Right-of-Way Use Agreements
Right-of-way (ROW) Use Agreements are a form of value capture that involve the sale or lease of development above, below, or adjacent to transportation ROW or real properties. 1 In active real estate markets, development rights are often transferred from historic properties to nearby properties. This practice can also be applied with highway or transit ROW. When this is the case, new developments are often built on platforms erected above the highway or transit facility or in caverns excavated below them. While there is added cost in making these preparations, ROW Use Agreements associated with transit or highway facilities are often attractive to investors because they enable the construction of new development in prime, center-city locations without demolishing other properties or displacing current residents. These opportunities create new development sites in urban core locations that would not otherwise be able to support new construction.
Highway and transit agencies in the United States have used four models for extracting value from ROW Use Agreements: 2
- One-time, upfront lease payments
- Long- and short-term leases that provide access to land and air space for a specified period of time, usually with renewal options
- Direct sale where the public sponsor sells the land and development rights outright to a private developer, who then provides a long-term or perpetual easement to the transit agency or highway authority through or below the property
- Sale of the development rights above the property with a grant of easement where the land owner gives a non-possessory interest to the developer to use the development rights and have access to the ground for construction
Bonds may be required to protect the public agency in the event that the private sector investor fails to complete or abandons the improvement.
The amount of built space that can be constructed on a ROW Use Agreement parcel is determined by the site's zoning designation. Zoning designations identify both the type of development that is permissible to construct and the amount of space that can be developed using a floor area ratio (FAR) designation. The FAR is the ratio of total amount of allowed built floor area to the square footage of the parcel. When the floor area built on a parcel is less that the maximum permitted, the difference in unused floor area may be transferred to nearby parcels through ROW Use Agreements. Many cities allow development rights to be transferred from smaller landmarked properties to nearby parcels, thereby increasing the gross floor area that may be built there under the zoning code.
With development rights projects above highway ROW, the full FAR is available for transfer to the development partner, as there is no preexisting built space above the site. This may not be the case with development rights projects associated with transit stations where the development may occur directly above the transit station or on nearby parcels. In some situations, there may be no existing zoning designations for transportation rights-of-way. In this case, the site first needs to be zoned in order for the development to take place. Larger projects may also involve site development agreements where the local jurisdiction may agree to alter preexisting zoning designations in order to allow the proposed development project to occur. ROW Use Agreement projects are also helpful to local jurisdictions in that they enable private development that would not otherwise occur, thereby increasing local tax rolls.
23 CFR PARTS 635, 710 AND 810: RIGHT-OF-WAY AND REAL ESTATE
FHWA has amended its regulations governing the acquisition, management, and disposal of real property for transportation programs and projects receiving funding under Title 23. This Federal Register Notice provides these changes. A discussion of changes to Title 23 USC 710.405, ROW Use Agreements is found on pages 70011-12 of the Notice.
Proceeds from the Sale or Lease of Real Property: 23 CFR 156
The Office of General Counsel of the Department of Transportation issued its analysis and opinion of FHWA's interpretation of 23 United States Code Section 156, the use of proceeds from the sale or lease of real property acquired with Federal-aid funds. It affirms FHWA's interpretation and implementing regulations that the Federal share of sale or lease proceeds do not constitute Federal funds, but must be used by a State for projects eligible for funding under Title 23. The analysis validates the position that the use of the proceeds on a subsequent Title 23 project does not create a Federal-aid project.
1 Part 710 of Title 23 (23 CRF 710) ensures the prudent use of Federal funds in the acquisition, management and disposal of real property and requires that private developers pay fair market value to obtain air rights.
2 Using the Economic Value Created by Transportation to Fund Transportation, Sharada R. Vidali, National Cooperative Highway Research Program Synthesis 459, Transportation Research Board: Washington, D.C., 2014, p. 24.