Massachusetts Department of Transportation (MassDOT)

Potential Next Steps for Projects: Route 3 South

Highway Real Estate Assets South Station Expansion

October 15, 2013

1 Route 3 South Managed Lanes

Contents

Executive Summary

Route 3 South:

Overview

Potential Delivery Structures

Considerations

Next Steps

Highway Assets:

Overview

Potential Delivery Structures

Considerations

South Station Expansion:

Overview

Potential Delivery Structures

Considerations

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Purpose

The Massachusetts P3 Oversight Commission (Commission) requested further information on three key projects:

– Route 3 South, Highway Real Estate Assets (“Highway Assets”), and South Station Expansion

The goal of this exercise is to understand what potential transaction structures may look like, what further information is needed to make a decision to move forward, and what are the necessary questions to consider when deciding whether to advance a project for P3 delivery

Key Findings

Various potential P3 delivery structures have been identified for Route 3 South, Highway Assets, and South Station Expansion

All three projects require further information, including revenue studies and cost refinements, in order to develop a detailed to support the decision-making process

Executive Summary

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The Project includes the construction of HOT (High Occupancy Toll) lanes, also known as “managed lanes”, between:

– I-93 / Route 3 interchange at Braintree at the north end; and

– Exit 14 (Route 228) in Rockland at the south end

The Project would add one lane in each direction, creating 4 lanes of traffic from the I-93/Route 3 interchange to Exit 16, and 3 lanes of traffic from Exit 16 to Exit 14

The Project could also include expansion of 3 lanes continuing down to Exit 11, as MassDOT examined the widening of Route 3 South from Exit 16 to Exit 11 in 2005

Different tolling policies may be used in order to manage congestion (e.g. dynamic pricing, time of the day pricing)

In 2012, MassDOT received an unsolicited proposal for the addition of managed lanes from the I-93/Route 3 intersection to Exit 14 under a P3 model

Route 3 South Overview

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Route 3 South Potential Delivery Structures

Potential Delivery Model Features

Option 1: DBFOM – Toll Concession

Risk transfer: A developer will be responsible for the delivery of the project under a fixed-price, date-certain design-build contract and will be responsible for O&M during the life of the contract (typically a 50-75 year contract term). Toll setting control as well as traffic and revenue risk are transferred to the developer. Tolling operations are the responsibility of the developer. Payment mechanism: The developer will pay for O&M, life-cycle costs as well the initial capital investment through the collection of tolls. Any funding gap will need to be covered by a Commonwealth contribution. Private investment: Typically, under this delivery model, projects are funded with a combination of debt and equity at a ratio between 65/35% to 80/20%. Bidder Selection Criteria: May be based on the private bid that generates largest upfront payment to the Commonwealth (if projected revenue exceeds projected costs) or the private bid that requires the lowest public subsidy from the Commonwealth. Another option would be for the Commonwealth to receive a portion of gross revenues over time. Procurement Process: Request For Information (RFI)/Market Soundings, Set up Data Room, Issue Request For Qualifications (RFQ), Select Qualified Bidders, Issue Draft Request For Proposal (RFP), Issue Final RFP, Bidder One-on-Ones, Bidder Negotiations, Select Preferred Bidder, Commercial Close, Financial Close. (The only variable will be timing as qualified bidders will be bidding on the same transaction scope).

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Route 3 South Potential Delivery Structures (Cont’d)

Potential Delivery Model Features

Option 2: DBFOM – Availability Payments

Risk transfer: A developer will be responsible for the delivery of the project under a fixed price date certain design build contract and will be responsible for O&M during the life of the contract (up to about a 35-year contract term). Traffic and revenue risk and tolling policy are retained by the Commonwealth. Specific activities may be retained by the Commonwealth (e.g. snow & ice removal), if it is deemed more cost effective. Tolling operations may be outsourced to the developer, if it is deemed more cost effective. Payment mechanism: The developer may be repaid by the Commonwealth with milestone payments during construction, construction completion payments, and/or a stream of availability payments post construction completion. Payments are additionally subject to performance deductions. The Commonwealth may fund payments though state funds and /or toll revenue. Private investment: Typically, under this delivery model, projects are funded with a combination of debt and equity at a ratio between 85 /15% to 90/10%. Bidder Selection Criteria: May be based on the private bid that requires lowest availability payment from the Commonwealth. Procurement Process: RFI/Market Soundings, Set up Data Room, Issue RFQ, Select Qualified Bidders, Issue Draft RFP, Issue Final RFP, Bidder One-on-Ones, Bidder Negotiations, Select Preferred Bidder, Commercial Close, Financial Close. (The only variable will be timing as qualified bidders will be bidding on the same transaction scope).

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Route 3 South Considerations

Information needs & activities:

Traffic & revenue study (on a segment by segment basis)

Technical advisors to provide refined capital and cost inputs, inclusive of tolling equipment (on a segment by segment basis)

Determining state tolling policy objectives (e.g., revenue maximization, throughput maximization)

Conduct market sounding with potential bidders

Conduct an operational assessment of managed lanes (e.g., impact of one HOT lane per direction)

Questions to move forward:

What are the optimal north and south project limits?

What is the optimal project design (e.g., Should there be one HOT lane in each direction? Should there be barriers on each side? How will this design affect operations & maintenance?)

Will SOV users also be permitted access to the HOT lanes?

How are toll rates going to be set (e.g. maintaining minimum speed or throughput maximized)

What are the economic benefits/costs of this project?

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Highway Assets Overview

Highway Assets

MassDOT has 133 highway assets*, which are properties that include one or more of the following assets:

Further analysis of these highway assets is required in order to identify which ones could be bundled in a potential P3 structure

MassDOT is interested in identifying opportunities that would allow revenue generation or costs savings in relation to these assets

*Assets include weigh stations, park and rides, service plazas, information centers, registries, and rest areas. Please note that some of the highway assets are located at the same geographical location. MassDOT owns 112 individual geographical locations of highway assets in Districts 1-6 as per the information provided by MassDOT.

Type of Highway Asset Interstate Highway State Highway Total Assets

Weigh stations 9 11 20

Park and ride 8 24 32

Service plazas 8 4 12

Information centers 7 8 15

Registry 1 0 1

Rest areas 8 45 53

Total 41 92 133

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Highway Assets Overview (Cont’d)

Further review required to determined available delivery structure:

Park & Rides

– Locations: State 24; Interstate 8 (1 of which is closed)

– Locations must be further examined in light of community agreements; however advertising may be permissible without a further location by location review

Based on State law, Commission for the Blind has first right to all revenue generated by vending machines

Federal Issues

– Advertising may be required to be located inside the building or on the ground (not facing the highway or directly visible from the highway) on both State and Interstate highways

– Federal restrictions on activities in the state highway locations may or may not be applicable based on different interpretations of the Highway Beautification Act

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Highway Assets Potential Delivery Structures

Potential Delivery Model Payment Mechanism

Option 1: Sponsorship/Advertising + O&M

Risk transfer: Contract out operations and maintenance functions for state-owned rest areas as well as develop and administer an advertising and sponsorship program for these rest areas. This project structure would take advantage of advertising and other revenue generating opportunities that currently exist under federal and state law. Bidder Selection Criteria: May include a firm that generates the highest net revenue for the Commonwealth or lowest O&M funding stream. Payment mechanism: Pre-agreed stream of payments from the Commonwealth for O&M funding net of revenues from sponsorship and advertising revenue (vending is also a potential option, however considerations for Commission for the Blind requirements must be taken into account). Procurement Process: RFI/Market Soundings, RFQ, RFP, Bidder One-on-Ones, Bidder Negotiations, Commercial Close, Financial Close. Comparable model: Arizona is working on a similar rest area program. The contract establishes that the private partner will operate and maintain state-owned safety rest areas as well as will develop and administer an advertising and sponsorship program at these safety rest areas. The project will take advantage of advertising and other revenue generating opportunities that currently exist under federal and state law. Adding vending would be an additional option for the Commonwealth to consider.

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Highway Assets Potential Delivery Structures (Cont’d)

Potential Delivery Model Payment Mechanism

Option 2: Sponsorship/Advertising/Vending

Risk transfer: Contract with a sponsor for state-owned rest areas in order to collect an annual revenue share in exchange for sponsorship rights directing travelers to rest areas. This project structure could help generate excess revenue in order to offset operating costs that are retained by the state. Bidder Selection Criteria: May include a firm that generates the highest net revenues for the Commonwealth. Payment mechanism: Revenues from sponsorship and advertising revenue (vending is also a potential option, however considerations for Commission for the Blind requirements must be taken into account). Procurement Process: RFI/Market Soundings, RFQ, RFP, Bidder One-on-Ones, Bidder Negotiations, Commercial Close, Financial Close. Comparable model: Virginia used a comparable model through its “SAVE” program. A private partner was selected to establish a contract to create new, and maximize existing, revenue streams by enhancing opportunities in sponsorship and vending, and by providing more comprehensive information of specific interest to the traveling public at the safety rest area and welcome center facilities throughout the Commonwealth.

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Highway Assets Potential Delivery Structures (Cont’d)

Potential Delivery Model Payment Mechanism

Option 3: Service plazas

Risk transfer: Developer will be responsible for the redesign and redevelopment of the rest areas to allow for additional activities. The contractor will be responsible for the ongoing operation & maintenance of the facilities. Repayment of the initial investment and ongoing costs will be funded from the revenue generated from restaurants, gas stations, etc. A mechanism can be set to share excess revenue between the developer and the Commonwealth. Such a s may require changes in legislation and/or negotiations with key stakeholders. Negotiations would be required with FHWA in order to get a change in Federal legislation that would allow for the Commonwealth to add more service plazas on interstates Bidder Selection Criteria: May include a firm that generates largest upfront payment from private developer in exchange for long-term lease, the bidder who requires lowest public subsidy or possibly the bidder who provides the largest revenue sharing. Payment mechanism: Pre-agreed upfront or on-going fee with the Commonwealth for the right of the developer to the revenue stream from the service plazas (from sponsorship, advertising, and concessions). Procurement Process: RFI/Market Soundings, RFQ, RFP, Bidder One-on-Ones, Bidder Negotiations, Commercial Close, Financial Close. Connecticut model: The concessionaire will pay for 100% of the improvements to the service plazas in exchange for a right to redevelop, operate and maintain the facilities for 35 years. In addition to funding the improvements, the concessionaire will make annual payments to the State in the form of minimum guaranteed payments and revenue sharing.

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Highway Assets Potential Delivery Structures (Cont’d)

Option 1: Sponsorship/advertising + O&M ( +

Vending)

Option 2: Sponsorship/advertising + Vending

Option 3: Conversion to Service plazas

Interstate Highway Locations

• Weigh Stations: 9 • Information Centers: 7 (3 of which

are closed) • Registry: 1 • Rest Areas: 8 (6 of which are closed) • Total Assets: 25

• Weigh Stations: 9 • Information Centers: 7 (3 of which

are closed) • Registry: 1 • Rest Areas: 8 (6 of which are closed) • Total Assets: 25

• Assessment of location by location basis is required

Comments • Limitation regarding revenue from

vending going to Commission for the Blind

• Limitation regarding revenue from vending going to Commission for the Blind

• Additional services at interstate highway locations would likely require changes in Federal legislation

State Highway Locations

• Weigh Stations:11 • Information Centers: 8 • Registry: - • Rest Areas: 45 (3 of which are

closed) • Total Assets: 64

• Weigh Stations:11 • Information Centers: 8 • Registry: - • Rest Areas: 45 (3 of which are

closed) • Total Assets: 64

• Assessment of location by location basis is required

Comments • Limitation regarding revenue from

vending going to Commission for the Blind

• Limitation regarding revenue from vending going to Commission for the Blind

• Would require negotiations with FHWA on interpretation of the Highway Beautification Act and MAP-21 and whether it applies to rest areas on state highways

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Highway Assets Considerations

Information needs & activities:

O&M and revenue estimates on a location by location basis

Market sounding with potential investors to refine scope for different bundles of assets

Legal review to further examine legal constraints around MassDOT owned highway assets (Federal and State law) and community agreements

Questions to move forward:

Can services / activities be expanded on state highway assets according to state law?

How (if applicable) will the community agreements in place restrict the Commonwealth’s ability to access revenue potential at park and ride facilities (and potentially other rest areas)?

What other restrictions will state law have on activities at rest areas by a private operator?

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The South Station Expansion Project involves the expansion of the station, as well as the creation of a new midday rail vehicle layover facility

The project includes the acquisition and demolition of an existing US Postal Service General Mail Facility currently located adjacent to the station and relocation and construction onto a new site

The expansion will include installation of new platforms and terminal tracks, the construction of new passenger concourse and facilities and the rehabilitation of the existing interlockings

Project elements also include pedestrian, bicycle and vehicular access improvements in the form of reconstruction of Dorchester Avenue, an extension of the Boston Harborwalk and associated urban landscape design and architecture

South Station Expansion Overview

South Station

Bus Terminal

CA/T Vent

Fort Point Neighborhood

Chinatown

Financial District

I-90 Ramps

Fort Point Channel

The project also includes exploring the integration of real estate investment and private development around and over the expanded station

There is currently an existing air-rights lease agreement with Hines for South Station (expiring in 2017) for the proposed, but yet to be constructed, Hines Tower. The agreement is expected to involve private funding for the expansion of the existing intercity bus terminal and certain platform improvements

USPS Facility

Source: MassDOT

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South Station Expansion Potential Delivery Structures

Potential Delivery Model Payment Mechanism

Option 1: DBFM - Availability Payment

Risk transfer: In this example, a developer will be responsible for the delivery of station redevelopment and expansion under a fixed-price, date-certain design-build contract and will be responsible for maintenance during the life of the contract (up to about 35 year contract term). Facilities management may or may not be transferred to the private developer. Due to the existing air-rights lease agreement with Hines that expires in 2017, the developer may be responsible for negotiating a new air-rights lease if incorporating commercial development (retail, office, etc.) into the contract.

The Commonwealth could enter into a contract for commercial development over the expanded station at the location that is currently occupied by the USPS offices to fund a portion of station costs after entering into DBFM contract to build transportation elements of the project. Such a contract is in addition to the current air rights agreement with Hines over the existing station building and which expires in 2017.

Payments mechanism: The Commonwealth makes milestone payments during construction, construction completion payments, and/or annual availability payments to developer during life of contract. The Commonwealth may fund payments though state or federal funds or proceeds from commercial development and store concessions. The real estate project would be funded separately by private real estate developer.

Private investment: Typically, under this delivery model, infrastructure projects are funded with a combination of debt and equity at a ratio between 85/15 to 90/10%.

Selection Criteria: May include the private bid that requires lowest availability payment from the Commonwealth.

Procurement Process: RFI/Market Soundings, Set up Data Room, Issue RFQ, Select Qualified Bidders, Issue Draft RFP, Issue Final RFP, Bidder One-on-Ones, Bidder Negotiations, Select Preferred Bidder, Commercial Close, Financial Close.

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South Station Expansion Potential Delivery Structures (Cont’d)

Potential Delivery Model Payment Mechanism

Option 2: DB

Risk transfer: In this example, a developer will be responsible for the delivery of the project under a fixed-price, date-certain design-build contract. Commonwealth retains risk for O&M and financing. The Commonwealth could enter into a contract for commercial development over the expanded station at the location that is currently occupied by the USPS offices to fund a portion of station costs. Such a contract is in addition to the current air rights agreement with Hines over the existing station building and which expires in 2017. Payment mechanism: Commonwealth makes payments to developer based on achieving milestones and completion of design and construction. Commonwealth may leverage funding sources from re-selling air rights or commercial redevelopment rights to invest in the design and construction of the station. Private investment: There is no private investment for the station expansion. Private financing will be used for the real estate development Selection Criteria: Bid selection may include the private bidder that requires the lowest DB price from the Commonwealth. Procurement Process: Design build contract procurement.

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South Station Expansion Considerations

Information needs & activities:

Technical advisors to provide refined capital and cost inputs

Commission revenue and market demand study

Discuss feasibility of real estate development

Determine right sized project scope

Complete the MEPA and NEPA processes to determine a fully vetted preferred alternative

Advance negotiations with US Postal Service and the City of Boston regarding acquisition and relocation of the General Mail Facility

Questions to move forward:

Can the negotiations between MassDOT and the US Postal Service be expedited?

How can this project scope be further refined?

Has a suitable location for the new midday rail vehicle layover facility been identified?

There is currently an existing air-rights lease agreement with Hines for South Station (expiring in 2017) for the proposed Hines Tower. What role will this lease agreement have in the future expansion of the station?

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Summary Next Steps

Commission necessary revenue and costs studies for desired projects in order to be able to accurately assess financial feasibility

Conduct further diligence on outstanding legal considerations to further clarify transaction structures

Discuss policy questions that have an impact on project feasibility

Move forward with market sounding activities to understand market interest in projects