The Art of Structuring Public-Private Partnerships 2013 National Community Development Association Southeast Regional Conference November 1, 2013 National

National Development Council

The Art of Structuring Public-Private Partnerships

2013 National Community Development AssociationSoutheast Regional Conference

November 1, 2013

Introduction

1


NDC Housing and Economic Development Corporation History• A national 501(c)(3) organization specializing in

community and economic development finance• Over $2 Billion in completed P3 projects• A public mission and a private approach • Headquartered in New York City

Overview

2


Overview

3

NDC HEDC Public-Private Partnerships

Our Mission

To lessen the burdens of government, by helping governmental entities efficiently develop buildings and infrastructure, reducing costs, creating jobs, and strengthening the local tax base.


Overview

4

History of Public-Private Partnerships• PPP models developed in Europe, Canada, and Australia• Focused primarily on major infrastructure development

• Toll roads• Bridges• Utility systems• Public buildings - less common & primarily Canada

• Generally involve a private development team experienced in development, construction, and finance

• A Design-Build contractor• An investment firm providing equity and debt financing• A management company as necessary


Overview

5

Why has the U.S. been slower to embrace PPP development?

• Concern within the public sector that it could lose project control

• Almost fanatical adherence to the concept of lowest bidder

• An entrenched bureaucracy two hundred years in the making

• Differences between U.S. municipal debt structure and private taxable debt structure


Overview

6


Current State of the IndustryCommon manifestations of Public-Private Partnerships

Overview

7

Privatization• Toll roads• Privatized student

housing• Sale of public assets

• Parking meters• Public utilities

• Water• Solid waste

Partnerships• Balanced allocation

between risk and reward

• Difference between privatization and partnership is a matter of degree

Subsidization• Public contributions in

support of a private project• Sports stadiums• Large redevelopment

project


What does the public sector seek from the private sector?

• Access to cost savings through efficiency in development and / or operations

• Ability to avoid both statutory and regulatory constraints

• Ability to monetize public assets

Overview

8


What does the private sector seek from the public sector?

• Development opportunities in pursuit of fees and ongoing revenue

• Ability to lessen project risk or achieve project subsidy

Overview

9

It is critical to understand the difference between Public & Private Development Processes


The Development Process

10

Without this knowledge, fair negotiations are not possible.

Contrasting the Public and Private Development Processes



11

• Review of the differences between the public development process and the private development process

• Understanding of the motives behind each process


The Development Process – Comparing Public and Private

12

Why do they build?Public

• Governmental needs• Offices• Fire stations• Police station houses

• Needs of its citizens• Roads• Parking• Parks• Public utilities

• Often includes societal goals• Green construction• Public art• Community development

• To reduce operating expenses

Private• To earn revenue

• Fees• Cash flow• Tax benefits• Appreciation

• To accommodate operational needs



13

Project ConceptionPublic

• Steps• Identify a need• Select a site• Determine means of funding• Initial authorization

• Characteristics• Long gestation• Many decision makers• Prone to false starts• Multiple goals

Private• Steps

• Identify an opportunity• Establish site control• Test the market• Structure financing

• Characteristics• Short gestation• Defined line of authority• Certainty of goal



14

Design & Pre-Development – Procurement Public

Selection• 1 or 2 step process

• Direct RFP = 1 step• RFQ followed by RFP = 2 steps

• Selection guidelines• Equality• Selection on price or scoring –

seldom qualitative• Adherence to the solicitation,

framework and timeline – no negotiation

• Inclusion of societal goals

Private• Negotiated or bid contracts• Emphasis on price and

qualifications



15

ConstructionA Different Approach to Risk

Public• Construction and Management

• Relies on process more than experience

• Involves multiple decision makers• Prone to greater time delays• Proscriptive change order process• Imbalance in relationships – Seldom is

the public sector on par with the private sector in allocating costs

• Without an experienced builder/developer, often resulting in a “learn as you go” process

Private• Construction and Management

• Relies on experience not process• Efficient decision making• Intense focus on timeline• Experience and efficient change

order process• Controls its the relationships – Subs

and General Contractors rely on relationships



16

Public Development Focus• Legal framework is paramount• Avoid controversy• Proceeds deliberatively• Time is subordinate to process• Process to handle the

unexpected• Social and political goals are

important• Lower-cost financing

Private Development Focus• Efficiency and experience are

paramount• Success defined in terms of

bottom line• Time management saves money• Flexibility to handle the

unexpected• Seeks opportunities to save

money• Higher cost financing



17

How each Manages RisksPublic

• Tendency to increase cost to avoid controversy or perceived risk

• Frequent use of consultants• Heavy reliance on contract

language• Tendency to treat cost over-run

and change orders as legal issues before financial

• Political risk often trumps financial risk

• Time delays are secondary to process and consensus

Private• Experience• Flexibility• Controlled bidding in combination

with negotiation• Market knowledge• Collaboration• Control of the time line• Constant pursuit of saving

opportunity• Negotiation and mediation before

litigation

Forms of Delivery

1. Design Bid Build

2. GC-CM (Construction Manager at Risk)

3. Design Build

4. Private• 63-20• 501(c)(3)



18

Forms of Delivery: Design - Bid - Build



19

Public AgencyArchitect & Engineer

General Contractor

Sub-contractors

Sub-contractors

Sub-contractors

Forms of Delivery : Design- Bid- Build

• The most common approach• Linear in character• Simply understood and explained• Supported by extensive legal framework

• Advantages• Intuitive structure• Lowest potential for controversy in approach

• Disadvantages• Does not allow for contractor input into design• Often prone to extensive change orders and delay



20

Forms of Delivery: GC-CMGeneral Contractor-Construction Manager, or Construction Manager at Risk



21

Public Agency

Architect & Engineer

General Contractor-Construction Manager

Sub-contractors

Sub-contractors

Sub-contractors

Forms of Delivery: GC - CM

• An alternative public works process• Design Team procurement outside of GC-CM contract• GC-CM procurement governed by alternative public

works rules• An RFQ vs. RFP process• Subcontractor bidding in a Low Bid Process



22

Forms of Delivery: GC-CM

• Advantages• Adds a Construction Manager to assist the public• Brings the General Contractor and Construction manager into

the later design stages• Allows for Qualification based bidding of the GC

• Disadvantages• Lengthy and Procedural laden procurement process• Difficult to verify pricing control • Subject to scope and price creep in pre-development phase• Maintains Contractual Privity between the public agency and

the GC-CM



23

6. Construction Servicesa. Finalize the construction documentsb. Issue Notice to Proceedc. Approve all subcontractors prior to workd. Have pre-construction meetinge. Have A/E and inspection staff on-site during constructionf. Partner with PCSD and the GC-CM to meet all social equity contracting goalsg. Manage the construction, including change orders, buyouts, contingency usage and track all cost allocations as outlined in the matrix



24

GC-CM Process in 6 Steps (as outlined by the Seattle Dept. of Finance & Administrative Services)

1. Assess the Contracting Methoda. Define projectb. Evaluate project risks and development a Risk Assessment Matrixc. Secure and appropriate fundingd. Confirm with Purchasing & Contracting Services Division (PCSD) appropriate contracting methode. Seek training in GC-CM deliveryf. Seek out experienced and qualified Project Team (minimum 6 members, defined by City)

2. Project Review & Documentationa. Complete Initial Project Review Form with any supporting documentation; submit to PCSDb. Prepare for Project Roundtable presentation

3. Bid Document Preparationa. Develop a selection plan including timeline b. Develop evaluation form and relative weight factors; prepare scoring formc. Prepare selection/bidding documents for advertisement d. Complete Request to Advertise forme. Edit and finalize documentsf. Name Selection Committee members; secure confidentiality agreementsg. Post to the City’s online solicitation webpage

4. GC-CM Selection Processa. Make room arrangements for meetingsb. Finalize scoring/evaluation sheetsc. Finalize selection pland. Prepare interview questionse. Facilitate scoring and evaluation sessions f. Lead interview sessionsg. Prepare scoring matrix for bid openingh. Confirm final pricing and submit final scoring i. Prepare Notice of Final Rankingj. Notify proposers of final ranking, post onlinek. Finalize the work plan with the apparently successful proposer

5. GC-CM Pre-Construction Servicesa. Prepare and lead partnering sessions (consider hiring a facilitator)b. Establish/manage pre-construction deliverablesc. Prepare and complete design documentsd. Secure and appropriate fundinge. Request GC-CM self-performance intentionf. Approve final subcontracting plang. Lead GMAX negotiationsh. Partner with PCSD to determine any alternative subcontracting optionsi. Assist PCSD with Social Equity Program

Forms of Delivery: Design Build



25

Public Agency

Design-Build Team(Architect & Engineer, General Contractor)

Sub-contractors

Sub-contractors

Sub-contractors

Forms of Delivery: Design Build

• An alternative public works process

• Design Team and General Contractor procured as a team

• A RFQ process followed by RFP

• Subcontractor bidding in a Low - Bid Process



26

Forms of Delivery: Design Build• Advantages

• RFQ process based on project requirements not design • Brings the Design Team and the General Contractor together in

design process• Potential for faster delivery• Ability to establish early pricing• Greater privatization of risk

• Disadvantages • Potential for loss of control in design process• Potential for quality control risks in development• Pricing commonly includes allowances to accommodate design

& development risk• Difficult to repatriate project savings



27

Forms of Delivery: Private



28

Owner - Developer

General ContractorArchitect & Engineer

Sub-contractors

Sub-contractors

Sub-contractors

Forms of Delivery: Private

• Advantages• No RFQ/RFP• Negotiated contracts• Brings the design team and the general contractor

together in design process• Fast delivery• Ability to estimate early pricing• Privatization of risk

• Disadvantages• Likely requires more costly private financing structure



29


Forms of Delivery: 63-20 (A Private Hybrid)

Design Stage


30

Public Agency

Developer Architect & EngineerGeneral Contractor

Not-For Profit


Forms of Delivery: 63-20 (A Private Hybrid)

Construction & Operation


31

Public Agency

Not-For-Profit Lease

Sub-contractors

Sub-contractors

Sub-contractors

DeveloperGeneral Contractor

Architect & Engineer

Forms of Delivery: 63-20 or 501(c)(3) (A Private Hybrid)

• Advantages• Brings the Design Team and the General Contractor together under the

oversight of a Developer at the front end of the process.• Maximizing public input• Allows early pricing and iterative pricing• Provides incentives and allows for cost savings to accrue to the public• Potential for faster delivery• Greater privatization of risk• Breaks Contractual Privity

• Disadvantages• Not suitable for small projects • Not an easily understood or intuitive process• Financed under a lease revenue bond and not a GO bond structure



32

Contrasting the Public and Private Financing Methods

• A review of the differences between public and private finance



33

Introduction to Financing


Financing

34

Public Financing• 100% debt• Tax exempt

Private Financing• Combination of debt + equity• Taxable• Two Lenders - Construction loan followed by a Permanent loan

Private Financing

• A Balance of Debt and Equity• Debt is 50-80% of a project• Equity is 20-50% of a project


Private Financing

35

Summary of Private Financing• Requires sources • Equity + Construction Debt = Project Cost• Permanent Debt to take out the Construction

Loan & part or all of the Equity

• Cost is generally related to risk• Cost relates to market and experience• Equity costs more than debt


Private Financing

36

Public Financing• 100% debt – Usually bonds (sometimes levies)• Access to sources of debt not available to the

private sector - taxable and tax exempt bonds• A single financing for construction and

permanent• More focused on ability to pay • Less focus on collateral and collateral value• Construction interest is capitalized


Public Financing

37

Public-Private Partnerships



38

Public Development

Private Development

Public-Private Partnerships Privatization Subsidization



39

Goals of a Public-Private Partnership

Public Partner

Goals:• Certainty• Efficiency• Societal goals

What does the public partner want from the private partner?• Openness• Risk transfer

Private Partner

Goal:• Fair return

What does the private partner want from the public partner?• Flexibility to succeed

Considering a Public-Private Partnership1. Does it lower costs?

2. Does it reduce risk?

3. Does it solve a significant problem?

4. How does it impact societal goals?

5. How does it impact project oversight and control?



40

1. Does it lower costs?A. Financing StructureB. Cost of TimeC. ExperienceD. StaffingE. Motivation



41

A. Financing - Things to consider

• Cost of funds• Risk transfer• Reserves• Date certain delivery• Guarantees• Abatement• Appropriation• Ownership of asset



42

B. Cost of time - Things to consider

• Decision making process• Change orders• Sequencing/critical path• Inflation



43



44

Design Consultant (DC) reviews Color

Standards for intent

DC coordinates with Project Manager (PM)

to define exterior elements subject to

color selection

DC assesses facility and determines

appropriate color scheme that meets the

intent of the color standards

DC assimilates information for review

with Assoc. Vice Chancellor (AVC) and

PM

PM forms and chairs Univ. Color Selection

Committee

Color Selection Committee finalizes

recommendations on color scheme

PM forwards recommended color

scheme to DC

DC prepares color boards, in consultation with Facilities Services

Director and PM

Facilities Services and Color Selection

Committee approve the color board

AVC advises Master Planning Committee of

color selection

Master Planning Committee seeks

concurrence of Univ. Chancellor

Color selection is made public

Example – Exterior Color Selection Process for a Public University

C. Experience – Things to consider• Management experience• Ability to respond to problems• Ability to realize opportunities• Ability to control design process

• Value engineering• In-house expertise vs. consultants



45

D. Staffing – Things to consider• Costs of in-house staffing• Costs of consultants



46

E. Motivation – Things to consider• How are all parties motivated to save money?• How are savings shared?



47

2. Does it reduce risk?• Management of the schedule• Responsibility for unforeseen conditions• Ability to respond to issues of force majeure• Oversight of design changes/change orders• Control of contingency• Failure to perform• Guarantees• Contractual privity• Liquidated damages



48

Waterfall of Construction Risk Management1. Quality of team – Developer, GC, subs, architect2. GMP3. Balanced contracting - controls on change orders4. Adequate contingencies5. Proper incentives6. Payment and performance bond7. Guarantees8. Contractual Privity



49

Contractual PrivityDefinition: The connection or relationship between two parties, each having a legally recognized interest in the same subject matter (such as a transaction, proceeding, or piece of property).



50

3. Does it solve a significant problem?

• Timeline/delivery issue• Voter limitation• Site assembly



51

4. How does it impact societal goals?• Arts• WMBE• Living Wages• Local Contracting• Green Building



52

5. How does it impact project oversight and control?• Design

• Perceived • Real

• Construction• Quality control• Open book

• Operations• Management• Maintenance• Long-term control



53

Balance - Risk, Control and Reward• Requirements must include flexibility• Expectation for savings must include incentives to

save• Do not expect PPP benefit if public procurement and

public process are imposed• PPP benefit cannot be achieved without private

direction• Define the project and let it proceed • Understand the agreements National Development Council


54

Public-Private Partnerships:Two approaches to consider that capture the best of public and private development

• 63-20• 501(c)(3)

• Public sector financing (tax exempt rates)• Private sector development (knowledge and experience)



55

63-20 BondsRevenue Ruling 63-20 allows a not-for-profit corporation to issue debt to finance a facility for tax exempt purposes, provided:• A local governmental entity endorses the financing• The facility will be occupied by a governmental or tax

exempt entity• The facility reverts to the ownership of the endorsing

local governmental entity at the retirement of the debt



56

63-20 Bonds (cont)

History• IRS’s 20th Revenue Ruling in 1963• Establishes a means for not-for-profits to finance facilities with

tax-exempt debt• Early users were hospitals• When the IRS allowed the conduit issuance of tax-exempt

debt for 501(c)(3) corporations without requiring the reversion of the asset to a local government, the use of 63-20 bonds nearly disappeared



57



58

63-20 Bonds for Public Facilities• Not-for-profit/tax exempt debt• Not-for-profit issues its own

bonds• Development using a private

development process• Governmental control through

a long term lease or use agreement

• Mandated reversion to governmental ownership at retirement of debt

501(c)(3) Bonds for Public Facilities• Not-for-profit/tax exempt debt• Requires conduit issuer• Development using a private

development process• Governmental control through

a long term lease or use agreement

• No mandated reversion; can negotiate a contractual reversion at retirement of debt

Using 63-20 and 501(c)(3) Bonds for Municipal FacilitiesAdvantages• Tax exempt debt• Private development process• Greater knowledge and efficiency = lower

development costs• Risk transfer to the private partner• 100% financing

Disadvantages• Slightly greater up-front cost• Slightly higher interest rate - 5-40 basis points



59

When does it make sense to use 63-20 or 501(c)(3) bonds for municipal facilities?

• When a public development is likely to be more costly than a privatized approach because of time delay or process

• When conventional general obligation bonds are not a good alternative

• When specialized development skills are necessaryNational Development Council


60

63-20 and 501(c)(3) Bonds: Not Your Typical Not-for-Profit

• Must be a single asset entity that has bankruptcy remote characteristics

• Strength and substance: There should be qualities about the not-for-profit that suggest it will be in existence for the length of term of the bonds

• Must have the correct public purpose

• Must understand real estate development, including long-term asset management

• Must understand the requirements of bond compliance



61

63-20 and 501(c)(3) Bonds: Not-for-Profit Responsibilities

• Negotiate and enter into development contracts• Architect Agreement• Development Agreement• Lease Agreements• Bond Documents

• Issue bonds• Review construction progress• Process construction draws• Asset management

• Bond compliance• Oversee repairs and upgrades



62

63-20 and 501(c)(3) Bonds: Public Entity Responsibilities

• Provide purpose, direction, and programming for facility

• Enter into long-term lease

• Asset management, in collaboration with the not-for-profit• Cooperate with the property manager• Make lease payments• Review and approve annual budgets



63

63-20 and 501(c)(3) Bonds: The Private Development Team• Developer• Works for the not-for-profit to oversee development• Must be substantial• Must be willing and able to guarantee completion and price• Must have direct experience in the project type

• Architect• Works for the not-for-profit, under the direction of the developer

• Contractor• Works for the not-for-profit, under the direction of the developer



64

63-20 and 501(c)(3) Bonds: Project Characteristics

• Must be public in nature

• Should be of substantial size - $15 million or larger

• Must be income-generating

• Must be credit-worthy



65

Steps in the 63-20 Process1. Public agency decides to use an alternative development

process2. A not-for-profit is selected - RFP or negotiation3. A developer is selected - usually by RFP4. Design process starts5. Contracts are drafted

• Lease• Development Agreement• Architect Contract• Bond Documents• Preliminary Official Statement / Official Statement• Trust Indenture



66

Key Players in the 63-20 Process• Local government agency• Not-for-profit• Developer• Architect• Building Contractor• Bond Counsel• Real Estate/Contracts Counsel• Bond Trustee and Trustee’s Counsel• Underwriter and Underwriter’s Counsel



67

Key Players in the 63-20 Process (cont)



68

Management

Contract

Bond

Proceeds

Development Agreement

Title to Improvements

Ground Lease

$ Bonds

Not for Profit

Not for Profit

Bond TrusteeBond

Trustee

Public AgencyPublic Agency

FacilityManagerFacility

Manager

UnderwriterUnderwriter

Developer

Architect

GeneralContractor

Developer

Architect

GeneralContractor

Construction Payments

Bond Repayment

Use Agreement

Bond Investors

Bond Investors

Asset Managing a 63-20 or 501(c)(3) Project• Improvements will be conveyed unencumbered to the government

agency• Obligation to maintain the facilities• If possible, hire a professional property management company• Fund a Repair and Replacement Reserve• Have an independent engineering study made every 5 years

• Make a 5-year capital improvement plan• Identify any issues of deferred maintenance

• Meet quarterly with tenants to ensure tenant satisfaction• Annual site visit• Act as a liaison between public and private to ensure everyone’s needs

are metNational Development Council

Asset Management

69

Structuring the Transaction

• It is critical that the deal is structured to accomplish intended goal

• Maintain focus - do not try to solve all societal problems on the back of a single deal



70

For More InformationDaniel Marsh III, Senior Director708 3rd Avenue Suite 710New York City, New York 10017

phone: (212) 682-1106mobile: (917) 559-6188e-mail: [email protected]

www.ndcppp.org www.nationaldevelopmentcouncil.org


Contact

71

mailto:[email protected]

http://www.ndcppp.org/

http://www.nationaldevelopmentcouncil.org/