Thursday, 17 January 2019

Maryland P3 goes to court

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The new Howard County Circuit Courthouse design-build-finance-operate-maintain (DBFOM) project is the first availability-payment structured municipal public-private partnership (P3) to reach financial close in the US, outside of the Governor George Deukmejian Courthouse in Long Beach, CA. By Brian Dugan, managing director, and Brandy Alles, marketing manager, at Edgemoor Infrastructure & Real Estate.

Edgemoor-Star America Judicial Partners (ESJP) has partnered with Howard County, Maryland to create an architectural landmark that expresses the values and traditions of Howard County’s effective, equitable, and accessible justice system.

Howard County’s new Circuit Courthouse, is a 240,000ft2 courthouse that will include space for the State’s Attorney, Sheriff, local Bar Association, Maryland Public Defender, Clerk of Courts, and more. The project also includes a cafeteria and staff fitness centre, as well as an adjacent 691-space parking garage.

The current Circuit Courthouse, located in historic Ellicott City, Maryland, was first built in 1841 and has become a symbol of the justice system and a foundational pillar of the community – and it was of the utmost importance to the ESJP team to achieve these same underlying attributes in a new Circuit Courthouse.

Since 1841, the county’s population has grown significantly and, as a result, the current courthouse became too overcrowded; presented security concerns, including lacking the proper separation of the circulation paths for the public, staff, and detainees; and is not well suited for technology upgrades and improvements.

A P3 delivery model was selected to help bring a new facility online quickly as well as ensure the county had a properly operated and maintained facility for the long term.

Through understanding the regional importance of the existing courthouse, as well as the current building challenges, the ESJP team set out to design an iconic new courthouse that was not only aesthetically pleasing but also efficient, functional, and sustainable – with technology enhancements that can grow with the building. Construction is slated to begin in June 2019 and the courthouse will be delivered in July 2021.

Procurement process

Howard County’s successful P3 procurement for its new Circuit Courthouse and parking garage was both innovative and industry-leading. The county was able to run such an effective procurement by being extremely well-organised from the outset – allowing the county to stay on track with its aggressive procurement schedule.

The county also set itself up for procurement success by obtaining key pre-approvals from the county council, performing facility studies, completing a value for money analysis, and engaging an experienced team of advisers.

The project’s two-step procurement process began with an expression of interest (EOI) in July 2017. Nine teams submitted a response to the EOI; three of which were short-listed, based on qualifications and approach, and received the county’s formal request for proposals (RFP) in November 2017.

During the RFP stage, interim technical and financial submissions were due in February 2018, and the county and its advisers held three interactive and confidential one-on-one meetings with each short-listed team, which proved very productive for both the proposing teams and the county.

Technical and financial proposals from the three teams were submitted in May 2018. ESJP was selected as the county’s preferred bidder in June 2018 and reached a simultaneous commercial and financial close in October 2018.

The developer and project team

ESJP’s experienced – both in the delivery of P3s around the US and courthouses – and highly-local team is led by Edgemoor Infrastructure & Real Estate and Star America Infrastructure Partners, the developers and equity investors.

The team also includes Clark Construction Group as design-builder, Hellmuth Obata + Kassabaum (HOK) as lead architect, and Johnson Controls as facilities manager. Additional ESJP team members include:

* Project Finance Advisory Ltd, financial adviser;

* Bracewell LLP, legal adviser;

* Willis Towers Watson, insurance adviser;

* Thompson Coburn, lenders’ legal adviser;

* Turner & Townsend, lenders’ technical adviser;

* Mazars Global Infrastructure (US), financial model auditor;

* Harkins Builders, associate design-build contractor;

* S2N Technology Group, Technology design-builder & integrator/operator;

* Allen & Shariff Engineering, commissioning agent;

* Site Resources, civil engineer;

* Cagley & Associates, structural engineer;

* WileyWilson, MEP engineer;

* Cerami & Associates, acoustical consultant;

* Arup USA; fire and life safety;

* Schnabel Engineering DC, geotechnical engineer;

* Kirlin Design Build, MEP design-builder; and

* Rosendin Electric, electrical design-builder.

Challenges and solutions

With any large, complex project, there are always challenges that threaten the project’s goals. To help the county best manage these potential risks, ESJP was tasked with identifying key risks and challenges early and working together to develop and implement creative solutions.

Described below in more detail are three key challenges the ESJP team encountered during the project’s procurement as well as the team’s creative solution for each of these potential challenges.

* Cost uncertainty and external market forces – With external market forces putting pressure on the budget during procurement – such as escalating interest rates and new trade tariffs inflating the market price of steel and initiating volatility in the cost of materials – the project required careful and strategic management of budgetary risks to deliver a compliant, fixed-cost bid that met Howard County’s imposed affordability ceiling, which was set prior to the implementation of the tariffs and during a lower interest rate environment. Additionally, proposers were required to hold their pricing for at least 180 days from the bid date.

* Solution– ESJP improved the efficiency of its courthouse design to reduce costs and collaborated with its numerous subcontractors to secure unique long-term price guarantees for various trades to mitigate pricing volatility during the commercial and financial closing period. Additionally, ESJP’s lenders contributed by providing ESJP with efficient lending terms, given the thoughtful financing structure.

* Balancing risk transfer with cost – One of the key county goals for the project at the outset was to transfer the risk of design, construction, financing, and especially long-term operations and maintenance to the private sector while still optimising/reducing the private financing costs – essentially, to transfer these risks in the most cost-effective manner.

One way the county accomplished this risk transfer was by including a US$75m milestone payment, financed by county general obligation bonds, to the private-sector partner upon the completion of construction. This preferred structure would allow for the project company to provide all the construction financing and approximately half the permanent financing as a DBFOM, or hybrid P3.

The structure still transferred 100% of the delivery risk – construction costs and schedule – to the private sector but reduced the amount of long-term private financing carried during the operating term. It was important that there was enough of a balance of the private financing – net of the county’s milestone payment – that would still carry forward for the 30-year operating term, ensuring the selected project company had “skin in the game” and remained properly incentivised to perform. The challenge for the proposers was to develop an efficient financing plan around the county-proposed deal structure.

* Solution– ESJP efficiently accommodated the county-proposed structure through a hybrid financing model that incorporated a creative organisation of bank, bond, and equity financing. The county’s milestone payment strategy, combined with ESJP’s financing approach, allowed the county to incentivise the project company to deliver the courthouse on schedule and appropriately transfer risk to the private sector during operations, while still optimising the amount of long-term taxable interest the county would be required to carry through its annual availability payments.

* Long-term operations & maintenance – Howard County wanted to leverage the private sector’s efficiency and expertise in government buildings to ensure funding for capital repair and replacement was locked in long-term.

* Solution – As part of the long-term contractual arrangement, ESJP guaranteed both the operating costs and the capital refurbishment costs for the full 30-year operating term. This approach not only provided Howard County with cost certainty, but also created a structure that will guarantee that the building will be handed back to Howard County in excellent condition at the end of 30 years.


ESJP, with support of financial adviser Project Finance Advisory Ltd (PFAL), created and executed a robust, creative, and efficient financing plan for the project. Some key features of ESJP’s financing plan included:

* Sophisticated debt providers;

* Competitively priced debt, with redundancy of lenders maintained throughout the RFP stage;

* Mitigated execution risk through securing legally binding financing commitments at bid submission, committed for 180 days, as required by the RFP;

* Fixed interest rates for the entire contract term at financial close, eliminating any refinancing risk;

* Ability to quickly reach simultaneous commercial and financial close, which ESJP was able to do within less than 180 days of the financial RFP submission.

The debt is a combination of a bank loan and bonds, with 100% of the capital budget privately financed at financial close. Seventy-five million dollars of the private financing will be taken out by a milestone payment by Howard County at occupancy of the new courthouse, scheduled to be achieved 32.5 months after financial close. Howard County’s milestone payment will be financed with county general obligation bonds at that date.

The developer partners providing the equity funding are Edgemoor Infrastructure & Real Estate and Star America Infrastructure Partners.

The banks providing the construction period loan include CIBC Capital Markets, Sumitomo Mitsui Banking Corporation (SMBC) and ING Capital, and the long-term note purchaser is MetLife Investment Management.

The availability payment is between US$10.0m and US$10.5m per annum for the 30-year operating term (2018$).

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