Balancing Act
Oct 1, 2007 12:00 PM, By Elaine Misonzhnik
Making it work
Beyond simply crunching the numbers, those who participate in public/private partnerships need to make sure both parties have what it takes to stay the course. These projects take at a minimum twice as much time as a privately run development. They unfold in the public spotlight. And with so many parties at the table, it's hard to balance egos and it means projects never work out exactly as planned, says Jon S. Wheeler, president of Wheeler Interests, a Virginia Beach, Va.-based acquisition and development firm. If a project ends up costing more than originally planned, it could mean a new round of negotiations to get the funding or to alter the design. Plus, there's always the risk of lawsuits from residents opposed to projects.
For example, while Wheeler Interests was working on the Berkley Center, a 51,176-square-foot neighborhood shopping center in Norfolk, Va. that was partially subsidized by the city of Norfolk (the city contributed approximately $1.5 million toward the project to bring a badly needed supermarket to the area), a run-up in the price of construction materials pushed up the cost of development. So after completing a 24-month-long negotiation process, Wheeler had to go back to the city and rework the contract.
“A public/private partnership is a roller coaster of negotiation — you start at point A and end up not where you thought you would end up and you have to solve the problem,” Wheeler says. “It just doesn't move as quickly as a private deal.”
In order to make it through, both the city and the developer have to take the partnership as seriously as they would a marriage, according to Kaplan. In his experience of working with dozens of public/private partnerships around the country, he has yet to see one concept plan that stayed the same from start to finish. “The retail tenants are always changing, condos get hot and then they die. When the airplanes hit on Sept. 11, they destroyed the hotel industry in one day.,” he says. “You have to be flexible.”
From the developer's perspective, the potential success of a partnership can be gauged from the first meeting with the city. If the municipal staff is uncooperative, if they tell you that you will have trouble getting the necessary approvals or if they seem inexperienced, it's better to stop, says Stephen P. Peca, managing director of New York-based Concourse Realty Group. Peca is also an adjunct assistant professor at New York University's Real Estate Institute, where he teaches a course called Public/Private Partnerships in Real Estate Development. He's walked away from potentially lucrative deals because government officials were reluctant to supply him with information on local zoning. “That's my first hint that they will be difficult to work with,” he says.
You can also include clauses in the development contract that call for the resolution of any conflict through nonlegal means, according to Norment. If all the parties involved are committed to the undertaking, there is nothing that cannot be worked out through negotiation, he says, while lawsuits take years.
Public/private partnerships also need strong civic leadership that believes in the project and can make the process move forward. Even the most benign development is bound to run into problems, Norment notes, and it takes a leader to push the partnership's vision through — the higher up on the executive ladder that leader is, the better.
The support of the local government is why Brian Jones, president and CEO of the western commercial group with Cleveland-based Forest City Enterprises, considers Victoria Gardens, a 1.3-million-square-foot open-air lifestyle and entertainment center the company developed in partnership with the city of Rancho Cucamonga, Calif., to be among its most successful projects. In addition to getting permission to use city-owned land for the center, Forest City benefited from unanimous approval of the city council and the city planning commission when it submitted its plans to Rancho Cucamonga in 2002. Less than two years later, the firm held the grand opening for the first phase of the project.
“City officials have to be prepared to look the developer in the eye and say, ‘This is our vision and we will be behind it’ from the policy standpoint,” Jones says.
Forest City estimates that Victoria Gardens generated 3,000 new jobs for Rancho Cucamonga and brought the city a total of $5 million in sales tax, property tax and business license tax revenues. The project also garnered awards from the Urban Land Institute and the California Association of Local Economic Development.
Finally, the local community deserves the chance to get involved in the project, so developers should attend meetings and hold press conferences as often as possible. Doing so helps avoid situations like the one currently taking place in Portland, where the speed with which the city moved on the Maine State Pier project made residents question the extent of the mayor's involvement.
“When people hear that a development got approved and nobody knows why or how it happened, that's one of the biggest problems you can have,” Peca says. “Some of their objections can be rather silly sometimes, but they can't be ignored.”
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