LSU Charity Hospital leverages P3, revitalizes community

Situation

Among New Orleans’ low-income communities, Charity Hospital had been a beacon of hope and high-quality healthcare for nearly 70 years. After damage from Hurricane Katrina shuttered the historic Art Deco facility in 2005, it sat vacant for more than a decade—until a visionary public-private partnership (P3) entered the picture.

Since its construction in 1938, Charity Hospital New Orleans sparked the growth of a Medical District that became home to two medical schools, a nursing school, hospitals and specialty clinics. The hospital was transferred to the control of Louisiana State University (LSU)—and its medical school—in 1997. Following the devastation of Hurricane Katrina, LSU opted to replace the outdated and flood-damaged Charity Hospital with a new hospital campus elsewhere.

For more than a decade, the Charity Hospital building was mothballed as the State of Louisiana, LSU and community organizations explored possible uses for the site to benefit the neighborhood. In response, LSU’s Real Estate and Facilities Foundation (REFF) commissioned the Urban Land Institute to uncover a path forward.

ULI recommended that REFF create a P3 to redevelop Charity Hospital alongside a separate community-led economic revitalization effort. REFF moved forward with the goal of returning the Charity Hospital building to commerce and using it as a centerpiece for the rebirth of the Medical District.

Challenges of Partnership

Development objectives in hand, REFF turned to JLL to bring the vision to life. And that’s where the complex work began.

Balancing stakeholder interests. For starters, the project involved numerous stakeholders, including REFF and LSU leadership; the State of Louisiana’s Facility Planning and Control Office; the Greater New Orleans Foundation; Louisiana Dept. of Culture, Recreation and Tourism; the National Park Service; and the developer entity. Each stakeholder had unique concerns and, for the State of Louisiana, regulatory requirements.

Community interest was robust. JLL helped REFF hold public discussion sessions that attracted hundreds of residents and community activists focused on ensuring that the community would truly benefit.

Developer selection. JLL helped REFF solicit developers, redevelopment proposals and, ultimately, to select the winning private development team. Critical to the selection process was developer commitment to the big picture and willingness to leave the underlying land in the control of the State. REFF was able to secure a developer that could commit to a ground lease, redevelop the building in a timely and commercially viable fashion, and attract investors to help finance the redevelopment.

Once the developer was selected, REFF and JLL began the 18-month process of negotiating the P3 agreement. Fundamental to the challenge was balancing the interests of the State of Louisiana and community stakeholders with the financial feasibility requirements of the developer.

Building trust. Trust is essential in any P3, and especially in a large, complex project. From the developer’s perspective, one concern was that the State of Louisiana, in its role as building code and approval authority, would have the power to significantly delay the project or leverage its approval power to gain excessive last-minute concessions from the developer. REFF and state authorities, meanwhile, wanted to ensure that the project respected Charity Hospital’s historic legacy and would return value to taxpayers.

One solution was for LSU and REFF to collaborate closely with the State’ Facility Planning and Control Office to help prevent surprise or decisions or delays. Another was for the developer to retain a third-party code compliance review consultant to objectively validate that the plans conformed to state and city regulations. Use of a third-party reviewer meant state authorities could quickly review plans without having to perform its own code review.

In addition, the development team looked to REFF itself to facilitate approvals. Through their extensive statewide contacts, including with government leaders, REFF board members helped build critical buy-in for decisions.

Financing and insurance. Within the P3 structure, financing was extremely complex, requiring close communication and collaboration. Although the state would continue to own the land, the developer needed to secure financing for the redevelopment work. In addition to bank financing, the developer had attracted equity investors and wanted to pursue state and federal tax credits, including Opportunity Zone funds, to support the project. REFF became the master leaseholder of the property as the developer secured subtenants for its development plan, providing assurance to lenders that the State of Louisiana had a stake in the building itself.

Insurance added complexity, too. Specifically, in the event of a catastrophic event, which party in the P3 would receive insurance proceeds? How could the developer insure a property when it didn’t own the land? With the ever-present reminders of Hurricane Katrina’s catastrophic damage, the project’s equity investors needed assurance that the state would protect the investors’ interest.

Construction risk: Another major negotiation focus was establishing a deadline for substantial completion of the project. For example, the developer wanted to avoid major construction delays related to State approvals or actions, while the State wanted to ensure timely completion of the project. Ultimately, the agreement established a 36-month deadline for substantial completion with occupancy of 150,000 square feet of residential or commercial space. And, the agreement included provisions to address force majeure delays caused by hurricanes or other catastrophic events.

Resolution

Today, the Charity Hospital redevelopment team is well on its way to achieving the visionary goals of the P3 team. Combining office, residential and retail space, the property is poised to become an economic engine for the community.

Tulane University has become a major tenant, committing to significant office space and student housing. As an innovation hub, the property provides affordable collaborative space to spur entrepreneurial growth in tandem with the “Spirit of Charity” community initiative also underway.

Sonder, a short-term rental housing company, is leasing 150 residential units to house corporate and medical visitors. The residential component will also offer market-rate and affordable apartments for conventional leasing. Landscaped courtyards will offer outdoor seating for restaurants and entertainment, alongside other types of retailers.

After its 15 years of neglect, the Charity Hospital building is once again becoming a beacon of hope for area residents. Standing on the foundation of a thoughtfully structured P3 agreement, the reimagined Charity Hospital has retained its historic legacy while helping the surrounding neighborhood become a vibrant, job-creating, and inclusive innovation district.