By Ann Henson Feltgen
September 9, 2016
FloridaBulldog.org
All Aboard 
Florida’s plan to operate regular passenger train service between Miami and Orlando is in jeopardy following a federal judge’s order questioning the company’s ability to borrow $1.75 billion in taxpayer-subsidized federal bonds to pay for the project.
At the same time, in a lawsuit filed by two Florida counties looking to block the project, the judge found that the U.S. Department of Transportation (DOT) ignored federal law when it issued bonding authority for Phase II of the private rail project from Cocoa to Orlando.
Another hearing in the case is set for Sept. 13, the same day DOT and All Aboard Florida (AAF) must file their formal answers to the complaint.
Phase l of the ambitious project, creating a passenger route and terminals at three stops along the Florida East Coast railroad line between Miami and Cocoa, is well underway. It is Phase II that is now precarious.
AAF, whose parent company – Florida East Coast Industries – is owned by the hedge fund Fortress Investment Group, approached the state more than two years ago with a plan to build and operate a privately owned railroad that would allow passengers to travel from Miami to Cocoa and from there to Orlando. AAF claims that trains would shave at least an hour off the drive time by car.
Railroad depots are under construction in Miami and Fort Lauderdale; a second set of tracks is being installed, and new engines and passenger cars are being built. AAF estimates that both phases will now cost more than $2.9 billion, excluding the cost of easements and land purchases it has already made.
But a lawsuit by Martin and Indian River counties, which challenged DOT’s bonding authority in federal court in Washington, D.C. in April 2015, has gained traction as their attorneys fended off DOT’s motion to dismiss the case while uncovering evidence that All Aboard Florida has little or no money in hand to begin Phase II construction.
Judge finds ‘legitimate questions’
On Aug. 16, after listening to both sides, U.S. District Court Judge Christopher R. Cooper said the evidence he saw raised “legitimate questions” about AAF’s commitment to Phase II without obtaining DOT’s private activity bonds.
Private activity bond-based “financing is not just the ‘current financing plan’ for the project – it appears to be the only financing plan,” the judge said.
Cooper’s finding allowed the two counties to continue to pursue their lawsuit alleging DOT violated the National Environmental Protection Act (NEPA) as well as federal law by approving $1.75 billion in tax-free bonds.
AAF, contacted several times by Florida Bulldog with requests for comment, did not respond. A U.S. Department of Transportation spokeswoman said the agency would not comment on pending litigation.
Any project that qualifies as a major federal action, which this project does according to the judge’s ruling, must comply with NEPA. The act provides for project reviews in this case by the Federal Railroad Administration, U.S. Army Corps of Engineers, U.S. Coast Guard, Federal Aviation Administration, Federal Highway Administration, U.S. Fish and Wildlife Service and the National Marine Fisheries Service.
An Environmental Impact Statement analyzes “a wide range of potential environmental and other consequences of the project and identified and evaluated measures that would avoid, minimize or mitigate impacts that would result from the project,” according to court documents.
A draft of that document was made public and comments taken, but then it was basically shelved, according to Indian River County Attorney Dylan Reingold.
“The evaluations were completed, but no record of decision was ever published,” said Reingold.
That action took place after AAF applied for a $1.6-billion loan through the Railroad Rehabilitation and Improvement Financing program in early 2014. Such loans are for the development and improvement of railroad tracks, equipment and facilities. The loan wasn’t approved, and AAF court filings say the company is no longer seeking that loan.
All Aboard Florida’s plan
In August 2014, AAF made another attempt at financing. It asked the U.S. Department of Transportation for $1.75 billion in tax-exempt bonds, which would mean up to $600 million in lost tax revenue over 10 years, according to court documents.
Four months later, DOT provisionally agreed to finance the $1.75 billion using tax-exempt private activity bonds (PABs). But the agency added several conditions, including a requirement that the bonds be sold by July 1, 2016, a deadline later extended to Jan. 1, 2017. The project must also complete the NEPA environmental review and prohibited from using the bond proceeds until 45 days following the issuance of the final environmental impact statement.
According to attorney Reingold, however, “they did this backwards. You have to go through a full NEPA analysis and Historic Preservation evaluation before authorizing allocation of funds.”
While DOT took the position that NEPA review was not required because the project is not a major federal action, Judge Cooper disagreed.
“The Court finds that the project does constitute major federal action,” he wrote in his ruling.
Without waiting for the NEPA findings, All Aboard Florida attempted three times last year to sell the bonds, each time with different terms, according to the judge’s findings. There were no takers, according to court records.
“NEPA is far more important than people realize,” said Steven Ryan, an attorney representing Martin County in this case. “This is a major procedural violation of environmental law.”
AAF initially told the court that it had $405 million in private debt funding held in escrow to begin construction of Phase II. In later court filings, however, AAF officials said that the $405 million is not for Phase II along with an apparent explanation of what the money is to be used for. The explanation was redacted from the public record.
That change was troubling for the court.
“Contrary to the court’s earlier understanding, [documents] do not show that AAF had already arranged financing for a significant portion of Phase II’s cost,” the judge wrote.
The need for taxpayer-subsidized bonds
AAF has said it can finance the project without government funding, yet also that it would be difficult if not impossible without the taxpayer-subsidized bonds.
AAF president Michael Reininger stated in a deposition that not approving the sale of the tax-exempt PABs “would certainly disrupt the current financing plan, make the project more expensive to complete and may delay its progress.”
In a letter to Paul Baumer of DOT’s Office of Infrastructure Finance and Innovation that emerged during discovery, Reininger went further, calling the funding a “linchpin for completing our project” and “a crucial factor in ensuring our project is financed and completed.”
According to The Bond Buyer.com, there is little interest in the market for high-risk, high-return bonds for a variety of reasons.
The owner of AAF’s parent company apparently cannot help. Court documents state that Fortress’ market capitalization has shrunk by nearly half in the past 14 months.
Likewise, Florida East Coast Investments, AAF’s parent company, has significant debt obligations coming due in three to four years, according to court documents.
While AAF appears to have no funding for Phase II, it does have equity in train stations, which it could sell, according to Ryan.
“You know, all along AAF has claimed that this is a private entity, but it is totally dependent on subsidies,” he said. “They should knock off this fiction. They have their hands in every government pocket they can find.”