the art of structuring public-private partnerships 2013 national community development association...
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National Development Council
The Art of Structuring Public-Private Partnerships
2013 National Community Development AssociationSoutheast Regional Conference
November 1, 2013
Introduction
1
National Development Council
NDC Housing and Economic Development Corporation History• A national 501(c)(3) organization specializing in
community and economic development finance• Over $2 Billion in completed P3 projects• A public mission and a private approach • Headquartered in New York City
Overview
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National Development Council
Overview
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NDC HEDC Public-Private Partnerships
Our Mission
To lessen the burdens of government, by helping governmental entities efficiently develop buildings and infrastructure, reducing costs, creating jobs, and strengthening the local tax base.
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Overview
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History of Public-Private Partnerships• PPP models developed in Europe, Canada, and Australia• Focused primarily on major infrastructure development
• Toll roads• Bridges• Utility systems• Public buildings - less common & primarily Canada
• Generally involve a private development team experienced in development, construction, and finance
• A Design-Build contractor• An investment firm providing equity and debt financing• A management company as necessary
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Overview
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Why has the U.S. been slower to embrace PPP development?
• Concern within the public sector that it could lose project control
• Almost fanatical adherence to the concept of lowest bidder
• An entrenched bureaucracy two hundred years in the making
• Differences between U.S. municipal debt structure and private taxable debt structure
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Overview
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Current State of the IndustryCommon manifestations of Public-Private Partnerships
Overview
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Privatization• Toll roads• Privatized student
housing• Sale of public assets
• Parking meters• Public utilities
• Water• Solid waste
Partnerships• Balanced allocation
between risk and reward
• Difference between privatization and partnership is a matter of degree
Subsidization• Public contributions in
support of a private project• Sports stadiums• Large redevelopment
project
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What does the public sector seek from the private sector?
• Access to cost savings through efficiency in development and / or operations
• Ability to avoid both statutory and regulatory constraints
• Ability to monetize public assets
Overview
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What does the private sector seek from the public sector?
• Development opportunities in pursuit of fees and ongoing revenue
• Ability to lessen project risk or achieve project subsidy
Overview
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It is critical to understand the difference between Public & Private Development Processes
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The Development Process
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Without this knowledge, fair negotiations are not possible.
Contrasting the Public and Private Development Processes
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The Development Process
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• Review of the differences between the public development process and the private development process
• Understanding of the motives behind each process
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The Development Process – Comparing Public and Private
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Why do they build?Public
• Governmental needs• Offices• Fire stations• Police station houses
• Needs of its citizens• Roads• Parking• Parks• Public utilities
• Often includes societal goals• Green construction• Public art• Community development
• To reduce operating expenses
Private• To earn revenue
• Fees• Cash flow• Tax benefits• Appreciation
• To accommodate operational needs
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The Development Process – Comparing Public and Private
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Project ConceptionPublic
• Steps• Identify a need• Select a site• Determine means of funding• Initial authorization
• Characteristics• Long gestation• Many decision makers• Prone to false starts• Multiple goals
Private• Steps
• Identify an opportunity• Establish site control• Test the market• Structure financing
• Characteristics• Short gestation• Defined line of authority• Certainty of goal
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The Development Process – Comparing Public and Private
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Design & Pre-Development – Procurement Public
Selection• 1 or 2 step process
• Direct RFP = 1 step• RFQ followed by RFP = 2 steps
• Selection guidelines• Equality• Selection on price or scoring –
seldom qualitative• Adherence to the solicitation,
framework and timeline – no negotiation
• Inclusion of societal goals
Private• Negotiated or bid contracts• Emphasis on price and
qualifications
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The Development Process – Comparing Public and Private
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ConstructionA Different Approach to Risk
Public• Construction and Management
• Relies on process more than experience
• Involves multiple decision makers• Prone to greater time delays• Proscriptive change order process• Imbalance in relationships – Seldom is
the public sector on par with the private sector in allocating costs
• Without an experienced builder/developer, often resulting in a “learn as you go” process
Private• Construction and Management
• Relies on experience not process• Efficient decision making• Intense focus on timeline• Experience and efficient change
order process• Controls its the relationships – Subs
and General Contractors rely on relationships
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The Development Process – Comparing Public and Private
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Public Development Focus• Legal framework is paramount• Avoid controversy• Proceeds deliberatively• Time is subordinate to process• Process to handle the
unexpected• Social and political goals are
important• Lower-cost financing
Private Development Focus• Efficiency and experience are
paramount• Success defined in terms of
bottom line• Time management saves money• Flexibility to handle the
unexpected• Seeks opportunities to save
money• Higher cost financing
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The Development Process – Comparing Public and Private
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How each Manages RisksPublic
• Tendency to increase cost to avoid controversy or perceived risk
• Frequent use of consultants• Heavy reliance on contract
language• Tendency to treat cost over-run
and change orders as legal issues before financial
• Political risk often trumps financial risk
• Time delays are secondary to process and consensus
Private• Experience• Flexibility• Controlled bidding in combination
with negotiation• Market knowledge• Collaboration• Control of the time line• Constant pursuit of saving
opportunity• Negotiation and mediation before
litigation
Forms of Delivery
1. Design Bid Build
2. GC-CM (Construction Manager at Risk)
3. Design Build
4. Private• 63-20• 501(c)(3)
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The Development Process
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Forms of Delivery: Design - Bid - Build
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The Development Process
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Public AgencyArchitect & Engineer
General Contractor
Sub-contractors
Sub-contractors
Sub-contractors
Forms of Delivery : Design- Bid- Build
• The most common approach• Linear in character• Simply understood and explained• Supported by extensive legal framework
• Advantages• Intuitive structure• Lowest potential for controversy in approach
• Disadvantages• Does not allow for contractor input into design• Often prone to extensive change orders and delay
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The Development Process
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Forms of Delivery: GC-CMGeneral Contractor-Construction Manager, or Construction Manager at Risk
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The Development Process
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Public Agency
Architect & Engineer
General Contractor-Construction Manager
Sub-contractors
Sub-contractors
Sub-contractors
Forms of Delivery: GC - CM
• An alternative public works process• Design Team procurement outside of GC-CM contract• GC-CM procurement governed by alternative public
works rules• An RFQ vs. RFP process• Subcontractor bidding in a Low Bid Process
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The Development Process
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Forms of Delivery: GC-CM
• Advantages• Adds a Construction Manager to assist the public• Brings the General Contractor and Construction manager into
the later design stages• Allows for Qualification based bidding of the GC
• Disadvantages• Lengthy and Procedural laden procurement process• Difficult to verify pricing control • Subject to scope and price creep in pre-development phase• Maintains Contractual Privity between the public agency and
the GC-CM
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The Development Process
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6. Construction Servicesa. Finalize the construction documentsb. Issue Notice to Proceedc. Approve all subcontractors prior to workd. Have pre-construction meetinge. Have A/E and inspection staff on-site during constructionf. Partner with PCSD and the GC-CM to meet all social equity contracting goalsg. Manage the construction, including change orders, buyouts, contingency usage and track all cost allocations as outlined in the matrix
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The Development Process
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GC-CM Process in 6 Steps (as outlined by the Seattle Dept. of Finance & Administrative Services)
1. Assess the Contracting Methoda. Define projectb. Evaluate project risks and development a Risk Assessment Matrixc. Secure and appropriate fundingd. Confirm with Purchasing & Contracting Services Division (PCSD) appropriate contracting methode. Seek training in GC-CM deliveryf. Seek out experienced and qualified Project Team (minimum 6 members, defined by City)
2. Project Review & Documentationa. Complete Initial Project Review Form with any supporting documentation; submit to PCSDb. Prepare for Project Roundtable presentation
3. Bid Document Preparationa. Develop a selection plan including timeline b. Develop evaluation form and relative weight factors; prepare scoring formc. Prepare selection/bidding documents for advertisement d. Complete Request to Advertise forme. Edit and finalize documentsf. Name Selection Committee members; secure confidentiality agreementsg. Post to the City’s online solicitation webpage
4. GC-CM Selection Processa. Make room arrangements for meetingsb. Finalize scoring/evaluation sheetsc. Finalize selection pland. Prepare interview questionse. Facilitate scoring and evaluation sessions f. Lead interview sessionsg. Prepare scoring matrix for bid openingh. Confirm final pricing and submit final scoring i. Prepare Notice of Final Rankingj. Notify proposers of final ranking, post onlinek. Finalize the work plan with the apparently successful proposer
5. GC-CM Pre-Construction Servicesa. Prepare and lead partnering sessions (consider hiring a facilitator)b. Establish/manage pre-construction deliverablesc. Prepare and complete design documentsd. Secure and appropriate fundinge. Request GC-CM self-performance intentionf. Approve final subcontracting plang. Lead GMAX negotiationsh. Partner with PCSD to determine any alternative subcontracting optionsi. Assist PCSD with Social Equity Program
Forms of Delivery: Design Build
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The Development Process
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Public Agency
Design-Build Team(Architect & Engineer, General Contractor)
Sub-contractors
Sub-contractors
Sub-contractors
Forms of Delivery: Design Build
• An alternative public works process
• Design Team and General Contractor procured as a team
• A RFQ process followed by RFP
• Subcontractor bidding in a Low - Bid Process
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The Development Process
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Forms of Delivery: Design Build• Advantages
• RFQ process based on project requirements not design • Brings the Design Team and the General Contractor together in
design process• Potential for faster delivery• Ability to establish early pricing• Greater privatization of risk
• Disadvantages • Potential for loss of control in design process• Potential for quality control risks in development• Pricing commonly includes allowances to accommodate design
& development risk• Difficult to repatriate project savings
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The Development Process
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Forms of Delivery: Private
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The Development Process
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Owner - Developer
General ContractorArchitect & Engineer
Sub-contractors
Sub-contractors
Sub-contractors
Forms of Delivery: Private
• Advantages• No RFQ/RFP• Negotiated contracts• Brings the design team and the general contractor
together in design process• Fast delivery• Ability to estimate early pricing• Privatization of risk
• Disadvantages• Likely requires more costly private financing structure
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The Development Process
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Forms of Delivery: 63-20 (A Private Hybrid)
Design Stage
The Development Process
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Public Agency
Developer Architect & EngineerGeneral Contractor
Not-For Profit
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Forms of Delivery: 63-20 (A Private Hybrid)
Construction & Operation
The Development Process
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Public Agency
Not-For-Profit Lease
Sub-contractors
Sub-contractors
Sub-contractors
DeveloperGeneral Contractor
Architect & Engineer
Forms of Delivery: 63-20 or 501(c)(3) (A Private Hybrid)
• Advantages• Brings the Design Team and the General Contractor together under the
oversight of a Developer at the front end of the process.• Maximizing public input• Allows early pricing and iterative pricing• Provides incentives and allows for cost savings to accrue to the public• Potential for faster delivery• Greater privatization of risk• Breaks Contractual Privity
• Disadvantages• Not suitable for small projects • Not an easily understood or intuitive process• Financed under a lease revenue bond and not a GO bond structure
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The Development Process
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Contrasting the Public and Private Financing Methods
• A review of the differences between public and private finance
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The Development Process
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Introduction to Financing
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Financing
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Public Financing• 100% debt• Tax exempt
Private Financing• Combination of debt + equity• Taxable• Two Lenders - Construction loan followed by a Permanent loan
Private Financing
• A Balance of Debt and Equity• Debt is 50-80% of a project• Equity is 20-50% of a project
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Private Financing
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Summary of Private Financing• Requires sources • Equity + Construction Debt = Project Cost• Permanent Debt to take out the Construction
Loan & part or all of the Equity
• Cost is generally related to risk• Cost relates to market and experience• Equity costs more than debt
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Private Financing
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Public Financing• 100% debt – Usually bonds (sometimes levies)• Access to sources of debt not available to the
private sector - taxable and tax exempt bonds• A single financing for construction and
permanent• More focused on ability to pay • Less focus on collateral and collateral value• Construction interest is capitalized
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Public Financing
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Public-Private Partnerships
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Public-Private Partnerships
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Public Development
Private Development
Public-Private Partnerships Privatization Subsidization
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Public-Private Partnerships
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Goals of a Public-Private Partnership
Public Partner
Goals:• Certainty• Efficiency• Societal goals
What does the public partner want from the private partner?• Openness• Risk transfer
Private Partner
Goal:• Fair return
What does the private partner want from the public partner?• Flexibility to succeed
Considering a Public-Private Partnership1. Does it lower costs?
2. Does it reduce risk?
3. Does it solve a significant problem?
4. How does it impact societal goals?
5. How does it impact project oversight and control?
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Public-Private Partnerships
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1. Does it lower costs?A. Financing StructureB. Cost of TimeC. ExperienceD. StaffingE. Motivation
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Public-Private Partnerships
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A. Financing - Things to consider
• Cost of funds• Risk transfer• Reserves• Date certain delivery• Guarantees• Abatement• Appropriation• Ownership of asset
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Public-Private Partnerships
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B. Cost of time - Things to consider
• Decision making process• Change orders• Sequencing/critical path• Inflation
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Public-Private Partnerships
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Public-Private Partnerships
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Design Consultant (DC) reviews Color
Standards for intent
DC coordinates with Project Manager (PM)
to define exterior elements subject to
color selection
DC assesses facility and determines
appropriate color scheme that meets the
intent of the color standards
DC assimilates information for review
with Assoc. Vice Chancellor (AVC) and
PM
PM forms and chairs Univ. Color Selection
Committee
Color Selection Committee finalizes
recommendations on color scheme
PM forwards recommended color
scheme to DC
DC prepares color boards, in consultation with Facilities Services
Director and PM
Facilities Services and Color Selection
Committee approve the color board
AVC advises Master Planning Committee of
color selection
Master Planning Committee seeks
concurrence of Univ. Chancellor
Color selection is made public
Example – Exterior Color Selection Process for a Public University
C. Experience – Things to consider• Management experience• Ability to respond to problems• Ability to realize opportunities• Ability to control design process
• Value engineering• In-house expertise vs. consultants
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Public-Private Partnerships
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D. Staffing – Things to consider• Costs of in-house staffing• Costs of consultants
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Public-Private Partnerships
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E. Motivation – Things to consider• How are all parties motivated to save money?• How are savings shared?
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Public-Private Partnerships
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2. Does it reduce risk?• Management of the schedule• Responsibility for unforeseen conditions• Ability to respond to issues of force majeure• Oversight of design changes/change orders• Control of contingency• Failure to perform• Guarantees• Contractual privity• Liquidated damages
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Public-Private Partnerships
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Waterfall of Construction Risk Management1. Quality of team – Developer, GC, subs, architect2. GMP3. Balanced contracting - controls on change orders4. Adequate contingencies5. Proper incentives6. Payment and performance bond7. Guarantees8. Contractual Privity
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Public-Private Partnerships
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Contractual PrivityDefinition: The connection or relationship between two parties, each having a legally recognized interest in the same subject matter (such as a transaction, proceeding, or piece of property).
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Public-Private Partnerships
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3. Does it solve a significant problem?
• Timeline/delivery issue• Voter limitation• Site assembly
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Public-Private Partnerships
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4. How does it impact societal goals?• Arts• WMBE• Living Wages• Local Contracting• Green Building
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Public-Private Partnerships
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5. How does it impact project oversight and control?• Design
• Perceived • Real
• Construction• Quality control• Open book
• Operations• Management• Maintenance• Long-term control
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Public-Private Partnerships
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Balance - Risk, Control and Reward• Requirements must include flexibility• Expectation for savings must include incentives to
save• Do not expect PPP benefit if public procurement and
public process are imposed• PPP benefit cannot be achieved without private
direction• Define the project and let it proceed • Understand the agreements National Development Council
Public-Private Partnerships
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Public-Private Partnerships:Two approaches to consider that capture the best of public and private development
• 63-20• 501(c)(3)
• Public sector financing (tax exempt rates)• Private sector development (knowledge and experience)
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Public-Private Partnerships
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63-20 BondsRevenue Ruling 63-20 allows a not-for-profit corporation to issue debt to finance a facility for tax exempt purposes, provided:• A local governmental entity endorses the financing• The facility will be occupied by a governmental or tax
exempt entity• The facility reverts to the ownership of the endorsing
local governmental entity at the retirement of the debt
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Public-Private Partnerships
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63-20 Bonds (cont)
History• IRS’s 20th Revenue Ruling in 1963• Establishes a means for not-for-profits to finance facilities with
tax-exempt debt• Early users were hospitals• When the IRS allowed the conduit issuance of tax-exempt
debt for 501(c)(3) corporations without requiring the reversion of the asset to a local government, the use of 63-20 bonds nearly disappeared
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Public-Private Partnerships
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Public-Private Partnerships
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63-20 Bonds for Public Facilities• Not-for-profit/tax exempt debt• Not-for-profit issues its own
bonds• Development using a private
development process• Governmental control through
a long term lease or use agreement
• Mandated reversion to governmental ownership at retirement of debt
501(c)(3) Bonds for Public Facilities• Not-for-profit/tax exempt debt• Requires conduit issuer• Development using a private
development process• Governmental control through
a long term lease or use agreement
• No mandated reversion; can negotiate a contractual reversion at retirement of debt
Using 63-20 and 501(c)(3) Bonds for Municipal FacilitiesAdvantages• Tax exempt debt• Private development process• Greater knowledge and efficiency = lower
development costs• Risk transfer to the private partner• 100% financing
Disadvantages• Slightly greater up-front cost• Slightly higher interest rate - 5-40 basis points
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Public-Private Partnerships
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When does it make sense to use 63-20 or 501(c)(3) bonds for municipal facilities?
• When a public development is likely to be more costly than a privatized approach because of time delay or process
• When conventional general obligation bonds are not a good alternative
• When specialized development skills are necessaryNational Development Council
Public-Private Partnerships
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63-20 and 501(c)(3) Bonds: Not Your Typical Not-for-Profit
• Must be a single asset entity that has bankruptcy remote characteristics
• Strength and substance: There should be qualities about the not-for-profit that suggest it will be in existence for the length of term of the bonds
• Must have the correct public purpose
• Must understand real estate development, including long-term asset management
• Must understand the requirements of bond compliance
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Public-Private Partnerships
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63-20 and 501(c)(3) Bonds: Not-for-Profit Responsibilities
• Negotiate and enter into development contracts• Architect Agreement• Development Agreement• Lease Agreements• Bond Documents
• Issue bonds• Review construction progress• Process construction draws• Asset management
• Bond compliance• Oversee repairs and upgrades
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Public-Private Partnerships
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63-20 and 501(c)(3) Bonds: Public Entity Responsibilities
• Provide purpose, direction, and programming for facility
• Enter into long-term lease
• Asset management, in collaboration with the not-for-profit• Cooperate with the property manager• Make lease payments• Review and approve annual budgets
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Public-Private Partnerships
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63-20 and 501(c)(3) Bonds: The Private Development Team• Developer• Works for the not-for-profit to oversee development• Must be substantial• Must be willing and able to guarantee completion and price• Must have direct experience in the project type
• Architect• Works for the not-for-profit, under the direction of the developer
• Contractor• Works for the not-for-profit, under the direction of the developer
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Public-Private Partnerships
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63-20 and 501(c)(3) Bonds: Project Characteristics
• Must be public in nature
• Should be of substantial size - $15 million or larger
• Must be income-generating
• Must be credit-worthy
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Public-Private Partnerships
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Steps in the 63-20 Process1. Public agency decides to use an alternative development
process2. A not-for-profit is selected - RFP or negotiation3. A developer is selected - usually by RFP4. Design process starts5. Contracts are drafted
• Lease• Development Agreement• Architect Contract• Bond Documents• Preliminary Official Statement / Official Statement• Trust Indenture
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Key Players in the 63-20 Process• Local government agency• Not-for-profit• Developer• Architect• Building Contractor• Bond Counsel• Real Estate/Contracts Counsel• Bond Trustee and Trustee’s Counsel• Underwriter and Underwriter’s Counsel
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Key Players in the 63-20 Process (cont)
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Management
Contract
Bond
Proceeds
Development Agreement
Title to Improvements
Ground Lease
$ Bonds
Not for Profit
Not for Profit
Bond TrusteeBond
Trustee
Public AgencyPublic Agency
FacilityManagerFacility
Manager
UnderwriterUnderwriter
Developer
Architect
GeneralContractor
Developer
Architect
GeneralContractor
Construction Payments
Bond Repayment
Use Agreement
Bond Investors
Bond Investors
Asset Managing a 63-20 or 501(c)(3) Project• Improvements will be conveyed unencumbered to the government
agency• Obligation to maintain the facilities• If possible, hire a professional property management company• Fund a Repair and Replacement Reserve• Have an independent engineering study made every 5 years
• Make a 5-year capital improvement plan• Identify any issues of deferred maintenance
• Meet quarterly with tenants to ensure tenant satisfaction• Annual site visit• Act as a liaison between public and private to ensure everyone’s needs
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Asset Management
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Structuring the Transaction
• It is critical that the deal is structured to accomplish intended goal
• Maintain focus - do not try to solve all societal problems on the back of a single deal
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For More InformationDaniel Marsh III, Senior Director708 3rd Avenue Suite 710New York City, New York 10017
phone: (212) 682-1106mobile: (917) 559-6188e-mail: [email protected]
www.ndcppp.org www.nationaldevelopmentcouncil.org
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Contact
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