By David A. Rogers
Frost Brown Todd LLC
The first public private partnership (P3) for a university parking system demonstrates some lessons for P3’s moving forward.
In February 2012, Frost Brown Todd LLC was engaged by QIC Global Infrastructure , an investment manager with over $64 billion in assets, to represent QIC in its bid to obtain a concession to operate for 50 years all of the parking facilities of The Ohio State University. A team of more than 20 Frost Brown Todd attorneys conducted preliminary due diligence on several issues of first impression, which can be expected with these newer financing structures, as QIC prepared its bid.
In June 2012, the University accepted the high $483 million bid submitted by QIC. After the successful bid, Frost Brown Todd was further engaged to assist in the formation of the holding company structure; review and negotiate the project finance agreements; assist in structuring documentation for a syndicate of four banks; and negotiate and implement the operator agreements; as well as advising on labor and employment considerations, and evaluation and implementation of the necessary licenses and permits.
This landmark transaction was formally consummated on Sept. 21, 2012, and QIC – via its team member and independent operator, LAZ Parking Midwest, LLC – successfully took possession of the University’s Parking System, which consists of over 13,500 spaces in 17 garages, 22,230 spaces in 56 lots, and 158 metered spaces. The net proceeds of the transaction was added to the University’s endowment.
Some things we learned
Lessons learned from this P3 include the operating benefits to the University: it still controls most aspects of the Parking System, but if it exercises control in a way that reduces fee income to QIC, then it has to pay for that lost profit. Officially, under those parameters, the Long-Term Lease and Concession Agreement provides the University with considerable flexibility in controlling operations, and requires QIC to pay for the construction of future garages, and accommodate future capital improvements on campus, reclassification of parking spaces, and the potential expansion of the campus.
Another lesson is the ability to coordinate the Parking System with the Transportation System (buses and people movers) the University still operates for itself. Because the two systems need to seamlessly operate to move students, faculty, staff and guests around a very large campus, they are in fact acting like two parts of one partnership. Neither part functions well without the other. One would be advised to find opportunities in other P3 situations to achieve (or try to build in) similar systems coordination between the private operators and the benefiting owner of the system that is subject to the P3.
A third lesson is what to do about new legal issues; and there will be many under the new legislation in Kentucky. The key, as in the case of the OSU P3, is to be both legally precise and practical. If the analysis is too cautious, then the lawyers can scare away bidders. If the analysis is not thorough, then the parties may have false expectations as to cost or timing; or even discover serious problems later. Experience in this type of work is essential.
A different option
Finally, this P3 used the payment-up-front by the concessionaire model, but it did not have to. It could have been structured as a deal where the concessionaire (QIC) was asked to take over the system and add capital improvements immediately, maybe even more than parking spaces, like new buildings on campus, and then the University would pay QIC certain negotiated “availability payments’ over 50 years; payments designed to pay it back for the take-over of the system and the future operation and maintenance thereof; and pay for the new buildings being built. The periodic availability payments would need to be large enough to pay for a return on the equity investment of QIC, pay related debt payments, and provide a profit.
Many P3’s now explore the availability payment model, and that can work so long as the municipality participating in the P3 has sufficient revenue (which may or may not be from the system subject to the P3) now and in the future. PS, The Ohio State University has a large revenue stream, its general receipts (tuition plus all other fees) and the capital markets has loaned it money on 100-year bonds! So 50 years would have been safe.
David A. Rogers is an attorney at law with Frost Brown Todd LLC’s office in Columbus, Ohio. He can be reached at email@example.com.