Public-Private Partnerships Community College Facilities Coalition November 4, 2013
The Panel Jeff Sykes / Scott Douglass - Attorneys Farella Braun + Martel LLP, San Francisco CA 415-954-4968 / 415-954-4498 jsykes@fbm.com / sdouglass@fbm.com Mark Zuffo Owner s Representative Brookwood Group, San Francisco CA 415-402-0800 Ext 8099 mzuffo@brookwoodgroup.com Jim Short Developer Balfour Beatty Campus Solutions, Houston TX 713-346-0971 346 jshort@bbcgrp.com 2
P3s Globally More than 45 countries have administrative units to evaluate, structure & procure P3 projects 1985 2011: 1,969 P3 projects funded Asia & Australia: 406 P3 projects UK Australian private finance initiative in late 1980s Private finance initiative in 1992 2001 2006: 32% of infrastructure investment via P3s Europe: 699 P3 projects 1990 2006: P3s increased 6 fold 3
Canadian P3s First true P3 project in 1997 (Confederation Bridge) Canada s P3 process is considered the benchmark Federal and provincial P3 agencies Centralize expertise & decision-making authority A federal agency seeks to increase use of P3s All projects over a threshold size must be evaluated for P3 delivery Standardization of procurement process and contracts Reduces transaction costs Risk allocation is well understood by project participants Well-developed bond market reduces cost of financing 4
Brief History of P3 in the U.S. Colonial America used P3s 1654 Mystic River Bridge (Mass.) Military Housing Privatization Initiative 1996 Chicago Skyway Bridge first privatization ation of an existing road in the US 2005 1985 2011: 377 P3s funded Compared to 1,969 globally two stout monks cc-by-2.0 5
Horizontal Projects Source: AGC of America 6
Vertical Projects Source: AGC of America 7
P3 Defined A Public-Private Private Partnership is a contractual agreement between a public agency and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to sharing in the resources, each partner shares in the risks-andrewards potential in the delivery of the services and/or facility. National Council for Public-Private Private Partnerships 8
P3 Structure (Typ.) Local Public Entity (Asset) Technical Consultants t Pi Private Developer (Equity / Debt) Technical Consultants Designer-Builder O & M Sub Sub Sub 9
Payment Models User fee To be paid by those who use the facility Service fees, tolls, etc. Establish/regulate fee setting mechanism Dynamic pricing based on demand Private partner risk sufficient user fees to cover: Design Construction Operation and maintenance Debt service on barrowed funds Reasonable rate of return User fee can be paid by public entity 10
Payment Models Availability fee Not part of enabling statute Payment based upon availability of facility Payment based upon performance of facility Payment plan leveraging public funds Where insufficient user demand Less revenue risk to private partner, but less up-side potential 11
Current Market Condition Lots of Need New projects Upgrade/expand existing facilities National infrastructure graded D+ per ASCE $3.6 trillion will be needed by 2020 Prop 218 limits on raising fees/assessments Private fees exempted Lots of Money Innovative financing strategies e.g., equity and debt $250 billion + currently available More from large pension funds and institutional investors Construction dollars go further now A real disconnect between supply and demand 12
California P3 Enabling Legislation 1989: AB 680 (sunset in 2003) 4 toll roads - 2 actually developed (SR-91 and SR-125) 1996: AB 2660 for local agencies Government Code sections 5956 et seq. Projects must be fee producing 1996: California High Speed Rail Act 1997: SB 465 Community colleges Projects need not be fee producing 2006: AB 1467 4 transportation projects - none developed 2009: SB 4 (sunsets in 2016) Transportation, corrections & court facilities 13
Examples of California P3 Projects High Speed Rail LA County Measure R Approved in 2008 $40 billion to highway and transit over next 30 years Doyle Drive SR-91 & SR-125 Long Beach Courthouse University of California Student housing, research labs, medical office buildings Recent examples UC Davis The Colleges at La Rue (P3 student housing) UCSF Neuroscience (P3 hybrid lease-leaseback w/ public taxexempt revenue bonds) 14
Doyle Drive Project 15
Long Beach Courthouse Project 16
Florida Atlantic University Housing 17
UCSF Neuroscience Building 18
Government Code Section 5956 Fee-producing projects/facilities Irrigation, drainage, energy, water treatment (incl. desal), sewage, flood control, harbors, light rail, airports, garbage, nonsports buildings/structures (e.g., hospitals) Highways, bridges and tunnels Caltrans problem/cost? Concession terms of up to 35 years lease or own Qualifications based selection Competitive negotiation no competitive bidding Public Contract Code does not apply Except bonding requirements Financing Private with reasonable rate of return (user fee vs. availability?) Alone or with federal or local funds 19
Education Code Section 81004 Education buildings or education centers Board of Governors must approve if project is eligible for state funding For construction, equipment or ongoing maintenance No state funds for off-campus centers Unless the Postsecondary Education Commission recommends P3 state funding does not supersede facilities that have been previously prioritized by the Board of Governors P3 projects shall not receive higher priority because they are P3 projects State funding available for instructional equipment for P3 project 20
Education Code Section 81004 Board of Governors shall adopt regulations to implement on or before January 1, 1999 The legislation was enacted in 1997 No regulations were adopted to our knowledge 21
Common P3 Alternatives Operate, Maintain Operate, Maintain, Manage Design, Build Design, Build, and Maintain Design, Build, and Operate Design, Build, Operate and Maintain Design, Build, Finance, Operate and Maintain Design, Build, Finance, Own, Operate and Maintain Build, Operate, Transfer Build, Own, Operate, Transfer Buy, Build, Own, Operate Lease, Build, Own, Operate 22
P3 Continuum 23
P3 Benefits Legal & Practical Perspectives Single point of responsibility for D-B-F-O-M Integrates design, construction and O & M O & M - extended warranty for concession term Allocate risk to party best able to control Design & construction risk to developer Cost overrun risk to developer Cost overruns of 1% on P3 vs. 15% on D-B-B Completion delay risk to developer Schedule delays of -3% for P3 vs. 45% Reduces potential of change orders and claims 24
Risk Transfer Transfers risk to the party best able to control it Design risk Construction risk Cost and schedule risk Operating risk Revenue risk Financing & interest rate risk Political risk Takes advantage of private sector efficiencies and innovations in construction, scheduling, and financing Provides efficiencies in long-term operations and maintenance ( life-cycle ) 25
P3 Benefits Owner s Perspective Projects delivered more quickly Design-build fast tracked project delivery Private partner incentivized to complete quickly Projects delivered less expensively Fewer claims and disputes than with design-bid-build Mitigates cost escalation of labor and materials Projects delivered with better quality Private partner incentivized to design-build well Public entity retains facility ownership Facility returned to public entity in pre-agreed condition 26
P3 Benefits Owner s Perspective Reduces overall lifecycle costs (15-30%) Project financing costs = 25% of project costs Public vs. private funding cost = 1 2% 5% Financial improv. opp. for 95% of remaining project costs P3 benefits can result in a 15 30% lifecycle savings Reduces Initial Public Capital Investment Delayed payment to private partner Funds can be used elsewhere 27
Cash Flow Comparison Traditional P3 Design / Construct Operate / Maintain 28
P3 Benefits Developer s Perspective Overall cost reduction Reduction in delivery time Tap into non-core expertise Private sector creativity 29
P3 Program Objectives Develop needed projects Strategic and business case assessment Feasibility study/alternative analysis Reduce cost for projects minimize lifecycle cost Enhance cash flow - reduce initial public capital investment Accelerate project completion - Fast-track track D-B, innovation in design/construct, etc. 30
P3 Program Objectives Reduce operational/maintenance costs Private partner incentivized to design/construct well when coupled with O & M responsibility maximizes efficiencies Create regional jobs/economic development MBE/WBE, prevailing wages w/ union support Be a reliable public partner avoid problem reputation Develop reputation as a can do public partner Allocate risks fairly and effectively 31
P3 Challenges - Generally Increased complexity of P3 deals Long lead time to come together Significant legal, financial and technical input Therefore, project must be of adequate size and cost Perception problems Privatization of public infrastructure assets P3 projects cost more Public responsible for private sector mistakes P3s make the private sector rich 32
P3 Challenges Owner s Perspective Complex structure can be difficult to explain Staff resistance to new delivery model Perception that it can take jobs from within Potential labor issues depending on structure Need to have a champion within the organization Identifying the right private partner Challenge of completed project seamlessly blending with other campus buildings 33
P3 Challenges Developer s Perspective Perception of free money Complexity many stakeholders, each with counsel Unrealistic timelines Lack of a Champion 34
P3 Best Practices (LAO Report) Establish expertise in P3s in-house/consultants Establish a consistent and transparent overall P3 policy/process Reduce transaction ti costs and time with one-offs Informs potential partners of specific requirements/timing Establish approval process for P3 approach Criteria and Value for Money (VfM) analysis Establish criteria for P3 candidate projects Public Benefit timing and project cost sooner/costlier Technically Complex more complex typically better Risk Transfer Opportunity EIR risk vs. user fees Revenue Source user fees vs. availability 35
P3 Best Practices (LAO Report) Rigorous VfM analysis - Net Present Value (NPV) cost comparison for project s life cycle Traditional public funding vs. private funding LAO Long Beach Courthouse (LBC) and Presidio Parkway (PP) should not have used a P3 approach Projects failed to meet criteria for P3 approach Faulty VfM assumptions: High discount rate for NPV - 8.5% vs. 5.0% on PP Unjustified tax adj. fed vs. state tax revenues Exaggerated claims and timing $125 million on PP at start Engineer s estimate high given competitive bid environment LBC - $160 million extra (AOC won t use P3 again) PP - $140 million extra 36
Definition of Success for P3 Projects On time On budget Quality construction Claims mitigated or avoided Cost savings for the public partner Initial demand forecasting is accurate Reasonable return on investment for the private partner 37
Successful P3 Projects Environmentally cleared - EIR Clearly defined scope Performance specs e.g., 50 MGD/water treatment Design criteria/standards Public sector political commitment project champion Public/community support education/outreach Common public misconceptions: Private ownership of public facilities - loss of public control High costs/private t profiteering/political i l graft Transparent and fair procurement 38
Successful P3 Projects Private Partner Interest/Return Equity and debt (e.g., PABs) to finance project Reasonable rate of return on investment Presidio Parkway - 14.46% 46% internal rate of return Generally 12 15% Experienced/reputable/trustworthy private partner Equitable and effective risk allocation Unsuccessful P3 Projects SR-125 (Caltrans success?) Design-builder unfamiliar with P3s Overly-detailed bridging docs Caltrans abuse of review and approval process Claims savvy design-build contractor Ridership much lower than projected 39
Risk Allocation Public Partner Project development risk Environmental clearance Political commitment Public support Funding sources, if any Private Partner Project implementation risk Finance equity and debt Design and construction w/ government oversight Facility operation/maintenance/management Fines e.g., unauthorized discharge of wastewater 40
P3 Opportunities For Community Colleges Student housing Development Management Dining/Bookstore Special purpose facilities Monetization Mixed use Parking structures t [OTHERS] 41
Case Study Florida Atlantic University Innovation Village Apartments, Phase I 42
The Project 1,216 beds, 492,000 square feet mixed use residential complex in two buildings six and seven stories 43
Background Founded in 1964 Now has 6 campuses Enrollment is over 29,000 About 22,600 on the main campus in Boca Raton Objectives Additional Student Housing Seed Money for Infrastructure Minimize Cost of Capital Avoid Direct Bond Issue by FAU Retain FAU Control over Residence Life 44
Parties Ground lessor Ground lessee Developer General Contractor Architect Manager Underwriter Trustee FAU (University) FAU Finance Corporation (Owner) Joint Venture of Balfour Beatty Campus Solutions and Capstone Development (Developer) Balfour Beatty Construction (Contractor) Pierce Goodwin Alexander Linville (Architect) Joint Venture of Balfour Beatty Campus Solutions and Capstone On Campus (Manager) RBC Capital Markets (Underwriter) U.S. Bank National Association 45
Transaction Steps The University board created a DSO Owner University leased the existing housing operation and the ground for the new housing to the Owner Owner engaged the Developer, e Underwriter, Trustee and Manager age Developer engaged the Architect and Contractor Underwriter placed tax-exempt bonds in the amount of $124,295,000 Senior issue of $120,930,000 (rated) Subordinate issue of $3,365,000 (unrated) purchased by Balfour Beatty All rents from the new housing project, and the net cash flow from the existing housing, are used to support the new bond issue The University manages residence life for all housing Manager manages operations and maintenance for all housing 46
Transaction Structure University $12 m Ground Lease Underwriter Trustee Non-Profit Owner Trust Indenture Ground Lease (New & Existing) $124.3 m Series A Bondholders Balfour Beatty Development Agreement Developer Manager Property Mgmt Agreement Construction Contract A&E Contract Contractor Architect 47
UCSF Mission Bay Neurosciences Clinical Research and Laboratory Building (19A) 48
UCSF Mission Bay Neurosciences Building 19A 49
Campus Plan 50
17C HELEN DILLER CANCER RESEARCH BUILDING 17A/B CARDIOVASCULAR RESEARCH BUILDING 24A/B/C GENENTECH HALL 19B ROCK HALL 51
UCSF Mission Bay Neurosciences Building 19A DEVELOPER BUILT BUILDINGS Serves as an alternative delivery method for the University Utilizes a third party developer selected through a competitive process Transfers risk and provides day to day oversight responsibilities i to a public/private i partnership Delivers a timely project within a commercially viable scope and budget Upon completion of construction, the building will be leased by the University under a long term ground /space lease- lease back 52
UCSF Mission Bay Neurosciences Building 19A KEY FINANCIAL POINTS Ground lease to Developer at market rate Space lease by user at market rate, paid by: Ground lease revenue Grant indirect recovery Gifts 501c3 issues loan to developer from tax exempt bond financing Still on UC balance sheet 53
UCSF Mission Bay Neurosciences Building 19A Overview of Ground Lease-LeasebackLeaseback Development Process Negotiation of ENA Negotiation of transactional documents Plan submittal and approval process Construction period Term of space lease Issue RFP Short List-RFP- Developer Selection Negotiate/ execute Exclusive Negotiating Agreement (ENA) to assure continuation of design Negotiate of Development Agreement (DA) Ground Lease & Space Lease Obtain Regents transactional approval & execute DA Satisfaction of all closing conditions; execute Ground & Space Leases - Issue Bonds & deliver premises to Developer Completion of construction by Developer, commencement of Space Lease and occupancy of premises by University 54
UCSF Mission Bay Neurosciences Building 19A KEY BUILDING STATISTICS Five story, 237,000 GSF (160,700 ASF) building Space Type Wet labs and lab support Clinical research facility Vivariumi Academic and Administrative offices Program Promotes Basic, Clinical i l and Translational l Research Collaboration with Neurology, IND, and Keck Programs LEED Silver 55
UCSF Mission Bay Neurosciences Building 19A BUILDING 19A GOALS To support the important research mission for the Program for Neurodegenerative Disease Research (PNDR) and the Keck Foundation Center for Integrative Neuroscience (Keck); To be a state-of-the-art neuroscience lab, clinic, and research facility To promote research, discovery, flexibility, and longevity To comply with the UCSF Mission Bay Master Plan Design Guidelines 56
UCSF Mission Bay Neurosciences Building 19A PROJECT SCHEDULE RFQ/RFP Process Feb-April 2008 Developer Selected July 2008 Execution of Exclusive Negotiating Agreement (ENA) Aug Nov 2008 Developer Negotiations/Regent s Approval Development Agreement, Ground Lease and Closing April 2010 Building Design Completed and Start of Construction Building Completion and Occupancy April 2012 57
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Q&A 59