Given the economic downturn and the scarcity of capital, public/private partnerships may seem appealing to more real estate developers than ever. Yet navigating the intricacies of these ventures can involve a steep learning curve. Three members of ULI’s Public/Private Partnership Council (Gold Flight) offer insights based on their extensive experience, speaking about the process of choosing which partnerships to pursue and how to avoid the potential pitfalls.
Peter DiLullo, president and CEO of LCOR, Inc. in Berwyn, Pennsylvania:
A public/private partnership is a process that has to be learned, because mistakes can be very expensive. You can invest millions of dollars in transactions that go nowhere, either they’re abandoned before an award is made, because the government body changes its mind or its political makeup, or there is no market for the product, or the government doesn’t control what they thought they controlled.
At LCOR, we spend very few dollars in the investigatory stage. We developed a scoring process for each potential public/private partnership we’re considering. There is a series of questions that have to be answered. Is there a market for the product? Is there a champion on the government side for the transaction? Does the government have the resources to be able to partner with us? If the composite score is under a certain level, we would not pursue that bid. If it’s in the moderate range, we would have to make an argument to our decision -makers as to why we should go forward. If it’s above a certain level, we would go through the request-for-qualifications or request-for-proposals process.
Jack Hambene, senior vice president of McCormack Baron Salazar, Inc. in St. Louis, Missouri:
Most private developers new to public/private partnerships are not used to the transparency needed to make a public/private partnership work. Private developers can often be frustrated by what I’ll call add-on requirements of projects using public money. At the local level, it could be a MBE/WBE [minority business enterprise/women’s business enterprise] requirement. If you’re using federal funds, it could be meeting the requirements of the Davis-Bacon Act or Article 106 environmental reviews. But each of these is manageable.
The private sector partner needs to understand who is going to be its champion on the public side and what the strength of that champion is. For example, if a mayor is in his or her final term and is termed out, people may not be paying as much attention to what the mayor says.
If you’re new to public/private partnerships, it’s going to help to hire consultants, whether architects or engineers or attorneys, who are familiar with all of the processes that you’re going to go through and who have relationships with a lot of the departments on the public side that you’ll need to make it work.
Brian Jackson, senior vice president of EYA, LLC in Bethesda, Maryland:
Here are some of the questions we think about at EYA as we approach a potential public/private partnership:
- What is the problem being solved for the public agency? Because the projects are usually complex, the agencies are understaffed and have multiple priorities, and usually development is not their primary business, or if it is, they are doing many developments. There has to be a burning problem that’s being solved by the project. We also think about how the project serves the core mission of the agency.
- Whose decisions are necessary to implement the project? The people who really need to make key decisions to implement the project may not be the ones who are issuing the request for qualifications or may not be the ones you are formally in a partnership with.
- When are we willing to walk away? We have to decide how much predevelopment money we’re going to advance before we stop. Things take longer than you expect and cost more than you expect, so it’s easy to end up incrementally making a very large commitment to a project that you shouldn’t have.