Monetization is the process of converting assets into economic value. Looking for options to generate greater revenue, municipalities and public sector entities have begun to consider the transfer to private operators of a greater variety of public assets than in the past. There has also been the development recently of more creative and profitable public-private partnerships.
For municipalities, the process of monetization historically has been tied to the ownership and operation of public utilities like water and sewer systems. But the delivery of utility services is becoming increasingly complex, and recent changes to legislation have added more restrictions on the use of such revenues. Many public operators have also experienced a decline in financial returns, just as an infusion of cash may be needed to upgrade aging infrastructure.
But this changing landscape is also harnessing new technologies and ideas to transform underutilized or dormant assets into sources of revenue. There can be great financial opportunity in the monetization of public assets, but parties should be aware of common dangers and oversights. And the potential for successful economic returns should be informed by the values and interests of the local community.
Development of Land Assets
One of the more underutilized municipal assets is land. The financial upside for land development is potentially great, as it may be an opportunity to unlock value from a zero-revenue asset. After mapping available properties, a municipality can explore the question of what can be monetized.
Consulting companies may be helpful in determining projects appropriate for different holdings. Real estate developers may also be interested in contributing to the conversation, as it may give them entry to developed locations attractive to outside businesses. But ultimately the municipality should seek to drive business and raise revenues for itself in the bargain.
Public lands have been developed for projects as varied as public parking and energy generation, both of which are particularly well suited for public-private partnerships. Whether partnering for the operation of an urban parking garage or the development of a solar farm, such partnerships can be a boon for municipalities, especially where capital funding comes from the private sector.
When partnering with energy providers, municipalities have also been able to unlock the value of formerly “passive” assets like undeveloped tracts of land and unused rights of way. In today’s common model for solar development, the municipality may provide the land, but the solar producer generally covers all costs of the facilities. Clean power is then sold to the municipality, often at a savings from traditional sources.
Under permissible arrangements for net-metering, public sector entities may be able to generate additional revenue by selling surplus power to the energy grid. A successful example is a power-purchase agreement between the Oregon Department of Transportation and Portland General Electric, where the parties transformed previously unused rights of way into “solar highways,” generating cost savings for the state and feeding power into the grid.
Disposition of Utility Assets
In more traditional dispositions of utility assets, the process of monetization tends to be one of conversion rather than the sole creation of value. Since assets like water and sewer systems are already “monetized” to the extent that they produce a steady financial return to the operator, the transfer to a private operator does not create entirely new value. It changes the revenue model—hopefully with a better return for the public.
An outright sale of a public utility system will convert a steady, annuity-type return into immediate liquidity. Under the terms of a typical purchase agreement, title will be conveyed to all above-ground and underground facilities (treatment plants, water towers, pumping stations, pipes, valves and access points), together with title to the underlying real estate interests (fee simple, easements). Payment for a sale tends to be in the form of a one-time lump sum.
A disposition of public utilities may also take the form of a long-term lease, known as a “concession” agreement. Under a concession with a private operator, the public sector owner may have more opportunity to negotiate a balanced financial return that combines a significant up-front payment with a tail from operational revenues.
The interests and financial needs of the community will likely determine whether a sale or lease is more desirable. Too often, however, public sector entities jump into deals without understanding the potential liabilities that may result. It is therefore extremely important to engage experienced counsel early in negotiations to advise about the process and undertake thorough due diligence to help ensure a smooth transition.
The importance of good due diligence cannot be overstated when preparing for a disposition of public assets. A municipal entity can face significant liability for attempting to convey more than it actually owns. Consider the situation of the Scranton Sewer Authority.
Last year the Authority finalized a $195 million sale of its sewer system to a private operator. After the parties entered into a purchase contract, it was discovered that for decades the Authority had been using sewer lines under nearly 600 properties for which it had no clear easements. The Authority attempted to resolve the issue by sending a letter to affected property owners insisting that they accept $100 in exchange for granting an easement within seven days, or face condemnation.
Just as the deal was closing, several homeowners were so irritated by the Authority’s actions that they filed a class-action suit seeking millions in damages. The Authority itself had already paid significant legal fees to complete the transaction, and it had to set aside millions more to attempt to resolve the litigation.
Donated or Dedicated Property
Unfortunately not all land may be monetized. Before engaging in any project to develop, dispose or change the use of public land, a municipality must first determine whether it had been donated or dedicated for a particular use. Under Pennsylvania’s Donated or Dedicated Property Act, all real property donated or dedicated to a political subdivision for public use is considered to be held in trust for the benefit of the public.
Municipalities may not sell such property or change its intended use without first obtaining permission from the appropriate orphans’ court, which has exclusive jurisdiction under the Act. For a sale to be approved, the original purposes of the dedication must no longer be practical and the property shall have ceased to serve the public interest. Examples of improper dispositions include the sale of public parkland to a private golf course developer and the lease of a small portion of dedicated parkland for a communications tower.
While courts have held that leases of municipal land must also be approved by the orphans’ court, the Act does not explicitly cover lands held by authorities or other non-municipal entities. Moreover, the Act does not affect a municipality’s right to dispose or change the use of lands or buildings acquired by purchase or condemnation. When seeking opportunities for monetization, these land assets should be considered first.
Public assets have the potential to generate significant economic value, but thorough due diligence and experienced legal advice is needed for any monetization to be successful.
Reprinted with permission from the October 5, 2017 edition of The Legal Intelligencer © 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.