Well Developed: The benefits and best practices associated with successful public-private partnerships
By Don Cardon and Steve Backman
As most commercial real estate professionals recognize, public-private partnerships have become an increasingly prominent feature on the development landscape in recent years.
Fully appreciating the power and potential of these partnerships requires not only a more sophisticated understanding of why they are important and where they can be most valuable, but also a willingness to embrace both established and emerging best practices for uniting the creativity of the private sector with the resources of public entities. Today, many of the most transformative and influential real estate developments were made possible through strong public-private partnerships.
Benefits
The most obvious benefit of any public-private partnership is resources: access to funding that makes certain developments possible that would otherwise never get off the ground. But evaluating the true value of these partnerships requires understanding just what it is that that money can do for you. It is important to remember that public investments can only be utilized for “public purposes.” In other words, public investments need to be aligned in support of purposes aimed to advance the public good (i.e. roads, infrastructure, streetscape enhancements, etc.). Funds cannot be used to fund private at-risk ventures, which provide no direct public benefit.
Size
Among the limitations of a “traditional” approach to real estate development are the challenges associated with bankrolling a project. A traditional development model requires extensive private equity, and the complications that arise from that often make larger developments either riskier or simply not feasible compared to smaller projects. Public-private partnerships frequently make it possible to execute a project on an entirely different scale. Public equity can bridge the financing gap and facilitate projects with the kind of critical mass and regional influence required to become a self-sustaining commercial engine. Further, unlike private equity, public equity does not involve a carried participation of ownership for the public jurisdiction making the investment. This is significant when considering the multiple layers of equity and debt, both public and private, that will ultimately be required for substantially sized pursuits.
Synergy
Beyond critical mass, size confers other advantages—most importantly, the capacity for synergy and the ability to tap into the support of complementary uses. Unlike smaller projects, which are frequently wholly dependent on context, larger projects can create their own context: unlocking the full potential of mixed-use design and development. Larger projects have more freedom to combine multiple complementary uses in ways that drive traffic and impact the bottom line—and they can leverage co-tenancy and destination value. Public-private projects also typically make it possible to include the kinds of amenities and public spaces (such as pedestrian walkways, public squares, and parks and green spaces) that may be cost-prohibitive in a smaller, privately funded project.
Civics
By definition, public-private partnerships involve a more active and engaged public sector. From civic and community leaders and decision makers, to the general public, the public buy-in is more than just literal. Frequently, working closely with a municipality makes it possible to solicit feedback, generate enthusiasm and integrate valuable local perspectives into the project. And when the public and political sector gets more involved, the momentum often picks up. Public-private partnerships are frequently the only real way to get large projects done in dense urban locations that are often surrounded by existing public assets, municipal facilities and other public interests.
Best Practices
Best practices for securing strong public-private partnerships range from basic consideration of site and circumstance, to more strategic advice for securing private investment, establishing credibility and momentum, and securing pre-commitment and engagement from core users and tenants.
Create a self-reinforcing cycle
Instead of seeking out public financial contributions first, consider approaching private interests before any public monies have been committed. One effective way to do so is to garner the support of local business and community leaders. If they can become vocal and visible advocates for the project, it takes significant heat off of the politicians who may otherwise be hesitant to stick their necks out and make a big financial commitment. Once public funding becomes a reality, the project is poised to generate even more interest from private sources. It is important to remember that the ultimate goal is not to maximize public investment, but rather to minimize it to a level solely necessary to advance the financial viability of a project deemed important to the community—not just to the developer.
Don’t be greedy
When working to secure public funding, fill the gap between where you are and where you need to be—do not ask for more than you need. If $20 million will do the job, do not get out over your skis and ask for $100 million. Additionally, be willing to justify every dollar that you do ask for, with detailed accounting, projections and metrics. If you go into a negotiation with a high price tag and an attitude of “we’ll figure it out later,” you are not asking for a partner, you are asking for a bank.
Establish credibility and momentum
The process of securing public backing is made significantly easier when there are credible names associated to the development; getting some core tenants involved early validates a project in the eyes of everyone from members of the community to the city council. Familiar names can also help ease the concerns of local opponents. As is often the case, more than a few projects have been rumored for years, or languished for long periods of time, making a certain level of cynicism inevitable. One of the goals is to bring credibility to the project and there are few better ways to do that than with the logo of a national retailer. The buy-in of retailers, restaurateurs, and hospitality groups can spur financing and give tangible life to a project, articulating the vision better than any plan or rendering.
Be strategic about site selection
There are a number of characteristics to look for when identifying potential sites that would be a good fit for the kind of large, multi-use projects that often require public-private partnerships to get off the ground. Generally speaking, underutilized sites, or sites adjacent to large public facilities and other developments and investments in urban areas will be more likely to have that reservoir of untapped potential.
Although increasingly popular, public-private partnerships are vastly misunderstood and, in many ways, could more accurately be defined as public funding partnerships, which deeply misses the point. True public-private partnerships advance projects designed to support, enhance and activate publicly embraced objectives often depicted under “Quality of Life” values: affordable housing, enhanced density in relationship to public services, reduction of transportation related challenges, etc.
Some of the most successful commercial developers today have become adept at utilizing
As most commercial real estate professionals recognize, public-private partnerships have become an increasingly prominent feature on the development landscape in recent years.
Fully appreciating the power and potential of these partnerships requires not only a more sophisticated understanding of why they are important and where they can be most valuable, but also a willingness to embrace both established and emerging best practices for uniting the creativity of the private sector with the resources of public entities. Today, many of the most transformative and influential real estate developments were made possible through strong public-private partnerships.
Benefits
The most obvious benefit of any public-private partnership is resources: access to funding that makes certain developments possible that would otherwise never get off the ground. But evaluating the true value of these partnerships requires understanding just what it is that that money can do for you. It is important to remember that public investments can only be utilized for “public purposes.” In other words, public investments need to be aligned in support of purposes aimed to advance the public good (i.e. roads, infrastructure, streetscape enhancements, etc.). Funds cannot be used to fund private at-risk ventures, which provide no direct public benefit.
Size
Among the limitations of a “traditional” approach to real estate development are the challenges associated with bankrolling a project. A traditional development model requires extensive private equity, and the complications that arise from that often make larger developments either riskier or simply not feasible compared to smaller projects. Public-private partnerships frequently make it possible to execute a project on an entirely different scale. Public equity can bridge the financing gap and facilitate projects with the kind of critical mass and regional influence required to become a self-sustaining commercial engine. Further, unlike private equity, public equity does not involve a carried participation of ownership for the public jurisdiction making the investment. This is significant when considering the multiple layers of equity and debt, both public and private, that will ultimately be required for substantially sized pursuits.
Synergy
Beyond critical mass, size confers other advantages—most importantly, the capacity for synergy and the ability to tap into the support of complementary uses. Unlike smaller projects, which are frequently wholly dependent on context, larger projects can create their own context: unlocking the full potential of mixed-use design and development. Larger projects have more freedom to combine multiple complementary uses in ways that drive traffic and impact the bottom line—and they can leverage co-tenancy and destination value. Public-private projects also typically make it possible to include the kinds of amenities and public spaces (such as pedestrian walkways, public squares, and parks and green spaces) that may be cost-prohibitive in a smaller, privately funded project.
Civics
By definition, public-private partnerships involve a more active and engaged public sector. From civic and community leaders and decision makers, to the general public, the public buy-in is more than just literal. Frequently, working closely with a municipality makes it possible to solicit feedback, generate enthusiasm and integrate valuable local perspectives into the project. And when the public and political sector gets more involved, the momentum often picks up. Public-private partnerships are frequently the only real way to get large projects done in dense urban locations that are often surrounded by existing public assets, municipal facilities and other public interests.
Best Practices
Best practices for securing strong public-private partnerships range from basic consideration of site and circumstance, to more strategic advice for securing private investment, establishing credibility and momentum, and securing pre-commitment and engagement from core users and tenants.
Create a self-reinforcing cycle
Instead of seeking out public financial contributions first, consider approaching private interests before any public monies have been committed. One effective way to do so is to garner the support of local business and community leaders. If they can become vocal and visible advocates for the project, it takes significant heat off of the politicians who may otherwise be hesitant to stick their necks out and make a big financial commitment. Once public funding becomes a reality, the project is poised to generate even more interest from private sources. It is important to remember that the ultimate goal is not to maximize public investment, but rather to minimize it to a level solely necessary to advance the financial viability of a project deemed important to the community—not just to the developer.
Don’t be greedy
When working to secure public funding, fill the gap between where you are and where you need to be—do not ask for more than you need. If $20 million will do the job, do not get out over your skis and ask for $100 million. Additionally, be willing to justify every dollar that you do ask for, with detailed accounting, projections and metrics. If you go into a negotiation with a high price tag and an attitude of “we’ll figure it out later,” you are not asking for a partner, you are asking for a bank.
Establish credibility and momentum
The process of securing public backing is made significantly easier when there are credible names associated to the development; getting some core tenants involved early validates a project in the eyes of everyone from members of the community to the city council. Familiar names can also help ease the concerns of local opponents. As is often the case, more than a few projects have been rumored for years, or languished for long periods of time, making a certain level of cynicism inevitable. One of the goals is to bring credibility to the project and there are few better ways to do that than with the logo of a national retailer. The buy-in of retailers, restaurateurs, and hospitality groups can spur financing and give tangible life to a project, articulating the vision better than any plan or rendering.
Be strategic about site selection
There are a number of characteristics to look for when identifying potential sites that would be a good fit for the kind of large, multi-use projects that often require public-private partnerships to get off the ground. Generally speaking, underutilized sites, or sites adjacent to large public facilities and other developments and investments in urban areas will be more likely to have that reservoir of untapped potential.
Although increasingly popular, public-private partnerships are vastly misunderstood and, in many ways, could more accurately be defined as public funding partnerships, which deeply misses the point. True public-private partnerships advance projects designed to support, enhance and activate publicly embraced objectives often depicted under “Quality of Life” values: affordable housing, enhanced density in relationship to public services, reduction of transportation related challenges, etc.
Some of the most successful commercial developers today have become adept at utilizing