DELIVERING ON THE PROMISE. Comparing P3 Models. November 18, 2014

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1 DELIVERING ON THE PROMISE. Comparing P3 Models November 18, 2014

2 Panelists Moderator Marv Hounjet, Plenary Group Panelists Barney Allison, Nossaman Mike Pikiel, Norton Rose Aleks Granchalek, William Blair 2

3 Public Finance P3 Social Infrastructure Model Who are the Parties and What are their Roles? What is the Procurement Approach? What are the Deal Structures? What are the Risk Allocations? 3

4 Who are the Parties and What are their Roles? Public Owner acts as the procuring agency and the lessee if leaseback structure is used Public Owner may or may not be responsible for raising the financing Private Developer designs and builds the facility and may also be responsible for operations and maintenance Private Developer acts as lessor if a leaseback structure is used Private Developer may be an LLC or a joint venture Public Owner may retain a Construction Manager/Agent 4

5 What is the Procurement Approach? Lowest annual rent, shortest term, greatest amount of project Best Value considerations may include attractiveness of design, earliest completion, offer of community amenities Technical provisions tend to be somewhat prescriptive; little opportunity for innovation since generally no shifting of long-term operation and maintenance cost risk 5

6 What are the Deal Structures? Most commonly lease/leaseback with purchase option Net lease or gross lease Prorata Abatement of rent if all or a portion of the facility is not available for intended use Financing may be accomplished through issuance of tax exempt bonds or COPs implication of IRS management contract rules and security interest test Developer offers a guaranteed completion date and fixed price True lease vs Financing lease Payments subject to budget and appropriation 30+ lease term subject to termination if not renewed 6

7 What are the Risk Allocations? Financing Site acquisition Site condition Permitting and environmental Utilities Haz Mat Operation and maintenance costs, including major maintenance and renewal 7

8 Typical PPP structure Governmental Sponsor Availability Payment DBFOM or DBFM Agreement Equity Provider Project Company/Developer Senior Debt Agreements Senior Debt Provider D&C Contract FM Agreement Design & Construction Interface Agreement Operations & Maintenance (including life cycle) 8

9 Attributes of typical PPP structure Non-recourse project financing License structure no change in ownership Significant risk transfer Strong value proposition Strong balance sheet credit rating + Efficient Risk Allocation + Contracted Long-Term Revenue (assuming performance) + Parent Company Guarantee + Security = Investment Grade Transaction 9

10 25 A Hybrid Approach: Some Opening Stakeholder Thoughts Greater Gov't Control Less Gov't Control Project Need Referendums Interest Rate Risk Cost of Funds Political Aversion to Debt Expertise in Delivering Specialized Occupancy Construction Risk Debt Level Limitations Procurement Process Drama Delivery Schedule 1

11 A Hybrid Approach: Surprisingly Unremarkable 25 Greater Gov't Control Less Gov't Control Public Control Hybrid Model Completely Privatized Model Conventional Tax-Exempt Financing Borrower remains in primary risk position. Moves down the spectrum of exposure: 1. Risk starts to shift 2. Financing starts to change 3. Control changes Starts behaving more like a real estate deal Wise picking and choosing Risk shifted a lot more. Cash outlay may appear higher Control given up? >> real vs. perceived 2

12 Applications and other Issues Ancillary Benefits

13 Understanding the Priorities University Housing Issue General Privately Placed Revenue Pledge Absolute Lease Triple Net Lease Triple Net Lease Bond Rating A3/A- A3/A- Baa1/BBB+ Baa1/BBB+ Development Budget $12,873,650 $12,873,650 $12,873,650 $12,873,650 Capitalized Interest Fund 736, ,418 1,154,837 1,852,988 Capitalize Through 9/1/2013 9/1/2013 1/1/2014 1/1/2014 Debt Service Reserve Fund ,175 1,249,575 Financing Costs 435, , , ,787 Total Uses of Funds $14,045,000 $14,175,000 $15,590,000 $16,290,000 Par Amount of the Bonds $14,045,000 $14,175,000 $15,590,000 $16,290,000 Term / Amortization 32 Yrs / 30 Yrs 32 Yrs / 30 Yrs 32 Yrs / 30 Yrs 10 Yrs / 30 Yrs Bond Yield 4.04% 4.30% 4.56% 6.50% Total Debt Service $25,025,711 $26,022,743 $29,473,713 $38,911,788 Max. Ann. Debt Service $812,150 $844,975 $958,175 $1,249,575 3

14 Case Study Chicago Transit Authority Open Fare Payment Collection System Stated Operational Goals for the Project Included: The Chicago Transit Authority ( CTA ) operates the nation s second largest public transportation system, offering mass transit services to 3.8 million residents within a 356 square mile area covering the City of Chicago and 40 surrounding suburbs. The CTA annually provides over a half a billion rides on its more than 4,000 buses and trains. In December 2011, the CTA entered into a 12-year agreement with Cubic Transportation Systems to design, install, finance, operate and maintain a first-of-its-kind Open Fare Collection System. The award was the culmination of a robust procurement process involving potential private sector partners from around the globe. Shifting capital outlays to the private sector Achieving operational savings Developing an Open Fare model that provides customer flexibility to payment options Divesting the CTA of the issuance and support of proprietary fare media Providing the unbanked and under-banked with inexpensive access to payment products Shifting the risk of increases in payment industry fees Providing flexibility for the future with regards to emerging technology and changing fare structures Identifying new non fare-box revenues Private Partner Term of Contract Financial Advisor Cubic Consortium 12 years William Blair & Company 4

15 Case Study State of Wisconsin Combined Museum State Department of Administration (DOA) contemplating a public-private partnership structure, among other delivery approaches. Combined Museum would provide substantially improved facility for State Veterans and Historical Museums in Madison. Very specialized occupancy. Lease structure can substantially decrease delivery time, mitigate/shift risk. Requires pragmatism about the weight of the tenant in terms of: Credit brought to project Size and affect of this anchor tenant. Important: Still Evolving 5

16 Panelists Moderator Marv Hounjet, Plenary Group Panelists Barney Allison, Nossaman Mike Pikiel, Norton Rose Aleks Granchalek, William Blair 16

Real Estate Terminology

Real Estate Terminology Types of Legal Entities Limited Liability Company LLC - A corporate structure whereby the shareholders of the company have a limited liability to the company's actions. Basically,