|
| by Roger D. Feldman Partner |
Federal public-private partnerships have involved acquisition of particular facilities with the aid of private sector capital and management expertise (military housing); disposition or enhancement of specific public assets by private sector involvement (utility privatization and energy efficiency upgrade); and, finally, the involvement of the private sector in the rationalization of the Federal asset base. The BRAC program has been a leading program of Federal efforts in the last category BRAC is a forerunner, of other efforts by the Federal Government to apply asset management to the inventory of Federal capital assets not just for cost control reasons, but also to achieve other stated government policy objectives. There are, however, other Federal programs targeted at Federal goals which generically also involve:
- Redeploying Federal capital investment through a structured program of asset disposition.
- Realizing economic or other benefits for Federal agencies or programs through such redeployment.
- Integrating such redeployment in a manner which takes into consideration the economic and environmental impacts of the local communities proximate to the Federal facilities.
- Developing public - private partnerships whose financial characteristics are scored budgetarily in a manner compatible with Federal fiscal objectives.
Meeting these goals is very difficult to effect outside of the framework of specific legislation. In some cases, this has been done through site specific legislation, as in the Kampala, HI (sale of property and use of proceeds for "in kind" replacement) or Brooks City Base. In others, like the field of "Enhanced Use Leasing", it has been undertaken through more generic legislation adapted for DoD or the VA. Congress has to date declined to pass similar legislation for several other agencies, such as NASA and GSA. Meanwhile, however, quasi-Federal agencies like the U.S. Postal Service (USPS) have pioneered various types of development programs designed to realize economic benefit from no longer needed USPS downtown properties. These projects, which have been undertaken with private developers, have sometimes included GSA, acting on behalf of other Federal agencies.
As the pressure for Federal budgetary savings persist and the massive requirements to effect BRAC-like asset redeployments is reemphasized, the use of tools like EUL, which is subject to use in many tailored transactional forms, may become more common. While EUL's statutory framework differs from BRAC's implementation is informed by the BRAC experience and will require utilization of the transactional approaches analogous to those used under BRAC.
Future BRACs, in turn, may be structured to embody some of the beneficial innovations embodied either in the EUL legislation or creative forms of its implementation. Additionally, it may be expected that innovations under the military housing and energy savings performance contracting fields, may be adapted and incorporated under future asset rationalization public-private partnerships.
Some of the key features of EUL which may provide a foundation for legal innovation include the following:
- Identification of transactions where Federal property is not excess, but can productively be benefited by long term out-lease to private parties, who undertake improvements.
- Statutorily-directed capture of a defined significant, portion of the proceeds of transaction net economic benefits from by the specific governmental unit (e.g., military base commander) nominating transaction undertaking.
- Provision of long term governmental leases or off take obligations sufficient to secure private amortization of the improvements by the EUL lessee.
- (V.A.) provision for the private contribution for lease improvement to be payable "in-kind", i.e., through services (including remediation and restoration) and operation (including facilities other than that to be privately provided).
- (V.A.) Permissibility of contributions to be revenue generation for benefit of agency, rather than limited to facility-specific improvements.
The exercise of EUL transactional authorities is hedged by appropriate internal checks, including the following:
- No long term lease arrangements without Secretarial approval.
- Lease revocability at any time by the Government absent specific approval to the contrary.
- Private fair market value compensation for the governmental lease.
Key factors which must be taken into account include:
- Compliance with other legal requirements such as McKinney-Ventor Homeless Assistance and the Historic Preservation Act.
- Assurance of ultimate compliance of private lease property use with environmental requirements.
- (V.A.) Need for tracking private "in-kind" consideration and cash management.
The future potential of the EUL program is illustrated by V.A.'s EUL experience. Over the past 14 years, 33 projects have been awarded, over 35 are currently active, and attention is being given to how its new CARES consolidation program can provide a road map to new opportunities. Its programs include replacement of high cost office space, replacement of outdated energy facilities, and development of housing units adjacent to medical facilities.
The Department of the Army has also recorded successes under the EUL program, most notably at the Walter Reed Army Medical Center (WRAMC). In the Building #40 project, an historic building was privately renovated, and restored to commercial office standards; WRAMC received at least the fair market value of the building as "in-kind" services over the prime lease term; the developer assumed a substantial portion of all O&M expenses; and the WRAMC arranged to receive the building and land back from the Developer at the end of the lease term. A follow on project for another WRAMC building recently was awarded to the same developer.
The private sector's perspective on EUL transactions is, understandably, to create non-recourse facility financings, in which the underlying credit for the repayment of debt issued is a stream of payment obligations by a Federal agency or non-profit receiving firm Federal contract benefits) for rental or operating purposes. Achieving this result frequently entails the utilization of some type of conduit "special purpose" entity which may issue debt secured by the governmental undertaking. Separate owner trusts are created by the V.A. for individual deals and transactions in which specially created non-profit corporations, enter into either leases or operating agreements with developers providing facilities.
In the documentation and structuring of EUL and other Federal public-private transactions from the private perspective the key financing issues will be the extent to which governmental undertakings can be translated into investment grade; tenor (long preferred); leverage (high preferred); coverage (preferably thin) and third party credit enhanceability (desirable). Practical document of key credit issues and other contractual allocations of contract risks include the following: the credit risk concerns are the risks of completion (on-time/on-budget); essentiality; lease-debt term match-up; certainty of revenue stream (e.g. issues of set-offs, appropriations); rights of access to public facilities (to private leases); contract risk allocation (e.g., responsibility for operation, taxes, maintenances); rights of lessee in the event of termination; rights of lessee to collateral value.
In addition to contractual issues, the other key issue is whether a Government undertaking is a capital lease, which must be "scored" as an upfront budgetary cost or an operating lease for which payments must be accounted only as costs when actually incurred. While the Congressional Budget Office is strongly inclined to sweep public-private partnerships into the former category, for purposes of advising Congress on the impact of legislation, OMB has adopted standards which generally mirror the standards applied for operating leases in the Accounting Standards, e.g., lease term greater or equal to 75% of economic life of asset; present value of lease payments greater than or equal to 90% of fair market value; no bargain purchase option; general purpose asset susceptible of private use. The tension between minimization of transaction scoring and the strength of a transaction credit package for financing is one that will continue to resonate through the area of public-private partnerships, including not only EUL, but also military housing and energy performance contracting.
As BRAC settings pose LRAs with increasingly difficult asset use issues for local communities, the creative thought which the EUL process has begun to stimulate may be expected to influence BRAC implementation. Conversely, the vitalization of the EUL program is likely to be influenced by the experience achieved to date under BRAC. Among the transactional issues which are likely to be similar between BRAC and EUL, although handled differently under the respective different statutory frameworks, are: nature of community involvement/approach to encourage development issues; terms and nature of conveyance; allocation and application of proceeds of conveyance; manner of dealing with host community local property utilization rules and codes; allocation of environmental risk liability; availability of tax exempt debt financing.
Out of consideration of the ramifications of these issues are likely to come focus on three areas of future critical importance to Federal public-private partnerships:
- the involvement of 501(c)(3) not for profit corporations as conduits, developers and strategic partners for project developments;
- the opportunities for using performance-based or shared savings contracts as a source of assured cash flow for necessary asset finance;
- the elasticity of swaps for "in-kind" services as a basis for creative arrangements between public and private players.
Need, experience and legal creativity are aligned to produce new innovation in the field of public-private partnerships. Both the public and private sectors stand to be the beneficiaries.
| ROGER D. FELDMAN |
Roger D. Feldman is a partner in the Washington, D.C. office of Bingham McCutchen LLP. He combines over 30 years of structured and project finance experience in private sector legal practice with senior public service in the Office of the Secretary of Defense, the Federal Energy Administration, the U.S. Environmental Protection Agency and the White House Staff.