By Michael Gougis - Contributing Writer

July 31, 2012 – With the Port of Long Beach looking for office space for its administrative staff and a building previously housing Boeing at the Long Beach Airport sized perfectly and priced attractively, moving to the airport might seem the obvious move.

But the owners of One World Trade Center in Downtown Long Beach, who also are looking for a buyer, say that the obvious move might overlook the long-term economic benefits available to a city willing to seek new, creative methods of financing municipal operations.

Specifically, Legacy Partners, owners of One World Trade Center, is proposing that the Port of Long Beach, the City of Long Beach, or both, create a non-profit entity to purchase the 27-story office structure.

Such a partnership could help the city in several ways. But most importantly, perhaps, is the example it could set for a new method of municipal investment for the purpose of infrastructure improvements and maintenance and economic development.

With the demise of redevelopment, cities and governmental agencies are looking at new ways of accomplishing the tasks that redevelopment agencies used to perform, says David Flaks, chief operating officer of the Los Angeles County Economic Development Corporation.

“We must look at using new and creative mechanisms such as Public-Private Partnerships [P3s] that combine government oversight with private sector innovation and efficiencies to supplement limited public funds,” Flaks says. “P3s are an established strategic growth measure that harnesses the capital, technical expertise, efficiencies and entrepreneurial spirit of the private sector and leverages those advantages with the environmental, quality of life and job creation goals of the public sector.”

One World Trade Center’s owners say the proposed sales price is $130 million for the 573,300-square-foot structure. That is far more space than the port needs for its employees – 170,000 square feet is about all the port needs. However, One World Trade Center currently has a 30 percent vacancy rate. In other words, the empty space in the building matches almost exactly what the port needs.

The building’s owners say that situation creates a unique opportunity for a public-private partnership that would benefit the city and the port. The way it would work is simple. The port, the city or both create a new, separate non-profit agency. That agency purchases the building, using money raised by partnering with an infrastructure fund. That fund is created by investors who want to partner with public entities in search of stable, reliable sources of investment returns.

In this specific case, the infrastructure fund’s investment would be repaid through the leases of the existing tenants in the building. Even with a 70 percent occupancy rate, One World Trade Center generates $5 million to $6 million in net operating profits, the building owners say.

Alternatively, the non-profit agency could bond through the port’s lease revenues for the purchase of the building. Part of the appeal to investors of the separate non-profit agency partnered with a municipality is the power such a non-profit would have to raise money. The investment community would be attracted to a non-profit that had access to a public entity’s ability to issue bonds against things like, in the specific instance, lease revenues from the port.

Jerry Neuman, an attorney representing Legacy Partners, says the building – and its existing vacancies – represent an opportunity for the port and the city to create a revenue-generating entity for other projects elsewhere in the city.

“The thinking along the lines of government today is, ‘How do we do the most simple thing, no matter what it costs, the most simple thing that is explainable and not worry about where we get our money from in the future?’ The budget crisis has shown one thing – that that model doesn’t work,” Neuman says. “We have to start looking at different models.”

By partnering with an investment firm, the port could receive space for its 400-plus staff, eliminating the need to purchase or lease new quarters. That would free up funds that could be used for the construction of a new building for the port’s administrative staff. Moving the staff into One World Trade Center would also help the downtown business environment by moving 400 paid employees into the area.

Ultimately, such a private-public partnership has much broader implications. What such arrangements promise is a greater ability of public entities to raise money through assisting in investments in fee-creating infrastructure, Flaks says.

“There are hundreds of billions of dollars of private investment capital available both domestically (e.g., pension funds, commercial banks) and abroad (e.g., sovereign wealth funds) that we can attract to help solve our critical infrastructure deficit and move critical infrastructure projects forward more quickly to ensure that the state remains globally competitive,” Flaks says. In the last half-decade, state officials have created a framework for the creation of such private-public partnerships. The Infrastructure Financing Act expanded the number and scope of projects open to private investment without replacing public works infrastructure programs, Flaks says.

Few municipalities have pursued such partnerships to date. But with the demise of redevelopment, and the need to “back-fill” the missing revenue streams, cities and other governmental agencies are taking another look at P3s.

“I’m very, very intrigued by the proposal,” says 2nd District Councilwoman Suja Lowenthal, whose district includes much of the downtown region. “I don’t make it a secret that I’m actively seeking areas and ways that we can replenish the funds that were generated by the redevelopment agency. Such a P3 could make Long Beach a model for the state. It needs to be looked at very closely. They’re not ground-breaking, in terms of the actual instrument, but we would be leading the state in actually doing it.”

Lowenthal says successful P3 arrangements exist around the globe, but – perhaps because of the comfort level with the familiar redevelopment process – few California cities have created such entities.

That may be about to change, Lowenthal says. Redevelopment, in any form similar to its previous incarnation, is not coming back any time soon, and cities have to adapt to this new economic landscape, she says.

“The old way of doing things has been taken away from us. We have to look at things that in the past we haven’t needed to. Looking at things we’re not comfortable with is an imperative. We can’t do it the way we used to do it,” she says.

“There’s nothing new-agey about [the P3 arrangement]. But because it hasn’t been taken advantage of in our state, there aren’t many examples to look at. You have to look outside of our state, outside of our nation, to see illustrations of where it works. There’s no reason that California can’t follow the global lead,” she concludes.