Developer to Defend High-Speed Railway Plans

(CN) — A federal judge ruled two Florida counties can challenge a railroad expansion that will send dozens of high-speed trains through their coastal neighborhoods each day.

Martin and Indian River Counties survived a motion to dismiss and can move forward with their lawsuit alleging that $1.75 billion in funding for the All Aboard railway project was improperly approved by the U.S. Department of Transportation.

The project, run by defendant AAF Holdings, seeks to connect Miami to Orlando with an express passenger rail service. Though the southern section of the railroad is well underway, the second phase of the project is in its early stages throughout the Treasure Coast, an area of relatively sparse population density where the two counties are situated.

The counties have raised concerns that the proposed railway, which includes no stations or stop-points in their area, will damage the environment and generate pervasive safety issues along with unrelenting train-horn noise.

Their lawsuit challenges the project by arguing that the $1.75 billion block of tax-exempt bond funding for All Aboard was approved before the completion of a required environmental review. The provisional approval violated the National Historic Preservation Act, the Department of Transportation's own regulations and the National Environmental Policy Act, the counties claim.

AAF Holdings moved to have the case dismissed, contending that the counties lacked standing because they failed to show that the $1.75 billion package was essential to the project. AAF, a subsidiary of privately owned Florida East Coast Railway, insisted that "it intends to complete the project, with or without [the] tax-exempt private activity bond financing."

But U.S. District Judge Christopher Cooper in Washington, D.C., rejected the motion Tuesday, in an apparent about-face from his prior stance.

The judge had ruled against the two counties in June 2015, finding they lacked standing, but he said this week that "the counties have now met their burden of demonstrating standing" by showing that the bonds are critical to the project.

"The call is a close one, to be sure. But based on the present record, the court finds that invalidating DOT's decision to authorize $1.75 billion in [private activity bonds] would significantly increase the likelihood that AAF would not complete Phase II of the project," Cooper wrote Tuesday. "The court will therefore deny defendants' motions to dismiss on that ground."

The judge pointed to AAF Holdings' inability to stir investor interest in Phase II of the project even while offering junk bond yields. As the ruling frames it, AAF has been trying to sell the tax-exempt bonds since mid-2015, with less-than-stellar results.

The initial bond offering had a seemingly enticing yield of 6 percent, which was later pushed up to 7.5 percent, only to be met with "insufficient interest from investors," the ruling states.

If the company is forced to pursue traditional debt financing — without tax-exempt status — yields would have to be even higher, prohibitively so, the judge reasoned.

And if investors are demanding high interest rates on the bonds, they would likely want an inflated return on any equity investment, Cooper said.

"That is, if the taxable-bond market looks bleak for AAF, so too would the equity market," the judge wrote.

AAF Holdings said it could secure alternative funding through an already applied-for $1.6 billion loan from an infrastructure program administered by the Federal Railroad Administration. The loan application has been at the center of the litigation since the get-go, as the FRA is in charge of the environmental review process that Martin and Indian River Counties claim needed to be completed before the approval of the tax-exempt bonds.

The status of that loan is uncertain, Cooper said.

"If AAF could easily obtain this loan, it is difficult to see how losing access to [the bonds] would stymie the completion of Phase II. Yet at the hearing on defendants' motions to dismiss, DOT appeared to throw cold water on that possibility. The Department represented that 'the company is not pursuing the loan application at this time,'" the judge wrote.

Cooper went on to rebut the AAF's argument that All Aboard does not represent a "major" project under federal control and is therefore not subject to the laws cited in the counties' complaint.

With respect to both the FRA loan application, and the tax-exemptions entailed by the bond approval, the court found that the amount of federal assistance involved would indeed support the classification of a "major" federal project under the National Environmental Policy Act.

Moreover, the judge said, federal involvement in the project is highlighted by the Department of Transportation's exercising authority over AAF Holdings by ordering it, as a condition for approval of the bonds, to cooperate with the environmental review and to hold off on spending the bond proceeds until the review is wrapped up.

In the wake of the court's decision, Indian River County Attorney Dylan Reingold spoke with Courthouse News and stressed that AAF itself had told the Department of Transportation in a letter that the bonds were "the linchpin" for completing the project.

He pushed back against AAF's attempts to shrug off the ruling as a minor development in the litigation.

"It's a very significant ruling in the case. The burden to prove standing was on the plaintiffs," Reingold told Courthouse News. "In the preliminary stages, the judge was very skeptical. But our [Washington D.C.] counsel put together a great oral argument. . . We showed that the bonds were critical to this project. There really isn't another financing element available."

All Aboard declined to comment on the case.

AAF has publicly maintained that All Aboard's environmental impact has been carefully mitigated, and that the project will generate positive economic results for Florida, producing $650 million in tax revenue and creating thousands of construction jobs.

The company did secure a minor victory in the Tuesday ruling, as Judge Cooper dismissed Martin County's claim that the Department of Transportation's bond approval exceeded the department's authority under a provision of the Internal Revenue Code, which governs tax exemptions for infrastructure projects.

The court ruled that Martin County's stake in the railway project "does not arguably fall within the zone of interests" protected by the tax provision.

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