Public-Private Partnerships CBA-CLE Real Estate Spring Update March 29, Brent E. Butzin Kaplan Kirsch & Rockwell LLP

Transcription

1 Public-Private Partnerships CBA-CLE Real Estate Spring Update March 29, 2018 Brent E. Butzin Kaplan Kirsch & Rockwell LLP

2 Where have P3s Been Used? P3s have more commonly be used in the U.S. for transportation projects; vertical infrastructure P3s are becoming more common. Airports Great Hall Project, Denver, Colorado LaGuardia Airport P3, New York Luis Muñoz Marín International Airport, Puerto Rico Other Southport Marine Terminal, Pennsylvania Fargo-Moorhead Flood Diversion, North Dakota Roads/Highways Central 70 Project, Denver, Colorado North Tarrant Expressway, Texas Port of Miami Tunnel, Florida Rail/Transit RTD Fastracks Eagle P3, Denver, Colorado Purple Line Light Rail, Maryland LAX Automated People Mover, California Vertical/Social Infrastructure Long Beach Courthouse, California University of California, Merced, Project 2020, California Long Beach Civic Center, California National Western Center, Denver, Colorado* (coming soon)

3 P3 Spectrum Project Delivery Structures Project delivery approaches range from public to P3 options with varying amounts of private sector involvement In all cases, the public sponsor retains ultimate ownership of the asset(s). Public Design-Bid- Build Public CM/GC at Risk Public Design-Build P3 Design- Build- Finance P3 Design- Build-Finance- Operate- Maintain Design & Construction Public Private Private Private Private Operations & Maintenance Public Public Public Public Private Financing Public Public Public Private Private Increased risk transfer to private sector Increased cost of capital/financing Reduced public sponsor control

4 Design-Bid Build Designer Construction Contractor Construction Progress Payments Taxes/ Governmental Revenues Public Authority Proceeds Debt Service Public Debt Operating Costs O&M Provider

5 Construction Manager/General Contractor At Risk Designer Coordination Construction Manager Contractors Construction Progress Payments Taxes/ Governmental Revenues Public Authority Proceeds Debt Service Public Debt Operating Costs O&M Provider

6 Design-Build-Finance-Operate-Maintain Taxes/ Governmental Revenues Design-Builder Construction Progress Payments Public Authority Availability Payment (AP) Developer / Special Purpose Vehicle Proceeds Private Debt + Equity Investors Debt Service Operating Costs O&M Provider Variations: DBFM (No Operations) Lease-Leaseback Public vs. Private Finance Public-Private Mixed Development Market Risk TOD/Value Capture

7 Long Beach Courthouse (2010) 545,000 square foot building 415,000 sf LA Superior Courts, 100,000 sf separate County leased space, 5,500 sf retail 1,000 space parking structure $495 million construction cost

8 Case Study: Long Beach Courthouse P3 Type: Design-Build-Finance-Operate-Maintain (DBFOM) Public Sponsor: Judicial Council of California (Administrative Office of the Courts), County of Los Angeles Private Partner: Long Beach Judicial Partners (Meridiam, Clark, Johnson Controls (Facilities Manager)) Contract Structure: 35-Year Project Agreement + Ground Lease P3 Benefits/Rationale: Provided single annual price for construction and operations with ability to adjust service levels over time as per formulas Accessed innovation and creativity in design to create unique landmark Allowed public sponsor to keep focus on core judicial operations

9 Advantages of a P3 Model Lifecycle Cost Savings/Innovation Debt Capacity Public Sponsor Resources/Focus Bundling/Accelerated Delivery Risk Transfer Lender Considerations

10 Advantages of a P3 Model Lifecycle Cost Savings/ Innovation Taxes/ Governmental Revenues Design-Builder Construction Progress Payments Public Authority Availability Payment (AP) Developer / Special Purpose Vehicle Proceeds Debt Service Private Debt + Equity Investors Operating Costs O&M Provider Encourages integration of design, construction and operating firms during bid process to drive efficiencies and innovation to manage total lifecycle costs Encourages energy consumption efficiency and achievement of sustainability goals Incorporates total capital and operating costs into scoring and selection criteria instead of solely focusing on upfront capital construction budget Requires consistent annual payments from the public sponsor (e.g., availability payments) and ensures regular, preventative maintenance is performed

11 Advantages of a P3 Model Debt Capacity Provides for payment vis availability payments may not count directly against debt limits for public sponsors (though still incorporated into overall credit quality considerations) Public Sponsor Resources/Focus Allows public sponsors to focus internal resources on core mission (education, justice, etc.); building construction not a core activity for most public sponsors

12 Case Study: University of California, Merced, 2020 Project Site Plan Housing 1A Completion Fall 2018 Cost: ~$1.1 billion in construction costs across three phases with interim delivery deadlines Size: 1.2 million GSF Scope: Academic, research, administrative, residential, dining and parking facilities; UC s science and technology campus of the future

13 Case Study: University of California, Merced, 2020 Project P3 Type: Design-Build-Finance-Maintain (DBFM) Public Sponsor: Regents of the University of California Private Partner: Plenary Properties Merced (Plenary, Webcor, Johnson Controls) Contract Structure: 35-Year Concession P3 Benefits/Rationale: Enhance schedule certainty; delivery schedule of paramount importance for campus with students and classes Incorporate key stakeholder collaboration and input in advance of procurement Manage allocation of internal resources to focus on core mission Limit direct issuance of UC debt Bundle smaller buildings to access international expertise

14 Advantages of a P3 Model Bundling/Accelerated Delivery Increases project size to attract larger, more experience contractors and enhance potential for innovation and competition Reduces overall project costs by limiting redundant mobilization/debmobilization expenses across many projects Saves public sponsor personnel and financial resources by combining several procurements into one Allows for faster delivery with streamlined construction activities and point of contact

15 Case Study: Pennsylvania Bridge Rapid Replacement

16 Case Study: Pennsylvania Bridge Rapid Replacement P3 Type: Design-Build-Finance-Maintain (DBFM) Public Sponsor: Pennsylvania Department of Transportation Private Partner: Plenary Walsh Keystone Partners (Plenary, Walsh) Contract Structure: 25-Year Concession Agreement P3 Benefits/Rationale: Bundled 558 bridges in a single P3 to attract large, experienced contractors and incentivize innovation Transferred long-term maintenance risk to P3 developer to drive lifecycle cost incentives into design and construction process Similar to UK small schools model

17 Advantages of a P3 Model Risk Transfer Transfers construction schedule risk to private developer who commits to fixed date for construction completion Provides fixed price for construction scope Provides fixed annual payments related to capital and operations; payments do not commence until construction is complete Allows for deductions to annual payments related to underperformance or unavailability of the facility; developer commits to performance standards Transfers specific risks related to site conditions, permits, etc.; certain risks retained by public sponsor

18 Advantages of a P3 Model Example 1: Availability Payments Commence Only Upon Construction Completion Public Delivery Construction Payments O&M Payments P3 Delivery Construction Completion Availability Payments No availability payments until completion Milestone payments may be made during construction Manage overall cost of capital by injecting public funds to reduce private financing Incentivize completion of discrete construction elements tied to payment Tradeoff between total cost/cost certainty Project: Eagle P3 (G Line)

19 Advantages of a P3 Model Example 2: Long-Term Private Capital Suffers Deductions for Non-Performance Equity Base Case Private Debt Private Equity Availability Payments Deductions Case Concession agreement includes specific events with corresponding financial deductions and noncompliance points Potential for developer default and termination if certain thresholds are met 50 Project: Eagle P3 (A Line) 0 Private Debt Private Equity Availability Payments

20 Lender Considerations Private lenders require step in rights to take over a project from a P3 developer and remedy construction delays in advance of the contract deadline; availability payments from the public sponsor only start when construction is complete. Public sponsor will receive liquidated damages during any period of delay beyond the scheduled completion date Performance security is available to lenders in addition to public sponsor

21 Choosing a Delivery Method Analysis Tool Description Key Question Economic Feasibility Benefit-cost analysis Comparison of social and economic benefits to costs of project Is the project economically attractive from the perspective of society? Financial Feasibility Financial viability analysis Evaluation of financial cash flows related to project Can the public agency afford the project? Comparing Delivery Options Value for money analysis + risk register Comparison expected P3 cash flows and expected conventional delivery method cash flows adjusted for key risks What is the optimal delivery method? or At what point is the P3 bid more attractive than conventional project delivery?

22 Risk Register Value Proposition: Risk should sit with party best suited to manage that risk

23 Value for Money Key Assumptions: Public vs. P3 Costs (Net Present Value) Construction costs Innovation Efficiencies Change orders Construction schedule 200 Operating costs Predictability 150 Level maintenance investment 100 Financing costs Debt Equity 50 0 Public Sector Comparator P3 Shadow Bid Risk register/retain risks Monte Carlo Construction Costs Operating Costs Financing Costs Retained Risk

24 P3 Procurement Process

25 Best Value Evaluation It's a very sobering feeling to be up in space and realize that one's safety factor was determined by the lowest bidder on a government contract. Alan Shepard The first American to travel into space

26 Case Study: Long Beach Civic Center

27 Case Study: Long Beach Civic Center P3 Type: Mixed Public/Private Development + DBFOM Public Sponsor: City of Long Beach Private Partner: Plenary Properties Long Beach (Plenary, Clark) Contract Structure: 40-Year Concession Agreement (Public Property) + Market Risk Properties Conveyed in Fee P3 Benefits/Rationale: Transfer of real estate development risk Access to real estate expertise/value capture Guaranteed civic center cost/schedule Integrated construction scope/site planning

28 Case Study: Moynihan Station P3 Type: Mixed Public/Private Development Farley Building New York, NY Public Sponsor: Empire State Development Corporation Private Partner: RVS Partners (Related, Vornado and Skanska) Contract Structure: 99-Year Ground Lease + Development Agreement; State- Financed PILOT payments from Private Partner Train Hall (250,000 SF) Private Development (750,000 SF) P3 Benefits/Rationale: Guaranteed train hall cost/schedule Integrated construction scope Access to real estate expertise Use of value capture funding Tracks continue under Penn Station

29 Key Contract Considerations Performance Specifications Construction and operations Payment Mechanism Including deductions regime for failure to meet specifications Supervening Events Events for which time and/or schedule relief are given Unforeseen Conditions/Baselining Geotechnical, right of way availability, etc. Termination Rights/Compensation Default, convenience and force majeure cases Handback Provisions Handover of facility/asset to the public at the end of the term Dispute Resolution Procedures for resolution Change in Developer Control Limits on timing and experience of replacement parties Refinancing Public sponsor sharing in benefits Ongoing Audits/Reporting Requirements Frequency, content and inspection rights

30 Payment Mechanism Example Deductions for elevator unavailability: 1 elevator = $1000/day ($2000/day on City Council meeting days) 2 elevators = $3000/day ($3500/day on City Council meeting days) 3 elevators = $5000/day ($7500/day on City Council meeting days) All elevators = 75% of maximum deduction for complete unavailability of entire facility

31 Case Study: National Western Center

32 Case Study: National Western Center