Public-Private Partnerships in Real Estate: Building Strong Foundations, Navigating Risk and Embracing Emerging Trends

P3s are often branded as tools for financing traditional infrastructure like roads and bridges. However, P3s are capable of much more and can be powerful vehicles for advancing complex and ambitious real estate projects, including large AI hubs. P3s combine public sector support with private sector innovation and efficiency and have brought to life everything from reimagined transit hubs to vibrant mixed-use communities. But success in this space requires the orchestration of many competing interests and the know-how to implement a balanced risk allocation among the various parties involved.

Foundations for a Successful P3    
At their core, P3s are cooperative ventures, each between a government entity and a private party, leveraging private sector expertise and investment to develop, build, finance, operate and maintain public-serving projects.

For the public sector, goals might include economic revitalization or boosting local employment (or building out AI infrastructure). For private developers, P3s offer access to marquee projects that are often high-profile and high-impact.

Effective P3s require a clarity of vision between the public and private stakeholders. Laying the foundation for success begins long before groundbreaking. Starting with the government’s request for qualifications or proposals, competitive bidding is often legally required, but it also builds public trust. Stakeholder engagement is also just as critical, as stakeholder opposition can significantly delay or derail even the most promising projects.

For both the legal and deal teams, contract documents are critically important due to the often decades-long lifespan of these partnerships. The documents need to address scope, performance standards, construction timelines and change management processes with a resiliency to withstand the passage of time.

Navigating Risk Allocation
Whether a party is a novice or a veteran, P3s present parties with a myriad of risk factors. For private developers, working with a government partner can mean having to navigate and address uncertainty around appropriations cycles, public procurement rules and statutory requirements.

For public entities, governance is a balancing act between maintaining appropriate oversight without micromanaging. Further, the public entity often wants its private partner to shoulder the burden of project delays and financing, which may be appropriate, but the public entity can provide support through mechanisms like tax-increment financing and municipal bonds.

Ultimately, risk should be allocated to the party best equipped to manage it. Legal tools such as insurance requirements, performance bonds and step-in rights give the parties practical mechanisms to address these risks if they materialize.

Next Wave of P3s
While traditional projects like redeveloping underused public spaces or upgrading infrastructure will always benefit from the P3 model, new opportunities are emerging as can be seen with the Plan.

As noted above, parties may see an increased effort by the federal government to engage in P3s to aid in AI development. The Plan lays out three pillars: (1) Accelerate AI Innovation, (II) Build American AI Infrastructure, and (III) Lead in International AI Diplomacy and Security. Pillar II highlights the need to ensure that infrastructure in the United States can meet AI’s growing demands. Specifically, relating to data centers and AI infrastructure, it is recommended to “[m]ake Federal lands available for data center construction and the construction of power generation infrastructure for those data centers by directing agencies … to identify sites suited to large-scale development.”

However, whether it’s a next-generation AI ecosystem or a mixed-use waterfront revitalization, the formula for success remains the same: disciplined planning on the front end, equitable risk-sharing, right-sized oversight and legal frameworks built to endure over time on the back-end. The reward of a successful P3, though, can revitalize a neighborhood and bring spaces into this new technological generation.