Public-Private Partnerships Grab Developer Attention [ By Lisa Harbatkin ] Greater efficiencies and lower costs are among the reasons why partnering with federal, state or municipal agencies can be an effective long-term component of a developer's business strategy. Several states, and some other public jurisdictions, have laws facilitating public-private partnerships. Some jurisdictions welcome proposals from developers and may not require low-bid processes; others might prefer RFPs or take flexible approaches. Whatever the method, the idea is to develop projects that combine the resources and capabilities of both sectors to provide facilities for general public use. "The public-private arena is becoming more accepted," according to Michael A. Haller, development director, Concord Eastridge, Inc., Washington, DC. There are more opportunities for the private sector in the current period. "This is a good time to get into it," Haller noted. Public-Private Partnerships (or PPPs) are structured in different ways and every one will be specific in its details, whether it is turnkey, design-build or any one of a number of arrangements pertaining to building, owning, leasing or operating. Financing might be by the private partner or through bond issues, tax exemptions or abatements or other funding mechanisms. " A public-private partnership is a relationship between a private entity making significant investments in a community and a public entity putting forth its resources to accomplish a common goal," explained Russell Tepper, vice president, development, for Matrix Development Group, Cranbury, New Jersey. The private sector's contribution is its expertise, ability to assemble the development team and in many cases, up-front financing. The public entity can provide infrastructure improvements such as roads, water and sewer, air rights, or perhaps a bond issue to expedite the process. "Many of the best sites and largest projects entail significant public participation, whether it is public grants or loans for affordable housing," said Ronald W. Ruth, a partner at the law firm of Sherin and Lodgen, Boston, Massachusetts, and chairman of its Real Estate Department. Public involvement could be essential in some cases in assembling the property or facilitating the financing, Ruth explained. These partnerships are rescuing downtowns, building mass transit systems, providing affordable housing and much more. Public partners are actively looking to work with private companies. They understand the importance of stability and defined procedures for the private sector. Greenville, SC Efforts Greenville, South Carolina began working with private partners in the 1980s, creating a revitalized city, and builds on each success to attract new private partners, while maintaining ongoing relationships with established ones. "We know we're competing for attention in terms of where private investment dollars can go," said Nancy Whitworth, economic development director of Greenville. "We want to do repeat projects with the same developer. We want to establish a relationship. Greenville understands the private partner's need for the same kind of reassurance that the city needs. They need the predictability and to be assured that we will do what we say we will do in a timely fashion." Making public-private partnerships work calls for strong political leadership; continuing monitoring and involvement on the public side. "Private developers successful in these projects have a strong awareness of the constraints operating on the public sector," said Ruth. Both sectors operate now in a political climate that is very different from what it was a decade ago. Issues like those raised by recently decided eminent domain cases and the New London, Connecticut appeal due for a spring Supreme Court decision (see sidebar) add their own complexities. This is especially true when land assembly is central to a public-private partnership. Court decisions in these cases can potentially affect several thousand properties and cases around the country. Trends and Impacts: What the Public Sector Wants Political realities play a major role in determining what cities, states and quasi-public authorities need or want to get out of a given project at a particular point. They may want more taxes, improved revenue streams, even an ROI. However, jobs, improved environmental quality, a new neighborhood facility or low-mid income housing are likely to be the public partner's major goals. Chances are that profit, at least as the private sector sees it, will be fairly far down the list. Long-range demographic and economic trends drive private sector opportunities. Demand now appears to center on several areas: Mixed-use projects are becoming more important as cities spread out and residential and commercial properties overlap. Residential is returning to downtowns, making them neighborhoods again, with renewed or growing demand for homes and upgraded retail properties. Affordable housing is a major focus for rural as well as urban localities around the country. Overcrowded school districts and public university systems with limited budgets are turning to private sector partners. Competitive pressures on universities have led to interest in providing fitness centers and other amenities. Changes in distribution channels, as noted in the Summer 2004 issue of Development, and shifting uses of old industrial and commercial properties demand new and creative approaches. So does the transportation sector. Brownfields and reclamation remain active opportunities. Government programs like Enterprise Zone are worth looking into. The public partner will have a strong say in setting priorities. The private developer "has to be sensitive to what's motivating the government," said Ruth. Higher tax revenues are good, but the real value for a city may be entirely different. ?It may be in stabilizing a neighborhood. It may be that the goal it has for the project is in revitalizing an area that?s too difficult and costly for the public entity to do on its own,? Ruth asserted. Governments in the Northeast are likely to be especially receptive to projects addressing the region?s need for affordable housing, he notes. Matrix partnered with New Brunswick, New Jersey, the home of Rutgers University, in redeveloping two buildings and associated parking areas into a mixed-use property. Benefits have been substantial, creating rental and for-sale residential units along with retail and parking. The city gets a neighborhood boost and Matrix has a development "in an urban setting, in an area where we've been focusing our resources," Tepper said. "We're partnering with the city to create economic development that otherwise might not occur." School districts and universities are frequent partners in Concord Eastridge public-private jobs. The company was recently selected to develop and build a 13-acre arts and business campus at Arizona State University, for example. The company often presents a complete proposal to the school district or university. This represents a considerable up-front investment. "We're coming to the table with the architect and the contractor at the table at the same time," Haller said. Among other recent examples of public-private partnerships, in Kissimmee, Florida, Berryman & Henigar, a southern California-based construction services consultant, worked with a private community developer to fast track the Bellalago Water Supply Facility, which was then turned over to a state utility authority for day-to-day operations. The first phase of a new public monorail system, connecting seven resorts, recently opened in Las Vegas, with plans to eventually extend it to McCarran Airport and other locations. Gensler Architecture, Boston, Massachusetts, part of a multi-partner design team, is designing the fixed facilities. A public-private partnership raised funding, secured environmental approvals and planned a rail connection for Utah's West Bench, with Kennecott Land as a major player. Getting Started: Defining Comfort Zones Working with a public partner calls for some attitude adjustments. Even with the opportunities available, cautioned Haller, "It's not something every private company will want to do." "Even with a shared goal, the public and private entities usually approach the job in radically different ways and with different views of the goal," Ruth advised, adding that, realistically, more public involvement is likely to mean more delays. For example: "The private sector has to understand that working with the public requires a little more patience - we cannot respond as fast," Greenville's Whitworth warned. On the other hand, said Haller, "We're used to doing things faster. The public sector has to be comfortable with the decisions it is making, and the private sector has to get used to that," Haller continued. The private sector needs to understand that as well as the public sector's fiduciary responsibilities. The private partner may be making a significant up-front investment, whether in financing, land assembly or developing the proposal. Balancing this, in jobs funded by a bond issue, "the money is there and we know it's there," Haller said. In other cases, rather than waiting for office lease-up for profit, the private partner may be able to collect fees as the project gets underway. Smoothing the Way: Spotlight or Sunshine? Preliminary talks, arrangements and preparations are confidential, but once a proposed public-private partnership reaches the point where official action is necessary to sign agreements and allocate public resources, it becomes public. Community concerns and intra-community conflicts are especially likely in projects involving residential changes and environmental impacts. Traffic patterns, proper usages - even the wrong kind of store - are among the issues that can get a neighborhood to the barricades. Responsiveness to these sensitivities is central to minimizing bad feelings and securing project approval. Opening the process does a lot to head off potential conflicts. "We encourage developers to conduct talks with the community involved, even during the confidential period," Whitworth remarked. "We advise developers not to go in with a fixed plan, but to bring some ideas. We advise them to be ready to listen, so people feel they've had a chance to get involved in the project." "Public-private partnerships are rescuing downtowns, building mass transit systems, providing affordable housing and much more." "Working with a public partner calls for some attitude adjustments. Even with the opportunities available, it may not be something every private company would want to tackle. Realistically, more public involvement is likely to mean more delays. Eminent Domain "Takings" Raise Sensitive Public-Private Development Issues Can cash-poor cities use eminent domain to clear economically viable private property for more desirable private development that, while deemed to achieve a public purpose, would also generate higher tax revenues? On July 30, 2004, in County of Wayne v. Hathcock, the Michigan Supreme Court reversed its 1981 ruling allowing condemnation of Detroit's Poletown neighborhood so General Motors could build a new Cadillac plant. In October, the U.S. Supreme Court accepted Kelo v. Connecticut on appeal from the Connecticut Supreme Court. If the state court's ruling is upheld, Connecticut would be able to condemn a middle-class area to allow development of up-market condos, hotel rooms and offices. The Court's decision will have a significant impact on many public-private developments, given the importance of eminent domain for land assembly in many projects. Once exercised for clearing slums and blight to provide better housing or infrastructure improvements, eminent domain has since been used to clear blight for commercial and industrial use. Cities now are using it to condemn homes and businesses for the purpose of economic development. Kelo and County of Wayne raise a central issue in today's public-private context, said Brian Blaesser, a partner in the law firm of Robinson & Cole, Boston, Massachusetts and co-chairman of the firm's Land Use Group. The basic question, Blaesser said, "is whether condemnation of one private property for use by another private entity satisfies the "public use" requirement under the Fifth Amendment and under the particular state constitution." Related issues, Blaesser continued, include whether local government is the only party capable of assembling land needed for a public-private project, and whether the private partner remains accountable to the public. "There is a real need for better criteria to determine what satisfies the "public use" requirement," Blaesser said. Once that is done, project documents should also give the developer the flexibility needed to respond to changing market conditions. "At the same time, the developer must keep the stated public objectives in mind in order to sustain public support throughout the project."