Public-Private Partnerships: Terms Related to Building and Facility Partnerships

Published by the Government Accountability Office on 1999-04-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Glossary

April 1999

                Terms Related to
                Building and Facility

Public-Private Partnerships

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

These partnership initiatives have engendered the use of a
wide variety of terms, many of which overlap but may have
subtly different meanings. This glossary is intended to
facilitate a better understanding of public-private partnership
related terms as they are used in the federal and private
sectors. This document was prepared at the request of
Representative Steve Horn, Chairman, Subcommittee on
Government Management, Information and Technology, House
Committee on Government Reform, and Representative Bob
Franks, Chairman, Subcommittee on Economic Development,
Public Buildings, Hazardous Materials and Pipeline
Transportation, House Committee on Transportation and

Our objective was to describe the most commonly used terms,
practices, and techniques currently employed by the
government 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 its
financing, construction, operation, maintenance, management,
and/or ownership.

As we developed this glossary, we relied primarily on six
glossaries already in print, as well as on other information
published by experts and practitioners. We identified
common terms in the glossaries and in the literature, and we
developed working definitions from these sources reflecting

                        Page 1                       GAO/GGD-99-71
                    Public-Private Partnerships

current federal usage. The six glossaries are (1)
Environmental Finance Program: A Guidebook of Financial
Tools, Environmental Protection Agency, 1997; (2) The
Privatization Primer, National Council for Public-Private
Partnerships, 1996; (3) Dictionary of Business Terms, Second
Edition, 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 the
Federal Budget Process, Exposure Draft (GAO/AFMD-2.1.1,
Jan. 1993); and (6) Glossary of Real Estate Terms, Federal
National Mortgage Association, 1997. In addition, we
consulted the following sources: The Language of Real Estate
Appraisal, Dearborn Financial Publishing, Inc., 1991; and the
Office of Management and Budget’s (OMB) Circular A-11. This
glossary is an expanded version of a glossary originally
published in our report entitled Public-Private Partnerships:
Key Elements of Federal Building and Facility Partnerships
(GAO/GGD-99-23, Feb. 3, 1999). Asset management experts
from the following companies also reviewed this glossary and
provided 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 to
this glossary. Please contact me on (202) 512-8676 if there are
any questions.

J. Christopher Mihm
Associate Director, Federal Management
  and Workforce Issues

                    Page 2                         GAO/GGD-99-71

Types of

Build-Own-          Under a BOO transaction, the
Operate (BOO)       contractor constructs and operates a
                    facility without transferring ownership
                    to the public sector. Legal title to the
                    facility remains in the private sector,
                    and there is no obligation for the public
                    sector to purchase the facility or take
                    title. A BOO transaction may qualify for
                    tax-exempt status as a service contract
                    if all Internal Revenue Code
                    requirements are satisfied.

Build/Operate/      Under the BOT option, the private
Transfer (BOT) or   partner builds a facility to the
Build/Transfer/     specifications agreed to by the public
Operate (BTO)       agency, operates the facility for a
                    specified time period under a contract
                    or franchise agreement with the
                    agency, and then transfers the facility
                    to the agency at the end of the
                    specified period of time. In most cases,
                    the private partner will also provide
                    some, or all, of the financing for the
                    facility, so the length of the contract or
                    franchise must be sufficient to enable
                    the private partner to realize a
                    reasonable return on its investment
                    through user charges.

                    At the end of the franchise period, the
                    public partner can assume operating
                    responsibility for the facility, contract
                    the operations to the original franchise
                    holder, or award a new contract or

                    Page 3                        GAO/GGD-99-71

                    franchise to a new private partner. The
                    BTO model is similar to the BOT model
                    except that the transfer to the public
                    owner takes place at the time that
                    construction is completed, rather than
                    at the end of the franchise period.

Buy-Build Operate   A BBO transaction is a form of asset
(BBO)               sale that includes a rehabilitation or
                    expansion of an existing facility. The
                    government sells the asset to the
                    private sector entity, which then makes
                    the improvements necessary to operate
                    the facility in a profitable manner.

Contract Services

Operations and      A public partner (federal, state, or local
Maintenance         government agency or authority)
                    contracts with a private partner to
                    provide and/or maintain a specific
                    service. Under the private operation
                    and maintenance option, the public
                    partner retains ownership and overall
                    management of the public facility or

Operations,         A public partner (federal, state, or local
Maintenance, and    government agency or authority)
Management          contracts with a private partner to
                    operate, maintain, and manage a
                    facility or system providing a service.
                    Under this contract option, the public
                    partner retains ownership of the public
                    facility or system, but the private party
                    may invest its own capital in the facility
                    or system. Any private investment is
                    carefully calculated in relation to its
                    contributions to operational

                    Page 4                       GAO/GGD-99-71

                efficiencies and savings over the term
                of the contract. Generally, the longer
                the contract term, the greater the
                opportunity for increased private
                investment because there is more time
                available in which to recoup any
                investment and earn a reasonable
                return. Many local governments use
                this contractual partnership to provide
                wastewater treatment services.

Design-Build-   In a DBO project, a single contract is
Operate (DBO)   awarded for the design, construction,
                and operation of a capital
                improvement. Title to the facility
                remains with the public sector unless
                the project is a
                design/build/operate/transfer or
                design/build/own/operate project. The
                DBO method of contracting is contrary
                to the separated and sequential
                approach ordinarily used in the United
                States by both the public and private
                sectors. This method involves one
                contract for design with an architect or
                engineer, followed by a different
                contract with a builder for project
                construction, followed by the owner’s
                taking over the project and operating it.

                A simple design-build approach creates
                a single point of responsibility for
                design and construction and can speed
                project completion by facilitating the
                overlap of the design and construction
                phases of the project. On a public
                project, the operations phase is
                normally handled by the public sector
                or awarded to the private sector under
                a separate operations and maintenance

                Page 5                      GAO/GGD-99-71

                agreement. Combining all three phases
                into a DBO approach maintains the
                continuity of private sector
                involvement and can facilitate
                private-sector financing of public
                projects supported by user fees
                generated during the operations phase.

Developer       Under developer financing, the private
Financing       party (usually a real estate developer)
                finances the construction or expansion
                of a public facility in exchange for the
                right to build residential housing,
                commercial stores, and/or industrial
                facilities at the site. The private
                developer contributes capital and may
                operate the facility under the oversight
                of the government. The developer gains
                the right to use the facility and may
                receive future income from user fees.

                While developers may in rare cases
                build a facility, more typically they are
                charged a fee or required to purchase
                capacity in an existing facility. This
                payment is used to expand or upgrade
                the facility. Developer financing
                arrangements are often called capacity
                credits, impact fees, or exactions.
                Developer financing may be voluntary
                or involuntary depending on the
                specific local circumstances.

Enhanced Use    An EUL is an asset management
Leasing (EUL)   program in the Department of Veterans
                Affairs (VA) that can include a variety
                of different leasing arrangements (e.g.,
                build/develop/operate). EULs enable

                Page 6                       GAO/GGD-99-71

                   the VA to long-term lease VA-controlled
                   property to the private sector or other
                   public entities for non-VA uses in
                   return for receiving fair consideration
                   (monetary or in-kind) that enhances
                   VA’s mission or programs. (See 38
                   U.S.C. § 8161, et seq.)

Lease/Develop/     Under these partnership arrangements,
Operate (LDO) or   the private party leases or buys an
Build/Develop/     existing facility from a public agency;
Operate (BDO)      invests its own capital to renovate,
                   modernize, and/or expand the facility;
                   and then operates it under a contract
                   with the public agency. A number of
                   different types of municipal transit
                   facilities have been leased and
                   developed under LDO and BDO

Lease/Purchase     A lease/purchase is an
                   installment-purchase contract. Under
                   this model, the private sector finances
                   and builds a new facility, which it then
                   leases to a public agency. The public
                   agency makes scheduled lease
                   payments to the private party. The
                   public agency accrues equity in the
                   facility with each payment. At the end
                   of the lease term, the public agency
                   owns the facility or purchases it at the
                   cost of any remaining unpaid balance
                   in the lease.

                   Under this arrangement, the facility
                   may be operated by either the public
                   agency or the private developer during
                   the term of the lease. Lease/purchase
                   arrangements have been used by the

                   Page 7                      GAO/GGD-99-71

                   General Services Administration for
                   building federal office buildings and by
                   a number of states to build prisons and
                   other correctional facilities.

Sale/Leaseback     A sale/leaseback is a financial
                   arrangement in which the owner of a
                   facility sells it to another entity, and
                   subsequently leases it back from the
                   new owner. Both public and private
                   entities may enter into sale/leaseback
                   arrangements for a variety of reasons.
                   An innovative application of the
                   sale/leaseback technique is the sale of
                   a public facility to a public or private
                   holding company for the purposes of
                   limiting governmental liability under
                   certain statutes. Under this
                   arrangement, the government that sold
                   the facility leases it back and continues
                   to operate it.

Tax-Exempt Lease   Under a tax-exempt lease arrangement,
                   a public partner finances capital assets
                   or facilities by borrowing funds from a
                   private investor or financial institution.
                   The private partner generally acquires
                   title to the asset, but then transfers it to
                   the public partner either at the
                   beginning or end of the lease term. The
                   portion of the lease payment used to
                   pay interest on the capital investment
                   is tax exempt under state and federal
                   laws. Tax-exempt leases have been
                   used to finance a wide variety of
                   capital assets, ranging from computers
                   to telecommunication systems and
                   municipal vehicle fleets.

                   Page 8                         GAO/GGD-99-71

Turnkey   Under a turnkey arrangement, a public
          agency contracts with a private
          investor/vendor to design and build a
          complete facility in accordance with
          specified performance standards and
          criteria agreed to between the agency
          and the vendor. The private developer
          commits to build the facility for a fixed
          price and absorbs the construction risk
          of meeting that price commitment.
          Generally, in a turnkey transaction, the
          private partners use fast-track
          construction techniques (such as
          design-build) and are not bound by
          traditional public sector procurement
          regulations. This combination often
          enables the private partner to complete
          the facility in significantly less time and
          for less cost than could be
          accomplished under traditional
          construction techniques.

          In a turnkey transaction, financing and
          ownership of the facility can rest with
          either the public or private partner. For
          example, the public agency might
          provide the financing, with the
          attendant costs and risks. Alternatively,
          the private party might provide the
          financing capital, generally in exchange
          for a long-term contract to operate the

          Page 9                        GAO/GGD-99-71

Other Terms
Related to

Air Rights       Air rights provide the right to use,
                 control, or occupy the space above a
                 designated property. Air rights can
                 often be leased, sold, or donated to
                 another party.

Anchor Tenant    An anchor tenant is the major tenant
                 that attracts or generates traffic within
                 a commercial operation. Anchor
                 tenants are strategically placed to
                 maximize business for all tenants. The
                 type of anchor tenant depends on the
                 type of commercial activity.

Asset Sale       An asset sale is the transfer of
                 ownership of government assets to the
                 private sector. Usually legislation or an
                 Executive Order defines the transfer
                 price distribution and recoupment
                 priorities. In general, the government
                 has no role in the financial support,
                 management, or oversight of the asset
                 after it is sold. However, if the asset is
                 sold to a company in an industry with
                 monopolistic characteristics, the
                 government may regulate certain
                 aspects of the business, such as utility

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

                 Page 10                       GAO/GGD-99-71

              as an asset and corresponding liability.
              Generally, this applies to leases where
              the lessee acquires essentially all of the
              economic benefits and risks of the
              leased property. (Contrast with
              Operating Lease.)

Cash Flow     Cash flow is cash receipts minus cash
              disbursements from a given operation
              or asset for a given period. A cash flow
              statement shows all sources and uses
              of cash reflected in the balance sheet
              cash account from one period to the

Concession    Concession benefits are rights to
Benefits      receive revenues or other benefits for a
              fixed period of time. (Also see

Cooperative   A cooperative agreement as set forth in
Agreements    31 USC 6305 is the legal instrument an
              executive agency uses to reflect a
              relationship between the U.S.
              government and a state, a local
              government, or other recipient when
              (1) the principal purpose of the
              relationship is to transfer a thing of
              value to the state, local government, or
              other recipient to carry out a public
              purpose of support or stimulation
              authorized by U.S. law, and
              (2) substantial involvement is expected
              between the executive agency and the
              state, local government, or other
              recipient in carrying out the activity
              contemplated in the agreement.

              Page 11                      GAO/GGD-99-71

Equity         Equity is the difference between fair
               market value of the property and the
               amount still owed on its mortgage.

Fee Simple     A fee simple is an absolute and
               unqualified estate providing the owner
               with all incidence of ownership,
               including the unconditional power of

Franchising    Under the franchising of external
               services, the government grants a
               concession or privilege to a
               private-sector entity to conduct
               business in a particular market or
               geographical area—for example,
               operating concession stands, hotels,
               and other services provided in certain
               national parks. The government may
               regulate the service level or price, but
               users of the service pay the provider

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

Lease          A lease is a written agreement between
               the property owner and a tenant that
               stipulates the conditions under which
               the tenant may possess the real estate
               for a specified period of time and
               amount of rent.

               Page 12                      GAO/GGD-99-71

Leasehold Estate    A leasehold estate is an estate in real
                    property held by a lessee/tenant under
                    a lease.

Leveraged Leasing   In leveraged leasing arrangements, the
                    owner of a capital facility obtains the
                    tax benefits of ownership of an asset
                    by arranging debt financing and leasing
                    the facility to a party who pays rent
                    from revenues generated by the

Operating Lease     An operating lease is a type of lease,
                    normally involving equipment, whereby
                    the contract is written for considerably
                    less than the life of the equipment and
                    the lessor handles all maintenance and
                    servicing. Also called service leases,
                    operating leases are the opposite of
                    capital leases, whereby the lessee
                    acquires essentially all the economic
                    benefits and risks of ownership.

Partnership         A partnership is a legal relationship
                    existing between two entities
                    contractually associated as joint
                    principals in a business.

Public-Private      Under a public-private partnership,
Partnership         sometimes referred to as a
                    public-private venture, a contractual
                    arrangement is formed between public-
                    and private-sector partners. These
                    arrangements typically involve a
                    government agency contracting with a
                    private partner to renovate, construct,
                    operate, maintain, and/or manage a

                    Page 13                      GAO/GGD-99-71

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

                  Under these arrangements, the agency
                  may retain ownership of the public
                  facility or system, but the private party
                  generally invests its own capital to
                  design and develop the properties.
                  Typically, each partner shares in
                  income resulting from the partnership.
                  Such a venture, although a contractual
                  arrangement, differs from typical
                  service contracting in that the
                  private-sector partner usually makes a
                  substantial cash, at-risk, equity
                  investment in the project, and the
                  public sector gains access to new
                  revenue or service delivery capacity
                  without having to pay the
                  private-sector partner.

Public Purpose    Public purpose debt is debt used to
Debt              finance a project intended to be of
                  value to the general public. Such debt
                  can include ordinary government
                  securities, such as general obligation
                  bonds or revenue bonds, as well as
                  qualified private activity bonds.

Request for       An RFP is an announcement, often by a
Proposals (RFP)   government agency, of a willingness to
                  consider proposals for the
                  performance of a specified project or
                  program component. A request for
                  proposals is often issued when
                  proposals for a specific research
                  project are being sought.

                  Page 14                      GAO/GGD-99-71

Request for       An RFQ is a procurement tool routinely
Qualifications    used by state and local governments
(RFQ)             and the private sector to select
                  partners in major systems acquisitions,
                  mainly those involving real estate
                  development transactions. This
                  approach differs from the traditional
                  request for proposals approach in that
                  it places greater emphasis on the actual
                  qualifications of the potential
                  contractor—his or her track
                  record—rather than how well the
                  potential contractor responds to
                  detailed project specifications and

Revenue Bonds     Revenue bonds are bonds (instruments
                  of indebtedness) issued by the public
                  sector to finance a facility or
                  equipment purchase, which, unlike
                  general obligation bonds, are not
                  backed by the full faith and credit of
                  the government. Instead, their
                  revenues are generated from the
                  facility or equipment that they finance.
                  Because they are state or local
                  government bonds, their interest
                  earnings are tax exempt under the
                  Internal Revenue Code.

Revolving Funds   Revolving funds are accounts
                  authorized to be credited with
                  collections that are earmarked to
                  finance a continuing cycle of
                  business-type operations without fiscal
                  year limitation. For intragovernmental
                  revolving funds, collections primarily
                  come from other government agencies
                  and accounts. A revolving fund can be

                  Page 15                     GAO/GGD-99-71

                  used to finance an initial
                  revenue-producing infrastructure
                  project, and as revenues are generated
                  by the completed facility and returned
                  to replenish the fund, they can be used
                  to finance subsequent rounds of
                  project development.

                  Revolving funds can help agencies
                  accumulate the resources needed to
                  make capital acquisitions over time,
                  but should only be established when
                  agencies have a record of sound
                  financial management and when fund
                  purchases are small and routine
                  enough to warrant reduced scrutiny by
                  Congress and OMB.

Risk Unbundling   Risk unbundling is a means of
                  facilitating the development of
                  public-private partnerships for the
                  development of capital improvement
                  projects. It calls for the segregation of
                  private and public risks, with the
                  private sector preferring to assume
                  those risks that are of a commercial
                  nature and can be appraised and
                  controlled, leaving the residual risks to
                  governmental entities.

Sublease          A sublease is an arrangement whereby
                  a lessee leases the property to a
                  different end user while the lessor
                  maintains ownership. Under such an
                  agreement, the lessee retains all of its
                  obligations under the lease.

                  Page 16                      GAO/GGD-99-71

           Copies of this glossary can be ordered
           by mail from the:

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

           or by visiting:

           Room 1100
           700 4th St., N.W. (corner of 4th and G
           Sts., N.W.)
           U.S. General Accounting Office
           Washington, 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 Wide
           Web Page at: http://www.gao.gov to
           access this glossary.

(410434)   Page 17                     GAO/GGD-99-71