Public-private Partnerships

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From the January 24, 2005 print edition

Shared resources puts new spin on development

Christine Hall

Houston Business Journal

In private real estate deals, the developer puts up the money to get the construction ball rolling.

For public projects, the financing comes through government sources.

But for projects on a grander scale, the huge undertaking may be more than private developers or a public entity can handle. In these instances, the two groups come together to form a public-private partnership.

A public-private partnership is a contractual agreement between a public agency (federal, state or local) and a for-profit corporation, according to the National Council for Public-Private Partnerships.

Through this agreement, the skills and assets of each sector are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.

Some of Houston's most successful developments have been the product of visionary and gutsy entrepreneurs who have managed to leave their mark on the city's commercial real estate landscape without public financing. Examples include the Galleria, Highland Village (see story on page 6B) and the Boardwalk in Kemah.

However, in addition to the developments created with minimal government help, Houston has many successful examples of developments created through public-private partnerships, including Minute Maid Park, the MetroRail and the Main Street Project.

Nevertheless, larger cities are laggards when it comes to public-private partnerships, according to Terry Montesi, principal and CEO of Fort Worth-based Trademark Property Co.

"Cities like Dallas and Houston are often the last to adopt creative public-private partnerships," he says. "Smaller cities are usually the first adopters, and that may end up costing Houston."

Hoping to change that perspective, Trademark collaborated with The Woodlands' Town Center Improvement District to get the Market Street project under way.

The 34-acre Market Street features a Main Street-styled shopping and entertainment center with high-end retailers, public art projects and a Central Park, complete with a live performance stage.

Baltimore. Md.-based Development Design Group Inc. is the architecture firm, while Gensler is handling the office design.

Main street style

"There's no question that the number of tenants that are here wouldn't have been here if Market Street was built conventionally," Montesi says. "There are a number of tenants who report having their top units in the country right here."

The partnership has enabled Market Street to put in place several different options for maximum usage.

Instead of using property taxes to pay the developer back, the Town Center Improvement District will use sales tax dollars.

"We estimate $1 million a year extra sales tax for the state of Texas." says Frank Robinson, president of the TCID.

They also developed Central Park which can be used for leisure activities, a Wi-Fi hot spot and as an entertainment center.

The fountain, after turned off, can be utilized as a stage.

"With all of this, Market Street becomes a destination," Robert Kinnear, TCID's chairman. "Everyone I have talked to says Market Street adds so much to The Woodlands."

Kinnear also estimates that Market Street will create between 1,200 and 1,500 jobs over the next year.

The partnership has allowed for the approximately $1 million worth of public art to be displayed throughout the project.

"The projects are very expensive when you factor in the parking garages and public art," Montesi says. "But the details are what makes the project different."

The project also spawned others, including Town Green Park, adjacent to Market Street, that will be used by the general public.

Market Street does not stop there.

The partnership garnered an opportunity for Market Street to help nonprofit organizations.

In addition to using parking meter money for its Change for Charities program, Market Street also gave money and space to The Woodlands Children's Museum.

Putting together a public-private partnership is challenging, says Robinson.

"A lot has to be decided on between the entities, and you have to understand the limits," he says. "Once you have that education and experience, you know what to do for the next time."

Outside the big box

Although larger cities such as Houston may be late adopters of the public-private concept, other experts say competition is what gets companies involved.

"It's the competitive nature that drives demand for the public-private partnership," says Sue Darcy, a principal with Knudson and Associates, which provides Texas urban planning, economic development services and landscape architecture. "When real estate took a downturn in Houston, companies needed a creative way to attract developers."

Public-private partnerships are by no way a new concept, but now that it is more accessible as a tool, cities are realizing the potential, says Patti Knudson Joiner, also a principal with Knudson and Associates.

As far back as the 1970s, cities around Houston, such as Sugar Land and League City, have been using partnerships to garner new development.

"Sugar Land has been using tax abatement for office buildings for the past 25 years," Joiner says. "League City, although it has stayed relatively the same size, partnerships drove how they turned out geographic land use."

Darcy says Sugar Land used the same economic development tools to develop its Town Center, which combines retail, office, hospitality and public entities.

A focus on more green-oriented communities has also affected development, Joiner says.

"The appearance of the community creates an environment that has high quality development, landscaping and the whole package," she says.

Both women say that cities should use public-private partnerships to end up with something better.

"A community shouldn't just be offering incentives without a market," Joiner says. "Incentives tend to make it faster, but there is a whole argument that if Tax Increment Reinvestment Zones (TIRZ) continue, some of the projects would have happened anyway."

Hot, hot, hot

Public-private partnerships is a sizzling market, according to John Stainback, managing partner of Stainback Public/Private Real Estate.

He estimates it to be a $50 billion to $75 billion market which includes sports arenas, convention center hotels, city halls and other commercial development.

Stainback helps the public side of the partnership from the pre-development stage through the construction process.

Recently bringing his company to Houston, Stainback is working with the City of Winter Park, Fla. to build a $30 million City Hall/Retail/Garage project, and has started a mixed-use development in Chapel Hill, N.C.

He has written a book called "Public/Private Finance and Development: Methodology, deal structuring and developer solicitation," that is in its third edition.

"My belief is that most projects can't be done by either the public or private entity alone," he says. "There are so many complex requirements that they can't do it separately, which has caused my business to explode."

Stainback says that Houston has a long track record of the private sector driving business.

However, he adds, there could be more. The partnerships generate taxes and jobs, and in fact, Stainback often works with private-private partnerships.

"You can get other government entities to team up with major government entities for the sharing of costs and risks," he says.

Houston's future

For a region that proposes to double in population over the next 20 years, Joiner has some words of advice.

She suggests that public policy, whether or not it concerns a TIRZ, should be employed to try to influence a land use pattern, so people will choose to build in Houston.

"There is a capacity to make things happen," she adds. "The city can create an environment where the new population is inside the city limits, rather than in a suburb."

In addition, Joiner says that 80 percent of all single-family homes are built outside the city limits every year, with the region breaking records in terms of 42,000 home starts in 2004.

She says this prompts developers to question if less than 20 percent of homes are building inside Houston every year over the next 20 years, what will the region look like then?

"People will continue to drive 30, 40, 50 miles for their daily commute, or they can live where there is already things like water, sewer and police serving the area," she says. "If not, will we continue to push development out?"

Although land inside the city limits may be more expensive, there is still land available, Joiner says.

The objective is to find an efficient way to market that land for use.

"What people need to do is to be efficient about the fact there is land and use the right tools to have a positive partnership."

chall@bizjournals.com