boyarmiller – public/private partnerships: basic concepts and examples of p3s

Public/Private

Partnerships:Basic Concepts and Examples of P3s

presented by:

Cassie B. StinsonBoyarMiller

STCL – Advanced Real Estate Law Conference June 7, 2013

What are P3s?

Public Private Partnerships (P3s) Are:

Projects ranging from on-going collaborative efforts with

roughly equivalent participation by public and private sector

participants to turn-key projects for providing government

services and/or infrastructure.

Often involve projects that are too massive and complex to

achieve without coordinated participation by public and

private participants

Often involve more than two parties to project agreements

Type of projects determines whether private sector

participant is for-profit or non-profit.

What P3s Are Not

Public Private Partnerships (P3s) Are Not:

Not new: the nation’s first toll road was the Lancaster

Turnpike in Pennsylvania in 1793; Erie Canal; and

Transcontinental Railroad

Not for the faint of heart nor the short of patience

Not formal partnerships under law

Why are there P3s?

Government Needs

Tight budgets

Lack of expertise within government staff

Public debt issues:– bond capacity is maxed out

– bond covenants too restrictive

– bond transaction costs too high

– public vote needed for issuance of debt

Procurement processes

Labor inefficiencies due to procurement requirements,

pension obligations, lack of at-will labor force

Quick delivery of services or infrastructure

Why are there P3s?

Government Objectives

Job creation

Affordable housing

Expansion or restoration of government infrastructure

Health, education

Quality of life

Incentivize private sector assistance in achieving local

governmental objectives

Why are there P3s?

Private For-Profit Sector Needs

Lack of other work opportunities during recessions

Credit-worthy clients

Entitlements for large scale development

Predictability, stability in market place

Public incentives for project site selection

Why are there P3s?

Private Nonprofit Sector Needs & Objectives

Mission and objectives often mirror public objectives

Public resources necessary as supplement to philanthropic

funding

Donor preference for private control of project

Donor preference for capital expenditures


Private DB with public FOMO is not a P3

F in public sector:– tax exempt is usually cheaper debt service

– transaction costs higher in issuance of public debt

– bond covenants can prevent revenue maximization

– process for issuance of public debt can be slower

O&M in public sector– subject to annual appropriation (“If I Had a Hammer”)

– O&M declines in tight budget years

– Cap Ex reserves are tough in public budgets, deferred maintenance is

common even over the good years

– public estimate of project costs often do not address costs of O&M

over useful life of project improvements

DBFOMO

Design/Build/Finance/Operate/Maintain/Own

DBFOMO

Design/Build/Finance/Operate/Maintain/Own


O&M in Private Sector– lower labor costs

– difficult and unpredictable for private nonprofit fundraising

Ownership issues– sovereign immunity for premises liability

– property tax liability

• if public sector is owner and user, property is tax exempt

• if private sector is owner and public sector is user, property loses

its tax exempt status

• Public entity gets adverse publicity from incurring property tax bills

– IRS rules prohibit private landlords from taking depreciation on

improvements in “financing” leases

Ten Principles for P3s1

Prepare properly

Create, maintain shared vision

Understand partners and key players

Define each partner’s risks and rewards

Establish decision-making process

Make sure each partner does his homework

Consistent and coordinated leadership

Communicate early and often

Fair deal structure

Trust as a core value

Corrigan, Mary Beth, et al, Ten Principles for Successful Public/Private Partnerships. ULI-Urban Land Institute, 2005.

ULI Catalog No. T26.

Statutory Authority for Gov’t Participation2

Tax increment financing: property, sales, liquor

Grants of public funds

Revenue sharing: user fees

Use of public land: sales at below market for specific public

purposes

Streamlined entitlement and permitting process

Fee waivers

In lieu payments

Eminent domain

Wilson, Reid, et al, Development Agreements: Basics and Beyond, Advanced Real Estate Law CLE,

South Texas College of Law, June 2, 2012.

Parties– City of Houston; Discovery Green LGC; Discovery Green

Conservancy

Project– $120 Million, 12-acre public park, heavily programmed and privately

operated at above-City standard criteria; development phase

completed 2007if public sector is owner and user, property is tax

exempt

Term– 75 years

Public Participation– 2 blocks of land

– abandonment of street ROW at no cost (subject to u/g easement for

utilities)

– Management fee of $750,000 per year, with escalator

EXAMPLE: Park Development

Discovery Green – Houston, Texas



Private Non-Profit Participation: >$100 Million– Funds to purchase 2 blocks of land

– Funds to design, build all park facilities

– Funds to operate and maintain park, including all programming

– Transfer of all 4 blocks of land to City’s LGC subject to park

restrictions and reservation of easements for commercial use (revenue

source limited to use for park O&M)

City’s Goals– Support convention business at George R. Brown Convention Center

• develop amenities for people attending conventions

• outdoor exhibit space for conventions

– Quality of life: increase green space in Houston’s CBD

– Stimulate economic development and increase property tax revenue

on surrounding properties

– Fast-track development and opening of park project



Conservancy’s Goals:DBFOM, not Ownership– Quality of life: increase green space in CBD; maintain an above-

standard park for the benefit of City’s residents and visitors

– Long-term control of project to protect private sector

Hammer– Conservancy has right to enforce deed restrictions, including possible

reversion of title for City’s failure to pay management fee

– Conservancy can cancel Convention Center’s “free days” for use of

park facilities

– O&M Agreement is enforceable by Conservancy as a “contract for

goods and services”, for which City’s sovereign immunity is waived by

law

– Upon City’s creation of HFC, the $750,000 annual management fee

may have been assigned to HFC, whose contractual payment

obligations are not subject to annual appropriation

EXAMPLE: Student Housing

University Pointe – Portland, Oregon3

Parties– Portland State University; American Campus Communities (ACC), a

REIT – for-profit developer; American Campus Equity (ACE),

subsidiary of ACC -- non-profit operator of student housing; TriMet

Project– $87.8 Million, 16-story, 282 units, 978 bed, LEED Gold on-campus

student housing tower; development phase completed 2012

Term– ground lease of 65 years +two 10-yr. renewals

TriMet Participation– Acquisition of land by eminent domain in connection with terminus for

extension of light rail corridor

– Sale of land to PSU at cost below acquisition/demolition costs as a

TOD project, due to no parking in project and proximity to terminal

station (increased ridership)



PSU Participation– Issuance (through Oregon University System) of $8 Million tax exempt

bonds for purchase of land from TriMet

– Long-term ground lease to ACC for ground lease rents equal to annual

debt service

– Grant of “exclusive” right to develop and operate all new/future student

housing on campus (but not on surrounding private property); prohibits

PSU’s support of existing on-campus housing unless PSU provides

marketing study showing “adequate demand”

ACC Participation– ACC provides DB services for a fee

– ACC provides O&M services for a fee

– ACC pays ground lease rents of $569,000/yr. to cover PSU’s annual

debt service

– Fees and rents are recouped from student rent revenue (rents range

from $2.01 – 2.72/ft., with parental guaranties)

– ACE provides F (financing) by raising equity in the stock market:

lower cost of funds than third party construction/permanent fund



ACC Participation– ACC provides DB services for a fee

– ACC provides O&M services for a fee

– ACC pays ground lease rents of $569,000/yr. to cover PSU’s annual

debt service

– Fees and rents are recouped from student rent revenue (rents range

from $2.01 – 2.72/ft., with parental guaranties)

– ACE provides F (financing) by raising equity in the stock market:

lower cost of funds than third party construction/permanent fund

– ACC has Ownership of improvements plus FF&E during lease term; at

end of the term, possession of land plus title to improvements and

FF&E revert to PSU



PSU’s Goals– Increase on-campus housing units to house 25% of enrollment

– Avoid financial risk for DB and O&M; obtain eventual Ownership

– Lacking core competence in student housing leasing/management

– “Off balance sheet” way to pay for cost of construction without

impacting OUSystem bond capacity

– Seeking student housing as TOD (eliminates burden of on-campus

parking)

ACC’s Goals– Developer fees; profitable NOI

– 13% return for investors per 2012 annual report

– Expansion of company’s business into Pacific Northwest

Macht, William P., A Public University/Private REIT Partnership in Portland, Urban Land magazine published by

Urban Land Institute, March/April 2013.

EXAMPLE: Incubator for Emerging Arts Groups

MATCH – Houston, Texas

Parties– City of Houston; Houston First Corporation, a local government

corporation of City of Houston; MATCH: Midtown Arts & Theater

Center-Houston, a Texas non-profit corporation; Mid-Town Main LLC,

a Texas for-profit developer

Project– $25 Million complex containing 4 flexible/multi-use exhibit and

performance facilities for arts tenants and third party users; office,

rehearsal and storage space for arts tenants; related amenities such

as food & beverage service facilities; booking services and ticket

office, covering one full city block at 3400 Main Street

– Shared parking garage to be jointly developed by neighboring for-profit

developer on land adjacent to MATCH facilities, and shared per

parking easement appurtenant to MATCH project

– Development phase scheduled to occur January 2015



Term– 30 years plus one 30-year renewal option

Public Participation– Upon acceptance of completed project, City will master lease the

MATCH facility to MATCH for $1/year

– City has entered into a Chapter 380 Economic Development

Agreement with MATCH, and indirectly to benefit Midtown Main for

shared parking garage: $6 Million rebate of sales and liquor taxes

generated in Impact Area, payable annually not to exceed 15 years

– City to abandon Berry Street ROW at no cost to Midtown Main or

MATCH, to facilitate construction of shared parking garage

– HFC to provide funding grant, from HOT taxes and other HFC revenue

from convention and parking facilities, $450,000 per year for 8 years

with opportunity for possible renewals to be negotiated



MATCH Participation– Acquisition of land for $2 Million, purchase money mortgage amortized

from private sector donations

– Provide DBF: raise $25 Million in private sector donations to design,

build MATCH facility

– Ownership: On completion of construction, MATCH to donate

complex to City and assign parking easement covering shared parking

garage on adjacent tract

– O&M: MATCH to sublease office and support space to arts groups;

handle bookings of exhibit and performance spaces; operate and

maintain complex; using revenues generated by subleases to arts

tenants and space rentals from bookings of facilities

– MATCH to create 8 out of total 25 FTE job count requirement under

Chapter 380 Agreement

– MATCH to share 50-50 with Midtown Main in tax revenue sharing

under Chapter 380 Agreement



Midtown Main Participation– DBFOMO of shared parking garage on Midtown Main blocks at 3500

and 3600 Main Street

– Grant parking easement to MATCH, providing all parking needed for

MATCH to meet parking code requirements and obtain building

permits for construction of MATCH arts & theater complex

– Chapter 380 Agreement contemplates that Midtown Main will develop

retail and commercial, including hospitality facilities on its 2 blocks, in

addition to shared parking facilities

– Midtown Main to create 17 out of total 25 FTE job count requirement

under Chapter 380 Agreement

Public Sector Goals– Stimulate economic development and “place making” in Midtown area

– Support cultural and arts groups and the public arts and theater

facilities they need



Private Sector Goals– Minimize development risks by collaborating with each other in joint

development of compatible projects in creating an entertainment

destination

– Minimize risk of negative NOI during O&M for an extended

stabilization period by Chapter 380 revenues and, in MATCH’s case,

by HFC grant funds

– In Midtown Main’s case, assure base level of parking revenue in

shared parking garage by providing parking easement to MATCH at

market rates per space for patrons of MATCH complex events and

productions

– In MATCH’s case, develop and operate small exhibit and performance

venues and office/admin space that are suitable for the needs of small

and emerging cultural organizations, which are not currently available

in City owned facilities

Questions?

BoyarMiller713.850.7766

[email protected]

boyarmiller – public/private partnerships: basic concepts and examples of p3s

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