Members of ULI’s Public/Private Partnership Councils discuss trends influencing the prospects for collaboration between the public and private sectors on development.
What issues or challenges will affect public/private partnerships over the next few years?
Brian Jackson:The public partners don’t have the same resources to bring to these partnerships that they used to. They have tight budgets, competing needs for funds, declining tax revenues, and rising expenses. Related to that, there is a higher degree of public sketicism about the importance and appropriateness of public/private partnerships. Because of the financial crisis and the bailouts that followed, the public is taking an increasingly jaundiced look at government and business working together and wondering if they are really working in the best interests of the taxpayer.
Mark Burkland: Municipalities are paying closer attention to what it takes to put a deal together and perhaps reducing the demands that they put on a particular development proposal and/or deferring some of the compensating amenities or benefits. The municipalities that I have worked with are reluctant to create debt and to extend their binding authority as far as they were willing to in the past because of the greater risk. There are some opportunities, particularly in inner-ring suburban municipalities where transit-oriented development, apartment houses, and health care facilities are still viable. But it is not yet a rosy picture.
Patty Gage: In states like Colorado, as the homebuilding market comes back, the public sector will create more special districts in order to make infrastructure improvements for housing. There are more buyers for those bonds, and they are good investments with higher yields than [those offered by] most alternatives. In larger cities in Colorado, downtown development districts will continue to be an important way to tap tax increment financing for projects and infrastructure in the urban core.
Tyrone Rachal: Invest Atlanta, Atlanta’s development authority, just closed a deal to provide new markets tax credits to fund the first phase of the National Center for Civil and Human Rights. I can’t tell you how complicated that capital stack was. This museum raised a significant amount of contributions from corporate donors; some were three-year contributions, some were one-year contributions pledged to specific purposes. Working with the PNC Financial Services Group, we bridged those disparate contributions so that they could be a source of cash for construction. In projects like these, which involve nontraditional forms of financing such as charitable contributions, there is an increased need for public sector participation.
Amy Neches: The biggest factor in California continues to be the loss of redevelopment funding. The governor has talked about putting new mechanisms in place to try to create some of the tools that redevelopment offered, but we don’t anticipate any action in the immediate future. The state doesn’t have a lot of alternative mechanisms. The infrastructure finance district program allows the use of property taxes to fund public infrastructure, but it doesn’t allow cities to capture as high a percentage of property taxes. San Francisco and other cities are looking at publicly owned real estate assets that can be sold for private development. By selling them through an RFP [request for proposals] process, the city has a great deal of input into the development. In a rising market, just selling the land at a reduced cost may be enough to help a project that otherwise would not be feasible.
What impact has the dissolution of redevelopment authorities in California had outside the state?
Gage: Depending on how urban renewal authorities in other states are structured, there will be more unwillingness to let these authorities continue with their line of business and more attempts to limit their activities. That’s one aspect of public/private partnerships that is at risk over the next several years, until all of our state governments get their financial houses in order.
Rachal: We have not seen a wholesale backlash against redevelopment in our state. We have definitely seen attempts to modify how the state law is written to [influence] what kind of development gets done, but nothing that reaches the level of dissolving redevelopment agencies.
Neches: I haven’t seen a move in any state that allows for the wholesale liquidation of tax increment financing. On the national level, it is clear that taking property by eminent domain for economic development is rarely done anymore. There are good and bad reasons to use eminent domain, but that has become almost the third rail.Burkland: I do most of my work in Illinois, and I don’t believe what happened in California has had that great [of] an impact here. The Illinois legislature has bigger problems to deal with, including $96 billion of pension debt. Most of the state’s redevelopment projects are in Chicago and the surrounding area, and Mayor [Rahm] Emanuel has already taken steps to cut back on the use of tax increment financing funds.
Rachal: Both the public and private sectors are becoming more proactive. For example, last year Invest Atlanta sent private developers a “request for ideas” for the Turner Field Sports and Entertainment District. Instead of issuing a typical request for proposals, we’re reaching out to the private sector earlier in the process to solicit input. Hopefully that builds more trust because both parties are talking earlier in the process, and it gives the public sector the chance to take the ideas and develop guidelines, make any zoning changes required, and get that site ready for when a request for proposals is issued. On the private sector side, developers that typically did not need to engage in public/private partnerships are now approaching the public sector earlier in the process. We used to be the last source of cash for a large developer. But now, having a public sector partner is allowing [developers] to obtain private sector financing more easily.How are public and private sector partners changing the way they work together? Gage: Over the last four or five years, because of the economy, private developers have become more interested in pursuing these partnerships. The public sector has stepped up to a greater degree to provide public improvements necessary to complete private development. Because of budgetary constraints, however, cities may want to keep more tax revenues for the general fund. That is likely to put more requirements back onto the private sector. The public sector may either not provide financing or, as part of the public financing package, require the private sector partner to make a greater investment in infrastructure and public art to benefit the larger community.
Jackson: Because the public sector can’t contribute as much on the financial side as it may have in the past, we have to find different ways to provide subsidies. The public and private sectors may approach the financial markets or other nongovernmental third-party foundations together to seek those funds. Usually, that was something the public sector just brought to the table. Also, in the past, it would be entirely our responsibility as the private developer to secure entitlements for a public/private development. Now, the public agencies engage in the entitlements process much more often, working with planning commissions and zoning commissions, even going before their own city councils in some cases, to help us secure entitlements.
Neches: We are seeing a different type of public/private partnership, in which the public sector works with the private sector to build and deliver infrastructure. For example, the city of San Diego has agreed to buy water from a privately built desalination plant in Carlsbad. The city will guarantee demand in order to allow a private group to finance what would typically be a public works project. This approach is similar to the one being used to build the George Deukmejian Court House in Long Beach, California, and it’s also being used for toll roads. It’s fairly common in other parts of the world, but had been pretty rare in the United States.
Burkland: I represented a development company in an inner-ring suburb of Chicago that was trying to structure a deal to build a two-story big-box store over ground-floor retail in a traditional downtown. It required construction of a 450-space parking structure and a new block-and-a-half-long street. The infrastructure costs were enormous, and the only contributions the municipality could make were to provide the land at nearly no cost and to share the cost and financing of the street and parking structure. That deal reflected a greater level of collaboration than typical in better economic times—the municipality wasn’t looking for off-site improvements, and the developer understood the need to find financing for both the municipality and the developer.
How are the public and private sectors responding to calls for more transparency and accountability to the public?
Burkland: The processes for structuring deals like this now include more opportunities for public input, both from city councils and boards of trustees for redevelopment authorities and at planning meetings that are open to the public. This is true even for relatively early drafts of public/private partnership agreements. It is difficult sometimes to measure the value of these deals, but there is much greater demand for metrics to measure their potential benefits, and much more heightened scrutiny than ever before.
Gage: There was a bill prepared for the Colorado legislature last year that would have increased urban renewal authorities’ reporting requirements on tax increment financing. It wasn’t clear as to what kind of reporting was being looked for, however, and the bill was never introduced. In most public/private partnerships, both sides are more than willing to provide enough information to the public so that they can understand the transaction. Where we struggle sometimes is that the public or legislatures aren’t quite sure what to ask for. There needs to be a meeting of the minds and a collaborative process to determine exactly what information would be helpful.
Jackson: I don’t think either the public or the private sector has figured out effectively how to combat public skepticism. Transparency is an important aspect of these partnerships. But the real challenge is how to make the economic and public policy arguments to people who believe it’s not the role of government to subsidize a project that wouldn’t otherwise pencil out in the private market. Both sides, public and private, have to be able to better explain the public benefits and explain why a partnership is sometimes the most effective way to pay for these projects. For example, the low-income tax credit program is a public/private partnership, and it has created more affordable housing than any direct construction or subsidy program at the federal level.