Report Submitted on M-1 RAIL Feasibility

City leaders outline project’s need, impact on Detroit.
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Dear Secretary LaHood, Administrator Rogoff, Governor Snyder, Mayor Bing, Members of Congress and Community Stakeholders:

We are pleased to submit the following report as the culmination of the review period to validate the feasibility of the M-1 RAIL Project. Since our meeting in January, M-1 RAIL has worked with the FTA, the State of Michigan, the City of Detroit, SEMCOG and a range of stakeholders to validate the capital and operating costs of this major construction project; to confirm existing private and philanthropic funding and secure new commitments; and to develop the complex financial and organizational structures required to implement this unique public-private partnership. This effort involved the full rigor of FTA’s project oversight, and it left unquestioned no aspect – large or small – of the plan to deliver this project. We are proud of our response and this extensive report, and we believe it demonstrates that the M-1 RAIL Project can and must go forward.

The M-1 RAIL Project represents an unprecedented commitment by the private and philanthropic sector to fund most of the cost to build – and then to operate for up to 10 years – a vital public infrastructure project for the benefit of the citizens of Detroit and the State of Michigan. M-1 RAIL and its donors are making this commitment because of our deep pride in the City of Detroit and the region; our abiding optimism for its future; and our conviction that this project will be the catalyst to ignite the reinvestment and growth Detroit so desperately needs. While we believe the M-1 RAIL Project will spur the continued transformation of the Woodward Corridor, and out from there the resurgence of a stronger Detroit, the benefits are even broader. The M-1 RAIL Project will create positive momentum for transit across Southeast Michigan as we work to meet our transit needs on a regional scale, and it will provide a tremendous financial head start for the proposed regional Bus Rapid Transit (BRT) project through federal legislation enabling the private investment in the M-1 RAIL Project to count as local matching funds.

While we are animated by what this project can accomplish in Detroit and for the region, we also fully recognize that this unprecedented initiative has unique risks and challenges. M-1 RAIL does not have the inherent backstops of a governmental body in building and operating a major public infrastructure project.

As such, we proposed and undertook this 90-day feasibility review to validate the key questions to moving forward: how much it will cost to construct and operate this project; and our ability to secure the required capital and operating funding. Though much work remains ahead, as a result of what we have been able to demonstrate in just this period, we are more confident than ever that the M-1 RAIL Project is both feasible and essential. Here are the key outcomes from this effort.

 Capital Funding Commitments

In January, M-1 RAIL set out to secure commitments to meet the target of a $125 million capital project, and we are proud to report that we have done so. This consists of over $84 million in committed private and philanthropic contributions which, together with $16 million in New Markets Tax Credits funding and a $25 million federal TIGER grant, meet our goal. During this period, we confirmed the commitments of our existing investors and raised a total of $19 million in additional capital contributions from six new sources and one existing donor. These capital commitments are documented in letters of commitment from our donors, all of which are included in the report. The donors represent a broad and deep swath of the Southeast Michigan business and national philanthropic communities, and reaffirm the importance that these communities attach to the M-1 RAIL Project.

As a result of the feasibility review, additional costs were added to the project in order to increase FTA’s confidence in the estimate, bringing the project cost up to $137 million. As discussed below, M-1 RAIL believes these added costs can be mitigated. Nonetheless, having been apprised of the need to raise this potential funding just a few short weeks ago, M-1 RAIL began the outreach and is already in active discussions for new commitments totaling approximately half of this additional amount. In addition, M-1 RAIL has many more investors and contributors to approach as the project moves forward. In reflecting on this effort and what has been accomplished since January, we can only take great confidence from the fact that FTA’s standard for New Start transit projects – its most rigorous standard – requires only a “realistic” funding strategy to secure initial FTA approval to move forward, and then only that 50% of the funds be committed when the project enters final design, a milestone much later in the process than we currently stand. By comparison, we have already secured commitments for 100% of our initial fundraising target and 90 percent of the updated fundraising target resulting from this review.

Capital Cost Estimate

Based on the findings of this review process, M-1 RAIL is confident that the updated capital cost estimate of $137 million is an appropriately conservative estimate for this stage and, indeed, that there are significant opportunities to bring in the project below that amount. Furthermore, M-1 RAIL has developed both specific and overall management strategies to mitigate key project risks. For these reasons, as investors with our own capital at risk, we are fully confident in our ability to move forward.

As with any project at this stage of the process – all parties agree that we are at an early preliminary engineering stage – there are inherent risks and unknowns as to the capital cost. For example, until the final engineering work is completed to physically confirm subsurface conditions, one cannot know for sure exactly what lies beneath Woodward Avenue. Under FTA’s risk-based estimating process, certainty in the cost estimate increases with the level of design and engineering, and one can approach the point of certainty only much later in the process. As such, under modeling tools that FTA uses, there will inherently be a wide range of potential best-case and worst-case costs at this stage of the process, and the question is whether we have confidence in the specific cost estimate and strategies to mitigate risks.

In the following report, Chapter Six explains in extensive detail why M-1 RAIL has a high degree of confidence in the cost estimate based on the best available information and analysis of project risks. To validate the project cost, M-1 RAIL employed the standard “top down” methodology and worked with FTA to break the project into every constituent element, and then to assign costs based on a database of values from other projects. Through this approach, M-1 RAIL validated known capital costs of approximately $100 million, to which were added $25 million in contingency for risk and $12 million in inflation and financing costs to reach the total of $137 million. M-1 RAIL then utilized the services of one of America’s largest privately owned construction companies, which is headquartered in Detroit, to develop an independent “bottom up” cost estimate from a contractor’s perspective as validation of this approach, which resulted in a lower estimate. Finally, M-1 RAIL compared the cost estimate to peer streetcar systems for further validation, and the cost per mile was virtually identical to the average cost across peer systems.

As just a few major risk areas tend to be the main driver of increased project costs, M-1 RAIL also stepped back to analyze and address the major risk categories for this project. In this regard, it must be emphasized that the M-1 RAIL project is a particularly straightforward project, running straight up and down Woodward Avenue for 3.31 miles. There are no turns, no tunnels and no other trains. One of the major risks in any transit project is acquiring the “right of way” or property to run the line, which is generally not at issue here. One of the major risks specific to this project is fitting under the bridge near Amsterdam Avenue, but M-1 RAIL has included conservative vehicle specifications demonstrating this is a risk that can be mitigated.

As schedule delays are always a risk, we have already lengthened the schedule per FTA’s feedback. The most significant risk in constructing this project is what lies underground beneath Woodward Avenue, simply because — despite the extensive and detailed utility drawings already included in our estimate — there are potentially unknown elements. To mitigate this risk, the M-1 RAIL project is being built in conjunction with the Michigan Department of Transportation’s (MDOT) planned 2013 reconstruction of Woodward Avenue, enabling M-1 RAIL to mitigate underground risks through partnership with MDOT.

Moreover, M-1 RAIL believes that there are significant opportunities to reduce the cost of the vehicle acquisition and professional services for design and engineering which will enable M-1 RAIL to bring the project in below the current estimate. While these are specific strategies to mitigate risk, M-1 RAIL also has an overall risk mitigation strategy that is unique to this project and reflects its unique business model relying on at-risk private contributions. As described in Chapter Ten of the report, M-1 RAIL will proceed incrementally and has built future validation points into the project schedule, at which the feasibility of going forward will be reviewed and reconfirmed.

Most significantly, M-1 RAIL will advance the project to 75 percent design – at which point there will be near certainty as to cost – and conduct a final validation at that time. Simply put, we will not dig until we are certain that we can deliver.

Operating Plan

M-1 RAIL has worked with FTA to estimate operation and maintenance costs of $5.1 million annually. We are extremely pleased that FTA has expressed a high-degree of confidence in this estimate.

Reflecting M-1 RAIL’s commitment to do everything in our ability to bring the extraordinary benefits of this project to Detroit and the region – benefits that include creating hundreds of construction jobs, meeting vital transportation needs, spurring new development, growing the City’s tax base, and supporting the BRT project – certain M-1 RAIL donors have made additional commitments beyond their capital pledges to help meet the operations and maintenance costs. As documented in the report, M-1 RAIL donors will purchase naming rights and/or provide supplemental contributions to endow a $10 million fund to operate and maintain the system for up to 10 years, until 2025, at which point M-1 RAIL plans to donate the project assets and operating responsibility to a public agency, such as the proposed regional transit authority.

The annual operating budget will therefore be met primarily through a combination of passenger fares, advertising and naming rights, and this additional M-1 RAIL endowment. Collectively, these revenues and resources are expected to cover 80% of the annual cost to operate the streetcar system, and we believe from discussions with the State of Michigan that there will be appropriate other and possible state sources to cover the final and minimal remaining increment and realize the truly extraordinary benefits of this project for Detroit and the region.

The City of Detroit is at a crossroads. To meet the needs of its citizens and regain its promise as an iconic American city that symbolizes the industrial heart of America, it must grow and continue its resurgence as a place where businesses want to invest, retail wants to locate, and people want to live. We believe the strength of this region hinges on the strength of its core, and that there is no opportunity with more potential than the M-1 RAIL Project to catalyze reinvestment, redevelopment and revitalization in Detroit – all while bringing the benefits this project offers for regional transit. This is why the project has engendered unprecedented support from the business and philanthropic communities to fund, overwhelmingly through private investment, a project that is quintessentially public. This is the reason the project has received, as documented in the report, such strong support from across the Southeast Michigan Congressional Delegation and our United States Senators; the endorsement of the County Executives for Wayne, Oakland and Macomb Counties; and the support of critical community advocates such as MOSES and Transportation Riders United (TRU).

Moreover, we know that the Governor and the Mayor appreciate the importance of this project, and how it demonstrates what can be done through public/private collaboration at this critical juncture. We are grateful for the Michigan Department of Transportation’s pledge of support and partnership as included in the report. We also know that the U.S. Department of Transportation shares deeply this view of the ability of transit investments to transform communities into places of greater opportunity, and this commitment to a brighter future for Detroit.

The question, then, comes down to feasibility. We believe that we have demonstrated in this feasibility review everything that could be asked of a project at this stage. While it was never possible to achieve certainty as to cost and to eliminate unknown risks within the timeframe for this review, we are very confident in the estimate, in our understanding of project risks, and in our strategies to mitigate them. We also are extremely pleased to have raised strong new funding commitments, and to deliver such a robust capital and operating plan. Ultimately, we are confident that this report establishes the feasibility of the M-1 RAIL Project with technical rigor matched to sense of purpose, and that it will instill in others the same confidence and urgency that it has given us.

Sincere Regards,

Roger Penske, Chairman, M-1 RAIL

Dan Gilbert, Vice Chairman, M-1 RAIL

Matt Cullen, President and CEO, M-1 RAIL

Rip Rapson, President and CEO, The Kresge Foundation

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