5. Paying for a Freeway Cap
Broadly speaking, caps can be divided into several categories for funding purposes. First, there are retrofit caps and there are caps connected with new freeway construction. Additionally, there are caps dedicated principally to public space and facilities (Klyde-Warren in Dallas, Freeway Park in Seattle) and there are private development caps (Capitol Crossing). The most “common” cap projects (if a cap project can ever be called “common”) at this time (at least until regulations change regarding private caps) are retrofit caps dedicated to public space and facilities. They are also the most difficult to fund. In contrast, new or expansion freeway projects are better able to obtain highway related funding as part of the overall highway project. Caps can be incorporated into the budget of new freeway construction, within limits, as a mitigation measure. However, park retrofit cap funding is more difficult since there is no existing source of funding to which to attach. The public tends to view them as expensive public parks. The benefits – beyond simply being a park – are yet to be widely recognized or they are viewed as not having any urgency or priority of need.
Funding a freeway cap or other freeway right of way project typically involves a patchwork quilt of funding sources. These can be categorized as government program funding sources, project based funding sources, and private capital. Additionally, the first category can be further broken down into federal, state, and local – each involving particular agencies and programs. This chapter provides an overview of various potential sources, with more detailed descriptions of various funding sources in Appendix A.
Governmental funding sources can come in the form of grants subject to an application process or in the form of legislative acts by a governing body. Grants are more typical for federal and state sources, whereas funding by legislative act is more common from local governing bodies. Additionally, Federal funding programs can be in the form of tax credits or cash funding, depending on the program. The sources of funding by local governing bodies can come from such varied sources as tax increment financing (TIF), sales tax, property tax, transient occupancy tax (TOT aka hotel taxes), development impact fees (DIF), developer contributions, and a host of other potential sources.
Grants can be particularly helpful in the early going of a freeway cap project. This is especially true for a retrofit cap. Unlike a new freeway construction cap, retrofit caps typically have little or no seed money or specialized staff for the early planning stages. There are state and federal grants that can help in generating critical analyses and documents important to the early stages of planning a freeway cap project. For example, the City of Ventura California utilized a Southern California Association of Governments Compass Blueprint grant (renamed “Sustainability Planning Grant”) early in the process for their Towne + Beach project “to examine the feasibility of creating a transit-oriented, mixed-use, waterfront downtown by capping a portion of Hwy 101.” Hollywood Central Park got started with a mixture of help from SCAG, LA’s redevelopment agency, neighborhood councils, and corporate donors.
For construction, grants will play a more limited role, and cannot be relied on for the lion’s share of construction costs, which must come from some form of project-based, state, or local funding. Nevertheless, the following federal grants, as well as applicable state grants, can comprise important components of gap construction funding:
- The Safe, Accountable, Flexible, and Effective Transportation Equity Act: A Legacy for Users (SAFETEA-LU)
- Surface Transportation Program (STP);
- Transportation Enhancement (TE);
- Congestion Mitigation Air Quality Improvement Program (CMAQ);
- Community Development Block Grants (CDBG); and
- Transportation Investment Generating Economic Recovery (TIGER);
Most of the above referenced grants require some level of local matching. There are other federal funding sources. For more specific information about these and other programs, please see Appendix A.
Tax Increment Financing
Tax increment financing is a “value capture strategy” whereby property tax revenue attributable to increases in appraised property values during a defined time period and within a defined geographical area is earmarked for infrastructure, public projects, or redevelopment within that geographical area. Because such an allocation may deplete property tax revenues going to other recipients, TIF is generally justified on the basis that, over time, it will increase property values in the designated area, thus in turn, increasing overall property tax revenue. Typically, TIF is associated with redevelopment and elimination of blight. The best known type of TIF is an urban redevelopment project. Most states have some type of tax increment financing program.
Laws regarding TIF vary by state and can be volatile. For example, in 2012, California repealed its primary TIF mechanism, the California Community Redevelopment Act. To fill part of the gap left by the redevelopment law, California enacted far more narrowly scoped TIF laws, such as the Enhanced Infrastructure Financing Districts law.  More recently, California has started to bring redevelopment TIF back via “Community Revitalization and Investment Authorities.”
Freeway lid projects are well suited for TIF. Properties near freeways, due to noise, pollution, and unsightliness, often have depressed values. Mitigating the existence of the freeway, and replacing it with a park or private development, has proven to increase the value of adjacent properties. Moreover, the building of a freeway deck in the airspace over a freeway actually creates “new land” upon which to build taxable improvements (however, private development in freeway airspace is currently limited. See Chapter 6).
Typically, there is a lengthy and complicated process for defining a TIF district. Depending on the state, that process can involve environmental review. Once a TIF district is established, it creates an identifiable revenue stream which can be used for bond financing.
Assessment or Fee Districts
Some states provide for assessment or fee districts. In certain instances, an assessment or fee district maybe a useful component in funding a freeway cap. The difference between assessments and fees is typically based on ownership or use, respectively. Such districts are a creature of state law and thus vary, if they exist at all, by state. Assessment and fee districts, to the extent revenues may be applied to capital improvements, may facilitate bond funding of projects within the district. Common types districts include the following:
In these districts, assessments apply to property ownership and typically attach to the property tax bill. The assessment revenue can be used for both capital improvements and for maintenance within the district. If created specifically for funding a freeway cap, such a district would likely include both the new land on top of the cap and adjacent properties. The inclusion of the adjacent properties would be justified under the theory that those properties benefit from the project. The new land on top of the cap, to the extent it is public space, would not generate assessments but could generate fees, such as for parking. However, private development could be subject to assessments. Assessment districts are particularly useful for creating a sustainable maintenance plan. A sustainable maintenance plan, independent of state DOT funds is typically a point of emphasis for state DOTs to approve a cap project.
Parking fee districts
This approach uses special districts and allocates funds from parking fees toward specific infrastructure projects within the district. By introducing or increasing parking fees, local governments can raise funds for a litany of infrastructural improvements and developments. Proceeds are available for both capital expenditures or operating & maintenance expenses. However, parking fee expenditures are typically determined by businesses within the district and usually are directed toward creating or maintaining parking for business customers. Nevertheless, if the proposed freeway cap will significantly add to the parking resources in the district, it may be a viable source of construction funding.
Business Improvement Districts
Business improvement districts (BID) are typically created to promote and serve businesses within the district. BID fees are usually added to the business license fee. Common uses of BID fees are marketing initiatives promoting the district to potential consumers of the goods or services of the businesses within the district. Applicable state law may even prohibit use of BID fees for capital improvements. Thus, BIDs are generally not good candidates for freeway cap funding.
Tax Increment Financing Districts
These districts are discussed separately under Tax Increment Financing.
General Obligation Bonds (GO Bonds)
A GO Bond is a bond which is secured by state or local government resources to repay the bond holders. GO Bonds rely on the city or state’s ability to repay the bonds through taxes rather than future revenue from the project. They may either be limited-tax or unlimited-tax GO Bonds. Limited-tax means the government is expected to raise property taxes as needed to pay the debt, but within statutory limits. Unlimited-tax refers to GO Bonds without such statutory limits, so that property tax may be raised up to 100% to fulfill the obligations. Bond funding is normally limited to capital expenditures.
Regional special taxes, such as local sales taxes, are sometimes a contributor to freeway cap projects. However, it is unlikely that taxes earmarked solely for freeway cap parks will pass in most jurisdictions, particularly in California which generally requires a ⅔ vote by the electorate for such taxes. If the tax is part of a larger tax package, such as a measure for parks or transportation funding, then it may be possible – although in California, such a measure would still require 2/3 voter approval.
Cities can implement taxing districts, which allow certain districts to increase sales tax rates to either pay for capital facilities or ongoing operations and maintenance. (In California, an increase is limited to a maximum of 2% and subject 2/3 voter approval.)
Transient Occupancy Tax (TOT)
Also known as a hotel tax, many cities have TOTs, which apply to visitor accommodations. They are usually levied on the gross receipts of lodging fees. TOTs can be city-wide or by district. Proceeds are available for both capital expenditures or operation and maintenance expenses.
Parcel taxes are similar to property taxes, except that a parcel tax is based upon the characteristics of a property rather than the value of the property. Common examples of parcel tax characteristics include square footage, acreage, apartment units, or status as a single-family home. As with any tax, an increase or implementation often requires approval by vote of the persons who would pay the additional tax. Proceeds are available for both capital expenditures or operations and maintenance expenses. A parcel tax is essentially indistinguishable from a property assessment.
Property tax is an ad valorem tax (proportional to value) on the value of a real property and/or improvements on real property. While there is nothing in the definition of a property tax that prevents its use to fund a freeway cap, typically most funds from a property tax are already committed, thus necessitating a property tax increase to fund a freeway cap. The process for approving a property tax increase, and for what purpose, will vary greatly from state to state. Some states, e.g., California and Washington, impose a cap on the property tax rate, limiting the power of states, counties, or cities to raise property taxes.
Tax credits typically relate to federal taxation. Rather than direct funding, tax credits provide private investors with a dollar for dollar credit towards income tax. Tax credits can make an otherwise unprofitable or economically unfeasible project into an economically feasible project. Perhaps the most applicable would be the Federal New Markets Tax Credit (NMTC), which encourages private investment in census tracts that meet certain eligibility criteria. The criteria are for the purpose of establishing that the census tract is economically disadvantaged. At first glance tax credit programs would appear ill-suited for public infrastructure, such as most freeway cap projects. However, private investment can be structured under the NMTC to help finance many types of public infrastructure. The NMTC is discussed in more detail in Appendix A.
City General Fund
City general funds are cities’ primary funding source, and they are dedicated to providing a number of fundamental city services. Access to city general funds to finance freeway caps is highly dependent upon the local government, policies, and procedures. City general funds are more likely to come into play as secondary collateral for a general obligation bond, where a primary source (such as revenue from a hotel tax increase) has been identified. It is hard to imagine a city that would fund a freeway cap project, in whole or in part, directly from its general fund.
Development Levies, Incentives, and Agreements
Requests for Proposals (RFP) and Development Agreements (DA)
RFPs and DAs apply where the city has ownership or control of the land to be developed. For example, this circumstance can include development on a planned freeway cap structure. In such a case, the City initiates the contact with developers by issuing an RFP. The City can condition approval upon the developer’s agreement to conditions. Due to the contractual nature of DAs, their parameters are largely open to the specific needs of the project.
Development Contribution or Fee
Sometimes known as development impact fees (DIF), some cities charge these fees on new development. This fee is usually a fixed percentage or unit charge contribution, based upon square footage or the number of residential units, which the developer pays to local agencies in exchange for project entitlements. Typically, DIF goes to designated projects. Therefore, it is important to have highway cap projects approved as eligible for DIF funding. For example, in San Diego “Freeway Lids” are a specific line item in its “Downtown Community Public Facilities Financing Plan and Development Impact Fee Fiscal Year 2015.” Items are prioritized as DIF 1 and DIF 2 items and given appropriation years.
Transfer of Development Rights (TDR)
TDR is defined as follows:
Transfer of Development Rights (TDR) is a voluntary, incentive based program that allows landowners to sell development rights from their land to a developer or other interested party who then can use these rights to increase the density of development at another designated location. TDR availability depends on the local jurisdiction.
Even where TDR programs are in place, highway caps aren’t traditional land to which the TDR may apply. At the least, some regulatory and planning adjustments will likely be necessary to make a TDR applicable to a highway cap. Additionally, it may prove controversial to allow developers the right to deviate from or exceed development restrictions in a neighborhood by helping to fund cap construction or construction on top of the cap. Accordingly, TDR is not likely to be a strong candidate for funding cap development, particularly as it applies to “backbone” infrastructure, i.e., the public facilities related to the cap, including the cap structure itself.
Airspace over freeways may be leased for periods up to ninety-nine years, which is a lengthy enough lease to raise private capital to fund practically all private development. In many cities, the cost of constructing a platform for buildings in highway airspace is comparable to or less than purchasing land. This is particularly true in the downtowns of thriving cities. Once the basic structural deck over a freeway is erected, private development costs are similar to building on terra firma. There may even be savings that can be achieved in the overlap between designing and constructing the building and the bridge structure and a reduction in demolition and excavation costs. However, FHWA and state regulations currently obstruct private development in freeway airspace, except in very limited circumstances (See discussion in Chapter Six).
Several of the retrofit cap projects that have been built or are in an advanced planning stage relied on private donations, particularly in the early stages. Such donations may be tax deductible, depending on the circumstances.
Public/Private Partnership (PPP or P3)
P3s allow private and public entities to work collaboratively to plan, finance, and build development projects next to or adjoined to public transportation facilities. Theoretically, P3’s can allow governmental and private entities to spread the risks of new projects, as well as pooling resources to successfully complete the project. They can be used for both for capital improvements and operation and maintenance.
The Presidio Parkway project, which included two caps over Highway 101 in San Francisco, utilized a P3. The Presidio Parkway project used the Design-Bid-Build-Finance-Operate-Maintain model (DBFOM) model. Under this arrangement, the private partner (Golden Link) paid for the Parkway and related improvements. Golden Link will operate and maintain the improvements for 30 years. The public partner (Caltrans and the San Francisco County Transportation Authority (SFCTA) agreed to make a payment to the private partner after construction and thereafter make 28 annual payments. This P3 and P3s generally were discussed more fully in Chapter 3.
Build America Transportation Investment Center (BATIC)
A resource for information on funding an infrastructure project is the Build America Transportation Investment Center (BATIC). It was established to help projects across the country learn from others’ experiences. In particular, BATIC was established to foster P3s. The BATIC is intended “to serve as a one-stop shop for cities and states seeking to use innovative financing and partnerships with the private sector to support transportation infrastructure.”
Additionally, the USDOT established the Build America Bureau to build
. . . upon the foundation established by the Build America Transportation Investment Center (“BATIC”). The Bureau serves as the single point of contact and coordination for states, municipalities, and project sponsors looking to utilize federal transportation expertise; apply for federal transportation credit programs; and explore ways to access private capital in public private partnerships.
The Bureau combines the Bureau, TIFIA and RRIF loan programs, Private Activity Bonds (PABs), and the INFRA grant program all under one roof within the Office of the Undersecretary for Transportation for Policy.
Funding possibilities for highway cap development can come from many sources: public or private; federal, state, or municipal. Therefore, diligent research is invaluable. Appendices A and, for California, B, provide a list of government funding programs. Experience helps too. Thus, having board or committee members who have extensive experience in local government or land use can prove invaluable. Creative out-of-the-box thinking can be another useful endeavor, and helps in the recognition of unobvious opportunities. If a highway cap can be part of the solution for another problem – even a problem that has yet to be recognized – it may access funding normally reserved for other capital expenditures. For example, in my city San Diego, we finally built a new public library that was worthy of a major city. The city did it with significant funding from the school district. Two stories of the library were built for a new urban high school. The inclusion of the school provided the gap funding needed to complete the library. Another school in downtown sits on leased park land adjacent to the freeway and across from Balboa Park. The lease was expiring. The school paid virtually nothing for the lease. At the time the school district wanted to extend the lease, there may have been an opportunity to have the school district help fund a freeway cap to extend the park and mitigate the unhealthy air at the school. In essence, the funding would have created land to offset the park land lost to the school by extending the lease. (Unfortunately, this scenario did not transpire) Transportation projects, convention centers, and the like can create public funding opportunities. With sufficient air quality remediation, even housing can be located on or adjacent to cap structures.
 Southern California Association of Governments (SCAG), Sustainability Planning Grants, Retrieved on Jan. 18, 2018 from http://sustain.scag.ca.gov/Pages/Grants%20and%20Local%20Assistance/GrantsLocalAssistance.aspx
 Roesling Nakamura Terada Architects, Inc., Kimley Horn and Associates, Inc., Economic Planning Systems, Inc., and Van Atta Associates (September 06, 2012), Ventura Beach + Town Project White Paper, for City of Ventura, page 1.
 Federal Highway Administration, Office of Legislation and Intergovernmental Affairs, Program Analysis Team, A Summary of Highway Provisions in SAFETEA-LU (August 25, 2005), Retrieved on Nov. 27, 2017 from https://www.fhwa.dot.gov/safetealu/summary.htm
 Wikipedia, Tax increment financing, Retrieved on Nov. 22, 2017 from https://en.wikipedia.org/wiki/Tax_increment_financing
 In 2014, California enacted a law allowing Enhanced Infrastructure Financing Districts [EIFD] as a partial replacement for redevelopment TIF. An EIFD allows the adoption of an infrastructure financing plan and issuance of bonds, for which only the designated district is liable, upon approval by 55% of the voters [within the district]. An EIFD is allowed to fund public infrastructure in the district.
 Reed, Chris, New law clears way for redevelopment’s return, CalWatchDog.com (Oct. 2016), Retrieved on Nov. 22, 2017 from https://calwatchdog.com/2016/10/01/new-law-clears-way-redevelopments-return/
 Investopedia. (n.d.). General Obligation Bond- GO. Retrieved from http://www.investopedia.com/terms/g/generalobligationbond.asp
 Duran, Robert, New Markets Tax Credits – the Best Kept Secret in Financing Public Projects, (Feb. 1, 2017) BBKnowledge by Best, Best & Krieger, LLP, Retrieved on Nov. 22, 2017 from https://www.bbknowledge.com/economic-development/new-markets-tax-credits-the-best-kept-secret-in-financing-public-projects/
 City of San Diego, Downtown Community Public Facilities Financing Plan and Development Impact Fee Fiscal Year 2015, p. 7, retrieved from http://www.sandiego.gov/facilitiesfinancing/pdf/plans/downtownpffpfv.pdf
 University of Wisconsin Stevens Point, Center for Land Use Education, Planning Implementation Tools Transfer of Development Rights (TDR), retrieved from https://www.uwsp.edu/cnr-ap/clue/Documents/PlanImplementation/Transfer_of_Development_Rights.pdf
 Backbone infrastructure is described in Economic & Planning Systems, Inc., Final Draft Financing Strategy
U.S. 101 Ventura Capping Project Phase 2, (September 5, 2012), p. 11:
“The term “backbone infrastructure” is often used to describe all publicly owned facilities. This report uses the following definitions to characterize these items more precisely:
• Backbone Infrastructure. This term includes most of the essential public service-based items that are underground or on the surface. Backbone Infrastructure is sized to serve the Project and in some cases serves broader development areas. For the Project, Backbone Infrastructure includes the following items:
— Grading. — Roadways.
— Freeway/Freeway Cap.1
• Public Facilities. This group of items comprises on-site amenities to the Project (e.g., parks) or houses employees providing services to the area (e.g., police, fire). For the Project, Public Facilities includes the following item:
— Parks and plazas. — Bus Infrastructure.
— Landscaping.2 — Promenade Improvements.
— Pier extension improvements. — Trestle bridge conversion.
— Dune restoration. — Parking facilities.
This report also contains a description of potential vertical construction (e.g., structured parking, commercial) and associated costs envisioned for development on the cap. It is anticipated that a public-private partnership will be formed to develop these land uses.”
See Appendix I: Financing Strategy, in Roesling Nakamura Terada Architects, Inc., Kimley Horn and Associates, Inc., Economic Planning Systems, Inc., and Van Atta Associates (September 06, 2012), Ventura Beach + Town Project White Paper, City of Ventura.
 Wikibooks contributors, “Public-Private Partnership Policy Casebook/Presidio,” Wikibooks, The Free Textbook Project, https://en.wikibooks.org/w/index.php?title=Public-Private_Partnership_Policy_Casebook/Presidio&oldid=2721801 (accessed September 21, 2017).
 USDOT. (July 13, 2015). San Francisco’s $1.1 Billion Presidio Parkway Completed. USDOT Press Releases. FHWA 52-15. Retrieved from https://www.fhwa.dot.gov/pressroom/fhwa1552.cfm
 See Appendix B for California-specific funding sources.
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