By Charles Renner, Husch Blackwell
Federal, state and local government agencies have significant real estate needs, including the necessity of repairing and replacing aging infrastructure and utilities. But these agencies are finding it increasingly challenging to find the funding to pay for the development of their properties.
As a solution, public-private partnerships (P3s) are gaining ground as a viable funding source for real estate development projects. This is an approach that is catching the attention of not only developers, but also government leaders looking for innovative ways to fund their community infrastructure needs.
What is a P3?
A P3 is a contract between a government agency and a private-sector entity for a public project. This alternative approach to traditional funding and financing transfers substantial risk to the private party and allows the private party to fund the project with capital investments as a replacement for shrinking public funds. P3s can be a boon for local communities by driving economic growth and creating jobs.
P3 real estate development projects can benefit the public sector by transferring risk to the private sector, allowing government agencies to shift monies to other needed projects. Agencies also gain the expertise and creativity of public agencies to help them solve problems. In return, government agencies may be required to relinquish some direct control over projects to the private sector, must agree to commit future public funds and may experience increased financing costs on capital projects.
P3 projects in action
Over the decades, P3s have evolved from physical infrastructure projects such as roads and bridges, to encompass more complex social infrastructure projects, including affordable housing, hospitals, off-campus student housing and more. Here are a few examples of how P3s involving real estate are taking shape:
- Drexel University partnered with the nation’s leading student housing provider for a three-phase project, worth $345 million, to develop more than 1.4 million square feet of space, increase on-campus student housing by nearly 80 percent and add more than 60,000 square feet of retail space in Bethesda, Maryland. The improved housing is returning students to campus and returning neighborhoods to residential areas for families with schools, parks and community spaces.
- Denver International Airport is in the process of completing yet another P3 project, recently narrowing its private developer search to relocate its security screening point to a new level of the airport. The space previously devoted to security screening will be used for revenue-generating restaurants and stores. A portion of these sales would be used to repay the private developer, creating a potentially significant return on the investment.
- The Tampa Housing Authority has agreed to an equal partnership with a developer to replace several rundown properties with condominiums, rental units and retail and office space on 150 acres of city-owned land. The developer agreed to designate 30 percent of the homes for low-to-moderate-income families.
- County commissioners approved a $550 million project for a private developer to rehabilitate the Cook County Hospital and redevelop 13 acres of county-owned property in the Illinois Medical District on Chicago’s Near West Side. The first phase includes building a hotel, restaurant and retail stores. Three subsequent phases will add a technology and research center, medical office building, apartments, another hotel and parking decks. The development team agreed to hire Cook County residents for one-half of all working hours, and workers living within a three-mile radius of the site will perform 7.5 percent of the construction work.
- The city of San Antonio is partnering with private developers to construct the Vista Ridge Pipeline as part of a water supply system that would protect the Edwards Aquifer (the city’s primary water supply) in case of drought. The new pipeline is estimated to increase the city’s water supply by 20 percent.
P3 survey results
In June of 2016, the Public-Private Partnership Conference & Expo was held in Dallas. Husch Blackwell LLP partnered with the P3C Conference and Expo, and created a “flash” survey that all attendees from the public and private sectors participated in. As anticipated, the survey provided encouraging results.1
Most survey respondents viewed P3s as necessary to supplement traditional financing methods for funding growth and improvements. Both public- and private-sector respondents indicated that funding shortfalls are the primary reason to enter into a P3. All other reasons rated as very secondary for the private sector, although the public sector rated the transfer of risk as another significant factor for using P3s.
In addition, 50 percent of public-sector respondents said they would accept unsolicited proposals and 80 percent of private-sector respondents said they were willing to voluntarily submit proposals.
Overall, respondents indicated that they felt hopeful about the future of P3s. Nearly 90 percent of private-sector respondents and 80 percent of public-sector respondents agreed that P3s will become a traditional finance model for public works projects. These survey results are consistent with findings in other surveys, representing a fundamental change in how the public and private sectors view P3s.
Keys to success
When considering a P3 project, best practices should be followed for a greater likelihood of success. According to the National Council for Public-Private Partnerships, the keys to success include:2
- A statutory foundation to implement the partnership
- A recognized public figure to play a critical role as the spokesperson or champion for the project
- A team assembled by the public partner that is dedicated to the P3 project from concept through execution
- A P3 contract that details the responsibilities, risks and benefits of each party
- An identifiable revenue stream that is reasonably assured for the length of the investment period
- Open and honest communications between the partners and the stakeholders affected by the partnership
- Partners chosen with great care, considering experience and financial capacity, to find the best value rather than the lowest price
Increasingly, public agencies are turning to P3s with private-sector partners to meet their needs to fund real estate development projects. Whether the public needs affordable housing, parking, office space, health facilities or mixed-use development, a P3 is an option that has shown proven results in cities across the country.
Charles Renner is a partner and member of Husch Blackwell’s Real Estate, Development & Construction team. He is based in the law firm’s Kansas City, Missouri, office.