CLEARING UP CONFUSION IN THE MARKETPLACE: Differences Between Asset Leases vs. Development Concessions DBIA Transportation Conference Minneapolis, Minnesota April 18, 2007 Corey A. Boock Partner Nossaman Guthner Knox & Elliott LLP Copyright, 2007 Nossaman Guthner Knox & Elliott LLP. All Rights Reserved. The information contained herein does not constitute a legal opinion and should not be relied upon by the reader as legal advice or be regarded as a substitute for legal advice.
PRESENTATION OVERVIEW Nomenclature The Procurement Process Contract Issues
NOMENCLATURE Asset lease/sale long-term lease or grant of operating rights on an existing facility where the concessionaire finances, operates and maintains the facility Typically a tolled facility Typically revenue positive Development Concession at least 2 primary flavors Hard money concessions Pre-Development Agreements (PDAs)
NOMENCLATURE DEVELOPMENT CONCESSIONS Hard money concessions long-term lease or grant of operating rights on a new/expanded facility where the concessionaire designs, builds, finances, operates and maintains the facility Can be tolled or non-tolled Can be revenue positive or revenue negative PDA agreement that facilitates early public-private sector collaboration in the development of a project (often pre-environmental clearance)
NOMENCLATURE PDAs (cont.) Developer assists and supports agency with enviro process (Agency still prepares enviro docs) Perform studies, prelim engineering Helps develop delivery plan and financial plan Developer may contribute significant sweat equity or get paid at discounted rate When project is mature (close to enviro clearances, ready to be financed, etc.), developer may have right of first negotiation to enter into a hard money concession
Asset Leases/Sales NOMENCLATURE US Project Examples Chicago Skyway (City of Chicago) Indiana Toll Road (Indiana Finance Authority/INDOT) Pocahontas Parkway (VDOT) Hard Money Concessions SH 121, SH 161, IH 635, Loop 1604 and North Tarrant Express Projects (Texas DOT) Port of Miami Tunnel (Florida DOT) Knik Arm Bridge (KABATA) PDAs TTC-35 (TxDOT) South I-205 Corridor, Sunrise and Newberg-Dundee Transportation Improvement Projects (Oregon DOT) VDOT Program
THE PROCUREMENT PROCESS ASSET LEASES/SALES RFQ or LOI followed by RFP Shortlisted Proposers Higher #s (ITR had 9 shortlisted teams) More of a prequalification standard Fairly simple RFP and submittal requirements Auction-oriented format Follow the $ Little in the way of technical submittals
THE PROCUREMENT PROCESS DEVELOPMENT CONCESSIONS Often RFQ followed by RFP True shortlisting of Proposers Optimal # is 3-5 Standard is which teams are most qualified RFP is fairly complex and detailed
THE PROCUREMENT PROCESS DEVELOPMENT CONCESSIONS (cont.) Hard Money Concessions Submittal includes technical and financial proposals Fairly detailed technical submittal including preliminary engineering, drawings, etc. Financial proposal sets forth detailed plan of finance PDAs Submittal includes conceptual technical and financial approach that answer: How are we going to develop and ultimately build it How do we envision paying for it?
THE PROCUREMENT PROCESS SELECTION METHODOLOGY Asset/Leases Sales Focus is on $ Limited technical analysis If any, it is likely of a pass/fail or compliant nature Quick evaluation/announcement/award (matter of weeks) Development Concessions Hard Money Concessions Best Value ($ and other non-$ factors) Evaluation requires significant technical and financial analysis Evaluation period 1-2 months
PDAs THE PROCUREMENT PROCESS SELECTION METHODOLOGY (cont.) Quals based selection + + assesses approach to developing and financing the project Little to no $ focus Evaluation requires moderate technical and financial analysis Evaluation period 1-2 months
THE PROCUREMENT PROCESS OVERALL TIMELINE Asset Leases/Sales Approximately 6-9 months, including financial close 1-2 months for submittal of proposal after RFP Example Indiana Toll Road started its process in late October 2005, had final bids in January and financial close in June 2006.
THE PROCUREMENT PROCESS OVERALL TIMELINE (cont.) Development Concessions Hard Money Concessions Approximately 15-18 months, including financial close 3-5 months for submittal of proposal after RFP issued PDAs Approximately 9-15 months 3 months for submittal of proposal after RFP issued
CONTRACT ISSUES DEVELOPMENT PERIOD Asset Leases/Sales Not particularly relevant/materially covered May be provisions for expansions, capacity upgrades tied to certain triggers Work performed likely tied to fairly standard specs
CONTRACT ISSUES DEVELOPMENT PERIOD (cont.) Hard Money Concessions Full blown design-construction contract and technical provisions Contract will address the whole array of design and construction issues examples: Design and construction to specified standards Performance-based Site conditions Completion dates QC/QA Bonding requirements Change orders
PDAs CONTRACT ISSUES DEVELOPMENT PERIOD (cont.) Addresses scope of work through the pre-development phase More generalized scope of work Provides for payment, if any, to the developer and how measured May be progress, periodic, deliverable based Sets forth the process by which a project will be deemed mature Including some timelines by which this must occur or one or both parties may terminate
CONTRACT ISSUES DEVELOPMENT PERIOD (cont.) PDAs (cont.) Describes process/parameters of developer s right of first negotiation Provides various off-ramps for either party to terminate relationship e.g., Environmental clearance by a certain date May include some basic design and construction standards for ultimate development More precise standards get negotiated when hard money concession is negotiated
Asset Lease/Sale CONTRACT ISSUES PROJECT FINANCING Developer responsibility Will be a mix of debt/equity Payments to agency of upfront concession payment and/or revenue share Includes rights in favor of lenders Includes termination compensation provisions Address developer s ability to refinance or change ownership structure
CONTRACT ISSUES PROJECT FINANCING (cont.) Hard Money Concessions Similar to Asset Lease/Sale If revenue negative, may include public funding Periodic, progress, availability based payments May be able to access federal programs such as TIFIA and PABS PDAs Premature to address
Asset Lease/Sale CONTRACT ISSUES OPERATIONS PHASE Contract will address whole array of O&M issues examples: Meet specified standards Performance measures Renewal/rehab work Upgrade/capacity expansion work Insurance/bonding Toll systems Tolling regime Revenue sharing
CONTRACT ISSUES OPERATIONS PHASE (cont.) Hard Money Concession Similar to Asset Lease/Sale PDA Premature to address
CONTACT COREY A. BOOCK Partner NOSSAMAN GUTHNER KNOX & ELLIOTT LLP 445 South Figueroa Street, 31 st Floor Los Angeles, CA 90071 (213) 612-7881 cboock@nossaman.com