Magazine | January 26, 2015, Issue

On the Right Track

(All Aboard Florida)
Private passenger rail returns to Florida

Miami, like many cities in America, was created by a railroad. Standard Oil founder Henry Flagler cobbled together several existing railroads to make the Florida East Coast (FEC) Railway in the late 19th century, and then he drove the line from Daytona Beach to the city that would eventually become Miami. Not content with reaching the bottom of the mainland, Flagler continued the line, which became known as the Overseas Railway, to Key West, nearly reaching the southernmost tip of the contiguous United States. For many years, rail was the travel mode of choice for vacationers and migrants making their way to what was then a fast-growing paradise.

Today, of course, South Florida is a very different place. Private passenger rail declined throughout the industrialized world after World War II, but the United States has had a particularly difficult time transitioning from being a market-driven rail system to being one run by politicians. The great railroads of the 19th and early 20th centuries practically invented American capitalism, but they struggled to survive the rise of the automobile. America’s suburban zoning patterns make viable mass transit difficult, and agencies such as Amtrak and their regulators have shown a unique ability to drive up costs while driving down the quality of service, reducing what demand still exists. South Florida is now a largely car-oriented region, with Amtrak trains arriving in Miami, unreliably, at a station many miles from downtown, far from the Florida East Coast terminal, around which the city grew.

But nearly half a century after the Florida East Coast Railway stopped carrying passengers, its owners think the business might once again be profitable. The storied FEC shocked the world of railroading when its parent company announced in 2012 that it intended to start a private passenger-rail service between Miami and Orlando, with long-term designs on Tampa and Jacksonville.

With vanishingly few government favors, All Aboard Florida, as the project is known, will test whether private passenger rail can return to the United States — in Florida but also in Texas, California, and perhaps one day the Northeast Corridor — mirroring the trend toward privatization in Europe and Japan. If successful, it will also make Miami a leader in conservative urbanism. The city already has fairly laissez-faire zoning policies and a thoroughly Republican political establishment. Add to this, in a few years, a privately run intercity passenger-rail service, heir to a company with a daring capitalist legacy, with a station in the heart of the city and ambitions for development that can be likened only to the New York Central Railroad’s Grand Central Terminal in Manhattan.

The modern Florida East Coast Railway was born in the 1960s, amid commercial and labor turmoil. Emerging from a bankruptcy that started during the Great Depression, the railroad reinvented itself in the 1960s as a nimble and tightly run freight carrier. Alfred I. duPont’s philanthropic trust, led by archconservative Ed Ball, bought the FEC out of bankruptcy and endured a bruising, sometimes violent 14-year strike that began in 1963. Ball managed to impose efficiencies on intransigent unions — primarily work-rule reforms such as paring crews down to just two people — that would eventually become standard throughout the industry. The railroad gained a reputation for effectiveness and pioneered a number of 20th-century freight-rail innovations.

We can now put, along with Henry Flagler and Ed Ball, the name Wesley Edens on the list of venturesome executives at the Florida East Coast. Co-founder of Fortress Investment Group, Edens is the driving force behind the railroad’s return to passenger service, according to Fred Frailey, who profiled the railroad in the January 2015 issue of Trains magazine.

“Nobody in the railroad business would even think of doing this,” Frailey tells National Review. “American [freight] railroads are too timid to bet against the conventional wisdom on passenger rail. And the conventional wisdom is that no matter how hard you try, it won’t work.”

But Edens didn’t come from a rail background; he came from a $66 billion investment-management firm. And given the railway’s invaluable right-of-way through the heart of South Florida, the growing congestion on Florida’s highways, downtown Miami’s rising stature, and the FEC’s reputation for good management, Edens figured (and seasoned rail administrators apparently confirmed) that private passenger rail could be financially viable.

#page#Fortress Investment Group took control of Florida East Coast Industries in 2007, when the railroad was riding high with the rest of the state at the height of what turned out to be a tremendous real-estate-fueled bubble. Florida East Coast’s finances declined precipitately as its rock-hauling business dried up during the recession, when Florida road and home builders stopped construction. All Aboard Florida, Frailey speculates, was Edens’s way of trying to make good on his investment.

Wesley Edens doesn’t have the hard-right tack of Ed Ball, and All Aboard Florida is a commercial rather than an ideological enterprise, but it has attracted a more conservative cast than most rail projects. Among FEC’s executives are Husein Cumber, a George W. Bush campaign bundler and Department of Transportation official, and Rusty Roberts, a former Republican staffer for Representatives Ileana Ros-Lehtinen and John Mica.

All Aboard Florida has also won over the people who killed an earlier government-led Florida rail project: Governor Rick Scott and Robert Poole, director of transportation policy at the libertarian Reason Foundation. In 2011, Scott rejected $2.4 billion in federal funding for a high-speed rail line from Tampa to Orlando, with South Florida targeted for a later phase. The plan would have required $280 million from the state, but Scott, backed by a Reason Foundation study, claimed that Florida would probably be liable for $1 billion in cost overruns.

All Aboard Florida is about as close to unsubsidized as a project of this sort can be. Edens’s original plan was to seek a $1.6 billion low-interest loan from the federal government, but the railroad, sensing the government’s reluctance, has changed course and now intends to sell $1.75 billion in private bonds to finance the construction of the line to Orlando.

To be sure, All Aboard Florida has not forgone all government favors. The private-activity bonds that the FEC is issuing to build the line from South Florida to Orlando are tax-exempt, of the sort that airlines use to finance terminal-expansion projects. (On the other hand, the $405 million in debt sold in June for the first phase of the project did not include any tax breaks or benefit from government incentives.) The company is also getting a break on its Orlando terminal, with Governor Scott spending $214 million on a rail station at the Orlando International Airport to be used by a number of services, including All Aboard Florida’s. And South Florida politicians are eager to move the Tri-Rail regional commuter service from the current inland route to FEC tracks, which run through areas that are more densely populated. But relative to government-led road and rail projects, All Aboard Florida is remarkably unaided by the government, with billions staked by private investors.

The project has a few natural advantages, chief among them its right-of-way, which cuts through the heart of South Florida’s urbanized area. This would be impossible to assemble at any reasonable cost today.

The railroad’s operating style — fast and on time — also makes it better suited to passenger traffic than are other lumbering freight carriers. The standard speed on the FEC is 60 miles per hour, a fact that did not go unnoticed by a pair of face-tattooed, freight-hopping, crust-punk hobos I met last year on the train in New York. Their faces lit up when I asked whether they’d ever hopped the trains of the Florida East Coast: They declared it the fastest freight railroad they’d ever ridden.

All Aboard Florida will also emulate the real-estate-development strategy of America’s old private railroads and those in East Asia today, as new office towers, retail shops, hotels, and housing spring up along the line. The plan is for the passenger service to be operationally profitable on its own, says P. Michael Reininger at All Aboard Florida, but real estate should also drive profits. Much like Grand Central Terminal in Manhattan and the hotels and office towers that the New York Central Railroad built above its tracks, All Aboard Florida will develop a number of buildings on top of and around the rails at its Miami Central downtown terminal, with smaller projects in the other cities served.

In much of America, mass transit is hobbled by tight zoning codes that restrict the potential pool of customers for travel within and between urban cores. But in Miami, planners have long been eager to allow growth in the core — not coincidentally, around the new rail terminal — and a number of builders have already hitched their wagons to the private passenger service, planning large projects nearby.

Why Miami is so pro-development is tough to explain, but the city’s conservative Cuban elite probably has something to do with it. South Florida’s Latino conservatives differ from the mainstream American Right in their support for immigration and their liberal views on social issues, but they share an interest in limited government and free markets. Cuban émigrés and their offspring dominate the construction industry, and the Latin Builders Association is a powerful force in local politics.

#page# “I’m not a sociologist,” says Xavier Suárez, Miami’s first Cuban-born mayor. “But you can read the books on it. A lot of them attribute [Cuban-American conservatism] to a very enterprising character and history and tradition for Cubans, and maybe [Cuba’s] nearness to the U.S.”

The loose restrictions on supply have met with an explosion of demand, as Miami has rebounded from its old role as a violent way station for cocaine traffickers to become the de facto capital of Latin America. The elite from Argentina, Brazil, and Russia fund frothy real-estate ventures, building apartments in Miami that are often rented or sold to Millennials and others following the nationwide movement toward urban living and a preference for hip inner-city neighborhoods.

Miami isn’t the only city along the rail route that’s booming. Florida has recently edged past New York to become the third-most-populous state in the union, and All Aboard Florida is banking on the revival of urban living in a state that has almost completely suburbanized — a common urbanist talking point, but one that’s finally being echoed by investors with billions in backing.

“Absent what we’re doing, [Floridians] are entirely dependent on a failing infrastructure base in the road system,” says Reininger. “And the macro trend is for people to want to move back into the urban centers of our existing cities.”

Still, the challenges facing All Aboard Florida are formidable. Large infrastructure projects, public and private, are often subject to cost overruns. The estimated capital cost of All Aboard Florida is $2.5 billion (including $1.5 billion for the tracks and related infrastructure, and another billion for things such as rolling stock and stations) — even aside from any real-estate development.

But if successful, the project could usher in a new wave of private investment in rail in the United States. An entity linked to the Central Japan Railway Company is planning a high-speed rail line, called the Texas Central Railway, that will run between Houston and Dallas–Fort Worth. That project has much higher hurdles to jump — it will have to be built from scratch — but the success of All Aboard Florida would aid the Texas Central in attracting investors. (It also helps that Houston has no zoning code, offering opportunities for the railroad to make money through real estate and a fast-growing pool of potential riders.)

The California High Speed Rail Authority similarly intends to attract private capital to build and operate its line, but it has shut down attempts by at least one private operator to straighten out the route between Los Angeles and San Francisco. Instead, the Authority opted for a circuitous tour of California that includes, among other things, a detour through the Mojave Desert.

All Aboard Florida, by contrast, will have only four stops: Miami, West Palm Beach, Fort Lauderdale, and Orlando International Airport. “Because it was designed by businesspeople and not by politicians, it doesn’t have stops every 20 miles,” says Reason Foundation’s Robert Poole.

The developments in Florida and Texas mirror recent global trends in rail toward a return to private operation and ownership. Japan, which has always had private suburban railways, privatized many of its remaining public intercity and commuter lines two decades ago. The success of private ownership has led the Central Japan Railway Company, which owns the country’s flagship Shinkansen line between Tokyo and Osaka, to embark on an incredibly ambitious scheme to build a magnetic levitating train line along the route, funding the project — estimated to cost more than 9 trillion yen, or $76 billion at today’s exchange rate — almost entirely without government aid.

Europe, especially the United Kingdom, has also taken steps toward liberalizing the rail sector through open-access rules, which allow competition by operators on infrastructure owned by the government.

America certainly is not as conducive to mass transit as  Japan and Europe, which both have a dense urban environment, but some very wealthy investors apparently believe that there is enough demand to make All Aboard Florida viable. The thought of private passenger service in Florida seemed outlandish at first, but the project has moved very quickly — faster than some skyscrapers are built in New York City. It has now passed the point of no return. Bonds have been sold, ground has been broken. The project will go forward, and Florida will soon find out whether passenger rail, once the driving force behind the state’s growth, can again turn a profit.

– Mr. Smith is the editor of New York YIMBY, an online trade publication devoted to real-estate development in New York City.

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