Key issues for over station developments

Increasingly, governments and developers are looking to utilise airspace above rail corridors for development.

Such sites offer the opportunity to achieve city building and place making outcomes, hide unattractive infrastructure and provide returns to both governments and developers. However, the physical constraints of these sites often impose additional risks and costs which need to be recognised by all parties.

In this article we investigate some of the issues that arise in these types of projects.

Tenure Considerations

Typically, a developer will be seeking volumetric freehold title. This is usually easier to finance and more acceptable for end users - particularly if the project is intended to include residential apartments for individual sale.

However, in many cases, governments will only want to grant long term leases. This is because the government wants to retain flexibility as to the long-term use of the corridors.

In either case, it is likely that the developer’s lot and the residual rail corridor lot or lots will be subject to a building management statement. The building management statement will include, for example, provisions establishing a management committee including representatives of the developer, government and the railway manager, and set out how, and at whose cost, shared infrastructure and facilities will be maintained.

The type of tenure that is made available affects the value that the government can obtain for the land and also impacts the type of development which is likely to be possible.

Public Realm

As part of city building initiatives, the government may be placing a priority on place making and the creation of public realm to be retained by the government or transferred to the developer subject to easements, covenants or other rights in favour of the public. Quality public realm can enhance the associated developments – but can be costly to build, activate and maintain. This needs to be recognised by governments.

Choice of Delivery Model

The government will usually dictate the basic delivery model however governments may invite innovative proposals from the development sector.

The government preference will be dictated by:

• its ambitions for the development site (including the type of proposed over site development – eg commercial or residential);
• its appetite for active involvement in the development process;
• the physical characteristics of the site;
• place making objectives;
• the results of any market sounding process; and
• industry expectation and standards.

The types of delivery model are typically:

• a sale contract delivery structure – although this would be more common for sites adjoining a rail corridor (not over a corridor);
• PDA delivery structure - which gives the government more control over the site; or
• Public/private partnerships - which are best suited to complex infrastructure projects where a more complicated procurement process is warranted.

Rail Environment Issues

Developing above an operating rail corridor can be a new experience for developers and builders who are not fully aware of the justified requirements of railway managers.

These issues are exacerbated where the rail corridor is required for use 24/7 and where the rail corridor is used for goods (especially if used for dangerous goods).

Typically, the project documents would reflect:

• technical requirements of government and the railway manager (including ensuring buildings are designed, and design documents are prepared, in accordance with CIVIL-SR-005 and similar technical requirements and standards);
• limited certainty as to the railway manager’s technical requirements until detailed design has been concluded;
• higher levels of public liability and other insurance requirements;
• strict regimes around track closures and track possessions including payment of costs (for example for additional staff and buses while tracks are closed and ensuring the developer is liable for costs associated with train delays);
• supervision of works by a track protection officer or similar representative of the railway manager;
• emergency management plans; and
• requirement for notice before undertaking works that may threaten the railway.

These requirements may increase construction costs materially (eg collision protection of buildings and piers, track monitoring, craning requirements and crossing grade separation).

Rail Regulatory Issues

Over station developments must also comply with the National Rail Safety Law. It imposes obligations on persons:

• undertaking railway operations, rail safety work or work involving rail infrastructure; and
• at railway premises if the person is involved in railway operations, rail safety work or work involving rail infrastructure or if rail safety officer exercises enforcement powers.

There are also other regulatory requirements such as the provisions in the Transport Infrastructure Act 1994 (Qld).

Bid Issues

It is important for the government and developers that there are clear criteria around the assessment of bids.

Governments will be looking at achieving value for money as well as other city building and place making outcomes. Governments need to recognise that if the government imposes development parameters (such as requiring development to be completed in a specified time frame and to contain particular product without reference to market conditions) the valuation of the airspace needs to reflect those conditions - as they are likely to deflate the value.

The government may also require certainty of activation of key features of the development and the delivery of returnable works. These may affect the amount that a developer is prepared to bid.

Governments should be aware that to the extent that risk is passed to the developer, it will be reflected in the amounts bid by the developer.

The government will also be looking for security arrangements in the form of a bank guarantee and parent company support for a special purpose vehicle.

Value uplift and revenue sharing may also be appropriate – but may be difficult to value.

Termination Issues

Given the size and risk associated with projects of this size, typically:

• there would be no hair triggers for termination;
• there would be step-in rights for financiers;
• government might also want the right to approve key construction contracts and to have step in rights;
• material default should be subject to cure plans or prevention plans;
• governments should have limited termination rights for committed stages of the project; and
• sunk costs for public infrastructure or early stage works which are recovered by re-tender should be paid to the developer.

Other Issues

Stamp duty continues to be an area of concern (see Commissioner of State Revenue and Lend Lease Development Pty Ltd and others [2014] HCA 51).

The GST treatment of the transactions needs to be addressed early - particularly having regard to the attribution rules.

There also needs to be an appropriate regime for the ownership of intellectual property – particularly in the bid phase.

Over station developments provide real opportunities for governments, developers and the community. Governments need to be aware of the commercial drivers for developers and financiers.

Developers need to be aware of the government's reasonable expectations for value for money, certainty of delivery and community benefits.