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Re: All Aboard Florida

Executive Summary: Fortress Investment Group, a Manhattan-based Hedge Fund and Private Equity Firm, currently awaits a decision on a $632 million federal loan to build a commuter line — named All Aboard Florida — connecting Miami to Orlando.' The project is large and complex, and has caused considerable controversy. While many Floridians fear increased traffic, noise, and safety concerns as a result of All Aboard Florida, thus harming their property values and quality of life, others, including many longtime rail industry observers, suspect that Fortress' commuter rail is not only infeasible, but also that Fortress' well-publicized plans of a passenger rail are a ruse to lure a large federal loan that will buttress private freight, shipping and real estate businesses, all of them owned by Fortress. Which begs the question: what really is driving Fortress' All Aboard Florida project?

Background: In 2007, Fortress Investment Group, a Manhattan-based Private Equity Firm, purchased Florida East Coast Industries (FECI), which operates the Class II shipping and freight Florida East Coast Railway running halfway up the east coast of Florida, from Miami at the state's southern tip up to Orlando. Five years later in 2012, FECI announced plans to build a private passenger rail that it named "All Aboard Florida," designed to connect commuters from Miami up to Orlando in only three hours, compared to the average driving time of 4 hours!

Federal Funding: FECI's move into public commuter rail probably made it eligible to receive more federal loan funding than it would have if it had stuck to private freight —federal lending to public commuter rail projects averaged $223 million over four loans since 2002. By contrast, loans to private freight projects have been far smaller, numbering anywhere from the tens of thousands of dollars to the very largest one valued at $64 million in 2012 (See Figure 1 for details). 3

1

http://biscavnetimes.com/index.php?ootion=com content&view=article&id=1579:life-in-the-railworld&catid=46:features 2 http://www.metroiacksonville.com/article/2012-mar-feci-bringing-private-passenger-rail-to-florida-bv-2014 3 http://www.seneca-11c.com/funding-tools/the-federal-rrif-loan-program


Borrower Mode

Organization

Year

Amt. ($ millions)

Alameda Corridor Transportation Authority

Public

Freight

2012

$83.7

Kansas City Southern Railway Company

Private

Freight

2012

$56.6

NW Pacific Railroad C_omparry/t4orth Coast RR Authority

PPP

Freight

2011

$3.2

Amtrak

Public

Passenger

2011

5562_9

Ceti Railroad

Private

Freight

2011

50.056

Denver Union Station Project Authority

Public

Passenger

2010

$155.0

Great Lakes Central Railroad

Private

Freight

2010

$17.0

Georgia & Florida Railways

Private

Freight

2009

$8_1

Permian Basin Railways, Inc

Private

Freight

2009

$64.4

Iowa Interstate Railroad

Private

Freight

2008

$31.0

Nashville and Eastern Railroad

Private

Freight

2007

$4.0

Nashville and Eastern Railroad

Private

Freight

2007

$0.6

Columbia Basin Railroad

Private

Freight

2007

$3.0

Great Western Railway

Private

Freight

2007

$4.0

Virginia Railway Express

Public

Passenger

2007

$72.5

R.J. Corman Railway

Private

Freight

2007

$11.8

R.J. Corman Railway

Private

Freight

2007

$47.1

Dakota, Minnesota & Eastern Railroad

Private

Freight

2007

$48.0

Iowa Northern Railroad

Private

Freight

2006

$25.5

Wheeling & Lake Erie Railway

Private

Freight

2006

$14.0 $9.35

Iowa Interstate Railroad

Private

Freight

2006

Great Smoky Mountains Railroad

Private

Freight

2005

$7.5

Riverport Railroad

Private

Freight

2005

$5.5

The Montreal, Maine & Atlantic Railway

Private

Freight

2005

$34.0

Tex-Mex Railroad

Private

Freight

2005

$50.0

Iowa Interstate Railroad

Private

Freight

2005

$32.7

Stillwater Central Railroad

Private

Freight

2004

$4.6

Wheeling 8 Lake Erie Railway

Private

Freight

2004

$25.0

Arkansas II Missouri Railroad

Private

Freight

2003

$11.0

Nashville and Western Railroad

Private

Freight

2003

$2.3

Dakota, Minnesota 8 Eastern Railroad

Private

Freight

2003

$233

Amtrak

Public

Pass e nger

2002

$100_0

Mount Hood Railroad

Private

Freight

2002

$2.1

Figure 1: RRIF Loans to Public & Private Rail Projects Since 2002 In 2009, President Obama's State of the Union address announced a plan to provide 80% of Americans access to high-speed rail (HSR) within 25 years. American Recovery and Reinvestment Act of 2010 followed, allocating $8 billion additional federal funds through 2016 to the cause. Loans from RRIF come with very attractive terms: 35 years repayment periods, and rates as low as those borrowed to the government today, or roughly 1%. In 2013, one year after announcing the plans for All Aboard Florida and claiming the project would be funded entirely privately, FECI changed tune and applied for an RRIF of $632 million. 4

Costs to Local Citizens:

4

http://nextcitv.org/daily/entry/numbers-emerge-on-mostly-private-passenger-rail-in-florida


A grassroots website "Florida NOT All Aboard" has been set up to stop FECI's project.' On a daily basis, facebook members post articles critical and questioning of FECI's plans and deeper intentions to a "Florida NOT All Aboard" facebook page. 6 FECI plans to run 32 trips a day between Miami and Orlando. For every highway railway crossing along that route — 314 crossings lie along the 200 mile stretch from Miami to Cocoa' — a passing train is legally required to sound its horn four times. To avoid noise pollution, local municipalities can convert their crossings into "quiet zones" — which requires warning lights, gates, and raised medians to be installed — the presence of which enables a train to pass without sounding its horn. Each quiet zone costs anywhere from $100,000-600,000 to install and $4,000-10,000 per year to maintain; in total, quiet zone installations have been projected to add up to $47 million. 8 In September 2013, after increasing disquiet over local municipalities having to raise funds for quiet zones, an FECI Executive Vice President made a verbal promise that FECI would pay for quiet zone installations.' For drivers, All Aboard will add an extra crossing and traffic delay every hour, estimated by FECI to last 52 seconds each time. 1° For boaters making crossings in Fort Lauderdale, Jupiter and Stuart, All Aboard's 32 daily roundtrips should add noticeably to the number of times each day that drawbridges are lowered for passing trains — they are currently lowered 10-15 times per day, with boaters estimating each raising and lowering of the bridge to take at least 12 minutes. il

Further Questions: Feasibility of the Commuter Rail and Fortress' Bigger-Picture Strategy Does All Aboard Florida as a commuter project make sense? What might Fortress' real motives in this situation be? The following questions are worth considering: •

Passenger rails have always struggled to survive and have generally lost large amounts of money. Amtrak was created by the U.S. federal government in 1971 purely to save the passenger rail industry from collapse. 12 Can a commuter rail between Miami and Orlando generate enough income?

What is the demand for rail travel between Miami and Florida? Are FECI vice president Jose Gonzalez's predictions about this demand credible? Gonzalez: "About 50 million people actually cross [the MiamiOrlando] corridor today. And 95 percent of them are doing it by car." Orlando, he said, is the most-

5

6 7 8

http://www.floridanotallaboard.com/ and httos://www.facebook.com/floridanotallaboard?filter=2

https://www.facebook.com/floridanotallaboard?ref=stream&hc location=stream httos://www.enotrans.oraeno-brief/all-aboard-florida-miami-orlando-oassenger-rail

http://www.tcpalm.cominews/2014/mar/17/all-aboard-florida-report-raises-more-questions/ http://www.mvpalmbeachpost.cominews/businessiall-aboard-florida-to-pay-for-safety-improvements-/nZ2in/ to http://articles.sun-sentinel.com/2012-12-10/newsifl-fec-all-aboard-20121206 1 train-horns-second-track-crossings

9

http://articles.sun-sentinel.com/2014-02-07/newsifl-railroad-drawbridge-boats-20140209 1 freight-trains-more-trainspassenger 12

http://biscavnetimes.com/index.pho?option=com content&view=article&id=1579:life-in-the-railworld&catid=46:features


visited city in the country, with 52 million annual visitors. Miami-Dade is the seventh most populous 13 county in the country. Those numbers, he concluded, show the huge ridership potential. •

Can All Aboard Florida really reach Orlando in three hours from Miami? Can FECI's current tracks, not to mention the often quite curvy path and congested areas it traverses (Dade, Broward, Palm Beach and Martin counties), sustain speeds fast enough to get a train between these two cities in such a short amount of time?

Upgrading tracks and establishing a commuter rail would require a substantial investment in tracks, train cars, and related asset investments that would presumably require significant lead time. Are claims true that FECI has not made binding orders to purchase such equipment already?

Is it possible that Fortress could legally use loan money from the FRA to upgrade its freight tracks, while never pushing the All Aboard Florida commuter rail all the way through to its conclusion?

Why might there be such a discrepancy between how optimistically All Aboard Florida has been scheduled in terms of construction, and how slow it has been to materialize? The venture was announced in early 2012. Trains would begin running in 2014. Yet construction has yet begin on the new tracks. Nonetheless, while FECI subsidiary Florida East Coast Railway (FEC) ordered 24 new freight, as opposed to passenger, locomotives in January 2014 — no word has been heard of All Aboard Florida ordering passenger locomotives. 14

Is there truth to the Florida Times-Union's assertion about All Aboard Florida and FECI, that "Their political contributions have reached every corner of the state"? If so, does this raise concerns about All Aboard Florida's progress over the last several years? For example, Florida Governor Rick Scott's announcement of a $215 million package that will assist the construction of a rail station at Orlando International Airport, laying 40 miles of new tracks to link All Aboard Florida from Orlando International Airport to existing tracks in Cocoa. 13' 16

Several developments around Fortress subsidiaries and freight shipping are worth considering: o The Panama Canal is being expanded so that by 2015, it will double its current capacity (opening Florida up even more to shipping from Asia and Europe). o Miami's international shipping port is in the process of expanding as well.

13

http://biscavnetimes.com/index.php?option=com content&view=article&id=1579:life-in-the-railworld&catid=46:features 14

http://www.railwav-technologv.com/news/newsge-transportation-to-deliver-24-locomotives-for-florida-east-coastrailwav-4169576

16

http://www.railwavage.com/index.pho/passenger/high-performance/florida-funds-to-aid-fec-airport-access.html http://www.allaboardflorida.com/faas


o

Another holding of Fortress' includes Seacastle Inc., a holding company with investments in leasing container ships and chassis — the base frames or skeletons upon which ships are built. 17

o

According to a Florida business publication, South Florida Logistics Services, a subsidiary of FECI, is actively turning itself into a profitable importing-exporting logistics center located just beside Miami International Airport, and its representatives are already working in Latin America to court exporters and convince them to move their goods through Florida ports. 18

o

FECI has considerable real estate holdings throughout southern Florida, and has increasingly been making efforts to develop land around projected and current All Aboard train stations.

Might All Aboard Florida be part of a broader plan by Fortress to expand its Florida freight and real estate businesses? •

If FECI were to receive a large federal subsidy to upgrade its tracks and potentially build a commuter rail to Orlando, what is the likelihood that another buyer could come along — and how soon — taking FECI's business off of Fortress' hands. If this were to occur, what kind of profits might Fortress ultimately earn from the federally-funded All Aboard Florida project as a result? Might Florida itself be the buyer?

Does the skepticism of former senior auditor at the Chicago, Milwaukee, St. Paul & Pacific Railroad, Gilbert B. Norman, hold true? Norman blogs about the American rail industry. 19 o

All Aboard Florida generates public visibility, Norman writes, "so that when the private equity concern that owns FEC approaches a public agency, such as the state, to buy the [corridor], all this public excitement about passenger trains will translate to voters saying, "buy it"... All p oy. ,,zo Aboard Florida is ai

o

Before All Aboard Florida is developed, Norman predicts Fortress will approach the state about buying the corridor. He believes the state wants it in order to allow other freight railways to serve South Florida's ports, which are currently only served by FEC. That would create competitive pricing and attract shippers, benefitting Florida and Fortress' shipping subisidiaries.

o

Just as important, Norman says, the state would want to prevent CSX or Norfolk Southern, competitors of FECI who run tracks up and down Florida's center (whereas FECI runs the eastern coast's tracks), from buying FECI's corridor. Those railroads collectively serve every major port along the East Coast north of Florida, and with FECI's tracks, would have no incentive to provide good service or competitive pricing at Florida ports —thus threatening the huge investments the state recently made at PortMiami and Port Everglades.

17 18

http://www.seacastleinc.com/ http://www.floridatrend.com/article/16022/feci-old-assets-new-organization.

19 20

http://www.ridingmytrain.blogspot.com http://biscaynetimes.com/index.php?option=com content&view=article&id=1579:life-in-the-rail-

world&catid=46:features


The All Aboard Florida scheme - part 2