What is a Cooperative Endeavor Agreement?
A Cooperative Endeavor Agreement (CEA) is a written document that outlines a joint undertaking of a public purpose between at least two parties, one of which is a state or local governmental entity. It sets forth the respective rights and obligations of the parties and may be entered into for any public purpose as long as there are substantial benefits flowing to the public from the endeavor.
The fundamental purpose of a CEA is to allow non-profit organizations and for-profit corporations to achieve a public purpose in collaboration with a public entity . They have become more common in Louisiana in recent years in connection with public-private partnerships involving economic development agreements, for example. They are also often used in the context of state tax incentives such as the Enterprise Zone and Quality Jobs programs. The use of a CEA can help to memorialize complex arrangements and provide the legal framework for distributing and allocating tax incentives, grants, contributions or other public funds within the parameters of state law governing appropriations for public purposes.
Requirements and Legal Framework
The legal framework governing cooperative endeavor agreements can be found in the Louisiana Constitution, Louisiana Revised Statutes, and numerous Attorney General Opinions. The basic requirements for a cooperative endeavor agreement to be binding are: (1) it must not be contrary to public policy, and (2) it must be supported by a lawful public purpose. The law is well-settled that there must be sufficient public interest behind the agreement to enable the public entity to justify any payment or service it may agree to give a private party therein. As stated by the Louisiana Supreme Court: [I]n order to be contractual in nature, this support [for a public purpose] must have some level of relationship, either as a direct benefit or reciprocal expectation, between the public and private entities. Specifically, it has been stated: the contracting parties must have mutual obligations, i.e., the private partner must agree to provide some services, and the public partner must agree to pay, or otherwise compensate, the private partner. . . . The Attorney General’s Office has consistently interpreted the language of the Louisiana Constitution to mean that the proposed expenditure of public funds must be for the purpose of providing services or facilities and specifically must not be for the private interest of the contractor. Instead, it must be designed to benefit the public as a whole. While the Louisiana Constitution does not specifically define a "public purpose," the Attorney General’s Office has opined that support for the State’s objectives or interests, or furtherance of State programs are examples of a valid public purpose.
Key Components of a Cooperative Endeavor Agreement
Although a CEA could take many forms, there are key elements contained in most CEAs. A typical CEA will generally contain the purpose of the agreement, the parties, a definition section, detailed obligations of the parties, a commitment of funds from the government entity, a commitment of funding from the private party (if applicable), schedule for receipt of funds, costs of the project and how those costs will be incurred, the method for project management, ownership of the relevant assets, if any, upon completion of the project and the procedures for the disposition of the property at the end of the term of the project.
Some of the typical subject matter sections of a CEA include:
● The parties – This section identifies all parties to the agreement. Although not a required component of a CEA, the parties typically identify an administrative contact at which the parties may direct communications.
● Terms of Agreement – This section sets forth the basic terms governing the relationship of the contracting parties including the municipal purposes or the social welfare goals that the parties intend to accomplish, the parties’ objectives, the necessary steps for planning, developing, constructing, maintaining, and otherwise managing the project including a timetable for the completion of each item, and the costs of the project and who will incur those costs as they relate to the various stages of the project.
● Scope of Work/Project Specifications – This section outlines in detail the nature of the agreement, the work to be done, the method of payment, and the type and amount of governmental assistance to be provided.
Pros and Cons
One of the many advantages of entering into a cooperative endeavor agreement is the relative ease with which the negotiation process and ultimate final agreement can be structured. The CEA statutes tend to limit and reduce the degree of risk in building in deliverables and penalties, as set forth above, since CEA transactions are not forced to comply with the more demanding requirements of a public contract. For example, performance deadlines, deliverables, penalty default provisions and the like will face greater hurdles in the public contracting world, while CEA terms will likely be more liberal. Additionally, the penalty and criteria structure of a CEA can be clearer and easier to add into the contract.
Also, many public entities, as well as private organizations, often view CEAs as a positive signal of good will or collaboration by the parties. This has been particularly true in Louisiana following the devastation of Hurricane Katrina. Inviting someone to enter into a CEA may be interpreted as an attempt to build a stronger bond with your organization at a key moment in time.
Further, CEAs are increasingly being used for the sharing of risks, public funding, and private initiatives that seek to partner and collaborate with the public sector. The data is still unclear how much CEAs are being used for procurement of goods and services, but we expect this trend to continue. These CEAs are at the heart of many private/public partnerships, which are becoming one of the more popular ways to enter into CEA relationships.
For several reasons, CEAs have not garnered lots of area to explicitly discuss the potential risks associated with entering into them. Commonly, CEAs are viewed as political documents or devices that can be used to secure public funding without much restriction. Yet, CEAs carry risk and should be treated no different than any other type of contract. First, people must not forget that CEAs are contracts and all of the typical risks apply. This includes the risk of breach, failure to perform, increased cost, and the like. Also, with any type of contract, there is the risk of non-performance. However, with CEAs, these risks are often magnified. One reason is that CEAs are not issued through a bid or negotiated process that builds in a due diligence component, cost analysis, or even a simple risk assessment. CEAs that are used as part of public procurement processes and public/private partnerships may be particularly susceptible. Further, even when they do incorporate these essential elements, many CEAs are not a part of a continuing contract that will force the parties to continue to evaluate risk, performance, necessary changes, and so forth.
These gaps in CEA use have led to several instances where negative side effects of CEAs came to light. For example, the New Orleans Center for Creative Arts, through a CEA, did not pay its electricity bill assuming the city would do so. However, that was not the case and the parties began to square off in court over payment. In the end, that CEA was rescinded since both parties had since moved on.
Another recent example was when a small, rural Louisiana town entered into a CEA with a private, nonprofit to share administrative roles, public resources, teaching initiatives, and the like. However, the goals of the CEA were not met, the partnership soured, and litigation ensued.
Cooperative Endeavor Agreement Examples
One of the most notable examples of a successful cooperative endeavor agreement took place in the renewable energy sector. A collaboration between a solar energy company, a local government, and a non-profit environmental organization, the deal resulted in the installation of a large solar farm that has significantly reduced energy costs for both the company and the municipality. In addition to the economic benefits, the project generated over 100 jobs and has produced enough clean energy to power 10,000 homes. This initiative not only advanced the environmental goals of each entity involved but also engaged the local community by inviting public participation in the planning stages.
Another industry where cooperative endeavor agreements have proven successful is healthcare. A rural hospital collaborated with a local university and a biotechnology firm to establish a research center dedicated to developing new medical treatments. The center has yielded promising results for several diseases and has attracted top-tier researchers from around the world. By pooling their resources and expertise , the three entities were able to achieve results that would have been impossible for any single organization to accomplish on their own. The center has helped to put the rural area on the map as a hub for medical research and has generated new jobs in the region.
A third example comes from the sports industry, where a professional sports team entered into a cooperative endeavor agreement with a local convention center to build a new practice facility. The facility not only serves as practice grounds for the team but also has an event space that can host concerts and other events. The agreement included provisions for revenue sharing that benefit both the sports team and the convention center, creating a win-win situation for all parties involved. The facility has found success in both hosting sports practice and being rented for other events, while creating important economic value for the surrounding communities.
Negotiating and Drafting Best Practices
A well-negotiated and carefully drafted cooperative endeavor agreement (CEA) clearly defines the respective rights and responsibilities of the PAR and project partner(s), establishes proper performance measures, and states the conditions under which the public benefits are provided and maintained during the CEA period. The following are a few tips for ensuring a successful negotiation and drafting process:
Establish the project scope
The parties should understand from the outset the general scope of the project. The effort required of the private partner and the PAR, the schedule for the efforts, the goals to be achieved, the expected funding sources, and the resources to be provided by the parties should all be well defined. The CEA should reflect a commitment by the private partner to deploy substantial effort toward achieving the project goals.
Carefully consider the duration of the project
Whether all, the majority, some or none of the costs will be funded by the PAR will depend on the duration of the project. The longer the project, the more likely it will be for tax credits and other funding sources to be available for certain expenditures.
Focus on performance measures from the outset
Make sure that no matter how complex the project is, the performance measures are at the forefront of the negotiations. Performance measures should include the number of jobs projected, the depth of any training that will occur, and the dollar amount of investments that will be made. Keeping the focus on performance measures generally yields better results for the parties.
Don’t lose focus on the long haul
While negotiations can often become stuck in the weeds over legal and business issues, frequent breaks should be taken to step back from the minutia in order to get a clear sense of whether the project proposed will ultimately redound to the benefit of the public. For example, a project partner may want to propose performance measures that solely show how many jobs the partner’s creation will create. This goal should only be pursued after considering whether the job creation is aiding the public purpose of the PAR.
Make sure the private partner does not lose its tax credit eligibility
Unintentionally violating the requirements of a federal tax credit program is a quick way to halt or destroy a project. If the project will involve the use of historic tax credits, make sure that all of the attorneys involved are well-versed on the requirements of the specific tax credit program.
Future Trends for Cooperative Endeavor Agreements
One area where we are seeing an increased use of cooperative endeavor agreements is local governments attempting to incentivize their downtown areas. The use of these agreements geared towards economic development shows very few signs slowing. Our firm has participated in drafting several of these types of agreements that are related to the redevelopment of historic buildings, such as a landmark newspaper building or a vacant furniture store designed by an award wining architect. We have also seen many of these agreements be renewed and restructured by local municipalities time and time again. Local governments are finding ways to balance the costs between taxpayers, the private investors, and the state or federal tax breaks that are available. Several recent amendments to the Louisiana Constitution and Louisiana law have increased the potential benefits of private investment into historic districts or cultural districts. The ability of Louisiana to offer third parties tax credits for projects has evaporated over the years. However , we expect to see an expansion with the introduction of new tax credits in the Louisiana Historic Rehabilitation Tax Credit and the Louisiana Restoration Tax Abatement programs. Local governments can always expand the use of local tax incentives to provide additional funding sources to entice this type of development. Baton Rouge has also recently created a Downtown Development District in the area of Government Street north of Interstate 10. This area will give local government greater power to assess local taxes and allow for urban growth via infill zoning. This area offers many beautiful buildings cloaked with rich history that we expect will be redeveloped in the coming years. Of course, we hope to see some of these projects be built with the aid of local cooperative endeavors. We expect to see an increase use of these agreements in two ways: as a community development tool for downtowns that continue to revitalize and as a public private partnership funding mechanism. Local governments have many options that allow them to fund projects. They can create a tax increment financing district, a special assessment district, an economic development district, an enterprise zone, or a loan through the U.S. Small Business Administration. All of these can be used in combination or blended with other private funding sources (such as tax credit investors). Cooperative endeavor agreements may be an effective coordination device.