The pandemic has created financial problems for state and local governments: tax revenues have fallen, public health spending has increased and infrastructure congestion is growing. Hope for swift relief from Congress was dashed late last year when the Senate refused to follow a House plan to strengthen the treasury.
This represents an opportunity for developers and real estate investors.
The fiscal challenges could open new avenues for the private sector to work with state and local governments, said Gabriel Silverstein, executive director of SVN Angelic, a real estate investment and advisory firm in Austin, Texas.
"We are in one of those times when the need is real," said Silverstein, who has worked on public-private partnerships known as P3. He predicted that "some interesting and creative things may be happening in the public-private partnership space".
The partnerships rely on developers and investors taking the financial risk up front and often delaying government payments until revenue flows in or certain construction benchmarks are met.
"It can be an incredible use of private markets to support the continued development, planning, and smart growth that cities and towns need but cannot do alone," said Lauren Jezienicki, founder and chief executive of One Circle Company, a residential real estate company, who worked on the partnerships as Senior Vice President at Bozzuto, a real estate developer.
The partnerships have been used, sometimes with mixed results, for projects in parts of Asia, Australia, the UK, Canada and other parts of Europe. But state and local governments in the United States have been slower to adopt them. As their tax problems worsen, some government officials are looking more closely at them as a tool to stimulate their economies.
President-elect Joseph R. Biden Jr. has proposed a $ 1.9 trillion bailout to combat the economic downturn, including $ 350 billion to help state and local governments bridge fiscal constraints support. It is not yet clear whether Congress will approve.
However, the data suggests that local governments will need all the help they can get. The National League of Cities estimates that nearly 90 percent of cities will be less able to meet their needs in fiscal 2021 than they were in fiscal 2020. Fiscal year 2021 for many states and local governments began in July 2020. The American Society of Civil Engineers estimated that the United States would have to spend $ 4.59 trillion by 2025 to repair or rebuild roads, bridges, dams, airports, schools, and other infrastructure – and that was before the pandemic.
"We see that this historic drop in revenue that public authorities are grappling with certainly results in many projects being delayed and postponed and canceled, but the need for infrastructure investments is greater than ever." said David J. Odeh, a civil engineer and director with Odeh Engineers in Rhode Island.
Local governments have recently shown renewed interest in public-private partnerships for projects such as school construction, said Darin Early, general manager, public-private partnerships at Gilbane Development Company.
"Most of the conversations took place around K-12," said Early, who heads a group of firms working on a public-private project for six middle schools in Prince George's County, Md..
The partnerships have a mixed record. A toll road in Indiana collapsed after the private tenant filed for bankruptcy in 2014. A much-criticized Chicago agreement to privatize parking meters in the city was a huge boon to investors but is seen as a bankruptcy for the city. In Maryland, the Purple Line light rail is behind schedule, and the state recently agreed to pay $ 250 million to settle a lawsuit with the private alliance building the system over delays and cost overruns.
But they could be a way to bring back the main roads and revitalize the inner city, experts say.
An early partnership in Quincy, Massachusetts to revitalize downtown stalled a few years ago. Since then, city officials have worked with several private developers to promote commercial and retail development and build new homes. A contract to rebuild the Quincy T-Station and promote the development of residential buildings, offices and retail stores includes the City of Quincy, the Massachusetts Bay Transit Authority, Atlantic Development and Bozzuto. Another project with the same partners is under construction around the North Quincy T-Station.
Part of the discussion will be who is contributing what to what, said Chris Walker, chief of staff to the Quincy Mayor Thomas P. Koch.
Whether public-private partnerships are the right choice for state and local governments is an open question. Their big selling points are usually that the private developer pays up front for improvements and construction, often manages the entire project, and promises faster completion than if the government were handling the project itself. However, with interest rates low and likely to stay that way for a while, state and local governments could also issue bonds to raise money for infrastructure projects.
Bonds may offer an alternative source of funding, but private sector companies offer "mixed-use expertise, our tolerance of development risk and our access to capital," said Mike Henehan, president of Bozzuto's development unit.
Despite its early struggles, Quincy isn't hesitant to take advantage of the partnerships, Walker said.
“There is no upfront risk to the city,” he said. "We only pay them back when the tax revenue flows in."
Another benefit: The partnerships can deliver results quickly and with enough skill to save public money in the long run, said Sean Brooks, director of real estate and property development for Bay Area Rapid Transit.
"One of the biggest things for us is financing affordable housing," he said. "We have to shake the trees and use all means to create affordable housing."
BART used the deals to attract development around its stations by offering density bonuses and getting the developer to include affordable housing, he said.
However, private investors need to do more than just view these deals as an opportunity to make a quick profit, said Stephen K. Benjamin, the Mayor of Columbia, S.C.
"This not only requires that municipal and local officials be open, but also that institutional investors rethink the way they bring these ideas," he said. "This is about solving community problems as opposed to" We see this collective financial opportunity "."
Even before the pandemic, the public school system in Prince George & # 39; s County, Md., Was considering partnerships and expected to land a $ 1.24 billion contract this month to build six middle schools.
The Washington suburb has lagged its wealthier neighbors for years in terms of school performance, business and job creation, and expanding its tax base. The public school system is grappling with the stresses of old age, and many of its 200-plus buildings have not been renovated in years. Finding outside investors, district officials say, will get them good business.
"This plan is one of the smartest we can do with the resources we have," said Angela Alsobrooks, the district manager. If the private contractor returns the buildings to the school system in 30 years, they will be in better shape than if the school system had serviced them, according to county officials.
Some elected officials remain skeptical. The Prince George & # 39; s County Project has been pushed back by a handful of members of the county council and school board.
And in Stamford, Connecticut, officials last year turned down a public-private proposal to restore and rebuild schools that were found to have mold and other problems. Some officials feared the cost would be higher than predicted and left the city on the hook in the future.
Details on the success rate of these partnerships are limited. Canadian government auditor reports have repeatedly challenged government claims that the projects were cheaper and saved public funds.
In the long run, the partnerships aren't worth the risk, said Kevin DeGood, director of infrastructure policy at the Center for American Progress, a Washington think tank. The need to make public buildings more energy efficient could, for example, arise well into the term of a P3 contract and require renegotiation. "It can be incredibly costly," he said, adding that cost overruns are often the subject of disputes well into the contract life.
"The states are facing massive budget deficits," he said. "P3s don't change that."
