It was pretty much business as usual at Thursday’s panel discussion on “Public/Private Partnerships: Solutions for the Next Generation” at ULI’s 2011 Fall Meeting in Los Angeles—master plans, local politicians decrying their tight budgets, pay-as-you-go infrastructure takedowns, tiffs over TIFs.
Then, veteran developer Morgan Dene Oliver, CEO of Oliver McMillan in San Diego, California, went wildly off script, pointedly refusing to discuss the Buckhead project in Atlanta, which his company recently took over, and going instead for some home truths.
“The solution now for all of you,” Oliver told the standing-room-only crowd of private developers and public officials packing the room, “is don’t invest in anticipation of making money over a very quick period of time if a public/private partnership is necessary to do the business you want to do. I’m not investing a dollar or a moment in public/private partnerships in the for-profit arena.”
Oliver’s take on the current situation, and the near-term outlook for public/private development, encompassed the growing gap between the haves and the have-nots in the U.S. economy as well as the lack of certainty and strong leadership at the local government level.
“It’s not like it used to be, where politicians theoretically served because they thought they had something really meaningful to contribute,” he said. “They need the money. They need their jobs. And it’s poison to the notion of public/private partnerships.”
The budget crisis in local government—including the threat to redevelopment dollars in California—is undoubtedly a core issue for developers working in the public sphere, said moderator Renata Simril, managing director for Jones Lang LaSalle of Chicago. Across the country, 44 states and Washington, D.C., are projecting 2012 budget shortfalls totaling $112 billion, she added.
But, Simril noted, that could mean increased opportunities for public/private partnership (P3) projects as public institutions seek to monetize real estate holdings and look to fund an estimated $300 billion in infrastructure projects over the next five to seven years.
Still, while 26 states have some kind P3 legislation on the books, the experiences of developers on the panel seem to indicate that the best public/private partnerships may be the ones in which the least public money and risk are involved.
Now president of McFarlane Partners in San Francisco, Gregory Vilnick was president of Forest City Enterprises during the late 1990s, when the company took over the redevelopment of Stapleton International Airport in Denver, Colorado. Forest City entered the picture after municipal leaders rejected a public plan that would have cost $100 million just to break ground, Vilnick recalled. The company’s solution was a master plan for transforming the decommissioned airport, originally built during the 1920s, in which infrastructure was installed on an as-needed basis, and getting retail off the ground created a revenue stream to continue building, he said.
“We negotiated with the city to take the land down over a 15-year period,” he said. “All the infrastructure went in and was paid for either from advances from the company or by bonds. Advances were in the form of bonds the company would take back and monetize and then would reissue them at a lower rate as soon as the existing tax revenues were in place.” The project, now half finished, is a walkable community with about 2 million square feet (186,000 sq m) of retail space and 5,000 residential units, Vilnick added.
At the other end of the spectrum, one area where public/private partnerships still seem relevant is for construction of public buildings with a critical function—such as the planned Long Beach, California, courthouse being developed with Meridiam Infrastructure North America of New York at the head of the project team.
Joseph Aiello, CEO of Meridiam North America, said his company’s plan for the courthouse is based on a P3 model called performance-based infrastructure (PBI) developed by former British Prime Minister Tony Blair. Private companies are given concessions to design, finance, build, operate, and maintain public buildings. They get yearly payments from the public agencies they contract with, but if the buildings don’t perform up to the agreed standards, the companies don’t get paid, Aiello said.
PBI is now widely used in some parts of Canada, but Aiello said the Long Beach courthouse is the first major rollout of the P3 model in the United States. He sees the model as widely replicable for schools and similar types of critical public projects.
“Generally, any public building, any series of public buildings [where large capital expenditures] end up coming to $500 million,” he said. “It’s about providing public infrastructure for the community.”
In Long Beach, a strong mayor and community redevelopment plan were also a part of the picture, Aiello said, echoing Oliver’s view that the future of public/private partnerships will depend on local officials providing the leadership and certainty developers need.
Before taking over the Buckhead project, Oliver said, he went to see the mayor of Atlanta. To get the project going, Oliver said, “I need a public/private partnership. I need you and your staff. I need a partnership and team to help me move this through in an expedited fashion that gets it. “That is a major new form of public/private partnership,” he said. “That is a good place to spend your money and time putting it together.”
