6. Private Freeway Cap Development:
Use of highway airspace for private projects holds great future potential. Unfortunately, private development thus far has been prevented by FHWA regulations which deter banks and other private investors from financing private development of or on freeway decks.
Public Policy Reasons to Encourage Private Development in Freeway ROWs
While not presently possible, there are numerous reasons for private ventures to want to build in highway airspace, including:
- Space: Highway airspace can provide large and contiguous developable space in urban areas with a shortage of buildable space.
- Incentives: Exposed highways in urban surroundings are highly undesirable to adjacent uses. Eliminating the negative impact of exposed highways, and replacing it with compatible development justify incentives to development, including relief from height, mass, parking, and other design requirements.
- Revenue: Private development in airspace can create long term revenue streams for local government and state transportation agencies through “in lieu of property tax” and rent revenue streams.
- Land Assemblage. Municipalities and the state can avoid land assemblage problems and the use of eminent domain for large public projects that would otherwise be built on privately owned land.
- Health: Highway caps can mitigate the negative impact on health to nearby populations from highway air and noise pollution. Such benefits are uneven and need to be further explored. In any case, to the extent that private development increases overall covering of highways, as well as creates revenue streams, the use of such highway coverings should accelerate the ability to design coverings that will mitigate pollution.
Regulatory Obstacles to Private Development in Freeway ROWs
The Code of Federal Regulation sections governing Right of Way Use Agreements does not ban nor even discourage private development in FHWA ROWs. Rather, it contains a provision that acts as a “poison pill” to private development. The purpose of the provision is to ensure there is room for expansion, if needed, of any highway in which the FHWA has invested funds. In particular, 23 CFR § 710.405(b)(4) requires that such agreements “[e]stablish terms for revocation of the ROW use agreement and removal of improvements at no cost to the FHWA.” The Airspace Guidelines for ROW goes on to explain that each agreement should contain provisions to:
“Revoke the agreement in the event that the airspace facility ceases to be used or is abandoned, or becomes necessary for highway purposes” and
“[A]ssure full understanding that the airspace user will not qualify for relocation benefits under the Uniform Act.”
While the regulations state that “[t]he terms and conditions listed in the guidance are not mandatory requirements,” the CFR requirement for “removal of improvements at no cost to the FHWA” appears sufficiently damning on its own. Additionally, these requirements are duplicated in some state DOT regulations. California is such a state. As a result, California has no privately funded or developed freeway caps.
Banks and other investors cannot tolerate uncertainty in the form of a revocation-at-will clause – not to mention without reimbursement – regardless of how unlikely such an event may be. As a result, private development requiring major financing will be – on a practical level – limited to non-FHWA airspace, i.e. airspace of rights of way that were not acquired, in whole or in part, with FHWA funds. Private development projects built on non-FHWA ROWs include projects like Hudson Yards in Manhattan (built over an active train depot and rail yards) or Capitol Crossing in Washington D.C. (built over a section of I-395 with an easement over land owned by the City). Nevertheless, these projects demonstrate the vast potential for private coverage of freeways if this regulation were removed and private development were encouraged.
Because of the regulatory impediment to financing private development, up to this time, the overwhelming number of highway airspace projects have been public uses such as parks and convention centers. Even in a state as large, populous, and freeway dominated as California, there is no private development of or on highway deck projects.
The purpose of the regulation’s revocation provision – i.e. preserving highway ROWs where expansion maybe necessary in the future – can be attained with procedures that do not have the effect of eliminating all private ROW development. For example, many freeways will never be expanded. Some are even being considered for removal. In other instances, potential expansion can be accommodated by constructing a freeway cap project to accommodate expansion. Rather than require that ROW use agreements to contain revocation-at-will provisions, the regulations could require DOTs to ensure that either there will be no future need for expansion of the ROW or that the freeway cap project be constructed to accommodate forseeable expansion. The relevant DOTs can implement procedures to evaluate such expansion needs. To some extent, this process is already occurring. For example, California’s Freeway Best Practices Guide requires that caps be designed and constructed to accommodate future expansion.
It will likely take an act of Congress, or the Executive Branch, to modify the regulations and facilitate private development of highway cap structures. On the other hand, perhaps some creative financial or legal minds will develop a work-around. The likelihood of the FHWA or state DOT revoking a ROW use agreement for a substantial cap project seems remote – but is real enough to prevent private financing. Perhaps the remoteness of the possibility, and offsetting revenues to a city, make it feasible for a city to assume the risk of revocation via insuring or guaranteeing reimbursement of private financiers. In turn, perhaps a city’s assumption of risk would make private financing and private cap development viable. The author is not aware of any project in which this arrangement has been tried.
Other regulations that deter private development include the following:
- The state transportation agency must determine and receive the fair market value of the airspace at issue, particularly if Federal funds were used to acquire the highway right of way. The state lease revenue must be applied to Federal Title 23 transportation uses, although such application does result in an offsetting credit against the state’s future receipt of such funds. These requirements in their application can be a conflict point. Given that the airspace would unlikely have any other productive use and given that private development will generate possessory / in-lieu, sales, and other tax revenue, there seems to be no justification for SDOT’s to recover more than they spend on cap development.
- Advertising signage is limited to identifying ownership and activity.
Even with the regulations, it’s possible to build and lease space to private entities in or on public caps, but these will likely be limited to small retail or non-profit facilities. As long as highway airspace decks are limited to public uses or small private uses, it seems likely that the pace of covering highways will remain very slow due to the funding priorities for public projects.
Financial Feasibility of Private Development in FHWA ROWs
The cost of land in Manhattan averaged $578 per square foot in 2015 and $183 per square foot in Brooklyn. However, Manhattan land prices have been as high as $1,375 per buildable square foot. Id. The most expensive land purchases in downtown San Diego – allowing high density development – San Diego have ranged from $500 – $700 per square foot. Outlier prices include $4,075 per square foot for a downtown Chicago lakeside property for high rise residential development, although the lot was valued by its prior owner at less than half that amount. Land in non- booming downtowns of major cities can range from $50 – $250 per square foot. In comparison, creating “land” in highway airspace likely costs between $300 to $750 per square foot. But some of the cap construction cost maybe offset by the elimination of the costs of demolition, grading, and foundation construction for a land development project.
Generally speaking however, freeway-airspace deck development is more expensive than land development, particularly when such development must pay for construction of the deck – all or in part. One method to offset the additional cost of deck construction is to develop an incentive program. Incentives can include such things as tax incentives, elimination of minimum parking requirements, relief from height / density restrictions, reduced permitting fees, streamlined permitting procedures, or any other of a number of incentives commonly applied to encourage development in blighted areas.
 US DOT – FHWA, Airspace Guidelines to 23 CFR 710.405 – 710.407 (revised August 10, 2010), retrieved from http://www.fhwa.dot.gov/real_estate/right-of-way/corridor_management/airspace_guidelines.cfm
 In California, “airspace lease agreements on Caltrans right-of-way include provisions governing lease revocation [under which] . . . Caltrans may terminate airspace leases at any time for purposes related to [state highway system] operations and maintenance, generally at no cost to Caltrans. Typical airspace lease agreements allow for the development of caps, but lack the certainty needed by investors to justify costs.” CalTrans (2017), Freeway Best Practices Guide, Final Draft, p. 5-3; Retrieved on April 4, 2018 from http://www.dot.ca.gov/hq/tpp/grant_files/final-products/11_FwyCapBestPracticesGuideFinalDraft_03122017_Watermark.pdf
 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, p.18
 CalTrans (2017), Freeway Best Practices Guide, Final Draft, supra, p. 5-3
 Freeway Best Practices Guide, Final Draft, supra, p. 5-1
 Title 23 CFR § 710.403(d)
 Hughes, C.J., The dirt on NYC’s soaring land values, The Real Deal – New York Real Estate News (April 2015), Retrieved from https://therealdeal.com/issues_articles/486631/
 Gallun, Alby, Most precious thing in downtown Chicago? Dirt, Crain’s Chicago Business (Oct. 2014) Retrieved from http://www.chicagobusiness.com
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