Public-Private Partnerships – Breaking the Status Quo
Public-Private Partnerships - Breaking the Status Quo
I have had experienced Public-Private Partnerships (PPPs) from both the public and private side. From my work as a real estate developer, I knew a great many qualified developers doing good projects all around the country. As I listened to these developers speak about their projects, I noted that the vast majority were only tangentially tied to a public entity. At the same time, while working and traveling as Mayor of the City of Sugar Land, Texas, I met a great many energetic and talented local leaders, each with a vision for their particular community. These visions included clear sets of goals and specific projects, yet for some reason, these goals were not always being achieved. It became obvious that opportunities were being missed due to a lack of understanding, on both the public and private sides, of the respective needs, values and opportunities that each could offer. I realized that part of the reason for this void in understanding lay in the difference in approach to questions, as well as needs, roles and responsibilities, not to mention the differences in background, experience and skill sets that each brought to the table.
As I reflected upon the projects I had worked on as a developer with cities, as well as city projects I had facilitated as a Mayor, I asked what had worked and why? Also what didn’t work and why? Where there were failures? Where there were successes? I asked myself, was there any common thread to failures and successes? How could I take a fresh look at things to provide focus on the opportunity for a PPP for the benefit of both developers and communities?
Having been on both the public and private sector sides of the development equation, I knew from experience that a PPP does not make a bad project good, rather it can make a good project possible … especially in the tumultuous economic climate in which we presently operate.
PPP does not make a bad project good, rather it can make a good project possible …
I also knew that there are well-intentioned people on both sides of the discussion, but that there was a better way to approach the question of development. It requires a commitment to the final outcome, recognition of the differences in both parties, an openness to communication, some innovative thinking, an openness in approach and a good deal of listening. In short, getting to that “win-win” situation requires a commitment to building relationships and a focus on the end game. I wanted to demonstrate how the public and private sectors can work together to create new developments which achieve the mutual and respective goals, increase economic activity in a specific area, attain a required internal rate of return for developers, and in the end, deliver a better life for all residents of the area.
In order to accomplish this, however, we must break the status quo and broaden the universe of our partners. In expanding our list of partners, I am not necessarily referring to the classical sense of investment equity partners, but let’s look to bring other public-sector partners to the table such as the Municipality, County, Public Improvement District, Management District, etc.
Municipalities are beginning to craft their own visions of what they want their futures to look like – from small towns to large cities. These vision statements, or “comprehensive plans” can be used to direct development projects and funds, encourage economic investment by targeted companies, or identify areas of the city that need new development or redevelopment. Often times, these vision statements, which very easily could include a student housing component in a larger master-planned development, are paired with development incentives or economic development funds that aim at facilitating the realization of this vision – resulting in additional benefits for developers that seek to meet the vision. These statements are created after a process of community input, professional evaluation of the applicable economic factors, and a review of the area’s existing resources and benefits. For developers, these documents present opportunities to create partnerships with the relevant public entities and fulfill the residents’ collective vision while creating economic opportunities for citizens and a higher return on investment for the developer.
When partnering with a university on a student housing development, the PPP discussions generally evolve around pricing, investment returns, resident life programs, Freshman-on-campus programs, master-leases, marketing characteristics, etc. The discussion does not center around how many jobs am I creating, or what is the incremental increase in Hotel / Motel Tax, Sales Tax, Ad Valorem Tax, etc. However, by broadening the list of public sector partners, a developer is able to add to this “discussion list” a few additional items, such as economic development tools, incentives, grants, tax abatements, etc. In short, additional contributions that can be added to the developer’s capital structure, without the incidence of ownership dilution.
Several of these mixed-use projects can include student housing, and be part of a larger mixed-use facility that can combine retail, hotel, convention center, parking, sporting and entertainment venues, office space or other features. Of course, the student housing developer can stay focused on their industry segment, and a master developer can secure other “industry specific” partners to focus on the other development components. Yet collectively, all of the individual developers win by the shared infrastructure, incentives and reduced cost structure. The common thread that runs through all of these PPP projects is that the public sector’s support is leveraged to facilitate increased economic activity that can be a catalyst for positive impact of job creation, increased property values in the surrounding area, greater ad valorem taxes collected from sales and property taxes, higher average income, and more school taxes collected. These benefits justify the risk that the public sector will take.
For a developer, the advantage of entering into a partnership with various public entities is that it decreases the developer’s risk by filling in financing that would otherwise need to be covered by a developer’s own investment in a project. Therefore, a developer can minimize their exposure and maximize the internal rate of return through this type of partnership. Most importantly, by creating this partnership, the developer then gains access to additional political support, as well as additional public finance resources that can help to cover different aspects of a project’s costs.