Leasing State Highway Right of Way to Sound Transit

Sound Transit is a regional transit agency serving King, Pierce, and Snohomish counties since 1993. It plans, builds, and operates express buses, commuter rail, and light railTransit that runs on fixed rails. Light refers to lighter passenger capacity, not the physical weight of the vehicles.. Roughly half of its funding comes from taxesMotor vehicle excise taxes (car tabs), property taxes, and sales taxes. paid by residents in the Sound Transit taxing district. The agency receives additional funding from federal grants, transit fares, and other sources. Sound Transit is currently building its Link light rail system using portions of state highways that the Washington State Department of Transportation (WSDOT) manages.

Sound Transit is also expanding its bus services on state highways. These projects often include dedicated transit and carpool ramps and lanes that benefit the highway system.

Sound Transit leases highway right of way from WSDOT for its Link light rail system

State and federal laws allow WSDOT to lease unused portions of highway right of way (ROW)The property used for construction, operation, or maintenance of a transportation facility. It includes the space located above, at, or below the highway's established grade line. for non-highway purposes. Highway ROW is also called a highway corridor.

WSDOT and Sound Transit signed a Land Bank Agreement (Agreement) in 2000 that provides a framework for leasing highway ROW to develop light rail. The Agreement creates a ledger to record in-kind transactions between the two agencies. WSDOT leases highway ROW to Sound Transit and the transit agency receives credits for funding highway improvements. Sound Transit then uses those credits to offset the cost of its leases.

Current and future leases will cover approximately 57 miles of state highway

As of 2022, Sound Transit has 20 active leases with WSDOT for light rail projects in state highway ROW. The leases include segments of I-5, I-90, and SR-520. Sound Transit uses these properties primarily to build light rail facilities. The two agencies signed their first lease in 2003 and their most recent lease in May 2020 for the Downtown Redmond Link extension. Sound Transit anticipates leasing additional ROW for Link light rail extensions to Everett, Tacoma, and Issaquah.

Exhibit 1.2: Sound Transit's current and future light rail leases in King, Pierce, and Snohomish counties

Source: JLARC staff analysis of Sound Transit routes and alignments.

Note: The map shows the approximate location of current and planned Link light rail alignments on state highway ROW.

Sound Transit and WSDOT work together to determine whether transit projects are compatible with current and future highway needs

Once Sound Transit identifies a highway corridor for light rail construction, the two agencies complete detailed reviews throughout multiple phases of a project:

• Pre-design: WSDOT's planners work with Sound Transit to determine if the project is compatible with present and future highway needs, including operations, maintenance, and safety.
• Design: Sound Transit hires engineering consultants to study whether the project is compatible with highway needs. The consultants' report must identify any future highway space needs. For example, a future need for additional lanes or a new interchange may affect the footprint that the light rail infrastructure will occupy. WSDOT's engineers must approve the report.
• Construction: WSDOT's inspectors visit the project site to ensure it meets design and compatibility requirements.

WSDOT created a new division to coordinate its work on Sound Transit projects

WSDOT formed the Regional Transit Coordination Division (RTCD) to coordinate activities that involve Sound Transit. RTCD is co-located at Sound Transit’s Seattle headquarters. Sound Transit fully funds all of RTCD's work that relates to its projects. For certain projects, WSDOT also engages resources outside RTCD, such as real estate specialists who work in WSDOT's Northwest Region office. In fiscal year 2022, Sound Transit reimbursed WSDOT for $1.9 million in RTCD labor costs and $1.48 million in non-RTCD labor costs (e.g., regional real estate services).

The Federal Highways Administration must approve project plans and leases

In addition to WSDOT and Sound Transit, the U.S. Department of Transportation's Federal Highways Administration (FHWA) also reviews and approves plans and leases for projects in federally funded highway ROWs. Sound Transit's light rail projects are located largely in federally funded highway ROWs.

Sound Transit has earned $602 million in credits to offset its lease costs by funding projects that benefit highways

Since the inception of the Land Bank Agreement, total credits for projects benefiting the highway system have exceeded total lease costs. To date, Sound Transit has not used cashSound Transit made one cash payment in 2004 for $57,000. It was an administrative error and was not due to insufficient credit in the Land Bank. to pay for its leases.

Sound Transit earns credits for projects that have a benefit to the state's highways. WSDOT awards credits based on the design and construction costs of each project. WSDOT maintains records of actual costs because it manages the design and construction of most of these projects.

Sound Transit's highway improvements include reinforcements to the I-90 floating bridges and new high-occupancy vehicle (HOV) on and off ramps that serve buses as well as carpools. See Section 3 for more on the credit process.

Exhibit 1.3: Sound Transit's highway improvement projects include HOV ramps and bridge reinforcements

Source: JLARC staff analysis of WSDOT data.

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WSDOT reports additional benefits from Sound Transit's light rail projects

In addition to funding highway improvements throughout the Puget Sound region, WSDOT believes Sound Transit offers other benefits to the state through its light rail projects. WSDOT reports it has:

• Less state land to maintain.
• Lower liability because Sound Transit assumes liability for injuries sustained in the leased areas.
• New noise walls along the highway.
• Less need for adding highway lanes because light rail can transport more people than the extra lanes can accommodate.

Sound Transit does not receive credits in exchange for these benefits.

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WSDOT leases highway right of way (ROW) to Sound Transit at 100% of market value

External appraisers use market data to determine the value of highway corridors. The Washington State Department of Transportation (WSDOT) sets its lease rates based on those values. Both the Washington Administrative Code (WAC 468-30-110) and the Land Bank Agreement (Agreement) indicate that lease rates must reflect market valueThe amount of money a purchaser is willing to pay a seller for a property. Both parties must agree to the price and neither is obligated to purchase or sell..

Additionally, the 2019 and 2021 state transportation budgets contained provisos requiring WSDOT to charge Sound Transit 100% of market value. The proviso was not included in the 2022 supplemental transportation budget.

Sound Transit's appraisers use the “across the fence” methodology to value highway corridors and calculate market lease rates

Since there is little or no market data available about corridor sales, the external appraisers estimate the corridor’s value based on comparable sales on abutting land. This approach, known as the across the fence (ATF) method, is the most widely accepted way to value highway corridors.

Valuing the corridor: Under the ATF method, appraisers divide the corridor into segments based on the zoning and use of the land abutting the corridor (i.e., the land "across the fence"). The appraisers research market sales of land comparable to the abutting properties. Using those comparable sales, they calculate the average cost per square foot for each segment. Then they add the values of each segment together to determine the corridor value.

Exhibit 2.1: Appraisers value highway corridors based on comparable sales of properties with similar zoning and land use

Source: JLARC staff analysis.

The Land Bank Agreement requires Sound Transit to pay for the initial lease term in one lump sum. For most long-term leases, the initial term is 20 years.

Calculating lease rates: The appraisers apply a lease capitalization rateThe rate of return for a rental property. Rent in year one of a lease is the product of the lease capitalization rate and the appraised fair market value. to the corridor value to determine the market rental value. The corridor value grows over time because of predicted increases in property values. The appraisers then discount annual lease payments over the 20-year term to present valueThe current value of a future cash flow given a specified interest rate..

WSDOT staff must review and approve each appraisal report before the lease rates become final.

JLARC staff's independent appraisers confirmed that WSDOT's lease rates are 100% of market value and meet industry standards

JLARC staff hired independent appraisers with specialized experience in valuing highway corridors to analyze WSDOT's lease rates. The appraisers reviewed five ROW lease agreementsThese covered 2016-2021 and both short-term and long-term leases. and appraisal reports between WSDOT and Sound Transit. They confirmed that the corridors were appraised at 100% of market value and that the methods used to calculate the lump sum lease payments were reasonable and supported by market data.

JLARC staff's appraisers also confirmed that the ATF method used to calculate WSDOT's lease rates was consistent with state law and complied with the Uniform Appraisal Standards.

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As described in Section 2, the Washington State Department of Transportation (WSDOT) leases highway right of way (ROW) to Sound Transit at fair market value for the construction of its Link light rail. WSDOT uses external appraisals to determine the value of each lease. Currently, lease rates are not discounted to account for the federal share of highway acquisition and construction costs paid for by the federal government, typically 80%-90%.

JLARC staff surveyed five states with light rail in highway ROW

To compare Washington's leasing process to other states, JLARC staff looked for states with:

• Public transit built in highway ROW, preferably light rail.
• Geographic diversity to ensure the comparisons reflect different regional priorities.

JLARC staff used the federal National Transit Database to identify public transit systems in urbanized areas, with a focus on light rail along the interstate highway system. Staff used transit maps and satellite images to determine which of these systems operated within highway ROW. JLARC staff found five states that met these criteria.

Exhibit 3.1: Five other states have rail transit in highway ROW

Source: JLARC staff interviews with other states' departments of transportation (DOTs).

Four of the five states do not charge public transit agencies to use highway ROW

Federal lawSee 23 USC Section 142(f) and 23 CFR Section 710.403(e)(5). allows a state DOT to lease federally funded highway ROW to a public transit authority free of charge, as long as the use does not interfere with highway operations. Four out of the five comparison states provide ROW free of charge to public transit agencies for the construction and operation of light rail.

JLARC staff explored whether other states appraise highway ROW in the same manner as Washington. Since the four comparison states do not charge public transit agencies, they do not conduct appraisals. However, staff from all four states indicated that they would use the across the fence (ATF) valuation method if they had to appraise their highway corridors. As described in Section 2, the appraisers hired by Sound Transit use the ATF method.

Oregon provides highway ROW to Portland's regional transit agency at a discounted rate

The Oregon Department of Transportation (ODOT) allows Portland's regional transit agency (TriMet) to use highway ROW for its light rail system. Similar to Washington, Oregon appraises the highway corridor using the ATF method to determine market value. However, ODOT does not charge TriMet for the federal share. TriMet typically pays 8% of the appraised market value, though the exact percentage depends on the specific highway segment. Like Sound Transit, TriMet can receive credits for funding highway improvements (e.g., installing new barriers). These credits are applied to the state share of the appraised market value.

Exhibit 3.2: Washington and Oregon use similar practices, but Oregon waives the federal share of costs

Source: JLARC staff analysis of other states' leasing practices.

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The Land Bank Agreement provides a framework for leasing highway right of way (ROW) and funding highway improvements

The Land Bank Agreement (Agreement) provides a framework for the Washington State Department of Transportation (WSDOT) to lease property to Sound Transit in exchange for its funding of highway improvements. WSDOT and Sound Transit signed the initial Agreement in 2000 and updated it in 2003. Sound Transit has leased property to build and operate light railTransit that runs on fixed rails. Light refers to lighter passenger capacity, not the physical weight of the vehicles. throughout the central Puget Sound region. It has earned credits to offset its lease costs by funding multiple projects.

The Agreement allows the following lease terms:

• Up to 40-year leases.
• Rates based on the market valueThe amount of money a purchaser is willing to pay a seller for property, goods, or services. Both parties must agree and are not obligated to purchase or sell. determined by an appraiser, with the first 20 years paid in advance.
• Adjustments to lease rates after the initial 20-year term. WSDOT can adjust the rent every five years to account for changes in market value.

The Agreement also covers how Sound Transit earns credits for benefits to the highway system. Before a project becomes eligible for credit, it must be added to one of three exhibit lists that are part of the Land Bank Agreement:

• Exhibit A-1: Projects that are “completed, under construction or have a final scope of design agreed to by WSDOT and Sound Transit” and “are deemed, in whole or in part, to be a highway purpose.”
• Exhibit A-2: Projects that “appear to be, in whole or in part, a highway improvement project but which will need further evaluation once a final design is agreed to by WSDOT and Sound Transit.”
• Exhibit A-3: Projects that Sound Transit contributed funding to “but is not necessarily the lead, contractor, final primary user or owner.”

Sound Transit may request credits for project expenditures on the A-1 and A-3 lists. Projects on the A-2 list must be elevated to the A-1 list before they become credit eligible. See Section 1 for more information on credits earned to date.

WSDOT's engineers determine whether a project has a highway benefit. An internal WSDOT committee makes the final determination on credits and costs.

WSDOT awards credits to Sound Transit for projects that benefit highways in one of two ways:

• Increased mobility: measured by the number of vehicles travelling through the highway over a specified time period. For example, Sound Transit may pay for new high-occupancy vehicle (HOV)/transit lanes that increase vehicle capacity on state highways.
• Improved safety: measured by the likelihood of fatalities or serious injuries. For example, Sound Transit may pay for a ramp that links the inner HOV/transit lane to an overpass. This can reduce accidents because buses do not need to weave across lanes of traffic to enter or exit the highway.

WSDOT's Land Bank Oversight Committee decides whether a project is eligible for credits

WSDOT formed the Land Bank Oversight Committee ("the Committee") in 2016 to develop criteria for whether a project is eligible for Land Bank credit. The Committee meets quarterly and leadership from multiple WSDOT divisions serve on it. The exhibit below outlines how WSDOT determines whether a project provides a highway benefit:

Exhibit 4.1: WSDOT Committee reviews credit requests

Source: JLARC staff analysis of WSDOT procedures.

If the Committee decides the project has a highway benefit and is eligible for credits, Sound Transit must submit a list of actual costs after the design and construction are complete. WSDOT staff review the submitted costs to ensure they all relate to highway benefits. In some cases a project may involve elements that only serve a transit purpose and those costs are not eligible for credits.

Many of the agencies' current practices are not reflected in the Land Bank Agreement

WSDOT and Sound Transit have developed new lease types, processes, and responsibilities since the last update of the Land Bank Agreement in 2003. The existing Agreement no longer reflects current practice.

Some examples of changes not reflected in the Agreement are:

• Using temporary construction leases (TCLs) for the construction period of every light rail project. TCLs were first used under a separate inter-agency agreement on the I-90 center roadway. While TCLs are now standard practice, the Agreement does not include this lease type or the administrative processes necessary to implement it.

• Awarding credits based on actual expenditures after projects are built rather than estimated costs prior to completion, as is required by the State Administrative & Accounting Manual.
• Recording the outstanding credit balance as a liability in the statewide accounting system. Prior to 2015, the credit balance was not recorded as a liability.
• Using the Land Bank Oversight Committee to review highway improvement projects and approve credit requests.

Soon after the Committee formed, the members drafted a series of briefing papers that documented practices to implement the Agreement. However, the Committee's practices have continued to evolve since then without formal documentation.

Some key actions that are not yet documented include:

• Whether the Committee must vote to issue credits when a lease is amended.
• What criteria WSDOT should use to determine if a project is eligible for the A-2 exhibit list.
• Whether the Committee must vote to determine if a project is eligible for the A-2 exhibit list.

WSDOT and Sound Transit lack formalized interagency coordination for the Land Bank Agreement

Staff from WSDOT and Sound Transit work together on the Land Bank projects, but there is no formal interagency process or structure to administer the Agreement. Sound Transit does not participate in Land Bank Oversight Committee meetings, and it does not have its own internal committees or procedures to perform similar functions. Sound Transit reports that it is developing procedures to identify projects that may be eligible for credits. However, there are currently no plans to create formal interagency administrative processes or structures. Formalizing interagency coordination could improve administrative efficiency and ensure that valuable knowledge is retained when staff leave or change roles.

Legislative Auditor recommendation

WSDOT and Sound Transit should strengthen internal oversight of the Land Bank Agreement and develop written procedures to jointly administer the Agreement. As the agencies negotiate an update to the Agreement, they may consider:

• Establishing formal procedures for interagency collaboration. These could include procedures for jointly preparing the Land Bank forecast and including Sound Transit in some Land Bank Oversight Committee ("the Committee") discussions.
• Incorporating new procedures developed since the last update in the new Agreement (e.g., using temporary construction leases, awarding credits based on actual expenditures, and describing the role of the Committee).
• Documenting when the Committee must vote on specific actions.
• Establishing and documenting criteria for highway improvement projects that are eligible for credit.

WSDOT and Sound Transit concur with this recommendation.

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Sound Transit offsets its highway right of way (ROW) lease costs using credits earned from funding improvements to the state's highway system. The terms of the Land Bank Agreement (Agreement) prohibit a negative balance in the Land Bank ledger.

For the first time, Sound Transit is forecasting a negative balance from 2024 through 2026. This means that Sound Transit may have to pay cash to cover the cost of its leases. A proposed new Land Bank Agreement may reduce Sound Transit's costs in the future.

Sound Transit's most recent forecast shows a negative Land Bank balance from 2024 to 2026

Sound Transit conducts annual forecasts of the Land Bank balance to determine whether its credits will cover the costs of its leases with the Washington State Department of Transportation (WSDOT). Due to rising property values and construction delays, Sound Transit's 2022 forecast shows that its lease costs will exceed its credit balance from 2024 to 2026. The forecast estimates a negative balance of $163 million from 2024 to 2026.

Sound Transit expects a return to a positive balance in 2027 due to credits received from the bus rapid transit (BRT) projects on I-405 and State Route (SR) 522. Its 2022 forecast assumes that it will earn $753 million in new credits from these projects and other highway improvements connected to the BRT facilities. See Appendix A for more on the forecast.

Exhibit 5.1: Sound Transit's lease costs are forecast to exceed available credits from 2024 to 2026, likely resulting in cash payments to WSDOT

Source: JLARC staff analysis of forecasted Land Bank balance (credits earned minus lease costs).

A proposed new Land Bank Agreement would reduce Sound Transit's future costs with longer lease terms and discounted lease rates

Sound Transit and WSDOT are negotiating a proposed new Land Bank Agreement that would change lease terms and reduce leasing costs. The new Agreement is based on the terms proposed in a 2015 update that was never adopted. The draft language:

• Extends the initial lease period from 20 years to 50 years. Sound Transit pays in advance for the initial 50-year term.
• Adds the option to extend for another 25 years, with a single reappraisal at the start of the second term and no reappraisals beyond that.
• Waives the federal shareThe percentage of highway acquisition and construction costs paid for by the federal government, typically 80%-90%. of the rental value for new lease agreements. It does not waive the federal share on existing leases.
• Updates the lease terms with procedures for utility access, infrastructure maintenance, and hazardous substance removal.

By 2060, the proposed new Land Bank Agreement is forecast to reduce Sound Transit's ROW costs by 57%

JLARC staff updated Sound Transit's forecast model to reflect the terms in the proposed new Land Bank Agreement. By comparing the results of the two forecasts, JLARC staff estimated the impact of implementing the new agreement on Sound Transit's highway ROW costs.

The proposed new Agreement would increase Sound Transit's short-term costs because it would owe lump sum payments for longer lease terms. However, the long-term savings from discounted lease rates more than offset those costs. By 2060, Sound Transit's aggregate highway ROW costs would decline from $1.4 billion to $606 million, a 57% reduction.

Exhibit 5.2: Proposed new Land Bank Agreement reduces Sound Transit's long-term ROW costs by 57% from 2022 to 2060

Source: JLARC staff analysis of Sound Transit forecast model.

Sound Transit is forecast to save $569 million in cash under the proposed new Agreement

In addition to reducing overall lease costs, the proposed new Agreement is expected to reduce the amount Sound Transit may need to pay in cash.

• Under the current Land Bank Agreement, Sound Transit is expected to owe $569 million from 2049 to 2060, after netting out credits from lease costs.
• Under the proposed new Agreement, the Land Bank is forecast to maintain a positive balance from 2049 to 2060. This could save Sound Transit the $569 million in cash payments forecast under the current Agreement.

The impact of the new Agreement will depend on the final terms and other factors

Several factors could impact the amount Sound Transit saves from implementing the proposed changes to the Land Bank Agreement.

• Sound Transit may earn more credits for future highway improvement projects. This would reduce the amount of cash it may have to pay in future years. The current forecast does not project any credits beyond 2027.
• Sound Transit may save more on future leases for planned light rail projects. Several planned projects are not included in the forecasts. If Sound Transit leases additional ROW for these projects, it would do so at lower lease rates that are discounted by the federal share of costs.
• The final terms of the new Land Bank Agreement are unknown and could significantly impact potential savings. For example, it is unclear how the new Agreement will define what is an existing versus prospective lease agreement. Currently, there are six leases valued at $124 million for projects currently under construction.

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