For state and local governments, the pandemic has caused financial gloom: tax collections are falling, public health spending is increasing, and their infrastructure backlog is growing. Hopes for quick congressional relief were dashed late last year when the Senate refused to accept a House plan to bolster state treasuries.
For developers and real estate investors, all of this represents an opportunity.
Fiscal challenges could prompt the private sector to work with state and local governments, said Gabriel Silverstein, managing director of SVN Angelic, a real estate investment and advisory firm in Austin, Texas.
“We are in one of those times when the need is real,” said Mr. Silverstein, who has worked on public-private partnerships, known as PPP. He predicted that there could be “some interesting and creative things happening in the public-private partnership space.
Partnerships rely on developers and investors to take the initial financial risk, often delaying payments from governments until revenues start to flow or certain construction criteria are met.
“It can be an incredible use of private markets to contribute to the development, planning and smart growth that cities and towns need but are unable to do on their own,” said Lauren Jezienicki, Founder and CEO of One Circle Company, a residential real estate company, who worked on partnerships when she was Senior Vice President at Bozzuto, a real estate developer.
Partnerships have been used, sometimes with mixed results, for projects in parts of Asia, Australia, Great Britain, Canada and other parts of Europe. But state and local governments in the United States have been slower to adopt them. As their budget difficulties worsen, some officials are seeing them more closely as a tool to revive their economy.
President-elect Joseph R. Biden Jr. has proposed a $ 1.9 trillion rescue package to fight the economic recession, including $ 350 billion to help state and local governments close budget deficits. It is not yet clear whether Congress will agree.
But the data suggests that local governments will need all the help they can get. The National League of Cities estimates that nearly 90% of cities will be less able to meet their needs in FY2021 than they did in FY2020. Many states and local governments started FY2021 in July. 2020. The American Society of Civil Engineers has estimated that the United States should spend $ 4.59 trillion by 2025 to repair or rebuild roads, bridges, dams, airports, schools, and other infrastructure – and that was before the pandemic.
“We are witnessing this historic drop in revenues that public agencies have to contend with, which certainly results in the delay, suspension and cancellation of many projects, but the need for investment in infrastructure is more acute than ever” . said David J. Odeh, structural engineer and director at Odeh Engineers in Rhode Island.
Local governments have recently expressed new interest in public-private partnerships for projects such as building schools, said Darin Early, general manager of public-private partnerships at the Gilbane Development Company.
“Most of the conversations were around Kindergarten to Grade 12,” said Early, who heads a group of companies working on a public-private project for six colleges in Prince George County, Maryland. .
Partnerships have a mixed record. A toll road in Indiana collapsed after the private tenant’s bankruptcy in 2014. A widely criticized deal in Chicago to privatize the city’s parking meters was a major boon to investors, but is seen as a failure for the city . In Maryland, the Purple Line LRT is behind schedule, and the state recently agreed to pay $ 250 million to settle a lawsuit with the private alliance that is building the system over delays and cost overruns.
But they could be a way to bring back main streets and reinvigorate city centers, experts say.
An early partnership in Quincy, Mass. To invigorate the downtown core failed several years ago, but city officials have since worked with several private developers to support business and commercial development and build new housing. An agreement to rebuild Quincy T station and spur housing, office and retail development involves the town of Quincy, the Massachusetts Bay Transit Authority, Atlantic Development and Bozzuto. Another project with the same partners is under construction around the North Quincy T station.
Part of the discussion becomes who contributes what to what, said Chris Walker, chief of staff to Quincy mayor Thomas P. Koch.
Whether public-private partnerships are the right choice for state and local governments is an open question. Their main selling points are usually that the private developer pays for improvements and construction up front, often manages the entire project, and promises faster completion than if the government managed the project alone. But because interest rates are low and likely to stay that way for a while, state and local governments could also float bonds to raise money for infrastructure projects.
Bonds may offer an alternative source of funding, but private sector companies offer “expertise in mixed-use projects, our tolerance for development risk and our access to capital,” said Mike Henehan, chairman of the unit. development of Bozzuto.
Despite his early problems, Quincy does not hesitate to use partnerships, Mr Walker said.
“There is no initial risk to the city,” he said. “We don’t pay them back until the tax revenue comes in.”
Another plus: Partnerships can produce results quickly enough and expertly enough to generate long-term savings in public funds, said Sean Brooks, director of real estate and property development for Bay Area Rapid Transit.
“One of the most important things for us is to fund affordable housing,” he said. “We need to shake the trees and mobilize all amounts of funding for affordable housing.”
BART used these deals to attract development around its stations by offering density bonuses and pushing the developer to include affordable housing, he said.
But private investors need to do more than just view these deals as a chance for a quick profit, said Stephen K. Benjamin, Mayor of Columbia, SC.
“This not only requires that city and local authorities have an open mind, but it is really going to force institutional investors to rethink how they bring these ideas,” he said. “It’s about solving community problems rather than ‘We see this collective financial opportunity.'”
Even before the pandemic, the public school system in Prince George County, Maryland, was considering partnerships and this month expected to finalize a $ 1.24 billion deal to build six colleges.
The Washington suburbs have lagged behind its better-off neighbors for years in terms of academic performance, attracting businesses and jobs, and expanding its tax base. The public school system has been grappling with the stress of age and many of its more than 200 buildings have not been renovated in years. By looking for outside investors, county officials say, they get a good deal.
“This plan is one of the smartest we can do with the resources we have,” said county leader Angela Alsobrooks. When the private developer returns the buildings to the school system in 30 years, county officials say, they will be in better condition than if the school system had maintained them.
Some elected officials remain skeptical. The Prince George County project was rejected by a handful of county and school board members.
And in Stamford, Connecticut, officials last year rejected a public-private proposal to restore and rebuild schools that had mold and other problems. Some officials feared the costs would end up being higher than expected, leaving the city struggling in the future.
Details on the success rate of these partnerships are limited. Canadian government auditors’ reports have repeatedly questioned government claims that the projects are cheaper and save public funds.
In the long run, partnerships are not worth the risk, said Kevin DeGood, director of infrastructure policy at the Center for American Progress, a Washington think tank. A need to make public buildings more energy efficient, for example, could arise well within the duration of a P3 contract, requiring renegotiation. “It can be extremely costly,” he said, adding that cost overruns are also often the subject of dispute over the life of a contract.
“States are facing massive budget deficits,” he said. “PPPs don’t change that.”