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-rail-

world&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

Organization Borrower Mode 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

Iowa Interstate Railroad Private Freight 2006 $9.35

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 Passenger 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 Miami-

Orlando] corridor today. And 95 percent of them are doing it by car." Orlando, he said, is the most-

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

6 https://www.facebook.com/floridanotallaboard?ref=stream&hc location=stream

7 httos://www.enotrans.oraeno-brief/all-aboard-florida-miami-orlando-oassenger-rail 8

http://www.tcpalm.cominews/2014/mar/17/all-aboard-florida-report-raises-more-questions/ 9 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

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

passenger 12

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

visited city in the country, with 52 million annual visitors. Miami-Dade is the seventh most populous

county in the country. Those numbers, he concluded, show the huge ridership potential.13

• 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-rail-

world&catid=46:features 14

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

http://www.railwavage.com/index.pho/passenger/high-performance/florida-funds-to-aid-fec-airport-access.html 16

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

Aboard Florida is aip oy. ,,zo

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 http://www.seacastleinc.com/ 18

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

19 http://www.ridingmytrain.blogspot.com 20

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