Public Private Partnerships for Real Public Private Partnerships for - - PowerPoint PPT Presentation

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Public‐Private Partnerships for Real Public Private Partnerships for Real Estate Projects: Latest Developments

Creating or Restructuring PPPs That Work in Challenging Economic Times

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUES DAY, OCTOBER 25, 2011

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

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Overview of Real Estate Development PPP

Tony Canzoneri Dennis Roy McKenna Long & Aldridge LLP Allan Kotin Allan D. Kotin & Associates

mckennalong.com

October 25, 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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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 / Real Estate/ Land Use Attorney

Fi i l Ad i (R l E t t E i t)

• Financial Advisor (Real Estate Economist)

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O i Overview

• In Public Private Partnerships – Expect Change in Good

and Bad Times

• Dramatic changes in capital and real estate markets have

highlighted the need for flexibility and deal modification highlighted the need for flexibility and deal modification.

• Our prior presentation provided the general framework for

p p p g creating public-private partnerships, this one will address planning for and responding to change.

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O tli f P t ti Outline of Presentation

• 1. Review Some Key Definitions
• 2. Strategies for Addressing Change
• 2. Strategies for Addressing Change
• 3. Advance Planning to Minimize and Facilitate Workouts
• 4. Examples
• 5. Lessons Learned

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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 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

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

1. REDEVELOPMENT (Policy-Driven) TRANSACTIONS

A. Driven by policy considerations; B. For private development that would not occur without public inducement or assistance; C U ll i t d ith i d l t d t it li ti ff d bl C. Usually associated with economic development, downtown revitalization or affordable housing. D. Governmental powers and funding sources

2 ASSET MANAGEMENT TRANSACTIONS 2. ASSET MANAGEMENT TRANSACTIONS

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

3. PRIVATE DEVELOPMENT OF PUBLIC FACILITIES

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

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C. Not considered here except in situations requiring joint development of public and private facilities

Th t f th h ll The nature of the challenge

1. MARKET WEAKNESS 2. LOSS OF PUBLIC FUNDING 3. LACK OF PRIVATE FINANCING 4. POLITICAL AND/OR PUBLIC AGENCY FISCAL DYSFUNCTION 5. FINANCIAL DISTRESS/INSOLVENCY OF DEVELOPER OR ITS FINANCIAL PARTNER 6. NEW LEGAL OBSTACLES; LEGISLATION OR LAWSUITS (E.G. CALIFORNIA REDEVELOPMENT)

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St t i f Add i Ch Strategies for Addressing Change

1. FIND WAY TO POSTPONE PROJECT FOR MARKET/FINANCE RECOVERY A. Preservation of entitlements and political acts B. Preservation of third party commitments; anchor tenants, operators, lenders C P ti f liti l/ it t C. Preservation of political/community support 2. PRESERVE DEVELOPER’S STANDING PER TRANSACTION UNTIL CONDITIONS IMPROVE A. Revise contractual timeline B Reduce/eliminate required time payments B. Reduce/eliminate required time payments C. Modify evidence of financing requirements D. Involve developer in infrastructure planning 3 FIND WAY TO SCALE DOWN PROJECT 3. FIND WAY TO SCALE DOWN PROJECT A. Down-size B. Start with less and phase the rest

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St t i f Add i Ch Strategies for Addressing Change

4. REDEFINE PROJECT A. Adapt to changed market change or add uses such as multifamily or government use B. Value engineering or downscaling price point C U i l t ti f t 2 t t 5 C. Use simpler construction; go from type 2 to type 5 5. IF PROJECT IS CLEARLY “DEAD” AS IS, CAN THE DEVELOPER MAINTAIN SOME PREFERRED POSITION FOR NEXT PROJECT THAT WILL TAKE ADVANTAGE OF THE INVESTMENT HE AND PUBLIC AGENCY HAVE ALREADY MADE? A. Rights of first negotiation B. Right of first refusal C. Shared cost and sweat equity for infrastructure that can be completed and reimbursement of selected developer cost if and when property is ultimately developed 6. IDENTIFY OTHER DEVELOPERS IF A. There is work a developer can do B. Current developer is not willing or able

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I l t ti M h i Implementation Mechanisms

1. IDENTIFY STAGE OF TRANSACTION A. Prior to ENA; constraints and flexibility in RFQ and RFP B. During ENA period C. After execution of DDA but prior to construction start D. After construction start E. After completion

Solicitation Solicitation ENA Preconstr ction Preconstruction Construction

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Operation

I l t ti M h i Implementation Mechanisms (continued)

2. POLITICAL AND STAFF CONTEXT A. Level of staff support and expertise B. Precedent of delegation authority to staff C. Presence, official or unofficial, of other jurisdiction priorities 3. LEGAL ISSUES - Contract modifications: ENA, DDA (see attachments) A. Determine whether or not force majeure or other provisions provide additional time or flexibility needed B Utili AND DOCUMENT b ilt i i i f d i i t ti difi ti ith t B. Utilize AND DOCUMENT built in provisions for administrative modification without public hearing or elected official approval C. Formal amendments when required; remember to follow public procedures 4. LEGAL ISSUES - Amending the agreement 4. LEGAL ISSUES Amending the agreement D. Don’t temporize, if it’s needed deal with it E. Beware of what you are inadvertently tripping (e.g. CEQA, entitlements, etc.)

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I l t ti M h i Implementation Mechanisms (continued)

5. LEGAL ISSUES - IN ALL CASES, DOCUMENT CHANGE BEFORE TAKING ACTIONS 6. LEGAL ISSUES - BUILD IN EXTENSION RIGHTS A. Money B. Evidence of diligent pursuit C. No other default 7. LEGAL ISSUES – PRESERVATION OF ENTITLEMENT A. Review flexibility and equivalency provisions B. Time and extension provisions already incorporated C. Extend tract map D C id i t f d l i t l d t l t d i D. Consider impact of delay on environmental documents, completed or in process E. Review, modify, or create statutory development agreement for rights to extend

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I l t ti M h i Implementation Mechanisms (continued)

8. ECONOMIC ISSUES A. Preservation of financial pledges, interaction with terms of contract 1) Deferred 2) Made Contingent 3) Restructure pledge B. Substitution of other funding sources 1) Developer advances against further recovery of public benefits 2) Current/future fee waivers or deferrals; watch for prevailing wage consequences 3) Eliminate prevailing wage 4) Conversion of some project elements to public funding, e.g. parking C. Recharacterization of time triggers 1) Tied to measureable market parameters; financial majeure 1) Tied to measureable market parameters; financial majeure 2) Outside dates contain prior choice points not simple expiration

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I l t ti M h i Implementation Mechanisms (continued)

9. POLITICAL AND COMMUNITY SUPPORT A. Lay the cards on the table face up B. Explain realities of choices or lack thereof C. Make solution partners of those who have relied or have a stake in your project, e.g. property owners and merchants who were looking for your project as a boost, community members who were looking for new shopping, employment or entertainment opportunities D. Manage perceptions to highlight ultimate potential for success rather than a failed transaction

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R i f K C t Review of Key Concepts

1. The nature of the challenge 2. Strategies for Addressing Change A Find way to postpone project relative to the external acts that affect it and preserve third A. Find way to postpone project relative to the external acts that affect it and preserve third party commitments B. Preserve developer’s standing per transaction documents until conditions improve C. Find way to scale down project D. Redefine project D. Redefine project E. Maintain some preferred position if the project is dead F. Identify other developer 3. Advance Planning to Minimize and Facilitate Workouts A. Identify state of transaction B. Political staff context C. Legal issues: contract modifications, amending the agreement, document change, build in extension rights, preservation of entitlement D Economic iss es

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D. Economic issues E. Political and community support

E l T ti G l Hi h Example Transactions – General Hierarchy

1. Single-use vertical development on finished lot 2. Multiple-use vertical development with equivalency to be flexible stipulated mix on finished lot

SIMPLE

flexible, stipulated mix on finished lot 3. Multiple-use with land development and multiple parcels – horizontal and vertical on unfinished lot

COMPLEX

4. Horizontal/vertical with major unusual and atypical infrastructure

COMPLEX

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E l T ti Example Transactions

1. Boulevards at South Bay – Carson 2 Hercules Bay Front – Hercules 2. Hercules Bay Front – Hercules 3. Grand Avenue – Los Angeles 4. Westfield Culver City – Culver City 5. Whittwood Shopping Center – Whittier 6. Douglas Park – Long Beach

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E l Th B l d t S th B Examples – The Boulevards at South Bay

LARGE MIXED USE PROJECT WITH MAJOR LANDFILL REMEDIATION

• City of Carson at intersection of 405 and 110

City of Carson at intersection of 405 and 110

• Project split between infrastructure /

remediation zone and vertical – airspace subdivision

• 168 acres, Illustrative Plan of up to 2 million
• Sq. Ft. of commercial retail, office and hotel,

plus 1,500 residential units, subject to equivalency

• LNR/Hopkins developer and the City and RDA
• Post Lehman need to restructure public

fi i d l financing model

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E l Th B l d t S th B Examples – The Boulevards at South Bay

LARGE MIXED USE PROJECT WITH MAJOR LANDFILL REMEDIATION The City will provide $120 million of public assistance to the project to fund remediation and public improvements p p Air space subdivision and land use entitlement Defense of the entitlements from challenge under CEQA Defense of the entitlements from challenge under CEQA Structure, negotiation and documentation of the public private partnership Statutory development agreement with the City vesting the developer’s entitlement rights Owner Participation Agreement documenting the Agency’s financial

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assistance to the project and establishing a non-profit mutual benefit corporation funded, in part, by a Communities Facilities District, to hold and manage the below-grade remediation

E l H l B F t Examples – Hercules Bay Front

PROPOSED HIGH DENSITY TRANSIT VILLAGE ON SAN FRANCISCO BAY DEVELOPMENT PROGRAM DEVELOPMENT PROGRAM Residential – 1,400 Unitss Retail, Office, Flex 400,000 square feet

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, q 2,500 parking spaces Total Cost over $600 million

E l H l B F t Examples – Hercules Bay Front

TRANSACTION ORIGINS, PARTIES, AND PROBLEMS

Private waterfront landholding had been subject of controversy for years. In 2008 with ANDERSON PACIFIC LLP as developer master plan was approved by In 2008, with ANDERSON PACIFIC, LLP as developer, master plan was approved by initiative to overcome bureaucratic paralysis. Plan calls for upscale Transit Oriented Development (TOD) to improve community image and take advantage of new transit rail link along east shore of S F Bay and take advantage of new transit rail link along east shore of S.F. Bay. Issue of prospective major public assistance from the public parties CITY AND REDEVELOPMENT AGENCY OF HERCULES was acknowledged but not directly addressed until late 2009 by which point: addressed until late 2009 by which point:

• Market was “in the tank”
• Limited private financing available
• City and Agency were in state of financial crisis due to prior bonds

Si l d f i j t i t ti k i f t t d l d t f

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• Simply deferring project is not an option - key infrastructure and land transfer

for transit must go forward or key transit funding will be lost

E l H l B F t Examples – Hercules Bay Front

ELEMENTS OF A SOLUTION Note that terms described are not yet final and negotiations continue

REVISING THE PROJECT CONCEPT REVISING THE PROJECT CONCEPT Some downscaling of residential to allow lower cost construction Redesign for lower cost to eliminate need for direct subsidy which triggers PREVAILING WAGE further eroding project feasibility INTRODUCING CONCEPT OF PUBLIC PARKING DISTRICT As part of redesign, and to make private project work better, public agencies will require a publicly funded parking district to cover both transit and commercial parking – financing will borrow from Pasadena and Santa Monica model with “backstop” assessments on private development development MAINTAINING MOMENTUM NEEDED FOR TRANSIT Developer and City will join to fund minimum infrastructure to allow transit to go forward, Developer will sell transit land to secure interim funding, Developer team will manage

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infrastructure to assure connectivity to later private development

E l G d A Examples – Grand Avenue

The $3 billion project, which is to be built on Grand Avenue, is designed to give Los Angeles a thriving city center. The project's key public component is a 16-acre park stretching between the development's two boundaries: City Hall and the Department of Water and Power building.

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E l G d A Examples – Grand Avenue

ORIGINS, PARTIES AND LAND ASSEMBLY

Project site is composed of multiple parcels, mostly publicly owned parking lots, some owned by County, others by Redevelopment Agency y y y p g y County, city and agency form committee to solicit proposals for an iconic major mixed used project intended to complement the recently opened Disney Hall and make the Civic Center a vibrant urban community Later the same three agencies form a Joint Powers Authority which functions as the public entity in the PPP After an RFP process the Related Companies were selected for negotiation based in part on their choice of Frank Gehry as an architect and their willingness to fund a civic center park with a $50 million ground lease prepayment

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E l G d A Examples – Grand Avenue

INITIALLY PROPOSED DEVELOPMENT PROGRAM:

• Retail

350,000-400,000 square feet

• Hotel

225-275 rooms

• Residential Units

2,100-2,600 units (20 percent affordable units)

• Parking

4,800-5,500 spaces

• Total Built Area

2,800,000-3,800,000 square feet

• Civic Park

16 acres Funded by $50 million ground lease y g prepayment made in 2006

TIME LINES, DELAY, AND CHALLENGES

• Construction was to start in 2007 but even then financing was a problem
• With 2008 recession financing and market demand both dried up
• Major penalties for delay

I iti l t “hi h d” i l di F k G h d i

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• Initial concept was very “high end” including Frank Gehry design

E l G d A Examples – Grand Avenue

THE SOLUTION? STILL A WORK IN PROCESS

Two key principles have guided this process 1. With $50 million already committed, the developer, who remains a very sound business, cannot or will not “walk” 2. As the property is already publicly owned delay is possible and the agencies in the Joint Powers Authority remain committed to the project These two principles and the absence of big external deadlines create flexibility 1. PENALTIES FOR DELAY – These are somewhat relaxed after three years and, more important, deferred until project starts 2. REDEFINING USES – One key parcel (formerly office ) now to be used for a new museum 3. LIMITED DOWNSCALING - Related (developer) is investigating modestly downscaled project with more rental units rather than high priced condos

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rental units rather than high priced condos 4. ADDITIONAL PUBLIC ASSISTANCE - In earlier discussion there was some public will to provide additional funds when project form had not changed – current status is unclear

E l W tfi ld C l Cit Examples – Westfield Culver City

ACCOMMODATE TARGET AS NEW ANCHOR AND ADVERTISING SIGNS

• Existing mall adjacent to the 405 freeway in Culver City
• The renovation includes the addition of approximately 300,000 square feet to the

existing regional mall, including a new Target store, a new Best Buy store and a comprehensive Freeway Onsite Sign Entitlement.

• Westfield, City and Redevelopment Agency
• RDA assistance and Sign income allowed redevelopment, with new major tenant, of
• bsolete 1960’s mall that did not have freeway presence.

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E l W tfi ld C l Cit Examples – Westfield Culver City

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E l W tfi ld C l Cit Examples – Westfield Culver City

• 1. Lost opportunity for city to use that 405 access and visibility to

i th “FORGOTTEN SIDE OF THE CITY” energize the “FORGOTTEN SIDE OF THE CITY” 2 Robinsons May goes dark and Westfield buys the pad

• 2. Robinsons May goes dark and Westfield buys the pad
• 3. Westfield redevelopment plan projects a very large gap between cost
• 3. Westfield redevelopment plan projects a very large gap between cost

to redevelop and after value

E l W tfi ld C l Cit Examples – Westfield Culver City

4. AFTER OVER 2 YEARS OF NEGOTIATIONS AND ENTITLEMENTS ON A 3/2 VOTE CITY/AGENCY APPROVES:

• A. $10 million rebate out of new tax increment to be generated, subject to

performance standards: (1) TENANT MIX QUALITY AND QUANTITY (1) TENANT MIX, QUALITY AND QUANTITY (2) TIMING, QUALITY AND COST OF IMPROVEMENTS

• B. FREEWAY VISIBLE SIGNAGE, which together with the center’s redesign, attracted

consumers off the 405 – this also provided traffic needed to revitalize surrounding

• area. For the signage, the City received a base payment and 50% of sign advertising

revenue in excess of a threshold return to owner.

E l L B h D l P k Examples – Long Beach Douglas Park

Adaptation to market change – modification of land uses

Development Agreement Entitlement Vesting Development Rights for 20 years

• 330 Acre: Reuse of Historic McDonald Douglas Airport Site
• 330 Acre: Reuse of Historic McDonald Douglas Airport Site
• City of Long Beach and The Boeing Company

2005 Initially Maximum 1400 Residential Units Maximum 1400 Residential Units 120 For Sale Senior Housing Maximum 3,000,000 Sq. Ft. Commercial Uses Maximum 400 Hotel Rooms Maximum 200 000 Sq Ft Retail Uses Maximum 200,000 Sq. Ft. Retail Uses Infrastructure Phasing Plan and Park Improvements 2010 Revised Eliminate Residential M i 4 000 000 C i l Maximum 4,000,000 Commercial Maximum 400 Hotel Rooms Maximum 250,000 Retail

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E l L B h D l P k Examples – Long Beach Douglas Park

Adaptation to market change – modification of land uses

Development Agreement Entitlement Vesting Development Rights for 20 years

2005 Initially 2010 Revised

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E l Whitt d Sh i C t Examples – Whittwood Shopping Center

WHITTWOOD SHOPPING CENTER IN WHITTIER

• Obsolete shopping center built in 1952 on 66 4 acres

Obsolete shopping center built in 1952 on 66.4 acres – 50% vacant in middle of suburbia with no freeway proximity

• Developer LNR/Hopkins

p p

• City of Whittier and Redevelopment Agency
• 150 high-density residential units in conjunction with up to

900,000 Sq. Ft. of mixed-uses integrating various commercial- retail, restaurants, and service type uses

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E l Whitt d Sh i C t Examples – Whittwood Shopping Center

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E l Whitt d Sh i C t Examples – Whittwood Shopping Center

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L L d Lessons Learned

1. Make deal flexible enough to survive economic conditions 2 D i th t ti t d t h 2. Design the transaction to accommodate change 3. Documentation for both transaction and land use T ki d i h t i i l

• Tracking and using what is in place
• Making changes when needed
• New documentation when required

4. Understanding Economic Issues

• Planning for contingencies

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• Consider use of financial force majeure

Overview of Real Estate Development PPP

Tony Canzoneri Dennis Roy McKenna Long & Aldridge LLP Allan Kotin Allan D. Kotin & Associates

mckennalong.com

October 2011 Webinar