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In public-private partnerships, both a park and recreation department and its partner bring assets to a collaboration that make it a viable proposition. The deal structures for almost every joint venture are unique. However, many share enough common characteristics to allow several general frameworks to be identified.
This column focuses on four characteristics: outsourcing, public-sector leasing, leaseback from the private sector and takeover of failing private ventures. Four additional models will be described in next month’s column.
The park and recreation field has a long history of outsourcing, so the principle is well-accepted. However, the range of services now being outsourced has increased, as financial resources have been reduced. While the focus is usually on direct cost savings, there are often other indirect benefits.
Outsourcing frees department staff time for other purposes. It not only saves money, but also removes the headaches and hassles associated with day-to-day management. One manager in the context of concessions noted that these included: “scheduling of part-time employees, purchasing perishable foodstuffs or imported souvenirs, determining what stands to open and for how long, determining whether the sanitation policies are enforced, determining who might be stealing cash.”
On a similar theme, another manager observed: “I am not suggesting that people who work in food and beverage are one iota more dishonest than anyone else, but these staff are dealing in cash, food and drinks. I can’t think of three more temptingly tradeable or consumable commodities handled together.”
Further, departments do not have the freedom to establish autonomous purchasing and personnel procedures, which a contractor can do. This freedom is especially important in revenue-producing services, where success often depends on an ability to respond rapidly to changes in market volume and preference.
This uses the department’s land bank as leverage to stimulate private-sector investment. The usual model is for a partner to inject initial capital investment to create or improve facilities in exchange for the resulting cash flow for a fixed period, a proportion of which is shared with the department.
NRPA board member Jack Kardys offered an example in the August 2015 issue of Parks & Recreation. The Miami-Dade Department of Parks, Recreation and Open Spaces partnered with a private company that invested more than $3 million in developing and operating small-sided soccer fields at three of the department’s parks. The department received a guaranteed minimum fee and a percentage of gross revenues. The business model included state-of-the-art floodlit facilities, afterschool and summer camp programs, and youth and adult soccer fields.
Many agencies have partnered with waterslide suppliers that install and operate waterslides at their pools at no charge and share the accrued revenues. Similarly, a growing number of departments are partnering with healthcare providers and hospitals to incorporate preventive and rehabilitation facilities into a recreation center’s traditional fitness operations.
Leaseback From the Private Sector
It is not unusual for governments to lease office facilities from the private sector. A similar approach can be used to fulfill equipment or facility needs without paying large capital sums upfront or seeking a bond issue. Because it is built with more expensive private capital rather than tax-exempt bonds and incorporates the partner’s profit margin, the cost to the city will be higher than if the city had financed it. However, the low interest rate for borrowing money that has prevailed in recent years means the advantage of tax-exempt bonds is currently relatively small.
In broad terms, leasebacks can be classified into two categories: build and transfer (BT) or build, own and operate (BOO). In both cases, the financing of construction is borne entirely by the private partner and the facility is leased to the department at a previously negotiated annual fee. A major advantage of this approach is that there are no change orders.
In the BT model, the partner’s responsibility ends with the construction of the facility, whereas a BOO agreement requires the partner not only to design, build and finance a facility, but also to operate, maintain and renovate it for the lease period. The BOO option provides a guaranteed budget for the length of the lease, which is an appealing feature for some cities.
A partnership between the city of Dublin, Ohio, and the Columbus (Ohio) Chill ice hockey team owners partially used this approach to develop a $3.3 million indoor ice rink. The city agreed to the Chill building and operating the ice arena on an eight-acre parcel of city land, and in return leased back 20 percent of the ice time to the city. The city received use of a state-of-the-art facility for its residents and a regional attraction that lures thousands of ice hockey fans to the city to attend tournaments and annual events.
Takeover of Failed Private Ventures
The takeover of a faltering private recreation facility may be an opportunity to retain a community asset that would otherwise be lost. Taking over facilities, such as golf courses, ski facilities, softball complexes or ice rinks, is consistent with the public’s image of what a department typically offers and, therefore, is unlikely to be controversial.
A department may be able to operate a facility that commercially fails for two reasons. First, the facility would not have to yield a return on equity, however, it could be operated either as a self-sufficient entity (without the return on investment) or with a tax subsidy.
Second, it is possible it can be acquired for substantially less than the original cost, making annual debt repayments less onerous. For example, if a bank forecloses on a recreation facility, it may take an offer from a city to purchase it at (say) half of its original cost, so the bank could recoup some of the outstanding loan amount on the property. By enabling the facility to continue operating, the bank would contribute to the community’s quality of life and enhance its image as a good corporate citizen.
John L. Crompton, Ph.D., is a University Distinguished Professor, Regents Professor and Presidential Professor for Teaching Excellence in the Department of Recreation, Park and Tourism Sciences at Texas A&M University and an elected Councilmember for the City of College Station.