United States General Accounting Office

GAO Glossary

April 1999 Public-PrivatePartnerships

Terms Related toBuilding and FacilityPartnerships

GAO/GGD-99-71

In recent years, governments at all levels have struggled tolimit costs without reducing services. At the federal level,various initiatives have been aimed at rethinking the role ofthe government in managing its buildings and properties,initiatives that in many cases mirror efforts at the state andlocal level as well as efforts in other countries. To meet thesefiscal demands, federal agencies are increasingly interested inmanaging buildings in a more business-like manner, includingexploring the formation of partnerships between the federalgovernment and the private sector.

These partnership initiatives have engendered the use of awide variety of terms, many of which overlap but may havesubtly different meanings. This glossary is intended tofacilitate a better understanding of public-private partnershiprelated terms as they are used in the federal and privatesectors. This document was prepared at the request ofRepresentative Steve Horn, Chairman, Subcommittee onGovernment Management, Information and Technology, HouseCommittee on Government Reform, and Representative BobFranks, Chairman, Subcommittee on Economic Development,Public Buildings, Hazardous Materials and PipelineTransportation, House Committee on Transportation andInfrastructure.

Our objective was to describe the most commonly used terms,practices, and techniques currently employed by thegovernment and private sector asset management community.The private-sector party can be involved in a variety of ways,from designing the public-purpose facility to undertaking itsfinancing, construction, operation, maintenance, management,and/or ownership.

As we developed this glossary, we relied primarily on sixglossaries already in print, as well as on other informationpublished by experts and practitioners. We identifiedcommon terms in the glossaries and in the literature, and wedeveloped working definitions from these sources reflecting

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current federal usage. The six glossaries are (1)Environmental Finance Program: A Guidebook of FinancialTools, Environmental Protection Agency, 1997; (2) ThePrivatization Primer, National Council for Public-PrivatePartnerships, 1996; (3) Dictionary of Business Terms, SecondEdition, Barons Educational Series, Inc., 1994; (4) Glossary:Terms Related to Privatization Activities and Processes (GAO/GGD-97-121, July 1997); (5) A Glossary of Terms Used in theFederal Budget Process, Exposure Draft (GAO/AFMD-2.1.1,Jan. 1993); and (6) Glossary of Real Estate Terms, FederalNational Mortgage Association, 1997. In addition, weconsulted the following sources: The Language of Real EstateAppraisal, Dearborn Financial Publishing, Inc., 1991; and theOffice of Management and Budget’s (OMB) Circular A-11. Thisglossary is an expanded version of a glossary originallypublished in our report entitled Public-Private Partnerships:Key Elements of Federal Building and Facility Partnerships(GAO/GGD-99-23, Feb. 3, 1999). Asset management expertsfrom the following companies also reviewed this glossary andprovided important input: (1) the law firm of Shaw, Pittman,Potts, & Trowbridge, (2) LaSalle Partners, Inc.; (3) Bostonia,Inc; and (4) Signet Partners, Inc.

Don Bumgardner and Alan Belkin were major contributors tothis glossary. Please contact me on (202) 512-8676 if there areany questions.

J. Christopher MihmAssociate Director, Federal Management and Workforce Issues

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Glossary

Types ofPublic-PrivatePartnerships

Build-Own-Operate (BOO)

Under a BOO transaction, thecontractor constructs and operates afacility without transferring ownershipto the public sector. Legal title to thefacility remains in the private sector,and there is no obligation for the publicsector to purchase the facility or taketitle. A BOO transaction may qualify fortax-exempt status as a service contractif all Internal Revenue Coderequirements are satisfied.

Build/Operate/Transfer (BOT) orBuild/Transfer/Operate (BTO)

Under the BOT option, the privatepartner builds a facility to thespecifications agreed to by the publicagency, operates the facility for aspecified time period under a contractor franchise agreement with theagency, and then transfers the facilityto the agency at the end of thespecified period of time. In most cases,the private partner will also providesome, or all, of the financing for thefacility, so the length of the contract orfranchise must be sufficient to enablethe private partner to realize areasonable return on its investmentthrough user charges.

At the end of the franchise period, thepublic partner can assume operatingresponsibility for the facility, contractthe operations to the original franchiseholder, or award a new contract or

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franchise to a new private partner. TheBTO model is similar to the BOT modelexcept that the transfer to the publicowner takes place at the time thatconstruction is completed, rather thanat the end of the franchise period.

Buy-Build Operate(BBO)

A BBO transaction is a form of assetsale that includes a rehabilitation orexpansion of an existing facility. Thegovernment sells the asset to theprivate sector entity, which then makesthe improvements necessary to operatethe facility in a profitable manner.

Contract Services

Operations andMaintenance

A public partner (federal, state, or localgovernment agency or authority)contracts with a private partner toprovide and/or maintain a specificservice. Under the private operationand maintenance option, the publicpartner retains ownership and overallmanagement of the public facility orsystem.

Operations,Maintenance, andManagement

A public partner (federal, state, or localgovernment agency or authority)contracts with a private partner tooperate, maintain, and manage afacility or system providing a service.Under this contract option, the publicpartner retains ownership of the publicfacility or system, but the private partymay invest its own capital in the facilityor system. Any private investment iscarefully calculated in relation to itscontributions to operational

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efficiencies and savings over the termof the contract. Generally, the longerthe contract term, the greater theopportunity for increased privateinvestment because there is more timeavailable in which to recoup anyinvestment and earn a reasonablereturn. Many local governments usethis contractual partnership to providewastewater treatment services.

Design-Build-Operate (DBO)

In a DBO project, a single contract isawarded for the design, construction,and operation of a capitalimprovement. Title to the facilityremains with the public sector unlessthe project is adesign/build/operate/transfer ordesign/build/own/operate project. TheDBO method of contracting is contraryto the separated and sequentialapproach ordinarily used in the UnitedStates by both the public and privatesectors. This method involves onecontract for design with an architect orengineer, followed by a differentcontract with a builder for projectconstruction, followed by the owner’staking over the project and operating it.

A simple design-build approach createsa single point of responsibility fordesign and construction and can speedproject completion by facilitating theoverlap of the design and constructionphases of the project. On a publicproject, the operations phase isnormally handled by the public sectoror awarded to the private sector undera separate operations and maintenance

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agreement. Combining all three phasesinto a DBO approach maintains thecontinuity of private sectorinvolvement and can facilitateprivate-sector financing of publicprojects supported by user feesgenerated during the operations phase.

DeveloperFinancing

Under developer financing, the privateparty (usually a real estate developer)finances the construction or expansionof a public facility in exchange for theright to build residential housing,commercial stores, and/or industrialfacilities at the site. The privatedeveloper contributes capital and mayoperate the facility under the oversightof the government. The developer gainsthe right to use the facility and mayreceive future income from user fees.

While developers may in rare casesbuild a facility, more typically they arecharged a fee or required to purchasecapacity in an existing facility. Thispayment is used to expand or upgradethe facility. Developer financingarrangements are often called capacitycredits, impact fees, or exactions.Developer financing may be voluntaryor involuntary depending on thespecific local circumstances.

Enhanced UseLeasing (EUL)

An EUL is an asset managementprogram in the Department of VeteransAffairs (VA) that can include a varietyof different leasing arrangements (e.g.,lease/develop/operate,build/develop/operate). EULs enable

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the VA to long-term lease VA-controlledproperty to the private sector or otherpublic entities for non-VA uses inreturn for receiving fair consideration(monetary or in-kind) that enhancesVA’s mission or programs. (See 38U.S.C. § 8161, et seq.)

Lease/Develop/Operate (LDO) orBuild/Develop/Operate (BDO)

Under these partnership arrangements,the private party leases or buys anexisting facility from a public agency;invests its own capital to renovate,modernize, and/or expand the facility;and then operates it under a contractwith the public agency. A number ofdifferent types of municipal transitfacilities have been leased anddeveloped under LDO and BDOarrangements.

Lease/Purchase A lease/purchase is aninstallment-purchase contract. Underthis model, the private sector financesand builds a new facility, which it thenleases to a public agency. The publicagency makes scheduled leasepayments to the private party. Thepublic agency accrues equity in thefacility with each payment. At the endof the lease term, the public agencyowns the facility or purchases it at thecost of any remaining unpaid balancein the lease.

Under this arrangement, the facilitymay be operated by either the publicagency or the private developer duringthe term of the lease. Lease/purchasearrangements have been used by the

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General Services Administration forbuilding federal office buildings and bya number of states to build prisons andother correctional facilities.

Sale/Leaseback A sale/leaseback is a financialarrangement in which the owner of afacility sells it to another entity, andsubsequently leases it back from thenew owner. Both public and privateentities may enter into sale/leasebackarrangements for a variety of reasons.An innovative application of thesale/leaseback technique is the sale ofa public facility to a public or privateholding company for the purposes oflimiting governmental liability undercertain statutes. Under thisarrangement, the government that soldthe facility leases it back and continuesto operate it.

Tax-Exempt Lease Under a tax-exempt lease arrangement,a public partner finances capital assetsor facilities by borrowing funds from aprivate investor or financial institution.The private partner generally acquirestitle to the asset, but then transfers it tothe public partner either at thebeginning or end of the lease term. Theportion of the lease payment used topay interest on the capital investmentis tax exempt under state and federallaws. Tax-exempt leases have beenused to finance a wide variety ofcapital assets, ranging from computersto telecommunication systems andmunicipal vehicle fleets.

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Turnkey Under a turnkey arrangement, a publicagency contracts with a privateinvestor/vendor to design and build acomplete facility in accordance withspecified performance standards andcriteria agreed to between the agencyand the vendor. The private developercommits to build the facility for a fixedprice and absorbs the construction riskof meeting that price commitment.Generally, in a turnkey transaction, theprivate partners use fast-trackconstruction techniques (such asdesign-build) and are not bound bytraditional public sector procurementregulations. This combination oftenenables the private partner to completethe facility in significantly less time andfor less cost than could beaccomplished under traditionalconstruction techniques.

In a turnkey transaction, financing andownership of the facility can rest witheither the public or private partner. Forexample, the public agency mightprovide the financing, with theattendant costs and risks. Alternatively,the private party might provide thefinancing capital, generally in exchangefor a long-term contract to operate thefacility.

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Other TermsRelated toPublic-PrivatePartnerships

Air Rights Air rights provide the right to use,control, or occupy the space above adesignated property. Air rights canoften be leased, sold, or donated toanother party.

Anchor Tenant An anchor tenant is the major tenantthat attracts or generates traffic withina commercial operation. Anchortenants are strategically placed tomaximize business for all tenants. Thetype of anchor tenant depends on thetype of commercial activity.

Asset Sale An asset sale is the transfer ofownership of government assets to theprivate sector. Usually legislation or anExecutive Order defines the transferprice distribution and recoupmentpriorities. In general, the governmenthas no role in the financial support,management, or oversight of the assetafter it is sold. However, if the asset issold to a company in an industry withmonopolistic characteristics, thegovernment may regulate certainaspects of the business, such as utilityrates.

Capital Lease A capital lease is a lease that must bereflected on a company’s balance sheet

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as an asset and corresponding liability.Generally, this applies to leases wherethe lessee acquires essentially all of theeconomic benefits and risks of theleased property. (Contrast withOperating Lease.)

Cash Flow Cash flow is cash receipts minus cashdisbursements from a given operationor asset for a given period. A cash flowstatement shows all sources and usesof cash reflected in the balance sheetcash account from one period to thenext.

ConcessionBenefits

Concession benefits are rights toreceive revenues or other benefits for afixed period of time. (Also seefranchising.)

CooperativeAgreements

A cooperative agreement as set forth in31 USC 6305 is the legal instrument anexecutive agency uses to reflect arelationship between the U.S.government and a state, a localgovernment, or other recipient when(1) the principal purpose of therelationship is to transfer a thing ofvalue to the state, local government, orother recipient to carry out a publicpurpose of support or stimulationauthorized by U.S. law, and(2) substantial involvement is expectedbetween the executive agency and thestate, local government, or otherrecipient in carrying out the activitycontemplated in the agreement.

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Equity Equity is the difference between fairmarket value of the property and theamount still owed on its mortgage.

Fee Simple A fee simple is an absolute andunqualified estate providing the ownerwith all incidence of ownership,including the unconditional power ofdisposition.

Franchising Under the franchising of externalservices, the government grants aconcession or privilege to aprivate-sector entity to conductbusiness in a particular market orgeographical area—for example,operating concession stands, hotels,and other services provided in certainnational parks. The government mayregulate the service level or price, butusers of the service pay the providerdirectly.

Ground Lease A ground lease is a lease for the useand occupancy of land only, usually fora long period of time. It is also called aland lease.

Lease A lease is a written agreement betweenthe property owner and a tenant thatstipulates the conditions under whichthe tenant may possess the real estatefor a specified period of time andamount of rent.

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Leasehold Estate A leasehold estate is an estate in realproperty held by a lessee/tenant undera lease.

Leveraged Leasing In leveraged leasing arrangements, theowner of a capital facility obtains thetax benefits of ownership of an assetby arranging debt financing and leasingthe facility to a party who pays rentfrom revenues generated by thefacility.

Operating Lease An operating lease is a type of lease,normally involving equipment, wherebythe contract is written for considerablyless than the life of the equipment andthe lessor handles all maintenance andservicing. Also called service leases,operating leases are the opposite ofcapital leases, whereby the lesseeacquires essentially all the economicbenefits and risks of ownership.

Partnership A partnership is a legal relationshipexisting between two entitiescontractually associated as jointprincipals in a business.

Public-PrivatePartnership

Under a public-private partnership,sometimes referred to as apublic-private venture, a contractualarrangement is formed between public-and private-sector partners. Thesearrangements typically involve agovernment agency contracting with aprivate partner to renovate, construct,operate, maintain, and/or manage a

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facility or system, in whole or in part,that provides a public service.

Under these arrangements, the agencymay retain ownership of the publicfacility or system, but the private partygenerally invests its own capital todesign and develop the properties.Typically, each partner shares inincome resulting from the partnership.Such a venture, although a contractualarrangement, differs from typicalservice contracting in that theprivate-sector partner usually makes asubstantial cash, at-risk, equityinvestment in the project, and thepublic sector gains access to newrevenue or service delivery capacitywithout having to pay theprivate-sector partner.

Public PurposeDebt

Public purpose debt is debt used tofinance a project intended to be ofvalue to the general public. Such debtcan include ordinary governmentsecurities, such as general obligationbonds or revenue bonds, as well asqualified private activity bonds.

Request forProposals (RFP)

An RFP is an announcement, often by agovernment agency, of a willingness toconsider proposals for theperformance of a specified project orprogram component. A request forproposals is often issued whenproposals for a specific researchproject are being sought.

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Request forQualifications(RFQ)

An RFQ is a procurement tool routinelyused by state and local governmentsand the private sector to selectpartners in major systems acquisitions,mainly those involving real estatedevelopment transactions. Thisapproach differs from the traditionalrequest for proposals approach in thatit places greater emphasis on the actualqualifications of the potentialcontractor—his or her trackrecord—rather than how well thepotential contractor responds todetailed project specifications andrequirements.

Revenue Bonds Revenue bonds are bonds (instrumentsof indebtedness) issued by the publicsector to finance a facility orequipment purchase, which, unlikegeneral obligation bonds, are notbacked by the full faith and credit ofthe government. Instead, theirrevenues are generated from thefacility or equipment that they finance.Because they are state or localgovernment bonds, their interestearnings are tax exempt under theInternal Revenue Code.

Revolving Funds Revolving funds are accountsauthorized to be credited withcollections that are earmarked tofinance a continuing cycle ofbusiness-type operations without fiscalyear limitation. For intragovernmentalrevolving funds, collections primarilycome from other government agenciesand accounts. A revolving fund can be

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used to finance an initialrevenue-producing infrastructureproject, and as revenues are generatedby the completed facility and returnedto replenish the fund, they can be usedto finance subsequent rounds ofproject development.

Revolving funds can help agenciesaccumulate the resources needed tomake capital acquisitions over time,but should only be established whenagencies have a record of soundfinancial management and when fundpurchases are small and routineenough to warrant reduced scrutiny byCongress and OMB.

Risk Unbundling Risk unbundling is a means offacilitating the development ofpublic-private partnerships for thedevelopment of capital improvementprojects. It calls for the segregation ofprivate and public risks, with theprivate sector preferring to assumethose risks that are of a commercialnature and can be appraised andcontrolled, leaving the residual risks togovernmental entities.

Sublease A sublease is an arrangement wherebya lessee leases the property to adifferent end user while the lessormaintains ownership. Under such anagreement, the lessee retains all of itsobligations under the lease.

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ORDERING INFORMATION

Copies of this glossary can be orderedby mail from the:

U.S. General Accounting OfficeP.O. Box 37050Washington, D.C. 20013

or by visiting:

Room 1100700 4th St., N.W. (corner of 4th and GSts., N.W.)U.S. General Accounting OfficeWashington, D.C.

Orders may also be placed by calling(202) 512-6000 or by fax using number(202) 512-6061, or TDD (202) 512-2537.On the Internet, visit GAO’s World WideWeb Page at: http://www.gao.gov toaccess this glossary.

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