Building Public Spaces Two Leases at a Time
This post was originally published on PublicCEO, February 25, 2016
Public space deficits such as fire and police stations, libraries, community and city centers present significant challenges for the public sector today. On the other hand such significant challenges represent leadership and investment opportunities of greater proportions for the public and private sectors. Never before these sectors have been so interdependent creating unprecedented opportunities for intersectoral relationships in delivering important public spaces. While several procurement methodologies have brought the sectors together over the last century, none could have a more profound impact on our economy today than well structured public private partnerships to design, finance, build, operate and/or maintain much needed public spaces.
Shortened to PPP or P3 for brevity, these arrangements are not business as usual. Individual variations of P3 including what we label “lease lease back or LLB” can potentially provide a range of benefits or meet major policy objectives for municipalities or the public sector while placing private capital, by and large, into a historically secure sector. Arguably the policy and financial interests of the public and private sectors have never been so clearly aligned for what could be the greatest social good since the last depression. Recognizing its benefits, municipalities are increasingly considering LLB over the traditional procurement and delivery methodologies to hire, integrate, maximize expertise and tap into special resources for the planning, financing, designing and constructing public projects.
While P3 has a long proven record internationally, leveraging the private sector to socially benefit the public sector is a fairly new phenomenon in the United States of America, especially in the context of social public spaces. P3 or LLB can provide a range of benefits or meet major policy objectives for municipalities if competently and appropriately applied. LLB’s are not magic bullets in building public spaces but they come with very attractive advantages. They are typically “turn key delivery” projects where the private sector assumes construction and delivery risks. The construction price is guaranteed and no payment is due until occupancy is delivered to the municipality based on a measurable outcome. Using the credit rating of the municipality, the private sector is able to issue bonds pursuant to the provisions of the Joint Exercise of Powers Act, commencing with section 6500 of the California Government Code. Financing vehicles known as lease revenue bonds or certificates of participation can be structured tax exempt at the same attractive rates as any other public agency tax-exempt bonds. Two leases anchor the transaction: one for the unimproved land and the other for the built public space on the land. The latter is 100% amortized over the term of the lease which can be anywhere from 10 to 40 years depending on the need of the municipality. After the lease term the municipality owns the public space free and clear. No up front costs or long procurement processes.
One such clear example of a LLB is the Oxnard Fire Station 8. Perhaps the most advanced fire station in the state, the Oxnard Fire Station 8 is built and delivered on time and on budget. An incredibly experienced team of professionals in collaboration with city of Oxnard leaders pioneered the LLB model for a fire station borrowing key components from the well-established concept codified in Education Code Section 17406, which specifically permits the design and building of schools in the state of California.
The Oxnard Fire Station is designed as a 13,956 square foot fire station and training complex constructed on the City owned property at 3000 South Rose Avenue, in the city of Oxnard. The property was part of a 70 acre unimproved land on the Southeast corner of South Rose Avenue and East Channel Islands Boulevard in the City of Oxnard. The Oxnard Fire Station 8, including its associated training building, occupies approximately 2.15 acres of the site and the ancillary training yard occupies the remaining approximate 0.35 acres. These 2.46 acres of the 70 acres is leased to a single purpose entity owned by a non-profit organization. The Oxnard Fire Station LLC (“OFS”) is the lessee of the first lease for the unimproved land, the borrower for the tax-exempt bonds used to build the facility as well as city’s lessor for the built fire station. OFS is also the client of the development team hired by OFS comprised of an architectural firm, developer, builder, financial advisor, financier and bond counsel. Several award winning firms each with decades of experience and substantial performance bond capacity delivered this lease to own, tax exempt and turn key public facility to the citizens of Oxnard on August 1, 2015 (one month early).
With substantial infrastructure deficits, both public and private sectors need to look for cost effective and efficient methods of designing and building public spaces. LLB can be one such method provided that these sectors foster an open and true partnership. Today’s designers, developers, builders, managers and policy makers need to retool to team up and forge meaningful P3 relationships. Full disclosures and an “open book” from the inception of the project build relationships, and strong relationships build trust. Research shows that P3 promote cooperation between the various actors from the public and private sectors during all project stages. Cooperation leads to innovation, efficiency, commitment, and effective implementation. While all actors from private and public sectors need to carefully evaluate their P3 partners, a 21st Century approach to an old infrastructure deficit problem can energize these sectors. In a recent article I wrote, “today, public administration is already experiencing a paradigm shift in guiding its constituencies from ‘government’ to ‘governance’. The latter term implies that the development and implementation of public policy is increasingly shared among a plurality of actors,” LLB’s illustrate this sharing of responsibility to better serve society.
updated 3/2/2016 to fix a language error in paragraph 2