Public-Private Partnership (P3) for the Sale or Lease of Assets

* NOTE: GFOA has an Advisory on Public-Private Partnerships alerting governments to the risks involved with these agreements.

Government assets may include properties that are not needed, that are used in anciallary, non-core government functions and/or properties better suited for private sector ownership and/or management. Additionally, governments may have assumed control or been granted properties that are no longer needed. Governments may be approached by a private sector party interested in acquiring property. Property owned by the government often does not generate tax revenues but may require maintenance and create risk exposure.

Sale or lease of a public asset involves a shift in rights and responsibilities from the government to the private sector. They may involve agreements with private parties to provide services previously delivered by the government. The degree of ongoing public-private partnership is dependent upon the nature of the transaction. Each transaction is unique, and requires careful analysis including estimation of the fiscal impact; consideration of future opportunities, and selection of the best private sector partner; all while ensuring equity, fairness, transparency and accountability. Successful partnering requires an understanding of a transaction’s risks and benefits for both parties. Government assets are property of the public, and disposal of them should maximize public value. Projects satisfy a private partner when they offer an appropriate return relative to the level of investment and risk that is undertaken.

If a government is considering the sale or lease of a public property or asset, it should develop and maintain comprehensive procedures for maintenance of property records and the processes used to evaluate the potential deal.  The following is a list of considerations and processes to help reduce the potential risk exposure from these agreements.

  1. Maintain an Inventory of Government-Owned Properties. Governments should maintain asset records that docoment properties owned, the history of government ownership, whether property was donated or purchased using grant funds or tax-exempt financing proceeds, how it is currently being used, its assessed value, its market value, whether there are donor or legal restrictions on its use, whether there are environmental concerns, and annual maintenance costs. 
  2. Categorize Properties as to Current Use and the Government’s Goals for Future Use. Current utilization may include use in a core government function, an ancillary function, as idle property or as privately-leased property. Future use could entail properties the government will contiue to own, that it holds for sale/lease, or that it would consider for sale/lease. A government may hold property in inventory with plans to sell in the future when economic conditions justify such. Defining a property’s highest and best use ensures property ownership and management plans are consistent with the government’s overall goals and strategies. 
  3. Develop and Maintain Policies Regarding Disposition of Property. Determine what unit of government will oversee the inventory of government property, including that which may be sold or leased. Create policies and procedures for guidance when a property is actively marketed for sale and when an unsolicited proposal is received. 
  4. Undertake a Competitive Process for Sale of Property. Whether the initial offer is an unsolicited offer or the process is competitive from the start, ensuring the public obtains maximum consideration for the property entails competition. Governments should market properties available for sale or lease and should require interested parties to submit proposals for evaluation. Complex projects may also warrant a prequalification process for potential proposers.
    1. Marketing efforts may range from postings on organization websites to the use of signs, sales brochures, marketing by a real estate professional or other methods. Auction is appropriate in certain circumstances, and marketing efforts applicable to the auction process should precede the sale. 
    2. Proposals should include a concept plan for any intended development, qualifications and experience of the proposer/developer, a business plan for the project, financing plan, an anticipated time schedule for development, evidence of financial strength and viability of investors, identification of any adjacent property proposed for inclusion in the project and an offer amount. 
  5. Perform an Economic Analysis. The fair value of the property should be determined by a third party utilizing acceptable appraisal methods. The evaluation should consider opportunities for the optimal use of the property and the fiscal impact associated with a change from tax-exempt to taxable status. An awareness of the government’s assessed value should be maintained, as there may be a significant variance between the proposed sales price and the assessed value. The economic analysis should also consider current revenues obtained by the government from the property, a forecast of anticipated future revenues under private ownership, current expenses incurred by the government, and future expenses, if any, under private ownership. Analysis should include an evaluation of the property’s suitability for development, whether it is challenging to develop, and whether the proposed project may spur additional develolpment. Finally, the impact of upcoming regulatory requirements, lifecyle costs and revenues should also be considered in connection with any economic analysis.
  6. Assemble a Strong Team to Evaluate Alternatives. The finance officer should play a central role in the evaluation process. Many asset transfer transactions are driven by a government’s financial needs. As such, the finance officer is well-positioned to serve as a lead member of the team evaluating sale or lease of an asset. Team members should include finance, legal, economic development, property mangement, and executive management members as appropriate. Outside expertise can augment unmet staff skills. This may include legal experts, appraisers and financial advisors working solely on behalf of the public entity.
  7. Determine Whether Sale or Lease is the Best Arrangement. Both the government and a private party may have preferences regarding sale versus lease of property, and these may not always result in alignment. Ultimately, the government should execute an arrangement that best suits its long term goals. Lease of property is appropriate when the government wishes to retain ownership, but determines that the private sector can most efficiently and effectively provide services. Leasing entails a careful assessment of the appropraite balance of risk and reward between a government owner and a private sector operator. When leasing, the government needs to ensure that agreements address required maintenance levels by the private sector.
  8. Define Required Legal Steps. Ensuring that government has the authority to sell or lease is the first step. Donor or grantor restrictions may exist regarding use and/or ownership. Steps to consider include advertising and public hearing requirements, bid/proposal processes, and the opportunity to considerother offers following receipt of an unsolicited proposal. Governments should seek an appropriate balance of confidentiality to maintain the best negotiating position, while remaining open and transparent to the extent possible.
  9. Establish and Weight Criteria to Evaluate Competing Offers. Suggested criteria include consideration received, long-term fiscal impact, proposed use, historic preservation, qualifications and experience of development team, proximity to other properties that will be involved in proposed development, and compatibility of a proposed use with comprehensive and neighborhood plans and current zoning. Consideration of viable alternatives (such as property swaps) should also be included in the evaluation process. Creative alternatives may offer the best solution.
  10. Develop Agreements for Sale/Lease of Property. Governments should develop one or more agreements based on the nature of the transaction. A sale or lease agreement will be needed, and a performance agreement should be developed if appropriate. A performance agreement protects the government’s interest by ensuring the developer executes the project as agreed. A performance agreement is of particular necessity when properties are transferred for amounts below market value. Performance agreements can address items such as required minimum investment, jobs created (during construction and upon commencement of operations), and tax and/or other revenues generated. Such agreements should establish milestones for delivery/performance and include reversion provisions or monetary penalties in the event of non-performance.
  11. Determine How Sales Proceeds Will be Used. The finance officer should ensure appropriate use of property sales proceeds, and that required approvals are obtained prior to any allocation of funds. If required, tax-exempt debt should be defeased and compliance with the requirements of any grantors should be met before proceeds are used for other purposes. 
  12. Monitor, Communicate and Report Results of Sale/Lease Activities. The finance officer can play an integral role in ensuring a strong, transparent process and in serving as a steward of the long-term public interest in the asset. This includes post-transaction monitoring and due diligence, analysis of performance and communication to elected and appointed officials. The finance officer should assist in determining whether agreed-upon performance criteria are satisfied, and if not, the appropriate steps that should be taken with the private partner to remedy or invoke reversion process and/or penalty provisions.