, entitlements for the DUS historic sta- tion building, and creation of a landmark preservation district. The plan was endorsed by each of the partner agencies as well as the USAC in 2004 (Barrett, 2014). Source: Denver Union Station Project Authority, 2011. Figure 19. Major DUS transit elements. Element Cost (millions) Light rail $56.9 Passenger rail $145.2 Regional bus $219.0 Streets and public spaces $40.0 DUS renovation $17.0 Miscellaneous $9.9 Total $488.0 Source: Barrett, 2014. Table 12. DUS project cost by element.

56 Guide to Value Capture Financing for public Transportation projects A key element of the plan was that major transportation infrastructure would be located below ground with the major real estate developments above ground. Unfortunately, based on the high-level planning that had occurred, true infrastructure costs of these plans were not fully estimated, and the plan had many technical challenges, including the Amtrak and FTA determi- nation that all rail had to be at grade. When the plan was finally priced, it was estimated to cost more than $1 billion, much more than the $200 million that was originally anticipated. The CCD formally rezoned property in 2004 as a transit mixed district in order to accom- modate mixed-use TOD (Barrett, 2014). The environmental impact statement (EIS) record of decision was issued in October 2008, clearing the way for the redevelopment of DUS to proceed. As shown in Table 14, the timeline for project completion—from initial purchase of the site to the end of construction—took more than a decade. Development of the private property around the station is still ongoing. IV.B Legal Steps DUS partners undertook a number of structural legal initiatives to make DUS a reality. These included measures to provide access to funding sources—TIF and special assessment districts— as well as innovative finance programs. Regulatory and institutional initiatives undertaken by DUS partners included: • Intergovernmental agreement: The intergovernmental agreement (IGA) was originally intended to memorialize the contributions of each of the four public partners to the purchase of the historic building and site and to acknowledge RTD as the property’s fee owner, man- aged through an executive oversight committee. This was not a legal entity, and it did not have the power to contract. Eventually the group established a legal authority, the Denver Union Station Project Authority (DUSPA) (Barrett, 2014). • DUSPA: DUSPA was created as the legal entity for the purpose of managing, financing, and implementing the project, including issuing tax-exempt debt, something that was lacking under the IGA. All four government partner agencies and the private partner participated in the governance of DUSPA (Barrett, 2014). Partner Role Regional Transportation District Transit agency City and County of Denver Local government Denver Regional Council of Governments Metropolitan planning organization/ other public entity Colorado Department of Transportation State DOT/other public entity Continuum/East-West Development Partners (now called Union Station Neighborhood Company or USNC) Developer Source: Barrett, 2014. Table 13. DUS project partners. Project Stage Date Purchase of site 2001 Master planning process 2004 Rezoning 2004 Selection of master developer 2006 EIS record of decision 2008 Construction completion 2014 Table 14. DUS timeline.

denver Union Station, denver, CO 57 • Denver Downtown Development Authority (DDA): DDA was created by statute. It com- prised 40+ acres in the Central Platte Valley and was the only downtown renewal authority at that time (Barrett, 2014; Khokhryakova, 2013). Figure 20 shows the area of the DDA. DDA had statutory authority to use TIF, which lasted for 30 years (5 years longer than a TIF through urban renewal authorities) unless obligations were retired earlier. The DDA plan area included the DUS project area (19.5 acres) plus an additional 25 acres. DDA entered into an agreement with CCD to remit TIF to DDA, which DDA pledged to pay debt incurred as part of DUS. Cer- tain taxing entities were excluded from the DDA area and TIF payments, including the Central Platte Valley Metropolitan District and Cherry Creek Subarea Business Improvement District DDA (Khokhryakova, 2013). • DUS Metropolitan District Nos. 1 through 5 (Met Districts): The CCD established “Met Dis- tricts,” statutory metropolitan districts that levied property taxes (like special assessment dis- tricts). Boundaries of Nos. 1 through 3 included the 19.5-acre site, and those of Nos. 4 and 5 include Market Street station. The districts had the following characteristics: – These Met Districts were not-for-profit corporations organized by CCD for managing, financing, and implementing the DUS. – They were defined as “enterprises” under Colorado’s Taxpayer Bill of Rights, each with authority to issue revenue bonds and operate “on behalf of issuer” (Khokhryakova, 2013) for federal tax purposes (allowing issuance of tax-exempt debt). – During the TIF period, revenues generated from the 20 mills6 of incremental property tax would be payable through DDA, and thereafter for an additional 11 years, payable through the Districts (Khokhryakova, 2013). Figure 21 shows the public and private partners in the DUS project. V Business Case Following master plan approval, the DUS partners led a request for qualifications (RFQ) process that led to the master developer selection of a master developer. DUS partners selected Continuum/East-West Development Partners (now called Union Station Neighborhood Source: Barrett, 2014. Figure 20. DUS value capture map.

58 Guide to Value Capture Financing for public Transportation projects Company or USNC) from 11 competing entities in 2006. The master plan called for approxi- mately 1 million ft2 of office space, up to 300 residential units, a hotel, and 100,000 ft2 of retail/ commercial space—based on previously undertaken real estate planning studies. USNC was able to propose a lower budget of $480 million, which was much lower than the budget originally envisioned by planners. This was achieved, in part, by putting all light rail, commuter rail, and intercity rail facilities at grade. The bus station, however, was located below grade, with some changes in configuration. RTD entered into the letter of intent in 2008 to develop the station site, and DUSPA later entered into a contract with the master developer, USNC. Kiewit Construction would complete the trans- portation elements of the work under a guaranteed maximum price contract. USNC would receive a development management fee of $10.4 million to plan and design elements of the site, and USNC committed to purchase various development parcels from RTD that would eventually total $27 million and agreed on a takedown from 2010 to 2015 to retain the rights to develop. Source: Barrett, 2014. A Public-Private Partnership DRCOG Denver Regional Council of Governments CDOT Colorado Department of Transportation RTD Regional Transportation District CCD City & County of Denver DDA Downtown Development Authority DUSPA Denver Union Station Project Authority Owner’s Representative: Trammell Crow Company Kiewit Western Company Transportation/Public Infrastructure Contractor AECOM Transportation Infrastructure Engineer Hargreaves & Associates Landscape Architect SOM re, Owings, and Merrill, LLP Master Plan & Transit Architect FEDERAL & STATE DUS METRO DISTRICT Design, Construction, and Operation of Private Buildings developed on DUS site CONTINUUM PARTNERS EAST WEST PARTNERS USNC Union Station Neighborhood Company Master Developer Private land and vertical developer of DUS sites Participate in management of transit and public infrastructure project PUBLIC PRIVATE DRCOG 1 member RTD 2 members CCD 6 members 2 non-voting members CDOT 1 member Metro District 1 member DESIGN-BUILD CONTRACT Denver Union Staon Skidmo Figure 21. DUS project organization.

denver Union Station, denver, CO 59 USNC has met all of its commitments to date, and every parcel is now either fully developed, built and on the tax rolls, or under construction (Personal communication, 2016). VI Local Economic Conditions and Market Considerations DUS was intended to be a major node of Denver’s light rail system. Part of the rationale for the project was to help lift Denver out of a long recession that lasted through much of the 1980s. DUS was intended to focus and orient demand for new office, retail, and residential real estate in downtown Denver. CCD contracted with CBRE to prepare an independent analysis of down- town real estate demand, and CBRE found that between 2.5 million and 3.0 million ft2 of com- mercial and residential development would occur within the DDA district over the following 20 years (Denver Union Station Project Authority, 2011). VII Creditworthiness, Finance, and Funding VII.A Identification of Funding/Financing The DUSPA process to identify funding sources included: • Identifying funding needs, • Determining source of borrowing, and • Determining source/sources for repayment (Barrett, 2014). DUSPA’s analysis resulted in: • Annuitizing the RTD FasTracks allocation (see discussion that follows), and • Establishing a CCD framework for collecting incremental taxes on the site and surrounding parcels. To issue the TIFIA and RRIF loans, DUSPA sought a credit rating from Fitch Ratings. Fitch Ratings rated the senior lien TIFIA loan “A,” which was one rating grade below RTD’s AA sales tax rating. This rating was based on the following: • Cash-flow coverage was not dependent on development revenues, but primarily on the RTD portion of pledged revenues, or $12 million; • The TIFIA lien was subordinate to RTD’s FasTracks bonds; and • “In addition to RTD’s annual $12 million payment, pledged revenues on both levels of debt include incremental property and sales tax revenues collected within the DUS project area and DUS metro district mill levies. Development activity within the project area has exceeded original projections and Fitch expects development activity to continue. That said, Fitch considers the pace and scope of such development very speculative. As such, development-related revenues are not currently a rating factor for the senior lien note” (Fitch Ratings, 2015a). VII.B Financing Evolution DUSPA originally assumed a financial plan based on tax-exempt securities to be sold in financial markets and serviced from RTD’s FasTracks allocation ($208.8 million) and CCD TIF revenue. Unfortunately, during the global financial crisis, the tax-exempt markets were not viable when needed. In response, DUSPA turned to federal agencies and funding sources (Barrett 2014). RTD pledged FasTracks sales tax monies of $209 million, less previous expenditures, amount- ing to $165 million for the DUS project. In addition, DDA pledged all tax increment revenue—

60 Guide to Value Capture Financing for public Transportation projects a millage rate of 67—for 30 years to DUSPA in order to secure and repay the RRIF loan. Prop- erty taxes (20 mills) generated within the DUS project area for 11 years after the TIF expired (Khokhryakova, 2013) were also pledged, which was an approximate 30% increase over the underlying base tax rate. The TIF district was expected to produce increasing levels of revenue as the master developer took down property. The RRIF loan was secured by the full faith and credit (city-contingent commitment) of CCD. In the event of a shortfall in revenue available for debt service on the subordinate loan (RRIF), CCD would request that the city council appropriate up to $8 million annually during the term of the loan to make up any such shortfall (Denver Union Station Project Authority, 2011). Figure 22 shows that TIF is ultimately expected to become DUS’s major funding source. In the early years, however, payments from RTD’s sales tax revenue receipts are expected to be the dominant source of funding. Some of these projections are based on CBRE’s independent analysis (Denver Union Station Project Authority, 2011). While TIF revenues and property taxes were expected to cover debt service, sales taxes and the city-contingent commitment provided a backstop in the event that these revenues were insufficient. VII.C Grant and Property Sale Sources The sources of the $482.4 million DUSPA funding consisted of grants, property sales, and loans from the TIFIA and RRIF programs. (The final source budget for the project was $482.4 million, somewhat lower than the expected $488 million cost.) As is typical, DUS received a variety of federal, state, and local grants and contributions (Denver Union Station Project Authority, 2016) including: • $50 million from FHWA [Colorado Department of Transportation (CDOT)], • $28.4 million in American Recovery and Reinvestment Act (ARRA) funds (allocated by DRCOG and RTD), Source: Denver Union Station Project Authority, 2011. 0 10 20 30 40 50 60 70 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 Lodgers Tax Sales Tax Special District TIF RTD Payment Figure 22. Projections of DUS revenue sources.

denver Union Station, denver, CO 61 • $9.6 million from the FTA, • $2.5 million TIP (from DRCOG), • $17.4 million via Senate Bill 1 (CO), • $45.7 million other federal and state grants, and • $50.9 million RTD Fastracks contribution and other funding. RTD, the property owner, sold some parcels to provide additional funding for the project, as follows (Denver Union Station Project Authority, 2016): • $16 million for five parcels of the 19.5 acres to USNC, and • $11.4 million for Market Street station property to CCD. While such joint development monies were helpful to the financial plan, they did not compare in magnitude to the TIF and sales tax monies. DUSPA received a TIFIA senior lien loan of $145.6 million, based on the following pledge (Denver Union Station Project Authority, 2016): • RTD sales tax monies annuitized at 5.65% to $12 million annually, and • Lodger’s tax generated within the DUS project area to the extent appropriated by the CCD and pledged to DUSPA. The RRIF loan, of $155 million, had a subordinate lien on the following: • DDA and Metro district monies. • Lodger’s tax generated within the DUS project area to the extent appropriated by the CCD and pledged to DUSPA. • The city’s obligation (city-contingent commitment) that could be accessed in the event of a shortfall of pledged revenue available for debt service on the RRIF loan and the draw on the reserve fund established to secure the RRIF loan. In that case, CCD would request the city council to appropriate annually during the term of the loan an amount sufficient to maintain the reserve fund at the required minimum amount. The maximum annual pay- ment from the city, if funds were appropriated, would be equal to 50% of the maximum annual debt payment on the RRIF loan (Denver Union Station Project Authority, 2011). RRIF did not require a security interest in the real property. This was unusual for a lender accustomed to receiving collateral in rail equipment and was the first time RRIF served as a subordinate lender, in this case to the TIFIA loan. VII.D Union Station One of the ironies of the DUS project was that Denver Union Station building was not part of the core project, aside from the connections to the adjacent rail platforms and bus station. RTD issued a separate request for proposals for the station development. The winning bidder transformed the developable parts of the historic station into a boutique hotel (Personal com- munication, 2016). VIII Takeaways Key DUS takeaways include: • Many moving parts: The DUS project is an example of how disparate stakeholders, funding sources, and project elements can be combined to create significant regional benefits. These were realized within a medium-sized U.S. metropolitan region and a highly multimodal facil- ity. DUS employed a wide variety of innovative funding sources and financing mechanisms, including TOD, TIF, P3s, and innovative loan programs.

62 Guide to Value Capture Financing for public Transportation projects • Role of developers: Through careful project reconfiguration, the developers were able to halve the cost of the project in order to make it financially feasible. • Flexibility and innovative finance: Flexibility in financial planning was essential to success. With financial markets disrupted due to the global financial crisis, RTD turned to TIFIA and RRIF funds as replacement financing. • Long timeline: From planning through construction, the project took approximately 13 years to complete, which is typical of such complex projects. • Legal complexity: To access several funding sources and financing mechanisms, DUS required a number of complex legal contracts and the establishment of several corporate entities. • CCD support: While TIF and SAD revenues along with those from a small number of land sales were expected to be more than sufficient to cover financing needs, sales taxes and CCD support made it possible to achieve federal credit approval, which essentially required investment-grade credit quality at the senior lending level and near investment-grade credit quality at the subordinate lending level.