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