Long Beach, California, has reshaped its downtown through two public-private partnerships to create “social infrastructure.”
The city's 22-acre Civic Center project resulted in a new city hall, port headquarters, library and community park on six blocks in the city's downtown.
The state courthouse, winner of The Bond Buyer nontraditional financing
But after the Civic Center opened, the city has been contacted “many, many times about what worked and for tips on how to pull such a project together,” said City Manager Tom Modica.
The city and Plenary-Edgemoor Civic Partners, the development team, celebrated the grand opening of the new port headquarters and city hall on August 2, 2019, with the new Billie Jean King Main Library opening a month later. Lincoln Park opened on Jan. 31.
It followed in the footsteps of the state's Governor George Deukmejian Courthouse next door,
The city agreed to $12.6 million in annual availability payments to Plenary, the lead developer on the $533 million redevelopment of the six-block civic center project. The amount was based on what the city was paying annually for upkeep on the old city hall building, but will rise to account for inflation.
“One of the key components was that performance and maintenance would become predictable, and that is working well,” Modica said.
Instead of paying upfront to build the facilities and then paying for their operating costs over time, those expenses, along with design and construction costs, are all wrapped into "availability payments" the city and Port of Long Beach will make over a 40-year period.
The agreement allows the city to make changes to the building — either adding to the annual payment to Plenary, or paying for the costs itself — and Modica said the city has done some of that.
JCI, a subcontractor to Plenary, is managing maintenance of the facilities for the city, which includes the underground parking garage.
The city, which had anticipated $1 billion in ancillary private development occurring around the project, has seen closer to $2 billion, said Ignacio Barandiaran, a principal at Arup, a global engineering and development company that was the city’s advisor on pre-development.
Funding for the project was a $212.6 million bank loan for the port, $239.06 million of privately placed long-term notes to cover the costs of city hall, the library and park, $21.16 million of equity and $30 million in equity injection in consideration of the private land purchase adjacent to the project site, said Chris Jauregui, a vice president at Plenary Group, a global investor, developer and manager of public infrastructure.
Plenary does a competition to assess the cheapest and best cost of capital and the privately-placed long-term notes won out over issuing a revenue bond, Jauregui said.
Prior to the financial close in 2016, the market was such that privately placed debt had a similar cost of capital to selling revenue bonds, but had the added benefit to the city of risk transfer to Plenary, said Orion Fulton, an associate principal at Arup.
Plenary was also able to do a delayed draw on the debt, which enabled it to save money over having to issue the bonds all at once, Jauregui said.
The city contributed $10.8 million for construction costs, covering the majority of that expense, roughly $8 million, with a $12.5 million lease revenue bond that will be repaid from revenues from a city-owned parking garage.
The project was driven by earthquake safety flaws in the old city hall, built in 1977, that eventually forced city workers to move out.
The city hired Arup in 2013 to craft a request for proposal to hire a development team for the multi-block project.
One of the things that set the city on a path to success was that “we convinced the city to go to the developer market quickly with a well-structured RFP that focused on the city’s objectives, provided a framework for eventual delivery,” Barandiaran said.
The RFP solicited and asked for innovations from developers, and the process didn’t overly complicate or elongate the predevelopment or procurement process, Barandiaran said.
“It was being streamlined up front,” he said.
How much the city could afford to spend was determined by figuring out how much the city had been paying annually to maintain the existing civic center properties, said Orion Fulton, an associate principal with Arup.
“There are different schools of thought on whether you should tell the developer market what you can afford to spend,” Fulton said. “In this case, we felt it was in the best interest of the city to use it as a management tool to keep city staff and the developer to a set [spending] limit.”
“The city was smart to focus on 'what budget I can afford' versus 'what will it cost me,'” Barandiaran said.
While the public-serving components of the project are complete, a privately developed mixed-use housing project is lagging.
Texas-based JPI Development, the original developer, pulled out after the pandemic created economic chaos and drove up building costs. Plenary, the lead developer on the P3 team, has stepped in as developer on the project.
“We always knew there was development risk in that deal,” Modica said. “Right when they started marketing the building, financial pressures started to build. The cost of steel went sky high. A number of developers who had expressed interest dropped out.”
JPI got the project entitled and then pulled out, Modica said.
The current project involves 580 units of middle-income housing in two towers and 50,000 square feet of ground floor retail including a grocery store. Original plans included a 200-room hotel, but as plans for the project progressed three or four other hotels, including a four-star hotel, moved into various levels of development saturating the market with hotel rooms.
The Long Beach City Council discussed plans Feb. 1 for California Community Housing Agency, a conduit issuer, to issue $490 million in bonds for Plenary Properties. Under the proposal, the developer would repay the bonds from rental income. The city has also proposed a $650,000 annual hosting fee to compensate for unrealized property taxes.
Jauregui declined to comment on the housing project, saying the firm is still negotiating with the city about various aspects of it.
“One of the big stories of this project is the city was able to use its own land to deliver on city specific needs [like building a new city hall and port headquarters], but also address housing affordability for the larger community and build a new public park,” Barandiaran said. “Those are economic and city-wide social benefits that the community cares about more than whether city workers have a nice new office.”
The city couldn’t get buy-in from residents to float bonds for a new City Hall. But Long Beachers changed their tune when the Civic Center project, with all of its community benefits, was proposed, he said.
“That’s why every vote to pass the deal from the city passed unanimously,” he said.
In the U.S., P3s are usually associated with transportation projects. But Long Beach offers examples for social infrastructure P3s.
Some of the projects in other cities emboldened by Long Beach’s success have already fallen off, Barandiaran said. Napa’s plans for a civic center have died. Los Angeles’ plans to create a civic center on the old Parker Center site have fallen away.
But other cities are moving ahead with projects. Sonoma County’s plans for a civic center P3 are still ongoing, but moving slowly. Burbank needs to rebuild its main library downtown and wants to create a mixed-use development that includes housing as part of that, Fulton said.
The California P3 that appears to be generating the most enthusiasm is the one planned by the San Francisco Municipal Transportation agency, which runs public buses and trains in San Francisco. They are looking at $1 billion in investments to modify their bus facilities to meet the California Air Resource Board’s mandates to move its fleet to electric buses, Barandiaran said. The project would upgrade one of its three bus yards to electric and build 575 affordable housing units.
The SMTA received responses to a request for proposal in December and is expected to announce the winning team soon, Barandiaran said.
Barandiaran said developers are much more comfortable with complex public-private partnerships then they once were.
“I think there is a greater acceptance,” Barandiaran said. “There is definitely a change in the market in the willingness to take on the additional complexity and figure out the interfaces.”
