leveraging public-private partnerships for project development:...

Leveraging Public-Private Partnerships for

Project Development: Deal Structures and

DocumentationAllocating and Minimizing Risks for Owners and Developers

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TUESDAY, JANUARY 21, 2020

Presenting a live 90-minute webinar with interactive Q&A

Patrick J. O’Sullivan, Jr., Partner, Herrick Feinstein, New York

Charles G. Renner, Partner, Husch Blackwell, Kansas City, Mo.

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Leveraging Public-Private Partnerships for Project Development: Deal Structures and Documentation

Charles Renner Partner | Kansas City

Why Do P3s Matter?

► $57 trillion in projected infrastructure needs

► Growing public sector use for high priority projects

► No federal solution in the near future

6

Opportunities in P3 Structures

► Selected as a service provider for the development consortium

or serving a public partner

• Terms dictated to you

OR

► Partner role on the development team and participate in the

capital stack

If the latter:

• Prepare to assume responsibilities outside your core

competency and comfort zone

• Know what you’re getting into

• Combined development and operations risk allocation

7

What P3s Are

Public-private partnerships that use private sector resources

to delivery a public facility/ good

• A project delivery model whose pros and cons should be

carefully considered by the public sector sponsor

- Cost/Value for Money (“VFM”)

- Control

- Delivery timeframe

8

Common Characteristics of P3s

• Public good/facility/infrastructure

• High priority assets and amenities

• Lifecycle asset performance

• Risk transfer to private sector

• Public ownership of the asset, or handback from private sector

at end of term

• Private equity/financing

• Extended term, i.e. 30-99 years

• Monetization of public assets

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Why A P3 Approach?

• Lower construction costs

• Accelerated project delivery

• Lifecycle performance vs. short-term profit horizon

• Can eliminate deferred maintenance/O&M backlogs

because it’s incorporated in project costs

• Comprehensive projects can enable monetized assets

to support delivery of non-revenue generating facilities

• Private sector expertise

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- Continued

• Underwriting considerations

• P3 role experience

• Team experience

• Revenue service

• Appropriation risk

• Cost of money

• Termination for convenience

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P3 Project Examples

Historical

• Golden Gate Bridge, Erie Canal, transcontinental railroad

Current

• LaGuardia redevelopment

• Long Beach Civic Center

• UC Merced campus

• Pennsylvania Rapid Bridge Replacement

• Colorado’s U.S. 36 express toll lanes

• Chicago Skyway

• Kansas City International (DBF)

• Travis County Courthouse (DBF)

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Common P3 Structures

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• Private sector developer contracts for the design/ build of

the facility, with separate O&M contract for term of the

agreement upon completion

• Typically incorporates “handback” requirements specifying

the condition of the facility/ technology at end of term

• Public sector financing

• Term of at least 25-30 years

DBOMDesign – Build – Operate - Maintain

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DBFOMDesign – Build – Finance – Operate - Maintain

• Same as DBOM, except that private sector is responsible for

financing the transaction

• Tax-exempt (public) financing not always advantageous

enough to warrant the constraints that often come with it

• Private financing may be obtained more quickly

• Lenders impose additional requirements that may affect

how the project is developed or operated (be aware up front of their degree of control)

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• Private sector is only responsible for financing, designing and building

the facility – the public sector retain O&M responsibilities

• Takes advantage of more flexible private financing

• Does not transfer lifecycle asset performance to private sector,

so public sector retains more risk

- Fewer incentives to build for long-term value vs. short-term profit

- Fewer opportunities to hold private sector accountable

for the value the public sector thinks it’s getting

• Tax exempt finance options exist

DBFDesign – Build – Finance

16

• Private sector is responsible for designing, building,

potentially financing, and maintaining the facility – public

sector retains operations

• Where used?

- Highly specialized operations, e.g. prisons, national security facilities

• Private sector maintains maintenance obligation, so

transfers asset performance risk away from public sector

- May increase friction between the parties if there isn’t a clear

understanding of how operations are conducted

DBM/DBFMDesign – Build/Finance – Maintain

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Other P3 Structures

• Many hybrid combinations of responsibilities are possible

• May not always involve building a new facility

- Example: Long-term facility concessions

‣ Concessionaire leases an existing facility for a long term

(e.g., 25-99 years), operates the facility, has ongoing CapEx

obligations, and collects revenues from facility operations

‣ More closely associated with “privatization” because it

transfers control of an existing public asset to the private

sector

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Typical P3 Entities

• Special purpose vehicle (SPV): The private sector

entity responsible for delivering/operating the project

- Also: “Concessionaire”, “Developer”

• Sponsor: The public sector entity procuring the P3

• Financiers: Lenders, bond issuers, etc.

• Contractors: design/build, operate/maintain

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P3 Entity Structure

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Compensation Models

Availability Payments: Public entity makes fixed or

escalating payments to the SPV when the facility is

available for use

Three Basic Categories for P3

User Fees: Tolls, facility use charges, etc.

Hybrid

21

P3 Finance Risks

• Political – Termination for Convenience

• Inexperience with enabling legislation or legal work-arounds

• Inexperience or lack of sophistication re legal and financial structuring

• Faulty VfM analysis

• Unrealistic/unclear asset performance and O&M standards

• Construction challenges/flaws

• Project financing and control by lenders

(Step in rights, non-pass through risk assumptions)

• Appropriations risk

• Parent Guaranty

22

Case Study

• $1.5 billion project to completely rebuild KCI

• Favored proposer didn’t win the opportunity

• Factors:

- Understanding of P3 complexities and procurements is

essential

- Must compensate for lack of expertise in P3 financial

and legal structuring with the right advisors

- For flagship projects, PR cannot substitute for

substantive experience

- Benefit factors for equity participation

KCI Terminal Modernization Project

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• $3.4 billion, 30-year water pipeline project

• 1st large scale water delivery P3

• Garney Construction transitioned from role of service provider to taking an equity stake and leading the deal as developer when original developer declared bankruptcy

• What Garney did right:

- Recognized and seized the opportunity

- Brought on subject matter experts to protect against increased risk exposure

- Lender project risk and participation

- Revenue based model

Case StudyVista Ridge Pipeline

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• $350 million, 55-acre development of campus facilities (student union, housing, parking, academic buildings, CUP, etc.)

• Out-of-state developer, unfamiliar with P3 enabling legislation

• Success factors:

- Bundling projects to enable more easily monetized components to

support development of non-revenue generating facilities

- Recognizing the need for expertise with the political and legislative

environment

- Creative financing solutions

- Debt only

Case StudyUniversity of Kansas Central District Development

25

26

Thank You

Charles G. Renner, Partner

charles.renner@huschblackwell.com

27

28

Leveraging Public-Private Partnerships for Project

Development: Deal Structures and Documentation

Patrick J. O’Sullivan

29

Agenda

1. P3 Enabling Legislation

2. Public-Private Development: Ground Lease

3. PILOT Structure and Tax-Exempt Financing

4. Case Studies/Examples

30

P3 Enabling Legislation

31

P3 Enabling Statutes

• P3 statutes enacted in 37 states as well as the District of Columbia and Puerto Rico

• In 1989, California became the first state to adopt P3 enabling legislation

• Rationale for statutes:

• Demonstrates a state’s commitment to working with the private sector to deliver projects

• Removes any uncertainty regarding the legality of partnerships

• Establishes a structure that leads to transparency and reduced transaction costs

• Statute typically enables the public sector to make procurement decisions based on “best value” instead of simply lowest cost

As of August 2018Source: U.S. Federal Highway Administration

32

P3 Enabling Statutes

Components of enabling statutes include:

• Enable P3-type structures for a wide range of projects

• Create an office dedicated to providing P3 expertise and assistance

• Promote best practices

• Protect the public interest

33

P3s in New York

One of 13 states without P3 enabling statute. Legislation has been passed to facilitate design-build projects in limited situations.

• New York State Infrastructure Investment Act (2011) – allowed five state agencies to make use of design-build procurement.

• Transformational Economic Development Infrastructure and Revitalization Projects Act (2016) – enabled Empire State Development to use design-build in connection with redevelopment projects involving Javits Convention Center and Penn Station.

• New York City Public Works Investment Act (2019) – enabled specific NYC agencies, including the Department of Transportation, to use design-build in connection with public works projects.

34

P3 Development Structures: Ground Lease

35

Ground Lease

Public Sector

1. Enforceable mechanism to structure both the development and operational relationship with its

private sector partner;

2. Opportunity to realize longer-term economic value in the property once improved; and

3. Means to ensure that particular public objectives are achieved.

Private Sector

1. Opportunity to develop a project without carrying a significant upfront acquisition cost for the land;

2. Means to access tax benefits; and

3. Flexible structure that can adapt as a project moves from construction phase to operational phase.

36

Key Ground Lease Terms

Public-private ground lease negotiations are complex and lengthy in nature focusing on:

1. Rent and revenue participation;

2. Tax benefits;

3. Capital work and public sector oversight;

4. Use and operations;

5. Term and purchase option; and

6. Reporting requirements and audit rights.

37

Key Ground Lease Terms

Rent and Revenue Participation

Public Sector: Provides an opportunity to realize additional value for the public sector property

contribution, particularly in the event of a highly successful project.

Private Sector: Make sure that participation payments are reflective of the project’s success.

Tax Exemptions and Tax-Exempt Financing

Public Sector: Utilize the tools at its disposal to provide additional investment to project to the extent

necessary to have the project come to fruition.

Private Sector: Access additional public sector support by demonstrating that such support is needed

to make the project a reality.

38

Key Ground Lease Terms

Construction and Public Sector Oversight

Public Sector: Negotiate into the ground lease rights to monitor construction through regular updates and

inspections to make sure construction proceeds in accordance with the agreed-upon budget and schedule.

Private Sector: Ensure that public sector monitoring rights do not impede the project’s development.

Use and Operations

Public Sector: Incorporate prescriptive use and operation provisions that go beyond standard provisions

prohibiting noxious uses to ensure end use satisfies certain public objectives.

Private Sector: Provide for flexibility to allow for future modifications to address situations where the

market for the intended use does not materialize or market preferences change over time.

39

Key Ground Lease Terms

Term and Purchase Option

Public Sector: Typically seeks to preserve its reversionary interest, but in the event the public sector is

willing to grant a purchase option it wants to ensure it is receiving fair market value for its interest and the

investment it has made in the project.

Private Sector: Seeks to have the flexibility offered by fee ownership particularly if tax benefits granted the

project have been phased out.

Reporting and Auditing

Public Sector: Ensure that the public sector receives the information necessary to keep constituents

apprised of project developments and whether the project is delivering the benefits promised.

Private Sector: Be responsive to needs of public sector while not being burdened by the time and expense

associated with excessive reporting and auditing.

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P3 Development Structures: PILOTs and Tax-Exempt Financing

41

Payments in lieu of Real Estate Taxes (PILOTs)

• Structure can be used to provide additional support to a public project

• In connection with the ground lease structure, PILOT structure can be set based on

negotiations as opposed to what would otherwise be owed in the event property was not

owned by public sector

• Payments in lieu of other taxes can also be structured

‐ Payments in lieu of sales tax (PILOST)

‐ Payments in lieu of mortgage recording tax (PILOMRT)

42

Tax-Exempt Financing

• Variety of tax-exempt financing options exist:

‐ Traditional tax-exempt debt

‐ Private activity bonds

‐ Exempt facility bonds

• Can be combined with a ground lease structure and PILOT structure to finance public

components of a project

• PILOTs used to support debt service on the bonds

43

Case Studies/Examples

• Ground Lease: Applied Sciences – Cornell Tech Campus NYC

• PILOT Financing: Hudson Yards NYC

• Ground Lease and Tax-Exempt Financing: American Dream Project (New Jersey)

• Other Asset Types:

‐ Student Housing

‐ Airport Project Development

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Cornell Tech Campus Roosevelt Island

• Applied sciences campus for graduate studies

and collaboration with businesses

• Three-phase development of 2M SF of space

and 2.5 acres of public open space

• Ground lease structure and funding agreement

Image from curbed.com

Image from Cornell University

45

Hudson Yards

• 28-acre mixed-use development on

Manhattan’s far West Side that when

completed with include 18M SF of space

and 14 acres of open space

• Includes 45-square block district created

for PILOT structure

• Ground lease, PILOT and Tax-exempt

financing

Image from The New Yorker

46

American Dream Project (NJ Meadowlands)

• 3M SF retail and entertainment center, including 450 retail stores, more

than 100 restaurants and 18 acres of entertainment space

• Center houses an indoor theme park, ice rink, water park and ski center

• Ground lease and PILOT financing

Image from CNBC.com

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Thank You

Patrick J. O’Sullivan, Jr., Partner

posullivan@herrick.com