The need for infrastructure such as classrooms, student housing, dining and wellness facilities has never been greater at colleges and universities.
Teaming with the real estate development community through public-private partnerships—commonly known as P3s—continues to gain in popularity as a way to get projects built on or near campus.
Public-private partnerships are a form of contracting between the public sector and private industry that capitalizes on the potential for private investment in a project, while sharing risk between the public and private partners.
P3s are relatively new in the United States, but have a long history in Europe, Australia and other countries where government-sponsored, tax-exempt debt is not available.
Benefits for both sides
In Florida alone, P3 projects have been done or are underway at Florida Polytechnic University, Florida State University, the University of South Florida, the University of Central Florida, Florida International University and Broward College. The advantage for universities is that P3s tend to accelerate project delivery, while shifting risk to the private sector.
As with any partnership, there must be benefits to both sides in order for a P3 to be successful.
For higher education institutions, benefits include increasing financial capacity for other projects, reducing the time spent on such projects, shedding some of the risk, and helping universities focus on their “core” capital projects.
For the private sector, the benefits of a P3 are the potential return on investment, fee generation, and the ability to leverage the borrowing power and credit worthiness of the higher ed user.
P3s tend to be complicated transactions, so it is important to have a clear set of goals that have been vetted at all levels of the institution before the procurement of a private partner begins.
These goals are important in order to maintain focus through procurement and negotiation of agreements, while concentrating heavily on the allocation of risk. The goals will be helpful to audit the project results through its lifecycle.
Negotiation goals
In addition to setting clear goals, here are a few more tips for ensuring the best chance of a successful P3 agreement:
- Private partners should put money into a deal and keep it there, because those with no “skin in the game” have less motivation than partners who have something to lose. Projects that are 100 percent debt-financed tend to shift risk to the debt holders, who will have a strong tendency to look to the public entity to bail them out if the project experiences stress and debt service payments are missed.
- The public entity should have a team specifically designated to handle P3 projects. That team should include a lawyer with experience in each of the areas involved in P3s—public finance, procurement, real estate and finance. Having the ability to understand and dissect complicated documents, and to confirm rates of return on investment, will be very important.
- A sufficient revenue stream must be identified to retire the investment and provide an acceptable return throughout the time frame of the partnership. Developers are not contributing equity—they are investing equity and that investment needs to be repaid. To this point, it is important to determine whether the private entities will be short-term or long-term partners.
This understanding may alter the negotiations. For example, if money and investment objectives of the private partner are short-term in nature, then it will be important to focus on provisions dealing with change in control of the private partner. Partners with short-term funding tend to sell their interests soon after the project is built and stabilized.
Support for the project from such stakeholders as members of the board of trustees, the president and staff will be critical. While P3s continue to gain in popularity, many stakeholders are still not familiar with their benefits.
Getting the stakeholder support for a P3 project from the beginning—based on the goals identified—is vital to ensuring there is positive support throughout the life of the project.
Ken Artin, is a public finance lawyer at Bryant Miller Olive. He can be reached at [email protected].
