Public Private Partnerships…What are They Good For?

By Duke Dennis

Over its 25-year operating history, Metropolitan Capital Advisors (MCA) has worked on numerous Public Private Partnership (PPP) transaction financings. PPPs have increasingly become particularly significant in commercial real estate. This post is an explanation of what PPP’s are, reasons to use a PPP, and finally, some local examples of PPP projects.

For starters, you might wonder what a PPP is exactly. According to the National Council for Public‐Private Partnerships (NCPPP), a PPP is: “[a] contractual agreement between a public agency (federal, state, or local) and a private sector entity.   Through this agreement, the skills and assets of each sector (public and private) are shared [to deliver] a service or facility [to] the public.  In addition to sharing resources, each party also shares the risk and reward potential of the delivery…”

PPP’s are often used as a tool to allow developments that would otherwise not financially be feasible.  From a local municipality’s perspective, engaging in a PPP falls within the category of social good.  For example, a city, Dallas would entertain a PPP to induce private investment, job creation and/or redevelopment of targeted areas that are often in need of revitalization. According to the office of Dallas Economic Development, “[i]t is… to provide assistance only [to] projects where such assistance is necessary to stimulate private investment and job creation. [Additionally]. [p]rojects occurring in Target Areas are provided special consideration.”

public private partnerships

The Omni Dallas Hotel was developed through a public-private partnership.

So, why would a project need the municipality’s involvement?

The question of a project’s viability usually boils down to one of two issues: either the costs are too high or the income is too low, thus making the project not worth investment.  This frequently occurs in low-income areas (i.e. typically targeted areas) or alternately, when construction costs are running rampant.  To qualify, “[p]rojects seeking economic incentives (via a PPP) must provide written assurance that ‘but for’ the incentives sought, the proposed project will not occur, or would otherwise be substantially altered so that the economic returns or other associated public purpose secured by the city’s incentives would be reduced.” If the project meets one of the three stated criteria, one way to overcome financial/economic hurdles is to enter a PPP.  If your project does meet one or more of the criteria above it could qualify for a PPP and receive one of the following real estate incentives:

  • Tax Abatements
  • Tax Increment Financing
  • New Markets Tax Credits
  • Historic Tax Incentives
  • Chapter 380 Grant Program
  • Freeport Tax Exemptions
  • Municipal Management Districts

These incentives can help a project achieve either lower overall costs or higher net income towards the bottom line –  both of which would result in greater returns to investors. This in turn would then be able to entice private capital to invest in and undertake the project.

PPPs are typically for public use. They include: infrastructure (roads or public transportation), schools, libraries, public meeting spaces (convention centers), support facilities, water facilities, hotels and urban redevelopment.  Local (North-Texas area) real examples are:

  • Texas Live!: A $1.25 billion stadium & mixed-use district featuring dining, entertainment, hotel and a convention facility adjacent to the new Texas Rangers Ballpark.
  • AllianceTexas Development: AllianceTexas is an 18,000 acre mixed-use development in North Fort Worth that includes the world’s first industrial airport and the nation’s largest inland port.
  • Irving Westin Convention Center Hotel: a $100+MM, 350-key high-end hotel that will support the Irving Convention Center.
  • The Star in Frisco: A $1.5 billion mixed-use development featuring the Dallas Cowboys’ practice facility, a planned Omni Hotel, sports medicine center, and more than 200,000 square feet of restaurants and retail stores.

When considering a new project, you should identify whether it meets adequate criteria to be considered for a PPP.  If it does, you could qualify for one or multiple incentives to turn your project from an average investment into a home-run of a deal!

The author, Duke Dennis, is a Senior Analyst in the Dallas office of Metropolitan Capital Advisors.  To learn more about PPP’s and how they can be financed Duke can be reached at ddennis@metcapital.com (972) 267-0600.

Posted on by admin in Commercial Real Estate Finance, CREF 1 Comment