Public Private Partnerships for p Real Estate Development - - PowerPoint PPT Presentation

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Public‐Private Partnerships for p Real Estate Development

Structuring, Documenting and Implementing PPP Deals

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUES DAY, FEBRUARY 1, 2011

Today’s faculty features: Tony Canzoneri, Partner, McKenna Long & Aldridge, Los Angeles Dennis S . Roy, Partner, McKenna Long & Aldridge, Los Angeles

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Allan D. Kotin, Principal, Allan D. Kotin & Associates, Los Angeles

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Overview of Real Estate Development PPP

Tony Canzoneri and Dennis Roy McKenna Long & Aldridge LLP Allan Kotin Allan D. Kotin & Associates F b 1 2011 W bi

mckennalong.com

February 1, 2011 Webinar

C t t I f ti Contact Information

Tony Canzoneri tcanzoneri@mckennalong.com 213 687 2103 213.687.2103 Dennis Roy droy@mckennalong.com 213.687.2132 Allan Kotin akotin@adkotin.com 213.623.3841

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O tli f P t ti Outline of Presentation

• Overview (Kotin)
• Process and Documentation (Canzoneri, Roy)

Process and Documentation (Canzoneri, Roy)

• Recap (all speakers)
• Q&A
• Example

6

Today’s Speakers as a Prototype for Today s Speakers as a Prototype for Negotiating Team

For both sides, public and private

• Transaction Attorney
• Government Relations / Land Use Attorney
• Financial Advisor (Real Estate Economist)

7

D fi iti f P bli P i t J i t V t Definition of Public Private Joint Ventures

A public-private joint venture in real estate is for purposes of this presentation, a transaction which meets three tests: 1 It would not occur without public participation 1. It would not occur without public participation 2. It is a negotiated transaction not merely compliance with some application formula 3. It involves public agency participation through and past completion in both regulatory and contractual roles

8

Th M j C t i f PPJV’ Three Major Categories of PPJV’s

1. REDEVELOPMENT (Policy-Driven) TRANSACTIONS

• Driven by policy considerations;
• For private development that would not occur without public inducement or assistance;

U ll i t d ith i d l t d t it li ti ff d bl h i

• Usually associated with economic development, downtown revitalization or affordable housing.
• Governmental powers and funding sources

2. ASSET MANAGEMENT TRANSACTIONS Involves deployment of publicly owned land for private development;

• Involves deployment of publicly owned land for private development;
• Often closely associated with other public activities, e.g., ports, marinas, airports
• Objectives differ in that revenue is the major objective but policy considerations do apply

3 PRIVATE DEVELOPMENT OF PUBLIC FACILITIES 3. PRIVATE DEVELOPMENT OF PUBLIC FACILITIES

• Currently popular and often referred to as P3 for “public private partnership”
• Related to but not same as privatization;
• Not considered here except in situations requiring joint development of public and private facilities

9

R id ti l L d U Residential Land Uses

• Affordable housing is particularly suitable to

redevelopment. p

• Residential multi-family works for both redevelopment and

asset management since it is easy to lease apartment land land.

• Residential for sale is hardly ever appropriate for asset

management since ground leasing for ownership housing is not acceptable except in very special circumstances.

10

C i l Offi Commercial - Office

• Often an important part of redevelopment transactions.
• There is some hope that the project may justify its full cost

There is some hope that the project may justify its full cost at some time.

• Works for asset management as well since offices do

f ti ll d l function well as ground leases.

11

C i l R t il Commercial - Retail

• Core function of redevelopment in California and some
• ther states because of importance of sales tax.

p

• The market may not be there now but a successful project

will create a market. W k f t t ll b it i it bl

• Works for asset management as well because it is suitable

to ground leasing.

12

I d t i l L d Industrial Land

• Sometimes associated with redevelopment as a form of

revitalization.

• Can work although not used frequently for asset

management because land values are not that high.

13

H t l d H it lit Hotel and Hospitality

• Excellent asset management use because hotels work

very well on ground leases. y g

• Works equally well in redevelopment and asset

management. U th t ft th b id if f l

• Use that can often repay the subsidy if successful.

14

R d l t T ti Redevelopment Transactions

• Key element in redevelopment transactions is the “gap”.
• The gap is the difference between what a project costs to

The gap is the difference between what a project costs to build and what it’s worth when it is built.

• Most redevelopment transactions cost more to build than

th th t l t i iti ll they are worth, at least initially.

• Measuring and defending the gap is an important part of

the transaction process. p

15

R d l t T ti 2 Redevelopment Transactions - 2

• EMINENT DOMAIN is a strength and a weakness of

redevelopment.

• The advantage agencies have is that they can sell land

they do not own.

• The disadvantage is they do not know what it costs.

g y

• Uncertainties associated with the cost and time of

condemnation are severe.

• Need special techniques to deal with these uncertainties
• Need special techniques to deal with these uncertainties.
• Recent and proposed restrictions in reaction to the KELO

court decision: backlash has made it illegal to condemn

• wner occupied housing for “private” use

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• wner occupied housing for private use.

R d l t T ti 3 Redevelopment Transactions - 3

• Redevelopment transactions can be either performance

based or front-end assistance

• Ability to borrow against tax increment or other public

revenue sources create a capital flow which can be used for front end assistance for front-end assistance.

• Performance based assistance can be granted by letting a

developer have his own increment or other public revenue sources back over time.

17

D fi i th “G ” Defining the “Gap”

Understanding the financial aspects of a Proposed Project and the “Financial Gap” that Communities Are Asked to Fill p If They Can? I ti A i t d ith N D l t Incentives Associated with New Development or Redevelopment Are Almost Always a Function of a “Gap” Between the Returns and the Costs

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D fi iti d E l Definition and Example

The General Statement of the “Gap” Has Two Critical Implications: Two Critical Implications: – A Public Infusion of Capital or a Reduction in Public Costs Is Necessary to Make Returns Match Costs OR – A Reduction in Expenses or an Additional Source of Income Is Needed to Make Returns Match Costs Income Is Needed to Make Returns Match Costs

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Example From Recent Major Example From Recent Major Shopping Center Starting Point

Base Case - In $000's UNASSISTED MODIFIED NET OPERATING INCOME (NOI) 8,200 8,200

• Cap. Rate

12.00% 11.50% p Investment Value $68,300 $71,300 Land Cost 10,200 10,200 Sitew ork 12,800 12,800 Hard (Building) Costs 24,900 24,900 City Fees 2,900 2,900 Oth C t ( ft t l ff t f l d l ) 26 500 26 500 Other Costs (soft costs, less offset for land sales) 26,500 26,500 Parking Costs 28,900 28,900 Total Project Costs $106,200 $106,200 Remaining Financing Gap $ 37,900 $34,900 Revenue Gap Required Return (% on Cost) $12,700 $12,200 Less: Net Operating Income ($8,200) ($8,200) Annual Revenue Gap $4,500 $4,000

20

Th B d El t i V lid ti Three Broad Elements in Validation

• Costs - Are they reasonable and do they include too much

y y “padding” or fees for the developer?

• Net Revenues - Are rents correctly estimated; are

expenses exaggerated? p gg

• The Required Rate of Return - Is the rate suitable for the

risk involved or overstated?

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Costs: Costs: Sensitive Items are Usually the Following

• Land cost is a key issue
• Off-sites, including required remediation or infrastructure

Off sites, including required remediation or infrastructure are often a big problem

• Basic shell construction costs are rarely a problem since

d id li ft i t good guidelines often exist

• Soft costs paid to the developer, e.g. overhead, leasing

fees and other items often require scrutiny but rarely are q y y the problem

22

V lid ti th G Validating the Gap continued

Revenues Less Sensitive

• Big problem is projecting rents for uses not established in
• Big problem is projecting rents for uses not established in

the particular area

• In most net leases expenses are not an issue; net

revenues and gross revenues track well

• Some areas have very sensitive and unpredictable

expenses notably parking expenses, notably parking

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Example From Recent Major Shopping Center p j pp g Assume 10% Higher Rent AND Land/Infra Subsidies

Combined Change Scenario - In $000's ASSISTED MODIFIED NET OPERATING INCOME (NOI) - (Raised by 10%) 9,000 9,000 Cap Rate 12 00% 11 50%

• Cap. Rate

12.00% 11.50% Investment Value $75,000 $78,300 Land Cost (Written Dow n to Zero) 0 0 Sitew ork (Reduced by $10 Million) 2,800 2,800 Hard (Building) Costs 24,900 24,900 City Fees 2,900 2,900 y , , Other Costs (soft costs, less offset for land sales) 26,500 26,500 Parking Costs 28,900 28,900 Total Project Costs $86,000 $86,000 Remaining Financing Gap $11,000 $7,700 Revenue Gap R i d R t (% C t) $10 300 $9 900 Required Return (% on Cost) $10,300 $9,900 Less: Net Operating Income Annual Revenue Gap $900 $900

24

V lid ti th G Validating the Gap continued

Rates of Return

• Development standards can usually be ascertained

p y

• Real issue is whether the standards apply
• Developers feel that high risk merits higher returns

P bli i f l th t th i b ti f th i k th

• Public agencies feel that their absorption of the risk or the

presence of strong anchor tenants should lower the expected return

25

Si T i l C f th “G ” Six Typical Causes of the “Gap”

1. Land cost too high because the land is already improved 2 Land cost too high because land prices are “sticky” 2. Land cost too high because land prices are “sticky” 3. Publicly mandated improvements or exactions that do not add to value 4. Publicly mandated ‘over-improvement’ to current market 5. Rents attributable to untested product, untried area or area with negative p , g image to be corrected 6. The omnipresent parking problem, particularly as it affects parking- intensive uses in retail and entertainment

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intensive uses in retail and entertainment

Th P ki P bl The Parking Problem

“In California and a lot of other places, all design solutions begin with parking” (Peter Kamnitzer, FAIA) g p g ( )

• With infill locations, retail (especially retail entertainment) involves parking

costs not supported by the rent

• Some view infill parking as more accurately a public infrastructure cost
• Evidence of a trend in mature “key” locations that paid parking will work; if

so, this becomes a rent uncertainty problem

• Creates opportunity for public ownership and financing

27

R M th d f Cl i G Recap Methods for Closing Gap

• Land write down
• Public funding of required infrastructure (of sites)

Public funding of required infrastructure (of sites)

• Waiver / deferral of fees
• Public parking
• Tax-exempt financing
• Other revenue sources and entitlement benefits

28

Diff t P bli A i t St t Different Public Assistance Structures

• There are two main types:

– Performance based where assistance is a function of Performance based where assistance is a function of benefits received – Front-end grants conditional only on the project being b ilt built

29

P f B d A i t St t Performance Based Assistance Structures

• Performance based assistance means that the developer receives

benefits only to the extent of created public benefits i.e. tax increment sales tax hotel tax increment, sales tax, hotel tax.

• This performance based assistance can be either:

– A note from the city payable only to the extent that the city gets benefits city gets benefits – A grant from the city secured by a loan where the loan does not have to be paid back if there is enough l t t t sales tax or property tax.

• Big problem with performance based assistance is to find a way to

“make it bankable”.

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F t d G t A i t St t Front-end Grant Assistance Structures

1. Front-end is critical to the developer. – It is always the preferred alternative for the developer – It does not require “selling” the lender q g – It immediately reduces his costs as well as his financing costs in overhead 2. The problems for the public agency include: – Where to get the money – When to pay it; developer wants it to use in construction; – When to pay it; developer wants it to use in construction; agency only wants to pay when project is done; typical solution is a bond or guarantee – What to do if the project closes, developer leaves, etc. 3 Typical Results 3. Typical Results – Public agency is at risk – Sometimes parties agree to a “claw back” provision where developer is liable for some repayment if he does not operate

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for specified time

A t M t T ti Asset Management Transactions

• Origin for these is in other government purposes, i.e. operating ports,
• perating airports, providing recreational marinas, operating state and

national parks.

• Originally these were concessions but the government did not have the

money to build the necessary facilities.

• Next step was to grant ground leases long enough so that developers

could afford to build.

• Most ground leases of this type are unsubordinated, i.e. the landlord comes

ahead of the mortgage lender.

• Most ground leases are participatory in nature in that the landlord shares in

the income.

• Ground leasing is clearly the best and most flexible technique for asset

management.

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A t M t T ti Asset Management Transactions (2 of 2)

• Benefits of ground lease include the fact that the rent can be set low at the

beginning when the developer takes the highest risk, and higher over the long term when it is most important to the public landlord. Ground rent can b f ti f i d t ith th t l l be a function of income measured at either the gross or net level.

• Ground leases are difficult to finance but ultimately very flexible and well

suited to meeting different needs.

• Ground leases are also sometimes used for redevelopment transactions.

33

P i t D l t f P bli F iliti Private Development of Public Facilities

• An increasingly attractive option for many public agencies.
• Key reasons for this are:

G tti it d f t – Getting it done faster. – Keeping it off the balance sheet or borrowing of the city. – Getting more efficient and professional development.

• This type of “privatization” is particularly attractive where there is some

reimbursement to the public agency, i.e. health services, DPSS, etc.

• Major issues are developer fee level of cost protection and method of
• Major issues are developer fee, level of cost protection, and method of

financing.

• This type of project does no good if the public agency has to guarantee the

financing: might as well use its own debt in construction

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financing: might as well use its own debt in construction.

K El t i th PPJV P Key Elements in the PPJV Process

I. Preparation II. Solicitation III. Negotiation – Focus on scope, time and money (“The Gap”)

• IV. Documentation

35

K El t i th PPJV P Key Elements in the PPJV Process

I. Preparation

– First requirements q – Initiating process – Forming the team

36

K El t i th PPJV P Key Elements in the PPJV Process

• II. Solicitation

– RFP/RFQ (Generic) ( ) – Competitive Bidding (Generic) – Qualitative Selection (Generic)

37

K El t i th PPJV P Key Elements in the PPJV Process

III. Negotiation Focus on scope, time and money (“The Gap”) Focus on scope, time and money ( The Gap )

• ENA/ERN (Generic)
• MOU (Generic)

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K El t i th PPJV P Key Elements in the PPJV Process

• IV. Documentation

– DDA (California version of disposition/construction agreement) ( p g ) – OPA (California version of disposition/construction agreement) – Statutory Development Agreements (California version of agreement to vest entitlement rights) agreement to vest entitlement rights) – Ground Leasing (Generic) – Joint Venture (Generic)

39

• I. Preparation: First Requirement -
• I. Preparation: First Requirement

Political Will and Mutuality of Interest

• A. Public/private real estate partnerships can take many different forms but

generally require a stronger and more complicated set of mutual interests than is generally required for successful private party partnerships – and, in th d d d l t ti l liti l ill M t l i t t the end, success depends almost entirely on political will. Mutual interests include: 1. Public ownership and/or ability to acquire real property 2. Public agencies socio-economic policies and goals related to i fl i d h i l d influencing and changing land use a. State and local general plan, land use and planning process and imperatives b. Fiscalization of land use 3. Alleviating blighted conditions 4. Need for public facilities 5. Need for public revenue 6 Economic development/stimulus

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6. Economic development/stimulus

• I. Preparation: First Requirement -
• I. Preparation: First Requirement

Political Will and Mutuality of Interest

• B. Because local government has discretionary land use approval

authority and responsibility under both state planning law, the C lif i E i t l Q lit A t (“CEQA”) f t i j t California Environmental Quality Act (“CEQA”), for certain projects, the National Environmental Protection Act, and the need for political will is critical.

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I Preparation - Other issues to consider before

• I. Preparation Other issues to consider before

starting down the public private partnership path

• A. Can We Demonstrate Economic Need and Public Benefit?

1. Economic need – traditional pro forma analysis – the GAP 2 P bli b fit bli ht ll i ti bli i t 2. Public benefit – blight alleviation, public improvements eg: ▸ Desired land use changes ▸ Transient occupancy tax ▸ Utility tax business taxes and other general fund ▸ Utility tax, business taxes and other general fund taxes ▸ Sales taxes – net of capitalization B Prevailing Wages

• B. Prevailing Wages
• C. Time and Cost
• D. Operational Constraints

E Transactional Complexity

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• E. Transactional Complexity
• F. Political Risk/Public Perception/Political Will

I Preparation - Other issues to consider before

• I. Preparation Other issues to consider before

starting down the public private partnership path

• G. Initiating Project Development

Importance of focused idea of nature of project (Conceptual Development Plan) and what will be required for the project Development Plan) and what will be required for the project (infrastructure imps.). ▸ Conceptual development plan ▸ Land acquisition ▸ Relocation ▸ Demolition ▸ Public improvements ▸ Marketing and disposition

• H. Who should be involved - City/Legal/Financial Team

▸ Generate own pro-forma and market analysis ▸ Legal documentation control

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▸ Legal - documentation control ▸ City - policy/supervision/coordination/decision

II S li it ti

• II. Solicitation

(using California for illustrative purposes)

There are many, many forms and different processes which are used to negotiate, implement and document g p public/private partnerships. The overwhelming majority of real estate public/private partnerships in the State of California are handled through a redevelopment agency California are handled through a redevelopment agency because the tax increment created by the step up in land value base and construction values are what make projects work The following addresses that most typical projects work. The following addresses that most typical framework.

44

II S li it ti P t

• II. Solicitation - Procurement

(using California for illustrative purposes)

1. Selection team – staff and advisors 2. Pick a partner RFQ versus High Bid RFP 3. California Infrastructure Financing Act (“CIFA”) allows for g ( ) Competitive Negotiation procurement

• Selection based on “competence and qualifications,” not price
• Involves “picking a partner” at the “idea” stage of a project, rather than after creation
• f design documents, as with design-build structures
• Allows for innovation: unsolicited proposals are allowed
• Allows for innovation: unsolicited proposals are allowed
• Offers the most flexible procurement model for both agencies and bidders

Low-Bid Procurement: Similar Pitfalls to Low-Bid Contracting

• Reduces analysis to one number
• Limited ability to judge quality or innovation

y j g q y

• Even with Competitive Sealed Proposals, use of factors such as price come into play

Qualification-Based Procurement / CIFA Competitive Negotiation: Similar to Private Negotiated Contracts

• Most flexible

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• Allows shared information on project goals, timeline, and cost from the very start of a

project

• Public sector already using Construction Manager At-Risk Procurement
• The next step: Integrated P3

II S li it ti Alt ti M th d

• II. Solicitation – Alternative Methods

(using California for illustrative purposes)

• Unsolicited Proposals / Direct Negotiation
• Request for Qualifications – Pick a partner

Request for Qualifications Pick a partner

• Separate Request for Proposals
• Combined RFQ/RFP

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II S li it ti S l ti

• II. Solicitation – Selection

(using California for illustrative purposes)

• A. Legal Requirements
• 1. Third-party property owner issues

p y p p y

• 2. State and Local bidding requirements
• B. Selection Team Requests for Further Information and

Interviews Interviews

• C. Governing Body Involvement in Decision Making and

Approval

• 1. Closed session deliberations
• 2. Open session selection subject to negotiation and

documentation of ERN

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III D t ti ENA / ERN

• III. Documentation – ENA / ERN

(using California for illustrative purposes)

1. ENA/ERN - Exclusive Negotiating Agreement or Exclusive Right to Negotiate Not required, but useful to both parties. Allows developer to justify further expense of planning and feasibility studies Allows developer to justify further expense of planning and feasibility studies. Allows agency to more fully assess developer and its financial commitment and ability to perform as well as evolving project feasibility. Typically contains: Typically contains: ▸ agreement to negotiate exclusively and in good faith for a specified period of time ▸ timeline for preparation and submission of pre-development studies and information - preliminary design, financial information, financing plan, projections ▸ payment of good faith deposit pay e t o good a t depos t

• refundable/non-refundable
• applicable to DDA/GL obligations
• applicable to Agency due diligence costs

▸ essential business terms

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▸ prohibition on assignment ▸ disposition of plans & studies upon termination of agreement

III D t ti MOU

• III. Documentation - MOU

(using California for illustrative purposes) 2. MOU - Memorandum of Understanding/Deal Point Memorandum ▸ Additional detail on items previously identified during RFQ/RFP - ENA t stages ▸ If not previously addressed, essential economic terms could now be articulated ▸ Terms of sale/lease (deposit holding payments disposition price ▸ Terms of sale/lease (deposit, holding payments, disposition price, participation) ▸ Property acquisition/funding/timing ▸ Responsibilities for condition of property ▸ Responsibilities for condition of property ▸ Restrictions on transfer ▸ Nature of agency assistance, if any, other than land write down ▸ Contingencies - financing tenant identification plans and permits

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▸ Contingencies - financing, tenant identification, plans and permits, environmental investigation ▸ Liquidated damages

III D t ti DDA

• III. Documentation - DDA

(using California for illustrative purposes)

3.

DDA - Disposition and Development Agreement

• Sets forth process and terms applicable to transfer of property to

developer and subsequent development p q p

• Transfer will be fee interest or ground lease structure
• Single-phase and multi-phase disposition
• Developer identify/restriction on transfer

Contingencies to disposition (approval of financing plans title

• Contingencies to disposition (approval of financing, plans, title,

construction contract, bonds; construction loan recordation and property conveyance occur simultaneously)

• Schedule of Performance - Phasing

Scope of Development

• Scope of Development
• Risk of hazardous waste/AS-IS - compromise solutions
• Certificate of completion
• Use restrictions

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• Restriction on encumbrances
• Personal guarantees
• Prevailing wage

III D t ti G d L Alt ti

• III. Documentation – Ground Lease Alternative

(using California for illustrative purposes)

4. GL - Ground Lease ▸ Term/up to 99 years authorized by CRL ▸ Rent: Holding Rent; Construction Period Rent; Base Rent; Fixed Rent Increase (CPI & Reappraisal) ( & pp ) ▸ Participation Rent: Gross, NOI, Cash Flow - Classes Risk (Market, Management & Financing) ▸ Rent Subordination ▸ Sale and Refinancing Participations ▸ Construction Obligations ▸ Use Restrictions/ Preferential Use Requirements ▸ Repair & Maintenance ▸ Leasehold Financing ▸ Assignment and Transfer/Transfer Fees/ Continuing Management and Control ▸ Insurance/Indemnification ▸ Condemnation ▸ Default/Cure Rights

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▸ Subordination/Non-subordination/intermediate solutions – subordination of rent increases ▸ Leasehold financing provisions

III D t ti

G C

• III. Documentation – Ground Lease Considerations
• In deciding whether to use ground lease structure,

consider at the outset:

– Increased transactional costs of negotiation and documentation – Availability and cost of financing improvements Long term management and control rights and responsibilities – Long-term management and control rights and responsibilities – Realization of expectations dependant upon project success – Will rent increases over time be sustainable by product type

52

III D t ti G d L Alt ti

• III. Documentation – Ground Lease Alternative

A. Land Lease Coupled with Disposition and Development Agreement (DDA) ▸ Structure of DDA/Relationship to Ground Lease Land leasing can and generally should be coupled with the use of a disposition and development agreement. If a DDA with option to lease structure is used, the DDA will control the transaction prior to exercise of the option, and, after exercise, both documents will have applicability. Depending on the timing of completion of improvements and

• ther factors, at some point many provisions of the DDA may become expressly
• t e

acto s, at so e po t a y p o s o s o t e ay beco e e p ess y

• inapplicable. Then, the land lease along will deal with those issues.

B. Multi-Phase/Multi-Parcel Development ▸ DDA coupled with a series of Option to Lease C. Advantages to Option to Lease Format Advantages to the option to lease format; land use entitlement; financing and use contingencies; the option fee; use of the normal DDA scope of development and schedule of performance provisions prior to exercise of the option

53

and schedule of performance provisions prior to exercise of the option.

III D t ti

• III. Documentation – Vested Development Rights

(using California for illustrative purposes)

Statutory Development Agreements (Govt. Code § 65864 et seq.) ▸ Vested right from local government for development of g g p a described project within a given time frame ▸ Exceeds common law vested rights ▸ Include description of duration of agreement permitted ▸ Include description of duration of agreement, permitted uses of property, identity of use, maximum height and size

• f building and provisions for dedication of land for public

purpose purpose ▸ Adopted after PC and CC approval by ordinance of the council and is subject to referendum

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RECAP AND OBSERVATIONS RECAP AND OBSERVATIONS

KOTIN – Some summary thoughts on “cultural translation”

• Different kinds of money
• Negotiating in fish bowl

Negotiating in fish bowl

• What you propose is never what you build
• The need for trust

CANZONERI Th ht d ti li t CANZONERI – Thoughts on educating your client

• Need to provide public decision makers with the story to justify

their deal as public policy

• Acknowledge that public officials will insert themselves into the

g p design process ROY – “The devil is in the details”

• Some particular clauses and issues to watch in the documents

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• Some particular clauses and issues to watch in the documents –

expirations and extensions, deemed approval, times for approval, etc.

Case Study – Case Study Large Scale Multiuse Town Center Ground Lease Development

Mixed Use Performing Arts Center Hotel Office Retail

56

Development Today Development Today

Case Study – Case Study Large Scale Multiuse Town Center Ground Lease Development

57

Town Center Development began with Hotel and Office Town Center Development began with Hotel and Office

Case Study –

A i t ffi

Case Study Large Scale Multiuse Town Center Ground Lease Development

Approximate office space square footage: 1,070,000

58

Case Study –

Approximate Town Center

Case Study Large Scale Multiuse Town Center Ground Lease Development

retail space square footage: 544,000

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Case Study – y Large Scale Multiuse Town Center Ground Lease Development

I. Before Developer Selection

• A. Agency purchased the site.
• B. Agency planned and entitled the site including all discretionary approvals.
• C. Agency plan was carefully calculated to achieve land use compatibility with

C ge cy p a as ca e u y ca cu ated to ac e e a d use co pat b ty t existing adjacent public facility uses such as city hall and high school, as well as future needs such as performing arts center, public safety center and library.

• D. Agency planned commercial uses reflected a realistic economic and market
• D. Agency planned commercial uses reflected a realistic economic and market

driven balance of both job generating office, community and regional serving retail and hospitality.

• E. Agency graded the site and installed backbone infrastructure and perimeter

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• E. Agency graded the site and installed backbone infrastructure and perimeter

landscaping / hardscaping that established the quality and character of the development and an assessment district that would capture reimbursement from future ground lessess.

Case Study –

II D l S l i DDA d G d L P

y Large Scale Multiuse Town Center Ground Lease Development

• II. Developer Selection, DDA and Ground Lease Process
• A. Agency was patient through the selection process in searching for developers

that had the expertise, track record and financial wherewithal to do the job — when economic or other incompatibilities were apparent and could not be resolved in a reasonable time, agency went on to another developer and went through several during the process.

• B. Agency split award in 2 — one office / hotel developer and one retail developer

but did not allow those developers to further split the development responsibilities and rights off to others.

• C. DDA was structured as a series of options to ground lease that reflected the

agency’s use and timing expectations and included a form of ground lease with established ground lease terms.

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Case Study –

II Developer selection DDA and ground lease process

Case Study Large Scale Multiuse Town Center Ground Lease Development

• II. Developer selection, DDA and ground lease process
• D. Significant deposits were required, but no pre-development land holding cost

was charged until the DDA was approved and first ground lease option was scheduled for exercise That together with all entitlements being in place scheduled for exercise. That, together with all entitlements being in place, allowed agency to attract strong developers and optimize long term rent, escalations and other lease terms. E Agency used 99 year unsubordinated ground leases with CPI increases

• E. Agency used 99 year unsubordinated ground leases with CPI increases

designed to optimize financeability and provide for a long term inflation protected financial asset – universe of ground lease construction and permanent loan lenders was small and availability and cost of financing would impact amount of rent agency could command. e t age cy cou d co a d

• F. DDA and ground leases established agency land use control objectives by

contract beyond the city’s police power land use regulatory rights.

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• G. Agency was very exacting about tenant selection for the retail component as well

as development standards – Sam Walton and the Granite Wal-Mart and the Bullocks, Buffums or better clause.