- Public-private partnerships (P3s) have expanded from physical infrastructure to social infrastructure.
- Successful P3s are highly structured.
- The litmus test for deals: a P3 advocate, enabling legislation, and previous partner experience in P3s.
How can governments better collaborate with private developers? As a real estate developer, what kinds of skills and strategies should you bring to P3? These were two of the primary questions addressed by a panel on public-private partnerships at the ULI Fall Meeting in Chicago.
“Governments have real estate assets, but they need some way to pay for development,” said moderator David Pennington, managing director of BMO Capital Markets in Chicago. Early P3s involving the U.S. Department of Defense were very specific, but expectations are now broader, he says, and public partners “need others to catalyze and help execute projects.”
With an anticipated zeroing-out of capital funding in the future, the federal government “is looking for more innovative ways to generate capital and high-performing properties,” and is pursuing P3s for facility renovations and improvements, said Allison Azevedo, regional commissioner for the U.S. General Services Administration’s Great Lakes Region. The GSA owns and manages nearly 56 million square feet of space, including over 1,650 properties plus leases.
“We’re always looking at taxpayers, communities, and generating jobs,” said Azevedo. “P3 development takes advantage of private-sector networks, brand development, creativity, and relationships that can help public entities achieve the highest and best use of assets for the community.”
P3s have evolved from physical infrastructure–roads and bridges—to include social infrastructure. A Hawaiian school district used a P3 approach to generate site value and meet social needs, like building a community center along with redeveloping schools. For municipal and state projects especially, governments look for private sector partners to help pay for parking, housing, commercial, and other uses that can create income streams.
In smaller communities, said Azevedo, the federal government sometimes looks to transfer assets to be able to do a structure renovation in another community. She said GSA is interested in partnering on redeveloping outdated parking facilities, though security concerns, such as a high-security vehicle fleet, can limit the full potential of the property.
Fernando Rodriguez-Marin, legal counsel to DLA Piper LLP and based in New York, cautioned that private developers should consider pros and cons of constructing and maintaining an asset without owning the land. A government agency may give a private-developer partner an adjacent piece of land to develop for an office building, he said, but will want constraints on how the facility is built and operated.
Constraints for public properties include historic structures with limitations on development. The flip side, said Cooper: Some constraints for the public sector can create value for the private sector, such as providing historic preservation tax credits.
From the government perspective, Pennington said, projects need to be politically palatable to the public; real estate developers focus on assessment of risks as well as potential profits. He said most transactions have been classic design-build-operate agreements, with specific templates and requirements for bidding and financing. The traditional real estate development process is “a lot more amorphous and flexible,” he said. “P3 is very structured, though every P3 is different.” Few P3 closings fail, he said. “The very structured bids seem to work.”
Sinclair Cooper is co-president of the Public Private Partnership Division for the Hunt Companies, Inc, based in El Paso, Texas, which has engaged in nearly 50 P3s since 1966. In terms of skills and strategies required, he said, “it’s really no different than traditional real estate development. You have to be willing to understand what those partners want to do.”
Cooper said Hunt Companies’ litmus test involves four questions: Does a city or county have enabling legislation that allows a P3 transaction? Is there a state law enabling P3 transactions? Have the potential partners done deals before? Is there an advocate in the public sector—say a mayor or county commissioner—who’s a proponent of P3 delivery?
“The public sector side is getting more sophisticated, and will use this model for new assets and renovations,” said Pennington. He predicted continued P3 growth in the easiest projects, such as roads, some of which have income streams from tolls. State legislation allowing for P3s for social infrastructure now basically looks the same, but in the future, he said, “we’ll see opportunities for scaled versions, with every state creating their own.”
Kathleen McCormick, principal of Fountainhead Communications, LLC, in Boulder, Colorado, writes for Urban Land and other publications about design and the environment.