The Canadian Council for Public-Private Partnerships
“The 10th Annual Conference on Public-Private Partnerships” Toronto, Canada
“Public/Private Real Estate Partnerships”
November 26, 2002 John Stainback
Malvern, PA
Stainback Public/Private Real Estate, LLC www.SPPRE.com
Presentation Overview
Overview of the U.S. Public/Private Real Estate Industry The Advantages of the Public/Private Partnership Approach A Predevelopment Process that Places the Public Partner(s) in a Position of Strength Two Case Studies: 1) 2) Oyster School/Henry Adams House The Square at Falling Run
The Precarious Future of Public/Private Partnerships
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I. Overview of the Public/Private Real Estate Industry
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The Two Primary Types of P3 Real Estate Projects
The public/private finance, design, development, construction and operation of needed public facilities and government sponsored commercial developments. The proactive management of underutilized government-owned real estate assets.
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Scope of the U.S. Industry
The public/private development of needed public facilities and government sponsored commercial developments is now a $50 to $75 billion per year industry. All levels of government in the U.S. own real estate valued at $5.6 trillion.
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Types of Development:
Government/University/School District Office Buildings Urban Mixed-Use Residential (High-Rise and Garden Apartments) Hotel/Conference Centers and Convention Hotels Airport Facilities (Terminals, Air Cargo and Hotels) University Facilities and Student Housing Technology and Bio-Tech Parks Transit-Oriented Developments (TODs) Sports and Entertainment Facilities
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Public Partner(s) in the U.S. Using P3 Approach:
Federal, State, County and City Government Colleges and Universities Public School Systems Public Authorities Special Purpose Development Corporations Non-Profit Corporations
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The Basic Characteristics of U.S. Public Partner(s):
Power to Lease Land Ability to Issue Bonds Ability to Leverage Project Generated Tax Revenue Power to Provide Capital and NonCapital Incentives and Investments Ability to Execute a Development Agreement
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II. The Advantages of the Public/Private Partnership Approach
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The Advantages of the Public/ Private Partnership Approach
From the Perspective of the Public Partner(s):
„ Reduce public ownership and development risks „ Reduces primary public partner(s) capital investment „ Generates non-tax income and tax revenue „ Monetizes excess and underutilized assets „ Fully utilizes private partner expertise and creativity „ Often expands into “public-public” partnerships and additional public/private partnership „ Implementation schedule is accelerated
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The Advantages of the Public/ Private Partnership Approach
From the Perspective of the Private Partner(s):
„ Often public/private developments are high profile projects „ Jointly control a government-owned real estate asset available for the first time „ If needed, primary and secondary public partner(s) provide capital and/or non-capital investments „ Reduce development cost and enhance cash flow „ Approval process is accelerated
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Problems
From the Perspective of the Public Partner(s):
„ Reduces control over design, delivery, and operation „ Reliance on a virtually unknown private entity „ Deal structure is perceived as not fair and reasonable sharing of costs, risks, responsibilities and economic return „ Private partner(s) has right to sell project to unknown third party „ Economic return is primarily contingent on performance of private partner(s)
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Problems
From the Perspective of the Private Partner(s):
„ Substantial cost both in time and risk capital „ Often public partner(s) is not prepared to structure, negotiate and implement „ Development site is either not under control, has environmental problems and/or is not entitled „ Public partner(s)' s expectations are not in sync with the marketplace „ Public partner(s) is susceptible to political change
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III. A Predevelopment Process that Places the Public Partner(s) in a Position of Strength
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Stainback’s Public/Private Pre-Development Process
1: Conceptualize 1: Conceptualize Project Project 2: Establish 2: Establish Project Objectives Project Objectives 3: Create the 3: Create the Project Vision Project Vision 4: Complete Market 4: Complete Market Demand Analysis Demand Analysis 5: Develop Land, 5: Develop Land, Building and Building and Infrastructure Infrastructure Program Program 6: Complete Design 6: Complete Design 7: Prepare Total 7: Prepare Total Development Development Budgets Budgets 8: Complete 8: Complete Financial Financial Analysis Analysis 12: Develop 12: Develop Public/Private Public/Private Financing Financing Structure Structure
9: Prepare 9: Prepare Development Development Phasing Plan Phasing Plan 10: Develop 10: Develop Alternative Alternative Public/Private Public/Private Finance Plans Finance Plans 11: Develop 11: Develop Alternative Alternative Ownership, Ownership, Investment, Investment, Development Development and Operation and Operation Scenarios Scenarios 15 - SPPRE
13: Issue 13: Issue Developer Developer Solicitation Solicitation
14: Negotiate 14: Negotiate Development Development Agreement Agreement
15: Obtain 15: Obtain Equity and Debt Equity and Debt
16: Start 16: Start Construction Construction
Predevelopment Process Places Public Partner(s) in a Position of Strength
Public partner(s) is assured that building program is market driven Many design issues are addressed prior to RFQ and/or RFP Development budget incorporates hard and soft costs Financial analysis reveals return/ shortfall
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Predevelopment Process Places Public Partner(s) in a Position of Strength
(cont’d)
Most advantageous public/private finance plan is determined prior to RFQ and/or RFP Most advantageous ownership/investment position for the public partner(s) is determined prior to RFQ and/or RFP Public partner(s) can better evaluate developer proposals Public partner(s) is less dependent on developer and can negotiate from a position of strength 17 - SPPRE
IV. Two Case Studies:
Oyster School/Henry Adams House The Square at Falling Run
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Oyster School/Henry Adams House
Bi-lingual magnet school originally built in 1926 In need of rehabilitation and expansion District of Columbia did not have the funds 21st Century School Fund was client and worked with public partners Market demand analysis revealed a luxury apartment building was highest and best use Private developer competitively selected to finance, design, and construct school and residential building
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Oyster School/Henry Adams House
Original school
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Oyster School/Henry Adams House
Site Plan
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Oyster School/Henry Adams House
New Plan
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Oyster School/Henry Adams House
New School and Apartment Building
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The New James F. Oyster School
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HENRY ADAMS HOUSE
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Oyster School/Henry Adams House
Public Participants Structured public/private finance, design, and development plan with the multiple public entities:
District of Columbia Public Schools District of Columbia Government District of Columbia Control Board Oyster School Community Council Oyster School Blueprint Committee The 21st Century School Fund Fine Arts Commission The Woodley Park Community Association
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The Oyster School/Henry Adams House
“The District of Columbia City Council cited the Oyster School/Henry Adams project as a model public/private partnership. As a result of these efforts, the District will have its first new public school in more than 20 years.” “In this public/private partnership, LCOR has proven to be a knowledgeable and experienced partner. I would recommend LCOR for consideration to other jurisdictions seeking to partner with the private sector.” Kathy Patterson Council Member District of Columbia City Council Washington, DC October 6, 2000
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The Square at Falling Run
Morgantown, WV
Project Scope:
A $212 Million Urban Mixed-Use Development – housing, retail, entertainment and office space
SPPRE’s Role:
Co-Developer for Pre-Development and Construction Phases
Plan of Action:
SPPRE is working closely with the McCoy 6 Group to structure and implement a 5-Part Public/Private Partnership between McCoy/SPPRE, WVU, City of Morgantown, Monongalia County and WVDO.
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Development Team
Developers
McCoy 6 Apartments, LLC, Morgantown, WV Stainback Public/Private Real Estate, LLC, Malvern, PA
Finance
Lehman Brothers, New York, NY First United Bank & Trust, Oakland, MD
Design and Construction
The Clark Construction Group, (Lead Contractor), Washington, DC March Westin, (Construction Company), Morgantown, WV RTKL and Associates, (Urban Designer), Washington, DC HKS Inc., (Architect), Dallas, TX Alpha Associates, (Architect), Morgantown, WV Sasaki & Associates, (Landscape Architect), Watertown, MA
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Development Team, continued
Legal Counsel
Bowles Rice McDavid Graff & Love PLLC, Charleston & Morgantown, WV
Engineering
Greenhorne & O’Mara, (Civil Engineering), Fairmont, WV Triad Engineering, (Geological & Environmental Eng.), Morgantown, WV
Specialists
Wells & Associates, (Traffic Planner), Washington, DC Prof. Ron Eck, WVU, (Traffic Planner), Morgantown, WV Robert Charles Lesser & Company, (Market Analyst), Washington, DC Integra Realty Resources, (Land Appraisals), Morgantown, WV
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Project Site
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Project Site
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Master Plan 30-Acres
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The SFR Development
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Public/Private Finance Plan
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Total Development Budget
Equity Private Development Projects Retail/Cineplex at The Square Office Space on The Square Housing on The Square Garden Apartments/Townhouses Total: Subtotal (Private Component) Public Development Projects: Parking Garage (Incl. 200 for trade with WVU) Public Square Street Improvements/Infrastructure/Other Subtotal (Public Component): Total (Public and Private Components):
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Debt $16,477,782 $14,703,431 $54,010,453 $46,663,098 $131,854,764 $171,917,761 81%
$5,492,594 $4,901,144 $18,003,484 $11,665,775 $40,062,997
$33,507,286 $1,300,000 $4,892,714 $39,700,000 19% $211,617,761 100%
Three-Part Public/Private Finance Plan
Two-Part Private Component: 1) Private Equity 2) Private Debt Subtotal: Public Component: 3) TIF – Backed Revenue Bond: TOTAL (Public and Private): $40,062,997 23% $131,854,764 58% $171,917,761 81% $39,700,000 19% $211,617,761 100%
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Finance Plan for Private Component
1) Private Equity: $40.1 M (23% of Private Costs) McCoy/SPPRE: $ 11.0 M (27% of Total Equity) Equity Investors: $ 29.1 M (73% of Total Equity) 2) Private Debt: $131.9 M (77% of Private Costs) Permanent Loan Commitment Construction Loan
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Return on Investment
IRR Retail/Cineplex on The Square: Office Space on The Square Housing on The Square Garden Apartments/Townhouses 23.0 22.8 18.4 21.0 ROC 11.60 10.80 9.80 10.47 DCR 1.78 1.53 1.43 1.48
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Finance Plan for Public Component
3) TIF-Backed Revenue Bond
Tax Revenue Generated by SFR: Year 1 $3,430,472 $1,897,500 $5,327,972 $ 234,019 $5,561,991 Years 1-30 $137,179,728 $ 90,274,351 $227,454,079 $11,584,201 $239,038,280 $ 8,948,974 $247,987,254
Property Tax Sales Tax Subtotal B&O Tax Subtotal Sales Tax (Construction) Total
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TIF Revenue Bond, cont’d
Primary Scenario: Property Tax, No Sales Tax & No B&O Tax Tax Year 1: Current Tax Base: Annual Tax Increment: TIF-Backed Revenue Bond
(DCR: 1.25, Coupon Rate: 5.0%,Term:30 Yrs.)
$ 3,430,472 - $284,515 $ 3,145,957 $39,700,000
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V. The Precarious Future of Public/Private Partnerships
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The Precarious Future
The future looks bright. Public partner(s) have increasing confidence in the public/private partnership approach, but there are looming problems:
„ The pre-development process is far too lengthy „ Many public partner(s) are not ready to issue an RFQ or RFP (they jump from Step 1 to Step 13) „ The solicitation process requires high-risk investment by the potential private partner(s)
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The Precarious Future (cont’d)
Public partner(s) are not allowing private partner(s) to be creative Increased voter control over public investment Public and private partner(s) are not utilizing the enormous creativity and flexibility available Expectations of public partner(s) are often not in sync with the market Many times, public partner(s) expects private partner(s) to incur all of the risks, costs and responsibilities
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