Business
What Makes Public Private Partnerships Successful CRE Ventures?
Public-private partnerships, or PPP, are collaboratory agreements between private commercial real estate development firms and governments to finance, build, and operate real estate. These agreements have been used to make public parks, schools, municipal buildings, courthouses, sports stadiums, and many other building types. They often include revenue-sharing contracts, tax breaks, or ownership concessions between governments and for-profit entities.
Public-Private Partnerships Definition
There is no single definition for public-private partnerships since the agreements can vary drastically depending on the entities involved and the type of project. However, some aspects are shared among all PPP models.
- A public entity (federal, state, or local government) transfers or shares ownership, financial responsibility, or operations of a building with a for-profit entity.
- The for-profit entity collects fees or other revenues that would otherwise be remitted to a public treasury.
- The agreement is governed by a formal partnership agreement outlining how the money is shared, each entity’s separate responsibilities for the project, and the transaction risks.
Key PPP Models
DBO
Design-Build-Operate (DBO) public-private partnership agreements are when a single contractor is retained to design, build, and then operate a property. They are similar to standard Design-Build contracts, which include defined operations periods following a building’s completion.
BOT
Build-Operate-Transfer (BOT) contracts grant for-profit developers the right to build a large project–usually an infrastructure project like a highway or a greenfield–and then collect fees to recoup its investment over a specified time period before transferring ownership of the development back to a public entity. Under a BOT contract, the developer finances the construction cost and then recoups the cost from a single “offtake purchaser,” like a utility company.
DBFOMT
Design, Build, Finance, Operation & Maintenance, Transfer (DBFOMT), sometimes called “turnkey” procurement, combines design-build and operations-and-maintenance contracts. One key difference is that financing for a DBFOMT contract is almost always secured by a public sponsor. The public entity also holds the operational risk.
Benefits with PPP CRE
Risk-sharing
One of the main benefits of PPP projects is risk sharing. For private developers, PPP can reduce the risks of raising capital, as well as risks associated with the operations and maintenance of a building. Public entities can also benefit by transferring the financial obligations onto a private developer, which is why PPP contracts are attractive when government budgets shrink.
Innovation & Efficiency
PPP agreements also incentivize both innovation and efficiency by allowing both parties to focus on what they do best. Public entities can capitalize on private sector technology and innovation, thereby increasing the speed to market for critical infrastructure. Similarly, private sector entities benefit from innovative financing models that spread the delivery cost over the development lifecycle.
Challenges & Risks with PPP in CRE
Contract Complexity
One challenge of public-private agreements is that the contracts are often lengthy and complex. They usually include a painstakingly detailed scope of work, lengthy milestone schedules, and complex payout terms. The complexity requires a diligent review from a firm’s legal department or representative counsel, which can extend the time the entities spend negotiating and increase compliance costs.
Political/Financial Risks
Funds for PPP projects can wax and wane with political administrations, posing challenges for a project’s financing. A 2019 study by Ramon Llull University found some politicians prefer the credit-claiming potential of PPP projects to the actual delivery of infrastructure, which can influence how much money a political administration is willing to release for development.
Case Studies/Examples of PPP CRE Developments
Gateway Arch
The Jefferson National Expansion Memorial, better known as the Gateway Arch, underwent a facelift in 2010 thanks to a public-private partnership between the Gateway Arch Park Foundation and the City of St. Louis, Missouri, and St. Louis County. The more than $300 million Build-Develop-Operate agreement resulted in a 30% increase in foot traffic to the monument.
Bucharest, Romania Water and Sanitation Plant
In 2000, Bucharest and France-based utility company Veolia Environnement S.A. partnered to upgrade the city’s water and sewer plant. Before the partnership, 31% of water samples in the city had too much chlorine and other chemicals. The $250 million build-rehabilitate-operate-transfer agreement resulted in 100% of Bucharest’s water sources testing clean for harmful chemicals by 2009.
Legal Considerations
Because of the complex nature of PPP agreements, a development firm’s lawyers should spend extra time reviewing the terms and conducting due diligence before putting pen to paper. Several aspects need to be considered. For instance, a state or country’s governing laws may make some contracts unenforceable. Freedom of Information Act requests can force a business to divulge trade or company secrets. And there are ethical considerations about the kind of project partners to bring on board.
PPP CRE Trends
PPP & Sustainability
According to the United Nations, public-private partnerships have become increasingly important for countries to meet sustainability goals without negatively impacting economic development. These partnerships can also be vital tools for addressing issues like poverty and climate change since they pool resources to tackle challenges too large for a single entity to overcome.
PPP & Public Sentiment/Social Impact
Public-private partnerships have also been leveraged for social impact investment purposes. A large number of these partnerships are being financed through social, development, and environmental impact bonds, which only pay returns to investors when certain benchmarks are met. These partnerships have supported initiatives ranging from improving education outcomes for children in India to supporting entrepreneurs in Kenya and Uganda.
FAQs
What is meant by Public-Private Partnerships?
Public-private partnerships are agreements between governments and for-profit businesses to develop, maintain, operate, or finance public infrastructure like bridges, schools, and water treatment plants.
What is an example of a Public-Private Partnership?
An example of a public-private partnership is an airport financed by municipal bonds but built by a local contracting firm and then leased back to a municipal airport authority.
What are the benefits of PPP?
Public-private partnerships can provide several benefits for both public and private entities. Some benefits include cost savings, an efficient construction process, financial relief, and structured performance benchmarking.
What are the four types of PPP?
The four most common types of PPP agreements in the U.S. are Design-Build-Operate, Build-Operate-Transfer, Design-Build-Maintain-Finance, and Operations & Maintenance.
Conclusion/Bottom Line
Public-private partnerships are among the most common ways governments build public infrastructure. The agreements offer numerous benefits to public and private entities, such as spreading the construction cost over a 20- or 30-year contract and allowing each entity to focus on its specialty. Developers need to understand the basics of these agreements before sitting down at the table to negotiate a PPP contract.
