Update on Public-private Partnership Projects Presentation to the Senate Budget and Taxation Committee

Update on Public-private
Partnership Projects
Presentation to the
Senate Budget and Taxation Committee
Department of Legislative Services
Office of Policy Analysis
Annapolis, Maryland
December 3, 2009
State Center
1
Current Project Timeline
• The Board of Public Works (BPW) approved the Master
Development Agreement on June 3, 2009
• In August 2009, the Maryland Department of
Transportation (MDOT) expected a negotiated lease
agreement for Phase 1 by September 2009
• In September 2009, MDOT altered the timeline for Phase
1 approval to the end of calendar 2009
• Projected Phase 1 occupancy by the State in June 2013
2
Oversight Modifications
• In July 2009, the State Center Executive Committee
was expanded to include Senators James
DeGrange and Verna Jones and Delegates
Talmadge Branch and Galen Clagett
• The committee was also expanded to include a
representative from the Maryland Stadium Authority
to serve in an advisory capacity.
3
Status of Development Team
• Development team reconstituted in Spring 2009
– PS Partners/Ekistics Capital Partners – one-third
funding
– McCormack, Baron, & Salazar – one-third funding
– Minority Business Enterprise (MBE) (to be
determined) – one-third funding
• Selection of new MBE partner was expected by October
2009
4
Phase 1 Evolution
• Parcel G
– Department of Health and Mental Hygiene (DHMH) offices –
300,000 square foot (SF)
– Other State agencies – 75,000 SF
– Private office space reduced
• Developer outline contemplates possibility of adding a public school
as part of Parcel G
• Parcel I advanced from Phase 2 to Phase 1
– 100,000 SF office space and15,000 SF conference center for
Maryland Transit Administration
5
Parcel G Evolution
2009 Session
Office
Office
State
Private
Retail
Grocery
Parking
939 Spaces
Residential
137 Units
375,000 SF
Fall 2009
Office
State
375,000 SF
Office
Private
15,000 SF
Retail
Grocery
50,000 SF
Retail
Other
30,000 SF
Parking
1,000 Spaces
523,800 SF
Residential
Up to 100
166,600 SF
208,400 SF
76,000 SF
523,800 SF
177,600 SF
1,160,400 SF
1,360,800 SF
SF: square feet
Office
6
Potential
100,000 SF
Parking Garage Development
• 30-year
Maryland
Economic
Corporation (MEDCO) bonds
Development
• Fewer spaces for State employees
– From 1 space per 3 employees to 1:4 ratio
• Debt service of approximately $3.3 million funded
by the Transportation Trust Fund (TTF)
– New parking fees for State employees
– Net revenue $500,000 to $600,000
7
Phase 1 Lease Term Potential Changes
2009 Session
• Ground lease is 50 years
with two 20-year options
August 2009
• Ground lease is 70 years
with one 20-year option
• Operating lease term
from 5 to 15 years
• 20-year operating lease
term to satisfy market for
bond financing
8
Effect of Credit Crisis on Tax
Increment Financing Bonds
• In August 2009, MDOT reported that two Transit
Oriented Development (TOD) projects (Savage &
Owings Mills) were on hold because the national
credit crisis prevented the issuance of Tax
Increment Financing (TIF) backed bonds
• Developer outline suggests Phase 1 of State Center
may be able to use existing infrastructure and TIF
can be in place later
9
Issues and Observations
Occupancy Lease
• Status of the Phase 1 Occupancy Lease
Maryland Transit Administration (MTA) Farebox
• Impact of State Center rent on MTA farebox
recovery level (fiscal 2009 at 31%, below 35%
requirement). Additional rent costs will worsen
noncompliance with statute
10
Issues and Observations
Financing
• Effect of long-term credit crisis on TIF bonds and
infrastructure needs is unknown
• Status of MBE partner for one-third of funding is
unknown
Policy precedents
• TTF subsidizing parking garage bonds for TOD projects
• State employee monthly parking fees
11
Issues and Observations
Project Oversight
• How much time will the legislature have to review
the proposed Phase 1 operating lease
• Oversight of project changes
Use of State-owned Space in Schaefer Tower
• What agency will move into State-owned space in
Schaefer Tower and will it move from currently
leased space?
12
DHMH’s Public Health Lab
13
New Public Health Lab
• The proposed new 198,000 gross SF facility will
replace the existing 35-year old inadequate, outdated, and unsafe laboratory
• Problems with the current facility include
– Insufficient and obsolete laboratory space
– Deteriorated building infrastructure and poor
environmental conditions pose high risk of
operational shut-down
– Facility design and location that pose security risk
and potential health risk to occupants
14
Financing Alternatives – Pros
Traditional GO Bonds
MEDCO Issued Lease-revenue Bonds
•
Offers accelerated project delivery –
up to 18 months sooner
•
GO bond financing offers the lowest
total principal and interest costs
•
Lower estimated design and
construction costs – up to $8 million
•
•
Would establish a dedicated facility
renewal and replacement fund
If funded within current projected GO
bond authorization limits, no impact on
State operating budget – no additional
general funds would be required to
service the debt
•
Would not require the use of limited
general obligation (GO) bond
authorizations in the 2010 session –
flexibility to use capacity to fund other
alternatives
•
If funded within current projected GO
bond authorization limits, no impact on
State debt limitations
15
Financing Alternatives – Cons
MEDCO Issued Lease-revenue Bonds
•
Most expensive total principal and
interest costs – costs vary depending
upon the length and type of financing
•
Impact on annual operating budget –
ranges from $11.5 million to $17.0
million annually depending upon the
financing terms (not including other
ancillary operating costs attributable to
each financing alternative)
•
Whether structured under an operating
or capital lease with the State the
financing is likely to impact State debt
limitations
16
Traditional GO Bonds
•
Project would take longer to complete
and have a greater total design and
construction costs due to more
stringent State procurement
requirements and budgetary cycle
•
Facility renewal and maintenance
would be subject to the vagaries of the
annual budget
•
Project is not currently in the State’s
Capital Improvement Program –
accommodating the estimated $165
million project within current GO bond
limits would necessitate deferral of
other capital priorities
Other Issues
• Capital or Operating Lease:
MEDCO financing
structured as a capital lease would result in lower
borrowing costs
• Capital or Operating Lease: A capital lease structure
would impact State debt affordability ratios but only
negligibly
• Capital or Operating Lease: The essential public
purpose and use of the facility likely to result in the
rating agencies counting the annual debt service as a
liability and, therefore, as State debt
17
Other Issues (Cont.)
• Status of Land Acquisition:
MEDCO intends to
purchase the building site from East Baltimore
Development Corporation – acquisition costs and
financing are still in negotiation
• Payment in Lieu of Taxes (PILOT): The site selected
is within a special taxing district, and a PILOT must be
negotiated with the State
• Build American Bonds (BABs): MEDCO has authority
to issue BABs for the project which could reduce
financing costs
18
MDOT Seagirt Berth 4
19
Provisions of the Agreement
•
50-year deal between the Maryland Port Administration (MPA) and Ports America
Chesapeake (PAC) to maintain and operate Seagirt Marine Terminal (SMT) and the
Canton property, an 18 acre site adjacent to SMT
•
Does not include the Intermodal Container Facility, currently leased to CSX
•
PAC will fund and construct Berth 4, a 50-foot berth, as well as purchase necessary
cranes
•
The Maryland Transportation Authority (MDTA) will transfer ownership of Seagirt to
MPA in exchange for a payment in excess of $100 million from PAC to MDTA
•
MDTA Police will continue to provide law enforcement
•
Ports America and Amports will return approximately 65 acres of land currently
leased at Dundalk Marine Terminal (DMT), allowing MPA to lease this land to
another company
20
Provisions of the Agreement (Cont.)
•
PAC must pay MPA an annual operating lease of $3.2 million
•
For each container over 500,000, PAC must pay MPA $15 per container. Current containers
handled is about 380,000
•
Both of these amounts increase annually by the Consumer Price Index-Urban with a minimum
increase of 1.5% and a maximum of 3.5%
•
Non-compete clause prohibits the operation of a container terminal at DMT for 16 years or any
land owned, leased, or operated by MPA or MDTA for 15 years
•
Adverse action by the State or Baltimore City can result in financial penalties or the termination
of the contract
•
The General Assembly has until December 9, 2009, to review the contract. The contract will be
presented to BPW on December 16, 2009, for approval
21
Financing the Deal
•
PAC will issue approximately $220 million in special facility revenues bonds through
MEDCO
•
PAC will put in about $50 million of private equity
•
PAC can revoke its offer if it cannot secure financing by December 15, 2009
•
The bonds will have a maturity of 26 years
•
Debt service is backed by SMT revenues
•
Debt service is the third call on revenues
•
Little private equity in the transaction and debt service as the third call on revenues
will limit PAC’s ability to receive high credit ratings, thereby producing higher interest
rates
22
Concerns – Provisions
• 15-day notification period requires little time for analysis
• Non-compete Clause: There will be some non-containerized
cargo handled at Seagirt by PAC
• Although MPA has a non-compete clause for new container
terminals in the next 15 years, no similar non-compete clause
exists to protect MPA for non-containerized cargo, meaning that
MPA may compete with PAC for some of this business
• Adverse Action Clause: Financial penalties are required if PAC
suffers any adverse actions from the State or Baltimore City.
Although MPA has the necessary buy-in from current elected
officials, over the 50-year term of the contract, elected offices may
change many times
23
Minimum and Maximum Caps on Annual
Increases in Lease and Container Payments
Benefit PAC More than MPA
CPI-U: Consumer Price Index-Urban
MPA: Maryland Port Administration
PAC: Ports America Chesapeake
24
Concerns – Provisions (Cont.)
• The agreement does not contain any performance measures that
PAC must achieve
• There are no restraints on PAC’s rate-setting ability. Although the
market will likely drive rate-setting, there are no restrictions on
setting rates too high or too low
• Although PAC has agreed to reach out to MBEs, it is not required to
do so under current law
• No State employees will lose their jobs as a result of this deal. PAC
has agreed to interview all 58 MPA crane maintenance employees
and hire at least 25 of them. PAC may hand-pick the best
employees and MPA will retain the remaining employees
25
Concerns – Financing
• Financing of the deal is not yet secured
• PAC is bringing little private equity to the deal ($50
million of $270 million or 18%)
• Financing the deal through 26-year MEDCO bonds
costs more than using cash or 15-year Consolidated
Transportation Bonds
• Should PAC default on the contract, MPA or a new
operator could take over operations, but debt service
would continue to be paid from revenues
26
MDTA Welcome Centers
27
MDTA Travel Plaza Redevelopment
• MDTA provided legislative notice on November 12, 2009, that it
plans to issue a Request for Proposal for a Public-private
Partnership for the travel plazas along I-95 in December 2009
• MDTA is seeking a private partner to design, build, and finance
the redevelopment of the travel plazas and operate and maintain
the travel plazas over the life of the contract
• MDTA seeks a 35-year deal in return for a monthly percentage of
gross operating proceeds
• The travel plazas serve 6.2 million visitors a year and generate
approximately $35 million a year in food and beverage revenues
28