QUESTIONS
Public-Private Partnerships, also known as ‘P3s’ or ‘PPPs’, are frequently praised for their ability to complete projects effectively and efficiently. Public-private partnerships first emerged under the Romans as a financing tool to build, operate, and maintain their expansive highway system. Following the demise of the Roman Empire, P3s disappeared and later re-emerged as a funding vehicle to construct and fortify newly occupied towns under 12th century French hegemony (Public-Private Infrastructure Advisory Facility, 2009). Contemporarily, however, P3s have been used to encourage and facilitate infrastructure investment, commercial development, and other public projects. In 2002, the City of Austin utilized a P3 agreement with Catellus Development Corporation (Catellus) to redevelop the old Robert Mueller Municipal Airport into a master-planned, mixed-use, urban village, formally known as “Mueller.”
The Mueller Master Development Agreement is the 96-page public-private partnership between the City of Austin and Catellus. Throughout this agreement, there exists key legislative elements that effectively and excessively align public needs with privatized interests. Investigating and understanding how these legislative elements encourage a level of unprecedented collaboration between public and private interests on the Mueller project is a crucial first step towards improving and replicating these successes in projects elsewhere.
Research Question: What legislative factors in the Mueller Master Development Agreement encourage public-private collaboration, and why do they work?
METHODS
To better understand the agreement and how it’s structured to achieve its successes, let us first review key legislative components that align public needs and private interests. (1) Section 8.2(b), titled “Dedicated Team,” requires the City of Austin to maintain a dedicated permit review team who will process permitting, platting, and plans for the project. (2) titled “Coordination of Work,” Section 8.2(f) states: “To the extent that the City is to perform work on or for the benefit of any portion of the Property to fulfill its obligations under this agreement, the City shall coordinate that work with Catellus so as to not interfere with or cause delay in any work of Catellus, and the City shall otherwise fully cooperate with Catellus in the performance of any such work.” (3) Section 8.1(e), titled “Affordable Housing,” requires the private developer to include at least 25% affordable housing evenly distributed throughout the site plan. This point is particularly interesting because the ratio of affordability will likely remain for years to come. Future, more dense, development that remains at or improved affordability rates will be a long-term housing solution for the City of San Antonio. In a lot of ways, strict legislative measures such as this build a case for longtermism and the act of positively influencing long-term decision-making and solutions throughout this development (Macaskill, 2022). (4) Lastly, on page 24 under Section 1.1 titled “Defined Terms,” the agreement mandates a “Base Developer Return'' that guarantees Catellus a 15% Internal Rate of Return (IRR) through the Land Sales Method outlined earlier in the document (The City of Austin, 2002).
The 8.2(b) and 8.2(f) are two legislative measures that regulate how the public-sector acts, responds, and manages the project from a legislative perspective. By streamlining processes and offering Catellus “backstage access,” project cooperation becomes easier to achieve. Section 8.1(e), on the other hand, is a legislative element that regulates how the private-sector acts and manages the project in accordance with objectives determined by the City of Austin. Last but not least, Section 1.1 “Defined Terms,” outlines terminology and clarification on key legislative elements like defining what “Affordable Housing” means and determining what the “Base Developer Return” is set at. Combining these unique factors and understanding how they can align public needs and private interests is precisely what I will be reviewing throughout this essay.
The methods used to examine this case were as follows:
1) Review and analyze the Mueller Master Development Agreement (MMDA)
2) Read P3 informational material to better understand P3 structures and capabilities
3) Investigate the implications of the key MMDA legislative elements in question
FINDINGS
McKinsey & Company, a privatized global management consulting firm, recently released an article titled “A Smarter Way to Think About Public-Private Partnerships.” Throughout this article, the author stresses “A central challenge is that governments may not fully capitalize on the true advantage of involving private-sector stakeholders: their ability to assess, price, and manage certain types of risk. PPPs that do not transfer risk — and benefit from the private-sector’s risk-management capabilities — will likely fall short of expectations” (Beckers, 2021). Mueller’s Master Development Agreement certainly encourages their privatized counterparts to assess, price, and manage the risk of affordable housing throughout the development. Section 8.1(e) for example, has five subsections each outlining the regulations associated with affordable housing throughout the project. Section 8.1(e)(ii) states “In no event will the mix of Affordable Housing units be more than 60% owned and 40% leased, or vice versa.” From a planning perspective, requiring P3 development to include a sizable portion of affordable housing could be considered equity planning. Metzger’s equity planning perspective is particularly applicable in this scenario, in that advocacy planners have influenced opinion, and have ultimately implemented policies and programs that redistribute public and private resources to lower income and working class constituents (Brooks, 2017). Despite the flexibility of regulation, these objectives allow the private developer to come up with creative solutions that assess, price, and manage the risks associated with fulfilling the redistributive and equitable public planning policies.
While most real estate development risk is associated with timing, funding, and demand projections — an additional risk often overlooked is dealing with city services and the associated inefficiencies. The Mueller Master Development Agreement, however, minimizes the public-side risk in exchange for a privatized company to fulfill public needs. This occurs on a variety of levels throughout the agreement, but for our purposes I will focus mainly on Sections 8.2(b) and 8.2(f). Section 8.2(b) regulates the city to provide the private developer a dedicated permitting team to expedite permitting approval. Reducing public-side inefficiencies encourages two things in particular: (1) It encourages Catellus to act as a developer on behalf of the City and (2) It encourages both sides of the deal to remain diligent and on-time. On private development deals, companies frequently blame permitting approval or development services for project delays. Removing this divisiveness from the equation allows the project to operate more efficiently than a typical market-rate project. Section 8.2(f) requires the City to coordinate with Catellus and avoid interfering with or causing delay in any work of the private developer. Whereas on market-rate projects the City would have no issue interfering or delaying a project, Mueller circumvents and is legally protected from these potential hindrances. Minimizing these risks by holding public and private actors accountable is a unique legislative element of the deal that encourages the private developer and the City to work closely together.
Lastly, under section 1.1 “Defined Terms,” the Base Developer Return is outlined under the “Waterfall” section. Waterfall distribution in commercial real estate is a deal structure that rewards debt & equity investors in accordance with an agreed upon capital stack and reimbursement structure. The Mueller Master Development Agreement guarantees Catellus a 15% IRR, and then splits returns 60/40 until Catellus reaches a 20% IRR, and then splits additional returns 30/70 on any investments exceeding 20% IRR. The equity waterfall structure is unique because it guarantees the developer a set return percentage, and then further rewards them disproportionately if they outperform return expectations. Reducing the traditional “market based return” risk that a private developer faces on any market-rate deal is appealing to the developer and encourages them to engage with the deal and potentially outperform market expectations. The better their work is, the better the product will be. The better the product is, the better off society will be. Structuring compensation to reward improved expectations is critical in aligning public needs with private interests. Mueller, Austin, Texas is an example of a wonderfully executed P3 agreement that resulted in unquestioned alignment of public needs with private interests through strategic legislative measures outlined in the P3 agreement.
FUTURE SCENARIO
The future of Mueller in Austin, Texas will likely include a wave of transformation over the years to renovate buildings with greater eco-efficiency, greater density, and additional emphasis on communal amenities (goods and services). Future development and land-use will likely encourage communal sufficiency and circular economies. Future opportunities might arise that will convert park space in the community to communal gardens, larger farmer’s markets with more options, and various additional opportunities to reduce the site’s carbon footprint while simultaneously improving residents’ standard of life will be a large part of decision making for the community over these next few years. These larger projects, large budgets, and eventually a larger population could also encourage the development and initiation of a more official governing council with more powers to drive the future of Mueller in the right direction.
REFERENCES
Beckers, F., & Stegemann, U. (2021, September 17). A smarter way to think about public–private partnerships. McKinsey & Company. Retrieved November 3, 2022, from https://www.mckinsey.com/capabilities/risk-and-resilience/our-insights/a-smarter-way-to-think-about-public-private-partnerships
Brooks, M. P. (2017). pp. 107 - 115. In Planning theory for Practitioners (pp. 107–115). essay, Routledge.
Macaskill, W. (2022, August 5). The case for longtermism. The New York Times. https://www.nytimes.com/2022/08/05/opinion/the-case-for-longtermism.html
Public-Private Infrastructure Advisory Facility (PPIAF). (2009). The use of private innovation and finance in public infrastructure is not a new concept but rather an old tradition experiencing a new revival. Washington, D.C
The City of Austin, Master Development Agreement between The City of Austin and Catellus Austin, LLC. (2002). Austin, Texas.
CRITICAL CASE STUDIES OF A PRESENT PLAN
https://storymaps.arcgis.com/stories/f411ac8de0564c3d8692d2883ed596a0