Public-Private Partnership: South Lake Union Streetcar, Seattle, WA

Matthew Steenhoek UAP 5784 Spring 2011

In cities around the country, modern streetcar lines have become increasing popular over the past decade. Their popularity stems from the ability for these lines to provide enhanced connectivity and stimulate development. Seattle began planning for a modern line of its own, the South Lake Union streetcar line (SLU), after seeing the success of the modern streetcar program in near-by Portland. This planning initiative began in 2003 and, by December of 2007, service on the SLU line had begun (The Brookings Institution, 2009). In order to ensure that the construction of the streetcar did not affect general fund expenditures, the City of Seattle utilized a number of innovative financing measures which involved the private sector, federal grants, budget allocations, local property disposition, and the sale of development rights. Most significant of these measures was the institution of a Local Improvements District (LID) which established private funding for approximately half of all planning and capital expenses related to the SLU line. The willingness of private sector landowners to participate in the LID program is indicative of the economically catalytic effects that modern urban streetcars have been shown to induce.

Routing and Operations

With a total of 2.6 miles of track (1.3 miles in each direction), the SLU line includes eleven stops and connects the South Lake Union and Denny Triangle areas with Downtown Seattle. The SLU line runs with 15-minute headways from 6 a.m. to 9 p.m. Monday through Thursday, 6 a.m. to 11 p.m. Friday and Saturday, and on Sunday from 10 a.m. to 7 p.m. This route provides

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intermodal connections to the existing monorail and Link Light Rail systems in Downtown Seattle (City of Austin, 2010).

The SLU line operates on these headways with three vehicles and has an average daily ridership that is projected to reach 3,800 this year when much of the development that was spurred by the construction of the streetcar line is occupied (City of Seattle, 2011). This ridership is a significant increase from the original projections and performance of the SLU line. During the first years of streetcar operation, the ridership numbers were significantly lower - just over 1,300 riders per day in December of 2009 (Lindblom, 2009). As the system matures and ridership increases, it is anticipated that the operational hours will expand to 18 hours per day (5 a.m. to 11 p.m.) and will operate on ten-minute headways (City of Seattle, 2005).

Planning and Investment

Identified by the City of Seattle as an area with the potential to develop into a biosciences hub, the industrial South Lake Union district was seen as a neighborhood that was primed to fully capitalize on the investment of a modern streetcar system (Reconnecting America, 2009). Without the improvements of the streetcar line, it was determined that the properties in South Lake Union would not fully realize their high and best development potential because demand on existing transportation infrastructure and levels of traffic congestion would become too great (Foreman & Sloan, 2006).

In concert with the prior planning that existed for the South Lake Union neighborhood and the growing interest in a streetcar line, significant private investment from some of the biggest names in Seattle were attracted to South Lake Union. These private sector efforts were due largely to billionaire Paul Allen and his development company, Vulcan. Vulcan was looking for UAP 5784 M. Steenhoek Page 2

ways create a more connected, dense, urban neighborhood in South Lake Union. Taken together, Vulcan and Clise Properties, a Seattle-based developer that has been active for more than 120 years, control twenty-eight percent of the properties within three blocks of the SLU line (The Brookings Institution, 2009). These local property owners formed a group called Build the Streetcar to advocate for and support the construction of the SLU line (City of Seattle, 2005). Other notable real estate developments in South Lake Union spurred by these investments include Amazon.coms relocated headquarters, a 12-acre campus for the Gates Foundation, a research campus for Seattles Childrens Hospital, the Fred Hutchinson Cancer Research Center, and a campus for the University of Washingtons School of Medicine focused on biomedical research (The Brookings Institution, 2009).

The total system cost for the SLU line was $52.1 million dollars, or $20.1 million per track mile along its 2.6 mile route. Annual operating costs for the SLU line are approximately $2.5 million (City of Austin, 2010). Because of this investment and the focused effort by both the public and private sector to transform South Lake Union into a new development hub, the real estate values along the alignment have seen significant expansion. One dramatic example of this expansion is the value of vacant land within three blocks of the SLU line. These properties saw a median property value increase of 123% during the five-year planning and construction period for the streetcar line. Similar vacant properties citywide only saw a median 53% increase during this same time period. When these properties are developed as office buildings in order to meet the high demand driven by the many foundations and research institutes mentioned above, the median increase in value is even higher at 166% (The Brookings Institution, 2009). Build the Streetcar recognized the property value growth potential that the SLU line represented and helped to create the innovative Local Improvement District (LID). The LID provided private sector funding for approximately half of the total system cost.

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Capital Funding Mechanisms

Innovative funding mechanisms allowed the South Lake Union streetcar line to be planned and constructed without the allocation of general funds from the City of Seattle. These mechanisms include collaborative partnerships between the private and public sector, as well as the utilization of Federal Grants, federal and State budget allocations, and the sale of surplus property and development rights. Successful financing mechanisms such as these can serve to promote the healthy economic expansion related to streetcar systems without putting a strain on the citys capital improvements or operating budgets.

Private Sector Funding: Local Improvement District Private sector contributions provided the largest single component of the financing necessary for the planning and construction of the South Lake Union line. These funds totaled $26.2 million and were accessed through the creation of a Local Improvement District, which included all properties within approximately five blocks of the streetcar alignment (The Brookings Institution, 2009). Back in 1981, Seattle used the LID mechanism, supported by waterfront businesses and property owners, to contribute $1.1 million to the construction of the Waterfront Streetcar line. As such, the city had already proved the LID method to be politically palatable and administratively workable for streetcar transportation infrastructure investment (City of Seattle, 2005). The basic structure of a LID is that the private property owners, who will see financial benefit through increased property values from the public infrastructure investment, in this case the streetcar line, pay a fee based on the increased property value each property owner will realize as a direct result of the investment. These property value increases are known as special benefits and are assessed based on a number of components, including existing land-use, potential redeveloped land-use, and proximity to streetcar alignment.

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Local property owners, through the Build the Streetcar organization, worked with and lobbied the City of Seattle to create LID No. 6750, essentially levying a voluntary tax on themselves to support the funding of the SLU streetcar line. This LID was formed by Seattle City Council in October of 2005, a few months after the Council authorized the funding plan for the SLU line in late June (Foreman & Sloan, 2006). This funding plan anticipated a total project cost of $47.5 million dollars (2006 dollars) and called for the creation of a $25 million dollar LID. The initial special benefits assessment, which was completed in 2002, demonstrated that the increase in property value due to streetcar investments would exceed $25 million dollars and would, therefore, make the creation of an LID to raise the intended funds feasible (City of Seattle, 2005). Clearly, the utilization of an LID for the creation of the SLU streetcar line was a publicprivate financing mechanism that was contemplated from the earliest stages of streetcar concept development, was actively supported by the private property owners along the corridor, and played a vital role in ensuring that significant funding was available to keep general fund sources from needing to be employed.

Due to the reasonably dense and fragmented industrial nature of the SLU streetcar corridor, the number of tax parcels and individual property owners that had to be accessed a special benefits assessment was very high: 1,089 tax parcels which were improved in a wide variety of ways. These existing uses included condominiums and industrial properties, high-rise office and lowrise retail, historical properties and vacant surface parking lots, and everything else in between (Foreman & Sloan, 2006).

The Final Special Benefits Study for South Lake Union Streetcar Project, City of Seattle LID No. 6750, which was completed for the City of Seattle in March of 2006 by the appraisal firm of Allen Brackett Shedd, found that the special benefits accruing to these 1,089 properties was substantial. They determined that the appraised value of these collective properties would rise UAP 5784 M. Steenhoek Page 5

from a before streetcar value of $5,385,208,105 to an after streetcar value of $5,454,566,415. This would provide for a special benefit of more than $69.3 million dollars to the private property owners.

Ultimately, the final assessments were approved; the assessment roll of Local Improvement District No. 6750 was adopted under Ordinance Number 122175 by Seattle City Councils unanimous vote on July 31st, 2006 and signed by the Mayor in mid-August of the same year (City of Seattle, 2006). The final assessment value for the LID was $26,197,929 which included approximately a half a million dollars of assessed value for Federal government properties that were exempt from the LID fees and, therefore, could not be realized as a funding source. This is an important detail for cities, such as Washington, DC, who are looking to create or expand their streetcar system into areas with significant Federal interests and Federal property ownership. Of the $25.7 million remaining in the LID, approximately $700,000 will go towards costs of creating, maintaining, and operating the LID program. The remaining $25 million is for capital expenditures on the SLU line (Foreman & Sloan, 2006). This $25.7 million LID funding mechanism represents just under half of the total project costs and 38% of the total special benefits assessment value.

As shown by the special benefits assessment, the local property value enhancement which comes as a result of the streetcar is considerable. The connectivity created by the streetcar brings higher exposure and demand to properties along its alignment. However, not every property experienced the same level of enhancement; and the special benefits assessment was designed to account for these differences. Benefit levels varied according to the relative proximity to the streetcar. Properties within five blocks of the streetcar were still considered to receive special benefits from the streetcar, but at a lower rate than those properties closer to the actual alignment. UAP 5784 M. Steenhoek Page 6

The methodology for the assessment included five geographic analysis areas which were used to help determine the relative special benefit received. These areas were defined as: Area A frontage on streetcar project, north of central business district core, Area B one block from streetcar or with frontage near south terminus, Area C two to three blocks from streetcar, north of Denny Way, Area D two to three blocks from streetcar, south of Denny Way, and Area E about four to five blocks from streetcar (Foreman & Sloan, 2006). The methodology used for Area C and Area D also takes into account the relationship of the properties relative to Denny Way. In Seattle, Denny Way is a border street that separates the traditional Downtown to the south, which is more developed and less reliant on the streetcar, from the Denny Way neighborhood to the north, which would see a higher special benefit from the streetcar. This demonstrates that other surrounding neighborhoods, adjacencies, and the relationships to the existing urban fabric must be taken into account instead of strictly looking at a properties distance from the streetcar line.

Properties that were already developed to their highest and best use, that is, which already contained the size and type of property that would yield the greatest financial value, benefited less than properties that were not already improved with their highest and best use. Accordingly, vacant properties and properties with an interim or temporary use on them benefited most greatly by the South Lake Union streetcar. Vacant properties have inherent flexibility which allows an owner to more appropriately respond to the new transportation infrastructure without having to raze a building, remove a tenant, or develop in response to historic designations or limitations from preexisting buildings. This flexibility helps to make vacant properties the primary beneficiaries of the special benefits. Multifamily residential, hotel, and retail properties were seen to reflect the highest special benefit while office and industrial properties saw lower special benefits. The particular transportation, jobs, and demand factors UAP 5784 M. Steenhoek Page 7

associated with office and industrial properties were the causes of the lower special benefits assessments (Foreman & Sloan, 2006).

Property owners along the South Lake Union streetcar alignment who were determined to have received special benefits from the infrastructure were required to pay the amount stipulated in the final LID assessment. However, property owners were not obligated to pay the full amount up front, ostensibly because the businesses had not yet had the opportunity to receive enhanced revenues resulting from the increased access provided by the streetcar. Assessments, or any portion of the assessment, were to be paid within 30 days of the publication of the notice without penalty, interest, or additional costs. However, if property owners chose not to pay the full amount of the assessment within 30 days of its publication, they were to pay the remaining amount in 18 equal annual installments at an approximate interest rate of 6% per annum. The interest collected on these assessment payments is used to cover the debt service costs of the local improvement bonds that were issued for construction of the streetcar under Local Improvement District No. 6750 (City of Seattle, 2006).

Of course, not every property owner along the SLU line was in agreement with the value that was assessed to their property by the LID; and the creation of this funding mechanism was somewhat controversial. Clise Properties, a major property owner in the area, despite being supportive of the streetcar efforts, expressed their displeasure with the methodology of the assessment. Other smaller property owners felt that their assessments were higher than justified and also expressed discontent to the local newspapers (Mulady, 2005). Had property owners representing 60% of the total assessment protested, the LID plan would have failed. Ultimately, there was only one property that appealed the final assessment roll. The appellant claimed that their wholesale floral warehouse was not specially benefited by the SLU streetcar line. The appeal was denied because it was determined that the assessment should not be UAP 5784 M. Steenhoek Page 8

based on the appellants current use of the property as a floral warehouse, but upon the potential for future development that the property could support (City of Seattle, 2006).

It is important to note that, due to state-level regulations on LID structure and use, LID cannot be used towards any operational or maintenance costs of the system. Currently, these costs are covered by a combination of farebox revenue return, contribution from King County Metro Transit, advertising revenue, and an interfund loan from the Citys Cash Pool (City of Seattle, 2011). Further, the total project costs exclude any additional coincident modifications or improvements that are completed by Seattle Department of Transportation or Seattle Public Utilities. These improvements are known as betterments and can include efficiencies in pedestrian improvements, paving, drainage improvements, etc (Foreman & Sloan, 2006). LID only acts as a funding mechanism for capital improvements directly related to the project (University of Washington Urban Form Lab , 2007).

Federal & State Government Funding: Grants and Appropriations The City of Seattle was able to secure a number of grants and appropriations from the Federal and State governments to fund $17.9 million dollars of the South Lake Union streetcar costs. The most common funding source utilized from the Federal government was the Federal Transit Administration (FTA) Urbanized Area Formula Funding program (FTA Formula 5307). FTA Formula 5307 makes Federal resources available to urbanized areas for transit planning, capital investments, and operating assistance. These FTA funds are distributed to Puget Sound Regional Council, the intergovernmental council for the Seattle-Tacoma-Everett urbanized area, which handles the further distribution and implementation of the funds (United States Department of Transportation, Federal Transit Administration).

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The South Lake Union streetcar was also able to attract four million dollars in Federal appropriations and three million dollars in State budget appropriations. This Federal and State level support played a vital role in allowing the SLU streetcar line to be able to be fully financed without using the citys general fund.

Local Government Funding: Sale of Surplus Property and Development Rights Finally, the financing of the South Lake Union streetcar line relied on $8.5 million of funds generated through the sale of excess property and development rights by the City of Seattle. Eight surplus properties that were under city ownership in the South Lake Union neighborhood were sold for $20.2 million in 2001. Policy guidelines adopted by the City Council in June of 2001 directed approximately $9 million of these proceeds to go towards transportation improvements in the South Lake Union neighborhood. These funds were used to close the funding gap that remained after private sector LID, Federal grant and appropriation, and State appropriation funds were exhausted (City of Seattle, 2005).

Additionally, the City of Seattle sold the development rights over a streetcar maintenance facility for approximately $2.5 million. The city commissioned a report to determine the highest and best use for this facility and reported that the development rights would be of greatest value to a residential developer (City of Seattle, 2005). By looking at the citys available untapped development potential and the liquidation of excess property, Seattle was able to close the gap left by the other funding sources and complete the design and construction of the South Lake Union streetcar line without the utilization of the general fund.

Conclusion The South Lake Union streetcar line provides a successful and innovative public-private funding model that is worthy of study and emulation in other cities that are looking to expand their UAP 5784 M. Steenhoek Page 10

surface transit options. The South Lake Union experience is telling of the power that streetcar planning and implementation can have in contributing to the escalation of property values and stimulation of development. This optimism about future values and opportunities is what created the Build the Streetcar campaign and, ultimately, is what convinced local property owners to levy a voluntary tax upon themselves through the LID. The City of Seattle greatly limited their risk in the proposition by diversifying the funding sources and structuring a financing program that did not rely on general fund expenditures for the capital costs.

Private owners and developers along the South Lake Union line that were appraised a special benefit and had the obligation to pay that assessment carried the brunt of the risk associated in the financing of the streetcar. Of course, there is no guarantee that the property value increases predicted will come to fruition; and property owners do not have the luxury of enjoying these financial gains until they sell or refinance the property . All told, the South Lake Union streetcar line cost $52.1 million dollars: $25.7 million was funded though the Local Improvement District, $14.9 million came from Federal sources, State budget allocations represented $3 million, and the sale of excess property and development rights brought in $8.5 million (The Brookings Institution, 2009). The success of the South Lake Union line has spawned the planning and development of additional streetcar lines in Seattle, and the financing plan has been studied and reviewed by many of the other jurisdictions that are contemplating the creation of a modern streetcar line (Reconnecting America, 2009). The South Lake Union streetcar line represents a successful example of a public-private venture where risk is successfully mitigated - a win-win for all parties involved.

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Bibliography
City of Austin. (2010). Central Austin Transit Study. Austin, TX: City of Austin. City of Seattle. (2005). South Lake Union Streetcar, Capital Financing and Operating and Maintenance Plan. The Office of Policy and Management. Seattle, WA: City of Seattle. City of Seattle. (2006, August 10). Council Bill Number: 115649 , Ordinance Number: 122175. Retrieved April 18, 2011, from City Clerk's Online Information: http://clerk.ci.seattle.wa.us/~scripts/nphbrs.exe?s1=south+lake+union&s2=&s3=&s4=&s5=&Sect4=AND&l=20&Sect1=IMAGE&S ect2=THESON&Sect3=PLURON&Sect5=CBOR1&Sect6=HITOFF&d=CBOR&p=1&u=%2 F~public%2Fcbor1.htm&r=10&f=G City of Seattle. (2011). 2011 Adopted and 2012 Endorsed Budget. Retrieved April 18, 2011, from www.seattle.gov: http://www.seattle.gov/financedepartment/11adoptedbudget/documents/StreetcarfromUTI LITIESANDTRANSPORTATION.pdf Foreman, D. A., & Sloan, M. C. (2006). Final Special Benefits Study for South Lake Union 50Streetcar Project, City of Seattle LID No. 67. Seattle, WA: Allen Brackett Shedd. Lindblom, M. (2009, December 23rd). Streetcar cost overruns: What about the next line? The Seattle Times. Mulady, K. (2005, October 4th). South Lake Union streetcar cost shocks neighbors. SEATTLE POST-INTELLIGENCER. Parsons Brinckerhoff. (2004). Seattle Streetcar Network and Feasibility Analysis. Seattle, WA: Parsons Brinckerhoff. Reconnecting America. (2009). Street Smart: Streetcars and Cities in the 21st Century. (G. Ohland, & S. Poticha, Eds.) Reconnecting America. Reconnecting America. (2009, March 5). www.reconnectingamerica.org. Retrieved April 18, 2011, from http://www.reconnectingamerica.org/assets/Uploads/090305streetcarbook.pdf The Brookings Institution. (2009). VALUE CAPTURE AND TAX-INCREMENT FINANCING OPTIONS FOR STREETCAR. Metropolitan Policy Program. Washington, DC: The Brookings Institution. United States Department of Transportation, Federal Transit Administration. (n.d.). Urbanized Area Formula Program (5307). Retrieved April 23, 2011, from http://www.fta.dot.gov/funding/grants/grants_financing_3561.html

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University of Washington Urban Form Lab . (2007). Financing Options for an Expanded Seattle Streetcar System and Network. Washington State Transportation Center. Seattle, WA: University of Washington.

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