An Interview With: Richard Newman
Editor's Note: In light of ongoing focus on public involvement in financing a DC baseball stadium, we thought it would be timely to cover the subject of public private partnerships. A senior partner at Arent Fox, one of our sponsors, is a leading expert in this area, so we have taken the liberty of asking him to discuss the broad subject with us.Newman came to DC from Cleveland in 1979 for an internship at HUD “to change the world,” as he puts it. He has been at Arent Fox for 11 years, having established one of the leading legal practices in using tax advantaged financing for real estate development, such as tax exempt bonds or other forms of subsidy. He represents numerous large institutional scale non profits, such as the Smithsonian, Corcoran, Shakespeare Theatre, Arena Stage, Phillips, National Geographic, World Wildlife Federation, National Academy of Sciences, and others.
Bisnow: People talk increasingly of public-private partnerships as being terribly important for real estate development in the region. What are they referring to?
There are some obvious examples in DC, such as MCI Center and the Shakespeare Theatre. But it’s a phenomenon going on in the suburbs as well. Rockville Town Center yet again is undergoing re-development through a major such partnership between the city and a private developer. Less well known but of great significance is the Hyattsville Metro Center project where that city financed the infrastructure for a new office park right on the Metro as a smart growth gesture. By collaboration between the developer and the city, both were able to reduce cost and jump start development in a way that addresses both the public and private interest. The final suburban example that I think is fascinating and the wave of the future is what I like to call Peterson-on-the-Potomac, which is otherwise known as the National Harbor project. It’s a huge joint venture between Milt Peterson’s company and the public sector, and without that collaboration the project could never happen. I think it’s a pattern we’re going to see in the metropolitan area over and over again, as the public sector begins to understand it can’t just legislate or mandate with a stick, but needs the carrot, too.
What is the carrot and what is the stick?
The stick is the traditional land use zoning regulatory structure, where the government says, “You can’t build housing here, you can’t build industrial there.” The carrot is public financing incentives where they say, “You give me 20 percent low income housing and I’ll give you bonus density.” Hyattsville is an example where the government said, “We want this project, we want to move faster, we will help you finance the infrastructure.” The city is not paying for the roads and sewers; that’s being paid for by the developer, but with the help of a special tax district that was set up by the city, which lowers the cost of the infrastructure. In effect, the public sector said, “We will help you lower your costs if you do development along the lines we want."
Is the Shakespeare Theatre another example?
Yes. The District wrote a check for $20 million and said, “We have this dead spot on Seventh Street, and we want it animated.” We saw the beginning of this effort with the MCI Center, but MCI didn’t fulfill the entire goal of achieving a 24/7 downtown. From the city’s perspective, assisting Shakespeare’s development will attract cultural tourism that is extremely profitable for the city: lots of sales taxes from the high-end tourism that the arts bring to Washington. It’s a great investment for the city. The same thought process supported the development of the MCI Center. The city contributed the land, and got an enormous tax boost. They got all of those people who previously shlepped out to the middle of Prince George’s county to USAir Arena and left immediately after the games. Now they go to MCI, stay downtown, go out for dinner or drinks, or go shopping first. So this is an investment opportunity for the public sector, not just the private sector, and the city has been repaid several fold.
Sounds good. So what’s the issue?
It’s still not widely understood how you go about structuring these things. And therefore, the private sector is often skeptical or antagonistic about working with the public sector, and sometimes vice versa. We have to be able to build bridges. If you look at the old convention center site, for example, you will see a big contrast with the wax museum site. The wax museum took 20 years to finally see the results of a public-private scheme, and that’s scary. Scary for the public sector, because can’t get anything done; scary for the private sector, because time is money. In the case of the convention center site, the city did an extraordinary job. It put together a program, went out and selected a developer, and that process is moving forward quickly. Some in the private sector remember the old horror stories too much and don’t focus on the fact that the public sector is much more sophisticated now in collaborating and able to move these projects much faster forward.
But what can you really do about that?
The private sector needs to understand the public sector rules better. It’s interesting: the public sector has perhaps done a better job in understanding the private sector rules than the other way around. One of those private sector rules is the need for certainty—what we call “re-trading” is verboten. Second, time is money. The public sector has learned it’s hard for private companies to operate without certainty. But the private sector needs to understand that sometimes this can’t happen no matter what the public sector’s intention. The public sector has unique approval requirements. When companies shake hands, they have a deal. That’s not necessarily the case with a mayor or city council. Getting to certainty with a public sector partner can be time consuming and, unless you recognize the possibility going in, very frustrating.
Any other examples?
Sure. Governments can’t do some things which private sector can do, such as give indemnities. If I’m buying a piece of property from another developer, they can say, “Don’t worry about such and such, I’ll indemnify you.” Governments typically cannot give indemnities, and DC is subject to the Anti-deficiency Act, so this is a huge problem for the District because it can’t commit money that hasn’t been appropriated. In fact, criminal liability attaches to violations of this law.
Are the jurisdictions different in other ways?
Very much so. To take an example, in DC we have a unique requirement whenever anyone does a public-private venture that there needs to be a special effort to hire DC residents and local disadvantaged business. The city wants not just buildings, but jobs and contracting opportunities for residents, which makes sense because they are the ones who pay income taxes to the city. There have been some bumps in the road—there was a big problem recently, for example, with city’s apprenticeship requirements, but again, things are much better now. Also, DC has a requirement of “layover,” since we don’t have true home rule. That is, when the city council approves a law, there is still the need for Congress to approve that approval, so developers have to contend with that unique process that involves typically a 90 day delay. Since one of the private sector axioms is “time is money,” that put DC at a disadvantage, but as long as a developer knows the rules going in, they can work with it.
What’s the “LSDBE” rule we hear about?
That’s the “local, small and disadvantaged business enterprise” program in D.C. The city requires that 35% of your contracting is to be done with small businesses, minority business, woman-owned businesses, and so forth. Although the feds have contracting preferences, no other jurisdiction has an actual requirement like this. Something similar is the “first source” rule, which creates a hiring preference in the hope that 51 percent of new jobs generated by city projects will be filled by DC residents. The city wants contractors to try to recruit locally and to use the DOES—department of employment services—as a job referral source. So the point is, you shouldn’t get surprised as a contractor if at the last minute someone says, “What’s your LSDBE plan?” The private sector needs to understand the public sector. It will not do well by saying, “What?”
But with all these special rules, and different jurisdictions to choose from, why do profit-oriented firms bother?
Well, there are some obvious reasons, like that the local government owns an asset (a site typically) that has great development potential and the "cost" of compliance with the local rules is absorbed in the cost the private sector pays. Or, as in the special tax district situation, the savings realized from cooperating with the government more than offset the costs and hassle. But really, the question assumes that there is no concurrence of interest between the private sector and the public sector, and I believe that that is a fundamental mistake—these deals really only work when there is a great deal of concurrence of interest—although it is not always economic interest.
We are working around the clock to close the financing (we represent Deutsche Bank) – which is real ironic to me as I am not a fan. :)