In public-private partnerships (P3s), ground leases have become a helpful tool for public agencies to facilitate the development of affordable housing, schools, community facilities, and infrastructure development on publicly owned land. In a typical scenario, a long-term ground lease by a public partner permits a private partner to develop a project on public land. Whether or not a ground lease is a good delivery approach in a public-private development project can vary significantly based on who owns the land at the outset.

When The Public Owns the Land

Ground leases are a logical choice in public-private development scenarios when the public agency already owns the land on which the private partner will develop the project:

1. Control and Oversight: Ground leases allow public agencies to control the land, ensuring the development aligns with public objectives and community needs. This oversight is crucial in public-private partnerships when the public’s interest is paramount.

2. Revenue Generation: Through ground leases, public agencies can generate consistent revenue streams over extended periods, benefiting municipalities or agencies seeking long-term financial stability from an asset.

3. Risk Mitigation: By leasing the land rather than selling it to a private partner, a public agency can mitigate potential risks associated with development failures or non-compliance by the private partner. The lease terms can be structured to ensure the land reverts to the public agency in such scenarios.

4. Preservation of Public Ownership: Ground leases in public-private partnerships allow a public agency to maintain ownership over public land, which may be located in high-value urban areas or close to other public facilities. They also offer flexibility for a public agency that may change the future use of the property.

When The Public Does Not Own the Land

When neither the public agency nor the private partner owns the land earmarked for development, or the private partner owns the land, opting for a ground lease might not make sense:

1. Added Complexity: Acquiring or reconveying land for the sole purpose of establishing a ground lease adds an unnecessary layer of complexity to a public-private project. Direct acquisition and ownership by a private partner streamlines the negotiation and development process.

2. Increased Costs: When a public agency acquires land it does not own, it will incur acquisition costs and ownership liability only to lease the land to the private partner. This increases project costs, potentially making the project’s private component less economically viable while reducing the public benefit achieved because of unnecessary added project costs.

3. Delay: The process of acquiring land, followed by negotiating a ground lease, introduces significant delay to a project timeline. In the fast-paced world of real estate and infrastructure development with constant market fluctuations and escalating construction costs, time is of the essence in delivering viable projects.

4. Public Review: Public-private developments often involve multiple sources of public and private financing, and transaction documents and agreements typically must be reviewed by public grant agencies and lenders. Public staff only offer guidance after a final review of project documents, which introduces significant uncertainty into the document preparation and negotiation process. Because of the complexity of ground leases, public comments received after ground lease negotiations can undo months of progress and materially impact the project schedule.

In a public-private development project, partners must assess the merits, risks, and challenges of using a ground lease on a case-by-case basis, ensuring their approach aligns with the project’s objectives, timeline, and broader community interests. While a ground lease may be a suitable ownership vehicle for a public agency that already owns the land, defaulting to a ground lease in other land ownership scenarios can introduce unnecessary complexities, costs, and delays that create more risk for a project than the risk the public agency is trying to mitigate with a ground lease approach.

INNOVATE P3 helps partners identify, analyze, and structure ownership frameworks that optimize the benefits of public-private partnerships.

 Historic mills stand as proud reminders of America’s industrial past. For residents, they also serve as an anchor of stability in a rapidly changing world. However, as time passes on these historic structures, there is a growing urgency to stabilize, preserve, and repurpose abandoned mills before they deteriorate beyond repair.

Often inheriting dilapidated mills and their associated environmental risks, upkeep costs, and security hurdles, local governments are keen to explore opportunities to unlock their potential. In addition to their value as heritage sites, a historic mill can represent a redevelopment opportunity to spur economic growth, boost tourism, and host new community facilities. Local governments typically lack the resources and expertise to rehabilitate properties independently, turning to public-private partnerships (P3) as a tool for historic mill redevelopment.

Laying the Groundwork for a P3 in Historic Mill Redevelopment

Before issuing a P3 solicitation for a private partner, a municipality must craft an implementation plan to guide a successful P3 strategy. Among many issues to consider:

  1. Envision the Mill’s Redevelopment: Prioritize desired outcomes like historic preservation, economic revitalization, or creating a cultural hub.
  2. Assess Public Support: Gauge the readiness of leaders to back the redevelopment financially and politically.
  3. Plan the Infrastructure: Identify essential public infrastructure and potential funding sources to support the project.
  4. Blueprint the Project: Draft a realistic timeline and budget for the project.
  5. Clarify Roles: Define public and private stakeholders’ roles, expectations, and benchmarks for success.

While foundational plans are important for a successful P3, flexibility is critical. Allow room for private partners to leverage their insights and expertise and adapt to evolving market conditions.

Crafting an Effective P3 Request for Qualifications (RFQ)

A well-framed P3 RFQ is a vision statement and an outline of how the local government will execute a project. It should demonstrate the municipality’s commitment to leverage the benefits and address the challenges of a P3. Instead of demanding design specifics and financial data from respondents, emphasize the public project team’s clarity of purpose and preparedness. Focus on evaluating potential partners for their alignment with the town’s goals and resources.

Collaborate, Adapt, and Overcome

Even with the right P3 partner on board, challenges will arise. Anticipate structural surprises in the building, regulatory hurdles, community resistance, and market flux. An adaptable implementation plan and well-defined public-private partnership can navigate and overcome challenges as they arise.

Be Realistic, Be Ready

Sometimes, a historic mill property might not be ripe for immediate private investment through a P3. In such cases, a town’s initiative to enhance infrastructure, host community programming, and invest in supporting public facilities will lay the groundwork for a future P3 and signal the local government’s commitment to the project’s long-term success.

Florence Mill: Laying the Groundwork for a Historic Mill Redevelopment

The Florence Mill in Forest City, North Carolina, represents an example of public investment preceding a P3 in a historic mill redevelopment project. The Town has taken the lead in revitalizing the mill property, investing in the mill’s structural stability, adding a public amphitheater, bolstering infrastructure, and building an adjoining rail trail connecting with neighboring towns in Rutherford County. As the Town sets out to engage a development partner, the Town’s efforts showcase its dedication and readiness for the rehabilitation of the 1986 mill building through a P3.

INNOVATE P3 guides local governments in conceptualizing, strategizing, and implementing P3s to redevelop historic mills by emphasizing careful advanced planning and creating compatible and value-added public-private partnerships.

Extending water and sewer infrastructure in new basins not served (or underserved) by utilities requires careful planning and collaboration between private developers, utility providers, and local planning jurisdictions.

What is a service basin?

A water and sewer service basin is a defined geographic area where a utility provider supplies water and manages wastewater collection, treatment, and disposal. The boundaries of a service basin are determined based on factors such as infrastructure capacity and coverage, population density, hydrology, and service area agreements. The provider establishes and maintains infrastructure within a service basin, including water supply lines, sewer lines, pumping stations, and treatment facilities, to deliver clean water and adequately manage wastewater. The utility provider plans for infrastructure expansion within the basin based on projected growth in the area. In fast-growing metros, development can outpace capital infrastructure plans; in this case, private developers typically extend and expand infrastructure to accommodate new growth in coordination with utility providers and local planning jurisdictions.

how does the water flow?

When designing new sewer infrastructure, utility providers build gravity or force main lines, depending on an area’s topography and geology. Gravity lines use the land’s natural slope to move wastewater, relying on gravity to guide the flow. Force main lines require pumps to overcome elevation differences and propel wastewater through the system.

Water systems primarily use pressurized systems to distribute water. Pressurized water distribution systems rely on pumps to maintain consistent and controlled pressure throughout the network. Water is pumped into the system at a higher pressure, allowing it to flow to consumers’ taps and fixtures. This pressurized system ensures that water reaches all distribution network areas, including areas with varying elevations or uphill locations. Unlike gravity systems, which rely on the natural downward flow, pressurized water systems provide the flexibility to distribute water to higher elevations and overcome terrain challenges.

What is Oversizing?

Utility providers and local governments may require developers to oversize utility lines to accommodate future growth and avoid costly expansions. This approach involves installing larger infrastructure than necessary for a single project to account for future sewer demand and prevent the need for parallel installations later. For example, instead of a 12-inch force main line for a single residential project, a 16-inch line may be required to accommodate future demands. The public utility or local government should cover the cost of oversizing through cost-share arrangements to ensure fair allocation of the added financial burden.

In new basins with multiple developers requiring expanded water and sewer capacity, one developer may enter into cost-sharing agreements with other developers to equitably distribute the financial responsibility. These agreements consider factors such as land area, anticipated usage, and projected growth to allocate costs.

In either case, the first developer in an unserved or underserved basin often bears a higher cost burden for initiating infrastructure improvements. Additionally, local and state laws may not address or require cost-sharing arrangements, leaving the first mover reliant on voluntary agreements with public utilities and other developers to share costs.

What is actual flow vs. calculated flow?

When considering the design and cost of new sewer infrastructure, it is crucial to understand the difference between actual and calculated flow (or paper flow). Calculated flow refers to estimated sewage flow rates based on factors such as population density, building occupancy, and predicted water usage. Actual flow considers real-time data and usage patterns and represents the actual flow rates of wastewater through a system. Utility providers establish infrastructure sizing requirements for new development based on minimum calculated flow rates, typically set by state law and local ordinance or policy.

Continuing improvement and implementation of water conservation measures can result in actual flow rates substantially lower than the minimum calculated flow requirements. Consequently, new wastewater lines may be oversized to provide unnecessary future capacity. On the other hand, climate change and natural weather events can put an unanticipated strain on wastewater systems. Rising sea levels, extreme rainfall events, and storm surges can overwhelm existing sewer infrastructure, with an influx of excess water into the sewer system exceeding its capacity, causing backups, overflows, and system failures. Additionally, flooding can introduce contaminants, such as pollutants and bacteria, into the wastewater system, further complicating treatment processes downstream.

Changes in legislation can significantly impact the requirements for calculating sewer flow and permitting sewer line extensions. North Carolina, for example, recently passed legislation changing the minimum calculated flow rates for wastewater systems. The legislation allows wastewater treatment systems to calculate wastewater flows for new residential units at 75 gallons per day per bedroom or a lower rate approved by the NC Department of Environmental Quality. This change represents a significant reduction in the minimum calculated flow previously required by the state for new sewer infrastructure. It will impact the design, cost, and capacity of new systems across the state for utility providers and private developers.

Navigating water and sewer infrastructure planning and expansion requires a significant investment of time and resources by utility providers, local governments, and private developers to meet current and future demands. With the added impacts of climate change and a shifting regulatory landscape in communities across the country, building resilient and cost-effective infrastructure will require more collaboration among public and private stakeholders.

Innovate P3 works with local governments, utility providers, and private developers to create partnerships and equitable cost-sharing arrangements for water and sewer infrastructure planning and development in urban and rural communities.