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

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88 I Overview and Description The Dulles Metrorail Corridor Project, also known as the Silver Line, is a 23-mile exten- sion of the Washington, D.C., region’s Metrorail system. The project is being designed and built in two phases by the Metropolitan Washington Airports Authority (MWAA). Phase 1 consists of 11.7 miles of rail and five stations, connecting some of the D.C. region’s largest employment centers with downtown Washington, D.C. Phase 2 will add 11.4 miles of rail and six stations, including a station at Dulles International Airport (IAD). Now operational since July 2014, Phase 1 has been transferred to the Washington Metropolitan Area Transit Authority (WMATA), and that phase is known as the Silver Line, a designation that will also apply to Phase 2. Figure 33 shows a map of the project. In total, the project will increase the track miles of the Metro system by over 20%. Value capture sources have funded approxi- mately one-fifth of the project. The original funding plan was based on the federal government paying for about half of the costs. Grants from the FTA would pay 50% of the entire project (i.e., both Phases 1 and 2), the Commonwealth of Virginia/MWAA would pay (through grants and Dulles Toll Road toll revenues) 25%, and local governments would pay the final 25%. Those percentages were subsequently revised as the costs increased while the federal dollar amount remained constant at $900 million, causing the other percentages to increase respectively (Fairfax County, 2016b). Combined, the two phases of the project, totaling $5.7 billion, will have been funded with a combination of tolls, commercial tax districts, and state and federal grants, as shown in Table 21. This funding does not include the cost of parking garages in Fairfax County (at Herndon and Innovation Center stations) and in Loudoun County (at Gateway and Ashburn stations) which are financed by the respective counties. The local funding responsibility was allocated as follows: • Fairfax County, 16.1%; • Loudoun County, 4.8%; and • MWAA, 4.1%. This case study focuses in particular on the contribution of the first of Fairfax County’s two Transportation Improvement Districts (Phase 1 TID), which produced the majority of the value capture funding. The Phase 1 TID set the precedent for the Phase 2 TID and the Loudoun tax district. A p p e n d i x G Dulles Metrorail, Washington, D.C.

dulles Metrorail, Washington, d.C. 89 Source: Dulles Corridor Metrorail Project, 2015. Figure 33. Dulles Metrorail project map. Sources of Capital/Funds Phase 1 Phase 2 Rail Project Budget Total % of Total TIFIA Loan Federal $900 – $9001 15.8% Commonwealth of Virginia $252 $323 $5751 10.1% Fairfax County $400 $515 $915 16.1%2 $403 Loudoun County – $273 $273 4.8%2 $195 MWAA (aviation funds) – $233 $233 4.1%2 – MWAA (Dulles Toll Road) $1,354 $1,434 $2,788 49.0%3 $1,277 Total sources of funds $2906 $2,778 $5,684 100.0% $1,876 (33% of total) 1Fixed amount; 2Fixed percentage of total cost, 3Residual. Source: Dulles Corridor Metrorail Project, 2015. Table 21. Dulles Metrorail funding.

90 Guide to Value Capture Financing for public Transportation projects Fairfax County’s total 16.1% share of the project is estimated to be approximately $915 million, which will be finalized once Phase 2 is complete in 2019. Fairfax County is expected to contribute the following: • Phase 1: $400 million would be funded from the Phase 1 tax district. • Phase 2: $515 million would come from the following future sources: – $330 million from the Phase 2 tax district, and – $185 million supported by proceeds from the TIFIA loan that will be repaid using the county’s commercial and industrial real estate tax and regional funds from the Northern Virginia Transportation Authority (NVTA) (Fairfax County, 2016b). II Local Economic Conditions and Market Considerations The Dulles Corridor is part of the Washington, D.C., region in which a key portion of the region’s economic activity occurs. This includes Tysons Corner, with approximately 37 million ft2 of office, commercial, and retail space and five Fortune 500 companies; the Reston–Herndon area, a growing office area; and other properties along the Dulles Corridor leading to the Dulles Airport (Fitch Ratings, 2016b). The D.C. region has benefitted from the growth of the federal government and ancillary busi- nesses, including aerospace, information technology, and telecommunications businesses. As Table 22 shows, the assessed value of the taxable commercial and industrial properties in the Phase 1 TID essentially doubled from 2001 to 2010 (from $5.0 billion to 12.4 billion) and grew at a compounded annual growth rate of 4.6% from 1985 to 2016. This growth occurred despite several major real estate cycle downturns and federal government budget sequestration cuts Fiscal Year Amount (Billions) % Change Tax Rate (Per $100 of Assessed Value) 1985 $3.1 N/A N/A 1990 $4.1 33.3% N/A 1995 $3.4 (16.3%) N/A 2000 $5.0 45.5% N/A 2001 $5.6 12.4% N/A 2002 $6.3 12.5% N/A 2003 $6.7 4.9% N/A 2004 $6.6 (0.6%) N/A 2005 $6.8 3.3% 0.22 2006 $8.1 18.3% 0.22 2007 $10.0 23.7% 0.22 2008 $11.6 16.4% 0.22 2009 $12.8 10.2% 0.22 2010 $12.4 (3.0%) 0.22 2011 $10.0 (20.0%) 0.22 2012 $10.2 1.7% 0.22 2013 $11.1 9.5% 0.22 2014 $11.3 1.9% 0.21 2015 $11.6 1.9% 0.21 2016 $11.9 3.1% 0.19 1The TID was established in February 2004. The table provides prior year information for property that now falls within the TID boundaries. Source: Fairfax County Economic Development Authority, 2016. Table 22. Assessed value of taxable commercial/industrial property in Phase 1 TID.1

dulles Metrorail, Washington, d.C. 91 that reduced jobs at government defense and other contractors located on the Dulles Corridor (Fairfax County Economic Development Authority, 2016). Projections show that the over the next 25 years, the Tysons area population within the corridor is expected to grow by 45% and employment by 63% (Metropolitan Planning Council, 2016). III Capacity, Organization, Coordination, and Partnership Dulles Metrorail planning and organization are complex and extend back decades to the cre- ation of IAD. The Dulles Metrorail, or a form of it not necessarily on the same alignment, was originally considered as part of IAD but could not be realized for several decades due to lack of funding at the local or Commonwealth of Virginia level (Dugan, 2014). One of the primary initiatives that advanced the Dulles Metrorail project was undertaken by a group of developers within the corridor who agreed to fund a portion of the local share of the project through special district tax financing. The group was called the Landowners Economic Alliance for the Dulles Extension of Rail (LEADER) and comprised the early landowners of Tysons Corner, including owners of the West Group and Lerner Enterprises. This group began to evaluate the possibility of rail connection to Tysons as early as the 1980s, putting money into planning studies. The work continued through several recessions in the 1980s and 1990s (Personal communication, 2016; Dugan, 2014). LEADER’s efforts to sign up owners of at least 50% of the assessed value in the Phase 1 TID gathered momentum in the late 1990s and into the early part of the 2000s. Convincing large land- owners and leaseholders such as Mitre Corporation and Northrop Grumman to support the effort was not difficult since they understood the benefit of providing employees and visitors alternative transportation options in an increasingly congested corridor. Convincing smaller landowners was more difficult. Many of the smaller property owners owned or leased to small retail operations such as gas stations, strip malls, and auto dealers who did not necessarily recognize the benefit of the Phase 1 TID or were simply not interested in participating in the process. Some developers had long-term leases with major corporations that had to be convinced to accept the higher Phase 1 taxes that would be passed through in the lease (Personal communication, 2016). LEADER spent much time and effort holding meetings and hiring well-known Virginia poli- ticians such as Chuck Robb and Linwood Holton to help convince the remaining landowners (Personal communication, 2016), which ultimately proved successful. The Phase 2 TID format followed a similar legal structure as Phase 1. That effort initially failed to win 50% of the landowners because the City of Herndon would not join the TID. Part of Herndon’s concern was that its businesses would be supporting benefits to Tysons-area competitors while the Phase 2 project was delayed. Table 23 illustrates the complex nature of the project, involving two transportation agencies, two county governments, the Commonwealth of Virginia, and the federal government provid- ing funding, financing, and negotiation participation. IV Master Planning, Zoning, and Other Regulatory Considerations Dulles Metrorail stakeholders initiated a variety of planning changes following the Phase 1 TID formation in order to allow a denser, urban-like fabric around the Dulles Metrorail stations within the Phase 1 and Phase 2 TIDs. Many of these changes are expected to benefit landowners affected by the TID special assessments.

92 Guide to Value Capture Financing for public Transportation projects In 2010, Fairfax County adopted a Comprehensive Plan for Tysons (Tysons plan). Concurrently, Fairfax County adopted a zoning ordinance amendment establishing a new zoning district called the Planned Tysons Corner PTC Urban District. These were related to a number of transporta- tion initiatives, including design of an urban street grid, reengineering of major intersections, and implementation of a bike share program (Fairfax County Economic Development Authority, 2016). In addition, in 2011 Fairfax County created a not-for-profit with private participants called Tysons Partnership that provided a comprehensive approach to marketing and branding, trans- portation, urban design/planning, public facilities, community amenities, and finance (Fairfax County Economic Development Authority, 2016). Securing the funding of Dulles Rail was a prerequisite for the Tysons Comprehensive Plan to be enacted. Since the adoption of the Tysons plan, 15 major redevelopment proposals have been approved or are pending approval within Tysons. These projects, and six rail-related projects approved prior to the plan, are primarily located within a quarter mile of a Metrorail station and represent 61 million ft2 of development (Fairfax County Economic Development Authority, 2016). Fairfax County initiated similar planning changes under a comprehensive plan amendment affecting the Wiehle Avenue station and two other Metrorail stations that were part of the Phase 2 TID, as well as similar planning of a street grid, bike share, and new overpasses. For the Wiehle Avenue station area, a number of zoning cases are under review that could add approximately 4 million ft2 of mixed-use development (Fairfax County Economic Development Authority, 2016). At issue for some landowners is that the Tysons plan imposes additional fees, including Tysons Service District rates of $0.06 per $100 of assessed value (AV) (Fairfax County, 2016c). As Tysons continues to increase in density over the next 30 years, these rates will remain in place. The addi- tional $0.19 Phase 1 TID tax increased the base tax rate by 22%, not including other tax costs such as for storm water, leaf collection, and water that are assessed in certain parts of Fairfax County. While this could present a competitive disadvantage, developers’ representatives believe that com- peting locations throughout the Washington, D.C., region have similar all-in tax burdens and the strong development at Tysons over the past 5 years suggests that tax rates have not been obstructive (Personal communication, 2016). (See Table 24 for a summary of the Dulles Metrorail timeline.) V Legal Steps V.A Phase 1 TID Fairfax County’s obligation to fund the $5.7 billion project was 16.1%, or $400 million for Phase 1 and $515 million for Phase 2 (Fairfax County, 2016a). Fairfax County established a spe- cial tax district on commercial and industrial properties in 2004 to fund the county’s portion of Partner Role WMATA Transit agency responsible for Phase 1 and Phase 2 operations. MWAA Airport authority overseeing project construction. Fairfax County, Loudoun County Local governments that established special districts for value capture. Commonwealth of Virginia Enacted legislation allowing for special districts and provided grant funding. LEADER Private development group, advocated for project and helped to organize the Phase 1 TID. U.S. DOT The FTA provided New Starts grant and loan to finance Phase 2 of project; U.S. DOT Secretary LaHood also played role in bringing Phase 2 partners together. Table 23. Principal project participants focused on value capture.

dulles Metrorail, Washington, d.C. 93 the Phase 1 TID. The Phase 1 TID consisted of most of the Tysons Corner Urban Center and an area around the Phase 1 stations, as shown in Figure 34. The Phase 1 TID was authorized by Chapter 15 of Title 33.1 of the Code of Virginia (the act). Commercial and industrial property within the TID created pursuant to the act can be taxed to raise funds for transportation improvements in the TID. Such a district can be created upon the petition of the owners of at least 51%, measured by land area or assessed value, of the real property located within the proposed district that is zoned or used for commercial or industrial purposes. The properties in the petition constituted over 64% of such property located within the Phase 1 TID, measured by assessed value (Fairfax County, 2016a). Per the Code of Virginia §33.1-435, properties zoned to permit multi-unit residential use but not yet used for that purpose and multi-unit properties primarily leased or rented to residential tenants or other occupants by an owner who is engaged in such a business are deemed to be in commercial use for purposes of the act. No other residential properties are subject to any tax that may be levied on behalf of such a district, even if they are within the boundaries of such a district (Fairfax County, 2016a). Phase 1 TID allows a tax level of up to $0.40 per $100 of assessed fair market value. However, under the terms of the petition, the Fairfax Board of Supervisors cannot adopt a plan of finance that would be reasonably anticipated to require a tax greater than $0.29 per $100 of AV, assuming growth in AV of 1.5%; this is a political but not a legal obligation (Fairfax County Economic Development Authority, 2016). The most recent tax rate is $0.19 per $100 of assessed value (Fairfax County, 2016a). The Phase 1 TID financing does not obligate the commonwealth or Fairfax County to impose the annual special improvements tax or to levy taxes. It is truly “non-recourse” to the county (Fairfax County Economic Development Authority, 2016). Project Stage Year The FAA recommends reservation of the median of the Dulles International Airport Access Highway for a future transit line. 1964 Dulles Access Rapid Transit sponsors a study for a transit line to IAD and raising funds through assessments. 1985 The Virginia General Assembly permits creation of special taxing districts to fund transportation along Route 28. 1988 The FTA announces that due to funding limitations, the project cannot be funded as a single project. 2002 The City of Herndon turns down participation in special tax district due to concern that its businesses would support a project benefitting Tysons- area competitors while the Phase 2 project was delayed. 2003 Landowners submit Phase 1 TID petition. 2003 Fairfax County establishes Phase 1 TID. 2004 Fairfax County establishes Phase 2 TID. 2009 Fairfax County adopts the Tysons plan. 2010 MWAA issues $343M of Dulles Toll Road bonds. 2010 Fairfax County issues $206M of Phase 1 TID bonds. 2011 Fairfax County issues $42M of Phase 1 TID bonds. 2012 Loudoun County creates Metro Service Districts. 2013 WMATA opens Phase 1 line for passenger service. 2014 TIFIA, Fairfax County, and Loudoun County close TIFIA loans, in part supported by Fairfax County Phase 2 TID and Loudoun County Metro Service Districts. 2014 Phase 2 completion (expected). 2019 Source: Dulles Corridor Metrorail Project, 2015. Table 24. Dulles Metrorail timeline, focusing on value capture.

94 Guide to Value Capture Financing for public Transportation projects V.B Phase 2 TID Fairfax County’s obligation for Phase 2 of the Dulles Metrorail project was $515 million, funded differently than Phase 1, as follows: • A TIFIA loan of $403 million; and • $112 million in non-TIFIA financing. The county’s $403 million TIFIA loan will be repaid from two sources: $218 million from the Phase II Tax District and $185 million from the County and Regional Transportation Projects Fund, Fund 40010 (Fairfax County, 2016b). Fairfax County received the petition to form the Phase 2 TID in 2009; the county approved the TID at the end of 2009. The Phase 2 TID tax rate was set at the end of 2009 at $0.05 per $100 and increased 5¢ each year to $0.20 per $100 in FY 2014. The Phase 2 TID could be as high as $0.25/$100 of assessed value, depending on financing needs. The Phase 2 TID revenues are not legally pledged to the TIFIA loan. Instead, the county com- mits to use Phase 2 TID revenues to repay the loan. There is, however, no legal obligation to Source: Fairfax County Economic Development Authority, 2016. Figure 34. Phase 1 TID map.

dulles Metrorail, Washington, d.C. 95 appropriate those monies, nor is there a direct obligation to repay the loan with Fairfax County taxes (Fairfax County Economic Development Authority, 2016). VI Loudoun County Special Tax District VI.A TID Loudoun County created a special tax district, the Metrorail Service District, to pay for its portion of Phase 2 of the project. The TID consists of properties around the Phase 2 Loudoun County stations. The levy within the TID is $0.20 per $100 of value (APTA, 2015a). VI.B Garages In order to manage Dulles Metrorail’s Phase 2 costs, the planned Phase 2 parking garages in Fair- fax and Loudoun Counties were made to be the separate project delivery and financial responsibility of those counties. Fairfax County is responsible for the garages at Herndon and Innovation Center stations and Loudoun County is responsible for the garages at the Loudoun Gateway and Ashburn stations. In Fairfax County, these stations are not financed with TIFIA loans and instead funded with parking revenues and county credit (Fairfax County Economic Development Authority, 2016). VII Business Case As shown in Table 21, special tax revenues collected by the Phase 1 TID have grown steadily from 2011 onward, reflecting strong asset valuations as well as a slight decrease in tax rate from $0.22 in 2012 to $0.19 in 2016 (Fairfax County Economic Development Authority, 2016). VIII Creditworthiness, Finance, and Funding The Phase 1 TID bonds were rated “AA,” “Aa1,” and “AA” by Fitch Ratings, Moody’s, and Standard & Poor’s, respectively (Fairfax County Economic Development Authority, 2016). Key strengths of these bonds according to Fitch Ratings were: • Coverage of maximum annual debt service is estimated by Fitch Ratings at a ratio of 1.45x based on the current actual tax rate and a ratio of 3.1x at the maximum legal rate; • County target of a minimum coverage ratio of 1.5x; • Tax rate flexibility, allowing the rate to change to maintain revenue at a sufficient level to cover debt service; and • Strong but concentrated tax base based on the corporate headquarters of five Fortune 500 companies and growing assessed valuation in Phase 1 TID (Fitch Ratings, 2016b). IX Takeaways The Dulles Metrorail project, combining Phases 1 and 2, is one of the largest single transit rail projects and value capture efforts in the United States undertaken in the past two decades. As with all projects, there are a number of unique elements, yet several elements are typical of large projects and their respective value capture issues. These include: • Growing market: The project was located in a high-growth-rate corridor in an expanding region. Phase 1 TID assessed value increased healthily over the previous two decades. This

96 Guide to Value Capture Financing for public Transportation projects relative prosperity motivated private landowners and gave local and state policy makers con- fidence in the project. • Committed public and private participants: Numerous public and private participants were committed to the project for years, overcoming a variety of challenges including questions about alignment, planning delays, debates about costs of project elements (such as tunnels), interregional differences, and federal funding limitations. For value capture, developers such as those initiating the Phase 1 TID were highly committed for two decades in their advo- cacy and resources for studies, legal costs, and paid spokespeople. This advocacy continued through economic downturns, which in retrospect appear to be small blips in the time series, as shown in Figure 35, but at the time severely challenged a number of businesses advocating for the project. • Meaningful planning: The Tysons plan and similar planning throughout the corridor reflected the transportation impacts of Dulles Metrorail—fostering a denser, more pedestrian-oriented area. It also allowed developers to further leverage their landholdings, justifying their early investment in advocating for the project and setting up the TIDs. • Managing value capture burden: It will take a decade or more to truly assess the benefits/ costs of the TIDs and their impact on land values. Based on the available anecdotal evidence, the increased assessments in Fairfax and Loudoun Counties do not appear excessive and are reportedly not creating a competitive disadvantage for developers. Nevertheless, obtaining agreement on special assessments among smaller landholders was a challenge given their rela- tive indifference toward the project. • Phasing flexibility: The project and the value capture effort underwent several phases, includ- ing splitting the project into two phases and dividing the Fairfax County TID in two. The project and the value capture participants nimbly responded to these changes. Source: Fairfax County Economic Development Authority, 2016. $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 1980 1985 1990 1995 2000 2005 2010 2015 2020 A ss es se d V al ue $ B Year Assessed Value in $B Figure 35. Assessed value of taxable commercial/industrial property in the Phase 1 TID.