P3 Arrangements - The Secret to Their Success

P3 Arrangements - The Secret to Their Success

12/14/2013 11:30:00 pm
By Maurice R Robinson
The government is often inspired to seek partnerships with private entities in order to develop and otherwise utilize the land it owns, either directly or indirectly (as through public agencies, in a more efficient manner. These public-private partnerships are rather unimaginatively referred to as P3 or PPP arrangements.
When the government owns a land (or a vacant old building) that it lacks the resources to develop or redevelop properly, a P3 arrangement seems to be a perfect solution. Looking at it from a financial and economic standpoint, it would definitely be better for the government to seek a partner to redevelop the land into a more productive and beneficial use, such as hotels, rather than let it sit fallow and ignored. Beyond the hotel project itself, the associated increased capital investment, the healthy economic activity driven by support businesses, new jobs and the new tax revenues stemming from all of these activities benefits land owner (in this case, the government) because of the rise in land value due to development.
However, the benefits are less obvious for the private entity involved, who contributed their own capital, resources, and marketing prowess into making the project a success. The most common complaint from these entities is the usually insufficient rate of return on the investment. The private sector must tread carefully to ensure they get a reasonable return on their investment while the public agency has nothing to lose because it is literally offering just the land that it already owns.
In dealing with P3 arrangements, asking the assistance of a creative and experienced consultant who has worked in other P3 scenarios before has proven to be the best approach. For the arrangement to be mutually beneficial, the right amount of public financial assistance, whether up-front to aid in direct development costs or deferred (sometimes in the form of tax or utility credits, or back-ended ground lease payments) over time, should be included as a structural support of the project so that the consultant will know how to correctly structure the P3 arrangement.
Although the lure of land use with a low buy-in, like vacant plots offered by public agencies in P3 arrangements, can seem like the deal of a lifetime, some constraints and entanglements involved due to the requirements placed on the land and development plans by the public sector are often overlooked or underestimated. The private entity can already be significantly invested before these constraints become obvious and some entities may feel cheated or exposed when they manifest. Constraints that increase development and construction costs - sometimes offsetting the public financial assistance - include requiring prevailing wages or other deals with the local unions.
In order to be most effective, proper financial structuring should be a part of the planning stages so that it can protect the private sector from this risk and still take advantage of the opportunity such P3 arrangements offer. Ultimately, for the bidding process to be successful, involving a consultant with P3 experience is absolutely essential.
Maurice Robinson is an experienced hotel and resort development consultant in California. His expertise includes development planning, deal structuring and financial issues, dispute resolution, and expert witness testimony related to hotel and resort development. For expert assistance in hotel and resort development, call Maurice Robinson at (310) 640-9656 or visit http://www.mauricerobinson.com

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