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Presenting a live 90-minute webinar with interactive Q&A

Financing Public-Private Partnerships for Infrastructure, Transportation, Energy and Redevelopment Projects

Structuring Traditional and Alternative Financing and Allocating Risk to Protect Return on Investment Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, JANUARY 5, 2017

David A. Rogers, Member, Frost Brown Todd, Columbus, Ohio Patrick Woodside, Member, Frost Brown Todd, Cincinnati

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FINANCING PUBLIC-PRIVATE PARTNERSHIPS FOR INFRASTRUCTURE, TRANSPORTATION, ENERGY AND REDEVELOPMENT PROJECTS

P3 FINANCING MODELS AND OTHER WAYS TO THINK ABOUT P3

January 5, 2017 Strafford Webinar David Rogers, Esq. FBT Project Finance Advisors LLC & Frost Brown Todd LLC Patrick Woodside, Esq. Frost Brown Todd LLC Rob Mecklenborg, Esq. Frost Brown Todd LLC

WHY A PUBLIC- PRIVATE PARTNERSHIP?

It is non-traditional methods of funding and procurement for infrastructure and other municipal projects: It is also a contractual agreement between a public agency and a private partner to achieve all,

• ne or a combination of the following:
• P3s are used throughout the world for a variety of

infrastructure asset classes.

• Increased “value for money” possible because of

increased efficiency, including with respect to O & M, for life of asset, and you can transfer most risk to the private partner.

• Value for money is considered over the useful life of the

project.

• Monetization of an existing infrastructure asset or

expansion.

• Design, construct, finance, and/or operate and maintain

an infrastructure project.

• Transfer risks--such as revenue, operations, permitting,

capital maintenance, construction—to the partner best able to retain and manage them.

Sectors Examples of Revenue Generating Assets Examples of Social Assets

• Transportation
• Water and Sewer
• Energy
• Public Facilities
• Parking systems
• Toll roads and bridges
• Water and sewer systems
• Airports
• Ports
• Solid waste facilities
• Student housing
• Schools
• Courthouses
• Roads
• Transit
• Other public assets that do not

generate sufficient revenues to be self-supporting

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DBFOM and Variations Thereon

DESIGN BUILD FINANCE OPERATE MAINTAIN

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P3 SPECTRUM

More Public Responsibility More Private Responsibility

P3 Options

New Build Facilities Private Contract Fee Services Design Build Design Build Operate Maintain Design Build Finance Design Build Finance Operate Maintain Concession Existing Facilities O & M Concession Long Term Lease Concession

Goal – Find more money and financing options through greater private sector participation in the delivery and financing of public projects.

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How Does a P3 Work?

Asset Monetization Availability Payment

The infrastructure asset’s revenues are monetized by the private partner – See Ohio State Parking example.

The public agency receives an upfront payment, annuities, and/or a revenue sharing arrangement.

The private partner operates and maintains the asset and assume most business, financial and capital risks.

Often structured as a long-term “revenue concession” and/or lease.

The public agency pays the private partner pre- established rent-like “availability payments” that are based upon the availability of the assets to the public – See Portsmouth Bypass example.

Creates budget certainty for the public agency over the life of the contract.

The private partner designs, builds (or rehabilitates), finances, operates and maintains the asset, based on strict delivery and performance requirements.

The public agency’s payments may be reduced for underperformance or there may be bonuses for exceptional performance.

• No two P3s are identical. P3s are tailored to meet the public agency’s financial, policy and
• perational goals.
• A P3 is NOT an outright sale of a public asset. The public agency maintains ownership of the asset

(for state law purposes) and sets operational, maintenance and safety standards.

Two Broad Categories

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Potential Benefits

 Introduction of new capital sources  Creation of new investment opportunities  Potential improvements in governance, transparency,

and accounting standards (because of new contract language)

 Incentives to adopt new technologies  Improved lifecycle facility management, with cost savings 10

Who are the Parties in a P3?

Public Agency Private Partner

• A variety of public agencies have used P3s for the

development or monetization of infrastructure assets.

• The public agency is supported by a team of financial,

legal and technical advisors.

• Depending on the nature of the P3 project, prospective

private partners can be sole companies or a consortium of firms that each represents a specific expertise.

• Prospective private partners will assemble a team of

advisors, consultants, lenders and equity sources.

• Pursuit costs are significant – final bidders may

request stipends for more complex projects.

Potential Private Partners Include

Infrastructure Equity Funds Developers and Operators Construction/Engineering Firms

• Attracted to the stable cash

flows of a public infrastructure asset

• Can be a stand-alone fund, or

part of a larger investing entity

• Invests capital
• Experienced with similar asset

classes

• Usually contribute equity
• Attracted to the possibility of

generating incremental value by

• ptimizing construction/

rehabilitation phases

• Potential equity participation

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The Need for a Champion

 Transactions can be complex (money is not easy to find).  As a “partnership” the right partners must be found, vetted and

become part of the team.

 The governmental partner has a continuing role – a P3 is not an

• utright sale of assets – so it needs internal expertise, and

probably outside advisors.

 The old way of using traditional public finance is an entrenched

industry [It’s “always” worked – except when it hasn’t. See Flint Water Crises.]

 As a result, every successful P3 has a public CHAMPION. That

takes knowledge, marketing and perservance.

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Bank Financing v. Bonds

• Governmental tax-exempt bonds may not be available at lower

rates

• - There may be a federal tax problem.
• - The differential in interest rates (taxable to tax-exempt) may

not be much.

• If the asset is privately owned or leased, and where a private

non-501(c)(3) company has equity and/or depreciates the asset, tax-exempt debt can only be used if it’s a permitted exempt facility bond under IRC Section 142

• For transportation projects the most commonly known exempt

facility bond is the so-called Transportation PAB – a private activity bond authorized under IRC Sections 142(a)(15) and 142(m) – authorizing up to $15 billion nationwide of PABs for “qualified” highway or surface freight transfer facilities

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Other Private Activity Bonds

Under IRC Section 142(a), some better known bonds of this type are: 1. Airports* 2. Docks and wharves* 3. Mass commuting facilities* 4. Facilities for the furnishing of water 5. Sewage facilities 6. Solid waste disposal facilities 7. Qualified residential projects [low and moderate income rental]

___________________________________________________________________________________ ______________________ *(1), (2) and (3) must be owned by a governmental unit.

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Advantages of Tax-Exempt Bonds

• Lower interest cost, because interest is excluded from

gross income for federal and (most) state income tax purposes

• Capital markets/purchasers of these have financed these

types of infrastructure assets before

• Can also finance so-called “functionally-related and

subordinate facilities”, more than the facilities that meet the core definition, like office and storage facilities.

• Can finance 100% of all capital costs plus costs of

reserve funds and costs of issuance; loan to value ratios are not usually officially part of the underwriting process.

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Tax-Exempt Financing Disadvantages

• No true equity in the project capital stack; so it’s easier for

private partners to “walk away” and administrators and

• perators can have less flexibility and profit incentive

because of federal tax law guidelines.

• Note: new IRS management contract guidelines allow more

flexibility so long as the operator does not look like an equity partner or get its compensation, directly or indirectly, as a share of “net profits”.

• Examples: student housing; headquarter hotels; parking

systems; wastewater assets.

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Bank Financing Advantages

• Documentation can be simpler and less tax rules to
• bserve than tax-exempt debt.
• Current rate differential is small; which is to the

advantage of taxable debt.

• Allows private parties and concession groups to go to

their more traditional asset and real estate lenders.

• Example – The parking facilities of The Ohio State

University are now leased to CampusParc, L.P., an affiliate of Queensland Investment Corporation, an Australian pension fund.

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Equity and Mezzanine Financing

If tax ownership and depreciation rights exist in the new private non-501(c)(3) owner then usually there is an equity investment to leverage greater ROI. Here traditional real estate loans, mezzanine financing, subordinated debt and convertible (debt to equity) structures can all be considered.

• Equity invested by infrastructure funds like QIC

(Queensland Investment Corporation) in OSU Parking; or by construction and engineering firms.

• Mezzanine and other debt can take any form, since

lenders are loaning against long-term tolls or governmental revenues, loan-to-value ratios, mortgages and cash flow.

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How is a Tax-Exempt Bond Financed P3 Structured? The So-Called American Model -- a Public Public Partnership, aka P2.

Public Agency Private Partner

• Current asset owner or user
• Needs new assets built or financed
• Another governmental entity or qualified

501(c)(3) corporation Potential Partners Include

• Another governmental unit – See Cincinnati and Toledo Parking examples
• An economic development agency or unit (like an Ohio Port Authority)
• A qualified 501(c)(3) infrastructure company
• An existing 501(c)(3)

Potential Benefits

• Better public perception; your champions are all public or charitable
• Tax-exempt financing possible – issued by a new governmental owner or conduit bond issuer for

the owner or 501 (c)(3)

• Long-term (30 year) management agreements are now possible under new IRS Regulations

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Key P3 Considerations and Questions – Dispelling Myths

Does the public agency lose control? Under the P3 Agreement, the public agency can control tolls or user fees, design and construction standards, operating, maintenance and safety standards and other key parameters. What will happen to user fees? The public agency can control user fee levels. The P3 Agreement may include revenue sharing or other arrangements to avoid financial windfalls to the private partner. How does the public agency oversee

• perations,

maintenance and capital improvements? The P3 Agreement should impose detailed operating, maintenance and safety standards and capital improvement requirements. A P3 still requires management and oversight by the public agency. What if the private partner does not perform? After an opportunity to cure the problem, the public agency may reclaim the asset without any payment to the private partner. Why is there demand for these assets now? Pension and sovereign wealth funds and other institutional investors are making significant allocations for infrastructure. There is particularly strong demand for US infrastructure assets due to their stable and predictable cash flows. What is the necessary term to create interest for prospective investors? Typical term has been 30+ years to create sufficient return for investors commensurate with the risk undertaken. More short-term deals are being proposed.

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HOW SOME P3 DEALS

ARE GETTING DONE AND WHY SOME ARE NOT

POLITICAL LANDSCAPE

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Brent Spence Bridge - Today

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Brent Spence Bridge: Today

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BSB Corridor Area

• Project length: 7.8 miles
• $2.7 billion in

construction costs

• Safety concerns
• Functionally obsolete
• 172,000 vehicles per day
• $417 billion in freight
• Connecting 10 states

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STATE AND LOCALLY ELECTED OFFICIALS ARE RELUCTANT TO RAISE INFRASTRUCTURE FEES, SUCH AS HIGHWAY TOLLS OR RATES, WHICH CAN LEAD TO A LACK OF NECESSARY FUNDING FOR LONG-TERM CAPITAL INFRASTRUCTURE IMPROVEMENTS

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*CONSTRUCTION COST LOWER THAN THE $860M INITIAL FINANCIAL PLAN =

SAVINGS OF MORE THAN $90 MILLION

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Case Study – The Ohio State University Parking Concession

• Asset monetization
• On June 22, 2012, The Ohio State University accepted a

$483 million bid submitted by QIC Global Infrastructure to lease the University’s Parking System for a term of 50

• years. The funding for the lease/concession closed on

September 21, 2012. LAZ Parking will operate the Parking System.

• The University’s Parking System consists of over 13,500

spaces in 17 garages, 22,230 spaces in 156 lots and 158 metered spaces.

• The concession agreement permits parking rates to

increase by 5.5% per year during the first ten years, and thereafter by the greater of 4% or the rate of inflation.

• The concession agreement gives the University considerable

flexibility and includes conditions about the construction of new garages, the movement or reclassification of parking spaces and the potential growth of the campus.

• The net proceeds of the transaction will be added to the

University’s Long-Term Investment Pool and used to support various program and facilities initiatives. Private Partner Up Front Payment Term of Lease

 Campus Parc LP, an affiliate of QIC Global Infrastructure LAZ Parking - Operator  $483 million  50 years

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Case Study – Portsmouth Bypass Project (ODOT Innovative Delivery Division)

Project Scope

Missing link in the highway system

connecting Ohio to North Carolina

16-mile, 4-lane, limited access

highway

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DELIVERY OPTIONS ANALYSIS

 Accelerates the project delivery by eight (8) years  Delivers the complete project rather than phases  Frees budgetary capacity  Provides similar or lower whole life cost to design-bid-build  Allows ODOT to pay for the project over a longer period and use

a TIFIA rural rate loan for cost savings

 Enables competitive, firm fixed-price with appropriate risk

transfer and long-term warranty of construction

 Generates economies of scale related to construction

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Example of Risk Allocation

Geotechnical Risk Full allocation to the Developer Significant geotechnical analysis previously

completed by ODOT provided as Reference Information (not contractual)

Opportunity for investigations prior to proposal

submittal

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Payment Structure

Milestone Payments

Existing federal funds used 70%, 80% and Substantial Completion

Availability Payment Structure

In return for the opportunity to earn Availability

Payments:

 Developer will design, build, finance, operate and maintain

(DBFOM) the facility for ~35 years following Substantial Completion

 Equity investors and debt providers are at-risk if payments

are not earned

ODOT Monitors the Roadway Facilities for

Ongoing Compliance

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Potential Finance Sources

PABs (Tax-Exempt Private Activity Bonds) issued by

State

 $610MM allocation from US DOT

TIFIA (Transportation Infrastructure Finance and

Innovation Act)

 33% of Project Eligible Costs  $209MM financed at TIFIA Rural Rate (~1.7%)

Developer Equity Bank Financing

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Availability Payment Risks

• Sources of ODOT Funds

 Federal  State

• Appropriations Risk

 Ohio Constitutional Issues

 Debt obligations limited to two-year biennium  If ODOT did not appropriate, sole remedy was to seek

a termination payment

 PPA + Lease Approach

 To create a legally enforceable claim, ODOT will

provide right of way by lease

 Legally accepted and can extend beyond biennium  Creates long-term relationship between ODOT and

Developer

 Provides Developer a constitutionally valid claim if

the termination payment is not paid

• Coverage

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Transaction Overview:

• City of Cincinnati Long-Term Lease and

Modernization Agreement with Port of Greater Cincinnati Development Authority

• A Tax-Exempt Bond Monetization Solution

Case Study – Proposed Public-Public Partnership

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SPOILER ALERT

• In November 2013, after the election of a new Mayor

and members of City Council, the City of Cincinnati and the Port Authority made a mutual decision to postpone indefinitely the proposed P2 transfer and modernization project. BUT Note…..

• City of Toledo and Toledo-Lucas County Port

Authority closed in 2012 a very similar deal for several downtown garages!

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LONG-TERM LEASE AND MODERNIZATION OF THE CITY OF CINCINNATI PARKING SYSTEM

• Initiated as a competitive process in October 2012, 4 teams were interviewed and the ParkCincy

team was selected in December 2012, with the Port Authority designated later as Lessee/asset manager

• Lease structured with $85 million* upfront payment to the City of Cincinnati with
• $105* million Note payable from subordinate cashflow for long-term transfer of the use of:
• Tax-exempt bond eligible because it’s a “sale” of system to the

Port Authority, but only for federal tax purposes.

• At Lease expiration, the parking system reverts to City of

Cincinnati

• *ESTIMATED
• ASSETS
• GARAGES
• LOTS
• METERS
• SPACES
• 2,242
• 286
• 5,000
• LEASE TERM
• 50 YEARS
• 50 YEARS
• 30 YEARS

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• ONE APPOINTEE

ADVISORY COMMITTEE

• CHANGES OUTSIDE THE NORM
• (E.G. DYNAMIC PRICING)
• BOND HOLDERS
• ON-STREET

• T

• XEROX
• ON-STREET

• OFF-STREET

• DENISON
• GARAGE/ LOT

• FOUR

APPOINTEES

• LEASE AND

MODERNIZATION AGREEMENT

Continuing City Participation

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• At close the City of Cincinnati was scheduled to receive an $85* million

upfront payment from tax-exempt bond proceeds

• Additional consideration (in the form of a residual Note) estimated to

total $105* million payable to the City of Cincinnati from:

• 50% of excess cash flows after debt service payments
• In addition, once the capital reserve reaches its ending balance

requirement of $12.5 million, excess cash flows will flow to the City up to the amount of the Note payment

• System returned to City of Cincinnati at end of Lease
• Also, Lease contains several City Covenants to protect the System

and Bondholders

* ESTIMATED

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 To operate and manage the on-street parking system for a term of 30 years

• To charge and collect meter revenues
• To enforce compliance including writing tickets, booting, and towing regular violators
• To collect fines and any related delinquencies

 To operate and manage the off-street parking system assets for a term of 50 years

• To charge and collect transient and monthly parking fees

 Authority has right to raise parking rates

• Initial schedule in Lease
• Future annual adjustments permitted, subject to greater of 3% or CPI-Urban Index
• Rate increases beyond those permitted only subject to Advisory Committee approval

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• Security for the Tax-Exempt Bonds
• 1. Issuer’s Leasehold interest in Mortgaged Premises
• 2. Accounts receivable
• 3. Existing leases, contracts, and operating agreements

including Lease Agreement and Operating Agreements

• 4. All Parking Revenues
• 5. Indenture – held funds including Debt Service Reserve

Funds and Parking System Expense Account

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Butler Tech, Ohio P3

 Unused land next to its high school campus  Looking for revenue and a development partner which could add educational value for students  Long-term 30-year lease with Developer desired to construct a building and then employ students  Needed to do deal without bidding; so Butler Tech entered into a cooperative agreement with a port authority and is “sharing” the port’s powers under ORC 4582.431. No bidding required; cooperation with port provides access to many P3 powers.  Now Port plus Butler Tech plus Developer are engaged in new type of P3

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The OM Model

• Private operators contract to operate for set

term; opportunity for public sector to evaluate

• May be followed by full DBFOM P3
• Examples: water and wastewater, parking, social

infrastructure

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DBOM Model

• Public sector will pay for construction and installation

with design-build and add “availability” payments during the term to pay for operation and maintenance

• Both revenue and non-revenue systems can use; if it’s a

toll, fee or revenue producing asset then the public entity can keep those revenues

• Examples: roads, buildings, social infrastructure, smart

parking systems

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The Enquirer/Liz Dufour

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50

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FWW Reconfiguration $203M

Ohio-Kentucky Connections $14.8M

Floodwall $17M Utility & Infrastructure $15M FWW Deck Foundation $10M Freedom Center $6.5M Street Grid Modifications $29M Third Street Viaduct $31.3M Parking Development $10M Intermodal Transit Center $47.5M Riverfront Park Development $150M

Paul Brown Stadium $455M

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PROCUREMENT STRUCTURES

• PUBLIC PROCUREMENT ENTITY ALTERNATIVES
• SEPARATE PROCUREMENT
• JOINT PROCUREMENT
• SINGLE STATE AS LEAD
• JOINT AUTHORITY STRUCTURE

56 56

MAJOR FACTORS TO CONSIDER WHEN DETERMINING A SPONSOR

• ABILITY TO EFFICIENTLY AND EFFECTIVELY MANAGE

PROCUREMENT, DELIVERY AND OPERATION

• ACCEPTANCE AND CREDIBILITY IN COMMERCIAL MARKET
• EXTENT OF POWER/AUTHORITY DELEGATED
• AVAILABLE COLLATERAL/SECURITY
• ABILITY TO RECEIVE AND MANAGE REVENUE

SOURCES

• ABILITY TO ISSUE DEBT
• MITIGATION/ELIMINATION OF SOVEREIGN STATE

APPROPRIATION RISK

• ABILITY TO MANAGE RISK TO LONG TERM PROJECT

BENEFITS

• EXPERTISE IN DEVELOPING COMPLEX PROJECTS

57 57

FUNDING COMMITMENTS

• LEGISLATIVE AUTHORITY
• APPROPRIATION RISK

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MANAGING THE RISK – ENFORCEABILITY: COOPERATIVE AGREEMENTS

• RECENT PROJECTS:
• OHIO RIVER BRIDGES PROJECT (DOWNTOWN & EAST END

CROSSINGS)

• ILLIANA EXPRESSWAY (ILLINOIS PORTION & INDIANA PORTION)
• EACH STATE INDIVIDUALLY RESPONSIBLE FOR:
• PROCUREMENT
• CONSTRUCTION
• FINANCING
• UNCERTAINTY AS TO ENFORCEABILITY AND

AVAILABILITY OF REMEDIES INCREASED COMMERCIAL AND POLITICAL RISKS

• LIMITED COST & SCHEDULE EFFICIENCIES

DUE TO MULTIPLE PROCUREMENTS

59 59

MANAGING THE RISK - INTERSTATE COMPACTS

• ENABLES STATES TO ACT JOINTLY ON MATTERS BEYOND AUTHORITY OF INDIVIDUAL STATE
• NEGOTIATED BETWEEN 2 OR MORE STATES
• DEAL-SPECIFIC LEGAL POWERS IN ONE

INSTRUMENT

• EACH STATE LEGISLATURE ENACTS IDENTICAL

LAW

• CONGRESSIONAL CONSENT
• BI-STATE AUTHORITY MAY BE CREATED TO

IMPLEMENT AGREEMENT

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ADVANTAGES OF INTERSTATE COMPACTS

• UNIFORM COMPACT RATIFIED BY BOTH STATES

ELIMINATES INCONSISTENCIES

• CONGRESSIONAL APPROVAL PROVIDES GREATER

ENFORCEABILITY AND CLARITY

• COMPACT ENHANCES ACCEPTANCE OF THE PROJECT

IN THE COMMERCIAL MARKETS

• COMPACT ENABLES THE CREATION

OF A SOLE AUTHORITY TO MANAGE PROCUREMENT, DEBT, TOLLING AND ADMINISTRATION OF THE PROJECT

61 61

Risk Allocation – Public Parties and Private Parties

• An important consideration in evaluating a P3 financing.
• Risk allocation involves allocating risk to the party best able to

manage it.

• Allocating risk to a Private Party is one of the primary motivators for

Public Parties to enter into a Public-Private Partnership.

• Risk assumption by a party results in greater expected costs for that

party.

• Private Parties will require a commensurate increase in

compensation in connection with the assumption of greater risk.

• Private Parties will generally assume greater risk if the increase in

expected compensation exceeds the expected costs resulting from the risk assumed.

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Risk Allocation Continued

• Risks assumed by a Private Party will be mitigated or

transferred to third parties to the extent financially possible.

• Insurance
• Further transfer to sub-contractors
• Funding of reserve accounts
• Risk assumed by Private Parties may be limited by debt and

equity providers

• Assumption of risk may prevent underwriting of debt by

lenders

• Assumption of risk may reduce expected return to an

unacceptable level for equity investors

63

Private Entity Risk Allocation

TYPICAL P3 STRUCTURE – CONTRACTUAL DIAGRAM

Notes: 1 May be part of the consortium awarded the concession 2 Organized by the sponsors 3 If/as necessary

Construction Company(ies)1 Operating Company(ies)1 Sub Contractor3 Sub Contractor3 Sub Contractor3 Sub Contractor3 Public Sector Authority Bank/Bond Financing Private Entity Equity Sponsors Availability Payment3 Concession Contract Construction Contract Operating and Maintenance Contract Project Revenue Upfront Payment3

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DBB Design-Bid-Build DB Design-Build DBF Design-Build-Finance DBFOM (ap)

Design-Build-Finance-Operate-Maintain Availability Payments

DBFOM (toll)

Design-Build-Finance-Operate-Maintain Toll Revenue/Monetization

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Project Delivery Options - Risk Allocation

Private Sector Assumed Risk for each Project Delivery Method Private Sector Assumed Risk for each Project Delivery Method

Project Delivery Method Design Build Finance Operate Maintain Traffic Design-Bid-Build X Design-Build X X Design-Build-Finance X X X Design-Build-Finance- Operate (AP) X X X X X Design-Build-Finance- Operate (Toll) X X X X X X

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RISK ALLOCATION

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Summary

Successful Projects Defined Public interest test

• Job Creation
• Economic
• Sustainability
• Affordable

Political win – champions need to lead process Value for money

• Risk transfer
• Optimization of “whole of life costs”
• Solution drives efficient program costs

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Summary

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CONTACT INFORMATION

David A. Rogers President FBT Project Finance Advisors LLC Chair, Public and Project Finance Frost Brown Todd LLC 10 W. Broad Street, Suite 2300 Columbus, OH 43215 Phone: 614-559-7252 Cell: 614-582-0688 drogers@fbtprojectfinance.com drogers@fbtlaw.com Patrick Woodside Frost Brown Todd LLC 3300 Great American Tower 201 E. Fourth Street Cincinnati, OH 45202 Phone: 513-651-6701 pwoodside@fbtlaw.com Rob Mecklenborg Frost Brown Todd LLC 3300 Great American Tower 201 E. Fourth Street Cincinnati, OH 45202 Phone: 513-651-6883 rmecklenborg@fbtlaw.com

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