Public-Private Participation: why it works, when it may not

September 2011

Owen Beitsch, PhD, FAICPTodd DeLong, AICP Real Estate Research Consultants, Inc.

Dori Debord, AICPCity of Winter Park, FL

Bill Burns, PhD, AICP,PECity of Orlando, FL

The drive for private participation

• Leverage of resources• Creation of alternative debt or financing sources• Cost savings • Introduction of industry expertise• New perspectives on old problems• Speed and response time• Shared objectives toward common goals• Economic stimulus

The challenge is to take advantage of all these opportunities.

City of Winter Park, FLState Office BuildingOverview and approach to private participation

• Building constructed in 1958 – “ray gun gothic” architecture

• Purchased in 2005 by city from state - located across from existing city asset

• Caught up in 5 years of city planning processes

– What will it be?• Envisioned as iconic site based on

location, size

• Open up offers through RFI/RFP process for suggestions, competition

City of Winter Park, FLState Office BuildingOverview and approach to private participation

City of Winter Park, FLState Office BuildingPurpose of private participation

• Thoughts of job creation, retention within the CRA• Cash cow for City – sale or lease brings revenue• Quiet community concerns about “what would go

there” – Fear of high intensity commercial part of the

scenario

City of Winter Park, FLState Office BuildingThe deal

• RFP caused some divided sentiments

– City opted for a long-term lease deal to save existing employer

– Conflict over property value/appraised value

– Worth of trees – tree preservation

– Site geometry constraints

• Marginal deal

– Cash flow was uncertain

– Valuation below appraised amount – even with less property

• After six months City said no deal

City of Winter Park, FLState Office BuildingLessons learned

• Specific set of objectives at outset– All or part of the property– Lease or sale – early discussion of terms

before process begins– What specifically does the City want…price

point, lease terms, redevelopment, other…?• Recognize that private sector not silver bullet

– Bottom line – investment needs to make money

City of Orlando, FLCity HallObjectives or purpose of private participation

City of Orlando, FLCity HallOverview and approach to private participation

• Traditional:– Solicit RFP for construction firms for the City Hall as

anchor and for additional sites

• Non-traditional: – Developer responsible for management construction

at a guaranteed price for City Hall:• City and developer would jointly select architect

(separate building and interior designers) • City would have final approval of designs• Project would include common loading/service • Developer would share in costs of public plaza, fountain

and common amenities

City of Orlando, FLCity HallVision

Near Term• Master plan included new City

Hall, pads for private buildings, plaza, and accompanying parking facility

Long Term• Master plan also included

future site for a performing arts center complex which required land assembly and relocation of fire station.

City of Orlando, FLCity HallVision

City of Orlando, FLCity Hall Vision

City of Orlando, FLCity HallSequence and outcome

Selection of developer and architect

Forced to contract with 2nd ranked firm

City management team: Mayor, DDB Dir., City Attorney, CAO, Planning Dir.

Lincoln team: Developer Rep, Construction Manager, Schedule Manager

City Hall must continue in operation

Old City Hall was imploded as part of Lethal Weapon 3

The 240,000 SF City Hall, plaza and fountain on time and within $27M budget

Savings & Loan crisis of 1990’s forces forfeiture of Lincoln’s $750,000 deposit

CNL negotiates purchase of first redevelopment site providing plans consistent with City Commons Master Plan

260,000 SF building completed for CNL Bank and CNL national headquarters

CNL negotiates the development of the second site for a 230,000 SF office tower and an expanded the parking facility

Groundbreaking for new performing arts complex as part of Master Plan

1987

1989

1991

1997

2004

2011

City of Orlando, FLCity HallOutcome

• Looking back, is this project considered a success?

• Depends on how “success” is defined• No longer able to offset entire public costs from

ground lease revenue• Project has taken longer than expected

• BUT• City has recouped significant amount of public

costs • City also obtained key properties necessary to

develop performing arts center and realizing vision

Proposed City of OrlandoFire Station One (downtown Orlando)

City of Orlando, FLProposed vertical mixed use fire station Office (150,000SF) and fire station (80,000SF)

Typical form of vertical mixed Use: Retail commercial (private)Residential (private)

• City Fire Department – the “owner”, the end user

• City Finance – facilitated public safety bond for fire station and police stations - interested o no more than $21M. City Real Estate is part of City Finance – they facilitated the RFP for the Air Rights Developer and participated in all of the acquisition/lease proposed contracts with the Developer

• City Economic Development – through City Housing, initially interested in the air space for only affordable and attainable housing. Subsequently the focused turned towards expanding downtown commercial and residential space to further advance downtown economic and social objectives. Also interested in constructing a LEED certified building.

• City Capital Improvements – facilitation role - provided Project and Construction Management services

City of Orlando, FLProposed vertical mixed use fire station Public, city stakeholders

• Obtain a 60K SF building with access off of Central and Pine and designed and built in accordance with a design specification that meets required needs.

• Not be put into a position in which functional conflicts occur (with regard to the proposed vertical mixed use)

City of Orlando, FLProposed vertical mixed use fire station Fire department objectives

• Utilize available Air Space above 4 floors to house more professionals (working and/or living) in downtown – close to retail and sports venues

• Facilitation of jobs for Creative Class which would support downtown residential or vice versa. Advancement of greater economic and social climate in downtown (intangible outcomes). Concept of Public Realm Engagement – research indicates that has a significant and explanatory affect on social capital and outdoor physical activity

• Additional Tax Revenue from the Residential or Commercial development in the Air Space (CRA district)

City of Orlando, FLProposed vertical mixed use fire station Economic development objectives

• Obtain a cost savings through the partnership

• Hold fast to what they perceived to be fair lease prices and lease stipulations.

• Additional Tax Revenue from the Residential or Commercial development in the Air Space

City of Orlando, FLProposed vertical mixed use fire station City finance objectives

• Meet the budget objectives stated by City Finance

• Bring the building on line in advance of deadline (October 2009) for vacating existing Fire Station No. 1 (located within the block where the new City Performing Arts Center was to be constructed).

• Meet the objectives of the Fire Department

• Meet the objectives of Economic Development

• Meet the objectives of the Developer

City of Orlando, FLProposed vertical mixed use fire station Capital improvement objectives

City objectives diverse from the start and matured during the process. The Developer did not have a well defined comprehensive expectation from the City at the RFP stage – up front.

City of Orlando, FLProposed vertical mixed use fire station Overall objectives

• Via an RFP process, the City initially advertised and selected a Design Builder to design and construct 3 stand alone stations / Fire Station No. 1 was one of the stations.

• City Economic Development and City Housing became involved and the City subsequently decided to explore the development of the Air Space above 4 floors as it pertained to Station No.1

• Via an RFP process, the City selected a Developer to participate in the construction of a mixed use building.

• City directed the Developer to utilize the selected Design Build company

• City and Developer embarked on preliminary design and due diligence

• Preliminary Design costs were borne by the City

• Concurrently with this, the two parties began discussions about how the partnership would work – the Developer would be the “Master Builder” and the City would pay for the first 4 floors.

City of Orlando, FLProposed vertical mixed use fire station Approach to public private project

City of Orlando, FLProposed vertical mixed use fire station Vision

City of Orlando, FLProposed vertical mixed use fire station Vision

Street LevelNorth Face

City of Orlando, FLProposed vertical mixed use fire station Vision

City of Orlando, FLProposed vertical mixed use fire station Vision

• Vertical Mixed Use Building Costs: estimated costs by developer at conclusion of due diligence – pre construction design services: $20M Fire Station (floors 1, mezzanine, 2 and 3), $32M for Commercial Space (floors 4-12, 150K SF). Note: Stand Alone station contract price: $17.5 M

• Differing views with regard to Shared Costs (foundation, common space, green roof, exfiltration), Air Rights lease (City appraisal - $220K/year, Developer appraisal - $140K/year) Rent Escalation every 5 years tied to CPI index, Re-evaluation period every 30 years. Differing view regarding Parking. These challenges may have been overcome, but:

• Market as whole – black clouds ahead. Developer pulled the plug.

• City End User ok with this outcome…perhaps “relieved”.

City of Orlando, FLProposed vertical mixed use fire station Outcomes

What was built: Stand Alone Fire Station

City of Orlando, FLProposed vertical mixed use fire stationOutcome, actually built

City of Orlando, FLProposed vertical mixed use fire station Outcome, actually built

City of Orlando, FLProposed vertical mixed use fire station Outcome, actually built

• Identify the Public Stakeholders and development one coherent objective/expectation for outcome. Stop the process if potential incompatible objectives are too great.

• Understand the Private Stakeholders objectives and determine if the Public can live with those. Is the Public willing to quantify and assign a value to “intangible” benefits?

• Do the Air Rights lease appraisal before RFP and include it and state the cost, period. Include a copy of the Air Rights Lease agreement in the RFP. Determine parking provision upfront and include it in the RFP. Include copies of all necessary contracts.

• State in the RFP that all pre construction design costs pertaining to the mixed use building will be shared 50-50 and state what party will be in charge of the designer.

City of Orlando, FLProposed vertical mixed use fire station Lessons learned

• If the Developer will be the Master Builder, let them select their Design Build team. Don’t “marry” them with a pre-selected City Design Builder.

• Specify that the Developer Master Builder is only required to meet the City’s MWBE goals as it pertains to the public portion of the building. Consider not imposing this mandate on the private portion.

• Specify that the Design Build contract will be “open book” – all sub contracts close bid (5 min) – opened in a public forum. All General Conditions open book and unit price. Profit and Overhead stated in the RFP. Guaranteed Maximum Price (GMP) provided at 100% plans. Contract unit price, not lump sum.

• State in the RFP how shared costs will be handled so that disproportionate participation results. There are different methods that translate into substantially different amounts to the Partners.

City of Orlando, FLProposed vertical mixed use fire station Lessons learned

The drive for private participation: themes

• The RFP may obstruct start this or similar processes– They need to fully anticipate the end state– Appraisals are only as good as the instructions…often

meaningless to the problem in the RFP– The initial design or development schemes may be

limiting or poorly defined– Timing and phasing

• Fundamentally different businesses with different objectives– Time and money evaluated differently– Can be very difficult to identify shared objectives

The drive for private participation: themes

• Process often more political than anticipated …can reduce perceived savings…may increase cost

• Asymmetry of information• Expectations are often misplaced• Likely to be more reliance on shared financial resources than

expected• Basis of opportunity and terms of subsequent success are

often defined in different terms

Questions:

Owen Beitsch, PhD, FAICPTodd DeLong, AICP Real Estate Research Consultants, Inc.

Dori Debord, AICPCity of Winter Park, FL

Bill Burns, PhD, AICP,PECity of Orlando, FL