In 2014, NetGain clients trod the dangerous ground between the public and private sectors in ways that illustrate the problems with 3P’s. Like the example of Centennial College’s proposal for Guild Inn Park, these suffered from the misalignment of public and private sector cultures and demonstrated the need for a third party intervener.
One client was a relatively small arts organization with need of a large, technically demanding space. It sought secure, long-term occupancy in a publicly accessible location, at below market costs.
Although these sound like impossible prerequisites – a large, well-located, cheap, and technically adaptable building – the organization was attractive to developers because of its community following, friends in local government, and its appeal to young, prospective condo buyers. Consequently, the organization was kept busy entertaining proposals, analyzing options, and negotiating preliminary terms for five years.
Yet it had little to show for its efforts other than a refined sense of what it wanted and anxiety about its future. Its current location was scheduled for redevelopment and its stakeholders were becoming concerned.
When, by serendipity, a great opportunity came along, a combination of fatigue and caution caused the organization to approach it too passively. Time almost ran out. Fresh eyes were needed to isolate the critical terms of the deal, draft a clear MOU, and give both Board and staff the confidence to enter into lease negotiations.
Timing was critical. The private sector partner couldn’t wait for our nonprofit client to sort through its options, test government support, and unify behind a decision. Corporate cultures and stakeholder relationships made the developer and the arts organization approach the deal in very different ways. Despite best efforts on both sides, the opportunity might have been missed.
In another case, a new organization was formed to combine the resources and capabilities of smaller groups in related fields. However realization of its potential seemed to hinge on occupancy of a new facility, purpose-built to accommodate the separate and collective activities of its member groups. The facility was made available and affordable to them through a “section 37” deal, in which the City traded increased building height in return for space in the pedestal for groups like our client.
The intention, years earlier when the deal was struck, was to provide state of the art accommodations at below market rates. Similar deals had created space for day cares, community centres, and libraries, and this looked like a good way to ensure that arts organizations won’t be priced out of downtown real estate.
Although this was a three-way arrangement between the City, the developer, and the fledgling group, the newly formed non-profit soon realized that it was the junior partner. Implementation of the deal created demands for expert oversight and advocacy that exceeded its means. Project costs escalated, technical specifications were overlooked, construction schedules slipped, and relations between the non-profit group and the developer deteriorated.
As the deadline for occupancy neared, the project was in danger. The capital required of our client had roughly doubled over the life of the project, and it was impossible to raise the money in time. Failure of the project would oblige the City to convey the space to another non-profit organization, assuming it could find a tenant willing to pay for a space designed for a different tenant and purpose. If one couldn’t be found, the space could be reclaimed by the developer, who would have the option of filling it with a commercial tenant.
The optics of this would be grisly for all three parties. It would be costly to the credibility of the non-profit group, who had expended years of effort and public money on project development. City Council and the media could have a heyday debating the wisdom of the original deal and its prospect of salvage. Even the developer, who sought a reputation for supporting culture in the communities around its buildings, might suffer from sticking a Shoppers Drug Mart or a Pet Valu in the transparent pedestal of a high rise that was built and sold on the premise of its compatibility with community cultural desires.
Another example in the 2014 NetGain portfolio was a highly successful and respected music organization had been negotiating for space in the base of a building along the waterfront. It planned to build a new performance venue, among other things.
In our view, our client’s success was contingent on outcomes that seemed to defy market forces and government priorities. It relied on the all the stars aligning on both sides of the public/private sector divide, with too little flexibility for unforeseen circumstances. In a year of provincial and municipal elections, with a quiet campaign beginning for a federal election on the horizon, the probability of locking in support for this project, as conceived, was low.
The waterfront is unusually fraught in this regard, with three levels of government, an arm’s length planning agency (Waterfront Toronto), and unusual infrastructure challenges. Timing is critical to the developers who operate in this environment, each privately pursuing a strategy to deliver a finished building as surrounding services, amenities, and competitors come on stream. Our client’s risk of capital shortfalls and operating deficits were exacerbated by pressure to meet the developer’s deadlines for design, financing, and construction, in an area where the mucky, contaminated, landfill is full of surprises.
In this case, the overlay of public sector and private sector perspectives helped to see where, when, and how this non-profit minnow might swim safely alongside public and private sector whales and sharks. We were able to recommend a change in schedule, place, and partners that gave the client a chance of succeeding on its own terms. Without this multilayered perspective, combined with a deep knowledge of the performing arts facility market, this group might have risked too much on a scheme with little likelihood of success.
These three stories have one thing in common. When public and private sector partners succeed in creating opportunities for tiny non-profit organizations, there is risk of a gap forming between intention and outcome. Non-profit participation adds a dimension of difficulty to strenuous deals between the public and private sectors. As the smallest, and weakest party in a three-way relationship, they are the most vulnerable. Concern about this can be hard to express to government and business partners who believe they’ve underwritten the entire deal with their assets and money, and that the junior “partner” is already getting something for nothing.
Project development, on this scale, is an excessive and unnatural expectation of the non-profit cultural groups most in need of secure, affordable, long term space. Even if they’re given money to hire the necessary lawyers, architects, cost analysts, business planners, and fund raisers, they may not have the staff or board expertise to know when and how to deploy those experts to best effect.
Although they learn quickly, they start at an impossible disadvantage. My colleague, Genevieve Tran, likens it to fish climbing a tree. We’re asking the right thing of the wrong species, and there isn’t time for evolution to work its magic. In the meantime, they’ll need help so that these cross-sectoral initiatives won’t leave them high and dry.