Senate Committee Reviews How TOD Can Be Financed and Built in America

On June 18, 2024, the Transportation, Housing and Urban Development, and Related Agencies Subcommittee of the U.S. Senate Appropriations Committee convened to discuss how the Build America Bureau at the USDOT can better support transit-oriented development (TOD) projects. Specifically, chair Brian Schatz (D-HI) and Senators Cindy Hyde-Smith (D-MS), Jack Reed (D-RI), and Chris Van Hollen (D-MD) explored how Congress can unlock the Transportation Infrastructure Finance and Innovation Act’s (TIFIA) potential to finance small-scale community TOD projects.

Testifying witnesses included: 

Through a congenial conversation, the witnesses agreed that the major factors stopping more TOD projects from applying for and receiving TIFIA loans include the program’s high credit rating requirements, its complex eligibility and application requirements, and often hard-to-maneuver compatibility issues between federal and private financing schemes.  

Transit-Oriented Development as A Tool to Invigorate Communities 

Transit-oriented development has historically been a successful strategy for creating vibrant, connected communities. By focusing dense mixed-use developments near high-quality mass transit nodes (typically within one-quarter or one-half mile), TOD aims to make sustainable transportation options both convenient and desirable for local residents.  

The benefits of TOD are multiple. Whereas new land use developments typically require acres of undeveloped land and costly investments in new infrastructure, TOD can often capitalize on already-existing transportation assets, making it a more affordable development option. Moreover, the proximity of (often affordable) housing to high-quality transportation in transit-oriented developments helps reduce residents’ dependence on private vehicles in favor of more sustainable transit alternatives. A recent study by the Brookings Institute estimates that individuals living near multiple activity centers can save up to $1,000 in transportation-related expenses and up to 3,000 pounds of CO2 emissions annually. Subsequently, TOD can improve communities’ sustainability.  

Though the term “transit-oriented development” was only introduced thirty years ago by architect Peter Calthorpe, the concept of concentrated mixed land-use near transit nodes has existed for centuries. TOD is experiencing a renaissance in the U.S. Recent TOD success stories can be found in diverse contexts nationwide: a commons development in small-town Concord, MA, a downtown revitalization in Collingswood, NJ, development near an Amtrak station in Emeryville, CA, and the Rosslyn-Ballston Corridor in Arlington County, VA, among many others. Given that an estimated 25 percent of housing-seeking households will desire to live in high-density housing near transit by 2030, the success of TOD will likely continue to grow.  

Though TOD has been shown to bolster local economies, increasing employment, property values, and sales tax revenues, developers and transit agencies that embark on TOD projects require up-front funding and financing options. On a federal level, several financing options are available, including Transportation Infrastructure Finance and Innovation Act (TIFIA) loans and Railroad Rehabilitation & Improvement Financing (RRIF) loans.  

The Transportation Infrastructure Finance and Innovation Act  

The TIFIA program was created under sections 1501 through 1503 of the Transportation Equity Act for the 21st Century (TEA21) in 1998. The program was initially created to facilitate the construction of complex, large-scale surface transportation projects of many modes (e.g., highways, public freight, passenger transit, and ports), but especially those wherein the proposed revenue source might be previously untested or potentially uncertain. At the time, these streams included highway tolls and other user charges. Both public and private entities are eligible for TIFIA financing. Though transportation projects of many modes are eligible, as of 2019, about two-thirds of loans had been extended to highway projects.  

TIFIA has proved an attractive financing option for large infrastructure projects for multiple reasons. First, by providing access to upfront financing options, project sponsors can accelerate construction, paying back the loan over time as revenue accrues. Moreover, TIFIA borrowing rates are low and fixed, commensurate with Federal Treasury rates, which are often lower than rates borrowers can secure from private lenders. Currently, TIFIA offers interest rates as low as 4.11 percent. Finally, though only 33 percent of the construction costs of most projects are eligible for TIFIA financing, TIFIA loans can be combined with other federal and local funding sources.  

 As of fiscal year 2022, TIFIA had provided $43 billion in financing to over 100 projects. The Infrastructure Investment and Jobs Act (IIJA) authorized TIFIA for $250 million in contract authority each for fiscal year 2022 through fiscal year 2026.  

TIFIA 49 For Smaller-Scale Projects 

In October 2022, U.S. Transportation Secretary Pete Buttigieg announced a new TIFIA initiative aimed to increase the accessibility of TIFIA financing options to smaller transit and TOD projects. In a press release, Buttigieg stated, “There are countless promising transportation projects with the potential to better connect people to housing, jobs, schools, and more – but that never get off the ground because of a lack of financing.” Buttigieg’s subsequent initiative, TIFIA 49, makes both transit and TOD projects eligible for loans up to 49 percent of total project costs, the highest percentage allowed by law. Eligible transit projects include the construction of and improvements to public transportation systems (see 23 U.S. Code Section 601(a)(12)(E)); eligible TOD projects include the integrated improvement of both transit infrastructure and non-transit land-use wherein project costs are shared among developers and transit agencies (see 49 U.S. Code Chapter 53).  

Subcommittee Members Share Support for TIFIA and TOD 

Attending members of the Transportation, Housing and Urban Development, and Related Agencies Subcommittee shared support for making TIFIA funding more accessible to TOD projects. Schatz opened the hearing, stating that funding TOD is a “no brainer” given shortages of housing coupled with skyrocketing housing costs nationwide. Financing TOD projects, he argued, is a promising method the federal government can leverage to encourage new housing development.  

Though Subcommittee members were aligned on this goal, Hyde-Smith recognized that only a single TOD project to date – the Mount Vernon Library Commons in Washington State – has successfully applied for and acquired TIFIA financing. The focus of the hearing, as stated by Schatz, was thus to identify opportunities for Congress to strengthen the TIFIA program to unlock its benefits to more deserving TOD projects.  

TIFIA Roadblocks for TOD Are Both Administrative and Statutory 

Through a congenial conversation, the hearing’s witnesses identified multiple barriers that project sponsors face when applying for or considering applying for TIFIA funding for their TOD projects. The witnesses generally agreed on several major obstacles.  

First, to be eligible for TIFIA assistance, project sponsors must demonstrate their creditworthiness to ensure that public funds are wielded responsibly. Nagraj stated that, in practice, special purpose entities often form to jointly own and operate a single development. When these new entities apply for TIFIA loans, they possess no credit history, rendering them ineligible for loans. Schatz added that this issue of creditworthiness extends to Native American tribes, which often are too small to be considered “investment-grade.” Adding additional context, Dr. Loh explained that credit requirements are in place to protect the public from defaulting risk. This concern is substantial and warranted for $1 trillion projects, but perhaps less essential for local multi-million-dollar TOD projects. Amending TIFIA credit requirements would require a legislative change.  

Second, as Dr. Farajian articulated, TIFIA eligibility requirements were drafted with billion-dollar projects in mind. As of 2019, all TIFIA-supported projects cost at least $175 million. Smaller prospective borrowers often do not possess the tools, staff, and experience to understand the federal application process. For example, funded projects must comply with the National Environmental Policy Act (NEPA). Many project sponsors who have not previously received federal financing experience a “learning curve” when tackling these complex institutional requirements. All witnesses agreed that the TIFIA application process can be streamlined. They also recommended that the Build America Bureau continue guiding potential sponsors through the application and underwriting processes to ensure success. This final recommendation can continue to be carried out via administrative action.  

Third, TIFIA financing can only be applied to a portion of a TOD project’s construction costs. Though TIFIA loans can be merged with other financing options, combining public and private financing schemes can create challenges for borrowers. For example, as Nagraj stated, each lender must sign an intercreditor agreement that outlines procedures in cases of default or foreclosure. Coordinating these multiple actors can be difficult. Moreover, because the amortization period for TIFIA loans is typically 30 to 35 years, longer than those of most private construction loans, the private loan must be refinanced during the TIFIA-financed loan’s amortization period, creating risks for the borrower due to interest rate uncertainties.  

Subcommittee Expresses Tempered Optimism 

Despite the obstacles the witnesses expressed during the hearing, Dr. Farajian remains optimistic that the TIFIA program will soon reach a wider TOD project base. He reported that the Build America Bureau has received 48 letters of interest from potential sponsors. Of these 48 prospective sponsors, 24 are actively working with a Build America Bureau agent to maneuver the TIFIA application process. Schatz, however, pressed Dr. Farajian on these figures, asking, “How many [of these projects] are close to being consummated?” Dr. Farajian’s response reflected a less rosy reality: “One housing project has a very good chance of closing this Fall.” As the hearing closed, Schatz provided some parting words of wisdom to Dr. Farajian, stating, “If I were you, I’d be a little nervous about supposing what might happen.”  

Despite his warning, Schatz indicated the Subcommittee’s dedication to increasing TIFIA’s accessibility, stating, “If there’s a place for this Committee to nudge the bureaucracy along… we want to do that.” The Senate Appropriations Committee, the Build America Bureau, and private developers all agree that these systemic issues with TIFIA are worth tackling; transit-oriented development remains a promising tool to create more equitable, affordable, and connected communities in the U.S.  

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