Any American driver can point to a crumbling, pothole-filled road or bridge and recognize that improvements need to be made to the nation's infrastructure. That same recognition is instantly made by any parent of a child in an older school who views the water-stained ceilings and the missing doors on overcrowded classrooms, and by the business traveler who wastes time sitting at a busy airport waiting for a flight to be rescheduled. And Californians bearing the brunt of that state's energy problems are well aware of the burgeoning energy problems nationally. But the American Society of Civil Engineers (ASCE) goes farther than the average American in evaluating the nation's infrastructure, and in 2001 the ASCE gave the entire country an overall "D+" rating for 12 vital infrastructure categories.

"When you've got rolling blackouts in California, bridges crumbling in Milwaukee, and kids in Kansas City attending class in a former boy's restroom, something is desperately wrong," says ASCE president Robert W. Bein, a civil engineer from Irvine, CA. "The solutions to these problems involve more than money, but as with most things in life, you get what you pay for. America has been seriously under-investing in its infrastructure for decades and this report card reflects that."

Bein adds that with the projected federal budget surplus of $5.6 trillion, Congress has the funds needed to restore the country's ailing infrastructure. "Without these resources, we gamble America's prosperity on an infrastructure whose pipes, schools and airports are literally at the bursting point," he says.

Problems Just Beginning

		Details on the ASCE Report Card The 2001 Report Card from the American Society of Civil Engineers....

And experts say the serious hazards caused by the crumbling infrastructure are already starting to be seen. "One of the most immediate examples which comes to mind of our failing infrastructure is what happened in Georgetown [a tony section of Washington, D.C., that suffered four days of power outages in June caused by worn-out underground cables], with exploding manholes and underground fires," says Maureen McAvey, senior fellow at The Urban Land Institute (ULI). "That infrastructure is over 100 years old and it will have to be repaired. The same thing has happened in New York City on Wall Street, where they had a series of electrical fires. In Boston, though, despite some of the criticism aimed at the cost of the work, major progress has been made on redoing the highway and downtown streets and cleaning up the harbor, too."

To remedy America's current and future infrastructure problems, ASCE estimates a $1.3 trillion investment is needed over the next five years and calls for a public-private partnership committed to finding solutions.

"As dismal as these grades seem [see sidebar below for details], many of the downward trends can be reversed with increased funding and a renewed partnership between citizens, and local, state and federal governments," says ASCE executive director James E. Davis. "As a nation, we have taken for granted that our lights will turn on, our roads and bridges won't crumble beneath us and that we'll have clean and safe water when we're thirsty. Without adequate resources, we cannot implement appropriate solutions."

"The Wilson Bridge [which carries the vital I-95 highway across the Potomac River between Maryland and Virginia] is a perfect example of something which was seen as a problem for a long time," says Robert Dunphy, senior resident fellow at ULI. "But it wasn't until it looked like it would actually fall down that people talked about finding the money and fixing it."

The nation's failing infrastructure will affect commercial real estate and developers, particularly in the areas of mass transit, roads and bridges, and energy shortages. Poor services such as overcrowded roads and unhealthy drinking water can cause the quality of life to deteriorate. A secondary, but no less important, issue is the financial implications of repairing, replacing or improving various sectors of the infrastructure.

"Some cities and jurisdictions have had substantial capital improvement plans, including five-year plans for major work and yearly road maintenance. Usually that money will come from property taxes," McAvey says. "But other places don't have that budgeting ability, and they need to raise the money by creating special infrastructure taxes or seeking state or federal money. In some crisis situations, for example, a hazardous waste clean up, the Environmental Protection Agency can provide the funds. Utilities are trying to raise their rates and taxes to cover their expenses."

High Tax Impact?

Impact fees charged to developers of both residential and commercial real estate are now becoming prevalent across the country.

"Impact fees are particularly popular in places where public funding has failed to keep up, such as Florida, California and Colorado," Dunphy says. "A lot of places favor the old saying, ‘don't tax you, don't tax me, tax the guy behind the tree'. Taxing the developer is politically popular because there isn't much public sympathy for developers. The people who will be coming into a new development, who may have some of the expenses of impact fees passed on to them, are not considered part of the local community yet, either."

While residential developers in most parts of the country are accustomed to providing sewer systems and road improvements for their projects, this trend has spread to retail and commercial developments as well, where the developer must often provide freeway ramps and extra traffic signals.

"When the public sector doesn't have the money to pay for an improvement they are seeking extractions from the developers of a community or a project," McAvey says. "For example, in Reston, VA, the developers have improved a bike path and created a tunnel under a main road for bikers as part of the approval process for expanding the commercial space in Reston Town Center. Federal Realty Investment Trust was required as part of their discussions with Arlington County officials to provide a shuttle to a Metro stop when they wanted to build a commercial development in Shirlington, VA. In some places, such as Portland, OR, larger developments are required to build an actual subway stop."

Stephen M. Renna, vice president and counsel for The Real Estate Roundtable, has been looking into the tax implications of impact fees for developers.

"Local governments are strapped for taxes and need to find a place to generate revenue. Impact fees are becoming a way of doing that," Renna says. "In the past year or so, the IRS has sent advice memorandums to their field agents on how to deal with local impact fees. They said that such impact fees are a non-amortizable expense, that they are simply costs that you paid and had no tax relief from. Typically, developers had been taking tax deductions for these impact fees. This new advice sent a shiver down the spine of real estate developers. Also, a lot of developers have been providing infrastructure improvements and contributing these improvements instead of cash. The IRS also said that developers cannot deduct the cost of these improvements."

The Real Estate Roundtable is part of a pilot project working with the IRS to resolve this issue, and their representatives argue that impact fees are part of capital expenses, and that it is therefore wrong to treat them as non-amortizable expenses. The group hopes to come to an agreement with the IRS by November 2001.

"We are simply advocating tax policies that match the tax treatment of expenses with the economics of the transaction," Renna says.

In addition to impact fees, local governments are also passing "green bills" or "green ordinances" aimed at developers requiring commercial buildings to meet certain standards for recycling, the use of recycled materials, and energy consumption. "For example, in Arlington County, they've drafted a Green Ordinance and if you want your building permit you need to follow the guidelines. In theory, this raises the cost of the initial development but presumably lowers the cost of future consumption," McAvey says.

New Issues with Revitalization

Infrastructure issues affect new developments but also come into play when discussing revitalization projects.

"In the transportation area there's the general perception that older cities and neighborhoods already have some infrastructure in place that just needs to be repaired. In some cases tax breaks are available for businesses as incentives to bring them in to an older area that may be decaying," says Dunphy. "There are a few examples of special districts which have been established in which commercial developers are being taxed additionally for special projects. In Los Angeles, the local government is assessing all adjacent commercial property owners to pay for the subway system. But the timing for this is problematic, because the taxes went up before any benefit was seen. Political leaders said that property values would go up as well, but there have been construction problems and that hasn't happened yet."

"In uptown Houston, a special tax district was established to make infrastructure improvements because developments were being created further west and local developers and leaders were concerned that all the development would move away," Dunphy says. "That's a case where property owners are being taxed but everyone agrees that it is the right thing to do."

Revitalization issues relate to sprawl concerns as well.

"In some areas, developers are choosing to build on the fringes of an area while at the same time perfectly usable roadways and water and sewer systems in the city are being abandoned," says McAvey. "Some regions have done better than others at this by using tax breaks to encourage legitimate infill development and taxing the extension of areas farther out. In other places, a lack of regionalism makes this more difficult. A prime example of this is Washington, D.C., where you have hundreds of taxing jurisdictions."

Privatization of infrastructure may be a future trend for resolving the financial problem of repairing and replacing roads, water systems and more.

"Privatization is being looked at in part because of the lack of political will to pay for infrastructure improvements," says Dunphy. "In Toronto a toll road was built with public funds and then sold for profit to a private company. In Loudoun County, VA, the Dulles Greenway is an example of a private entrepreneur getting the land developed and building a toll road. There were some initial problems with forecasts and setting the tolls and determining growth patterns, but this is obviously a long-term investment of 20 years or more. Maybe state governments will decide to sell off highways to private companies to let them run them in the future. This sounds like a truly extreme idea, but you never know."

Infrastructure improvements and maintenance may not be the most glamorous topic for politicians or developers, but the problems must be faced in the coming years by both the public and private sector.