Public/private partnerships, or P3, is becoming a more popular form of delivery that many institutions and governmental entities are employing as a way to build mixed use projects or parking garages that improve or enhance campuses and downtowns.
Partnerships between public and private entities are beneficial to each party. Both entities share in the risk, which is mutually beneficial. By partnering with a third party, the public entity may be able to advance a much needed project, such as a parking garage, that enables other developments to happen in their downtown. In most cases, the public entity can deliver a P3 project faster and more affordably when working with a private entity. For the private entity, they benefit as they have a “project” and the associated opportunities that come from designing, building and financing a deal. In short, both parties, when the P3 opportunity is defined, planned and delivered properly, prosper.
There are several structures that are used for P3 delivery, the more common structures are defined.
A condominium structure can be used to achieve the separate ownership of a joint parking structure developed to serve a variety of users. In this structure both the public and private entities would own and maintain its condominium interest in the parking structure. The condominium legal structure will avoid issues of tax exemption from the real property taxation point of view which will be important to the public entity, and it would also provide the added benefit that the public entity would own its parking garage and control future management.
In this structure, the public entity as the owner of the property enters into a long-term agreement (normally 30 years) with a developer who designs, builds, and finances the project. The land is leased to the developer under a ground lease arrangement, then the improvement (a parking garage) is then leased back to the public entity for their use. The lease amount covers debt service, operating expenses and reserves for maintaining the asset for the 30 year period. Using this structure, the public entity can operate the parking facility or as a component of the lease agreement, the developer or a third party operator can manage the garage. At the end of the lease, assuming all debt obligations have been met, the asset would revert to the public entity for a very small fee, typically $1.
In this structure, the private (or third party) will finance, design, build, and operate the parking facility under a long-term lease. At the end of the lease, the asset reverts back to the Owner for a predetermined fee (typically $1.00). Under the concessionaire approach, the third party entity will operate and maintain the asset throughout the term of the lease. The concessionaire will collect revenues from the parking facility, or from the parking system to pay for project costs and operations of the facility.
Long-Term Lease Structure
Another P3 development structure would be a long-term lease. In this case, the public entity would lease the land to the selected developer for an extended period of time. A long-term lease would also implicate realty transfer tax considerations if it were for 99 years or longer. A lease would require a pass through of operating costs.
No matter what structure is chosen, a P3 project only works when both the public entity and the private entity work hand-in-hand to form a long term partnership and both see the benefits of working together.