Increasingly, public-private partnership (P3) hospitality projects have become a go-to solution for cities seeking both private investment and development leadership to transform underperforming areas into tourism hubs. Successful implementation, however, is no cakewalk. It requires experience, and a deep understanding of how to structure a partnership for successful facility financing and delivery.
Although each P3 is unique, all follow the same fundamental framework: A government agency contracts a private entity to design, finance, build, operate, and maintain a facility. In hospitality, this typically includes a headquarters hotel for a conference or convention center, or other connected municipal function, and additional mixed-use development. The public owns portions of the facility funded accordingly in the capital stack, as well as long-term quality and operating standards of the new facilities through provisions in development, financing, and lease agreements. The private partner typically owns, finances, and operates the balance of the site improvements, and assumes the project risk, including delivery of high-quality work within budget and schedule, repayment of private financing, long-term maintenance, and capital improvements.
The Overton Hotel & Conference Center in Lubbock, Texas, developed by Garfield Public/Private LLC and designed by DLR Group, is an instance in which the city owns the conference center and leases it on a long-term basis to the private hotel owner, which operates and maintains the entire property. Another DLR Group-designed project currently under construction is a full-service Hilton property attached to the existing convention center in Des Moines, Iowa. This project came to fruition because of a strong partnership among various public entities and private parties across the state.
More than merely financial arrangements, the best partnerships leverage the strengths of both the public and private spheres through a collaborative and transparent process. To attract developers, municipalities typically contribute land for the development via long-term ground leases at a nominal rent, invest in parking and other supporting infrastructure, and ease the financial burden on partners through tax incentives or issued bonds. In return, projects benefit from the private sector’s ability to secure the maximum available amount of private capital to complete the project financing, fast-track delivery, contain costs, and maximize efficiency in long-term operations and management. The private developer can also introduce innovations in construction, scheduling and financing, and operations. Moreover, in most cases, public participation in a P3 development can be achieved without the need for a voter referendum and without impacting property tax rates on its community residents.
Of course, if not planned well, not all public-private partnerships translate into renewed economic activity for a local community. Nor do all projects make ideal candidates for P3 development. At the very least, they should fulfill the following criteria:
• NEED. The hospitality development must be essential, and not merely desirable. Does it reflect actual market demand? And is there a real need for private capital and the expertise of a private developer?
• WILL. The project must have strong political leadership from elected officials and municipal staff, as well as the active—and vocal—backing of local civic and business leadership to rally public support and help secure financing. All partners should understand the project’s real financial requirements and projected performance, and should keep citizens regularly informed of project program and projected benefits for maximum public consensus.
• LEGALITY. Is a public-private partnership lawful for this particular public entity?
• CREDIT. The public agency must have a source of funding or financing to participate. Will it be able to contribute its portion of the capital? Public/private full-service hotel transactions commonly require investment by the public partner in a third or more of the project costs. Solicitations that do not indicate a realistic understanding of the requisite public participation, and a willingness by the municipality to participate, will not succeed.
Because P3s involve multiple stakeholders with competing priorities, success can hinge on assembling the right team. Members should demonstrate skill and experience in the development of facilities of similar size and scope, as well as resolve legal and zoning issues; interfacing with public entities and citizens; determining economic feasibility, and securing financing. Informing and educating the public early in the process—who typically will only invest in this type of facility once in a generation—will help ensure transparency and shepherd the community through the process. Early engagement of qualified design and construction teams will also help ensure that the design fulfills the goals of both the project and the community.