Philadelphia — This year’s InterFace On-Campus Housing conference brought over 240 leading figures in on-campus housing to Philadelphia late last month to discuss everything from on-campus trends, to targeting Generation Z and achieving excellence in on-campus management.
A prevailing hot topic throughout the conference was public-private partnerships. Panels on the subject ranged from the university and college perspective, to trends and challenges in the sector and the overall outlook for years to come. One of the most comprehensive discussions occurred on Wednesday, Oct. 25, during the session “Where are P3 Partnerships Today and Where Are They Headed?”
Moderated by Greg Wachalski, principal of Wachalski Advisory, the panel brought together leading executives from American Campus Communities, Capstone Development Partners, University Student Living and Harrison Street Real Estate Capital to discuss the trends and challenges present in P3 development today.
“I’ve probably been at this longer than any of the rest of the group here, and we have seen a very dramatic shift in attitudes from universities about working with private sector companies on housing initiatives in recent years,” said Jeff Jones, principal of Capstone Development Partners. “There was a lot of reticence in the early days — when the P3 movement got its start, institutions worried about loss of control and if they would get the quality of facility that they wanted. Would they lose control of the student experience? A lot of folks felt a little bit threatened by the advent of private sector development and operations. I think that reticence and that angst has substantially decreased over the years.”
Jones continued that while the degree of reticence from institutions has lessened, it has not completely been eradicated. “We have to work extra hard to establish the confidence and trust of our partners when we become involved and help them understand that our goal is to be an extension of the university’s team to help deliver quality projects that can really make a difference to their students and do it on a schedule and in a cost-efficient way,” he said. “The goal is win-win outcomes and the whole is greater than the sum of its parts. When you’re able to deliver that and people can see that and talk to their peers, there is a lot less angst and a lot less trepidation.”
The conversation then turned to tax-exempt P3 models versus equity P3 models for projects today, and the difference in client attitude between the two. Michael Leonczyk, assistant vice president at Harrison Street Real Estate Capital, notes that the financial structure is often chosen on a case-by-case basis.
“There is greater risk transfer generally in the equity model, so that requires a little bit of relinquished control,” said Leonczyk. “Industry-wide, we’re seeing an even split between debt opportunities and equity opportunities. At Harrison Street, we’re actually working on how we can be a player at both of those. I think each transaction structure has its fit and has its place and its ultimately working with the university stakeholders to determine what is right for that campus, for the population that they’re trying to serve and for what their strategic goals are.”
Noel Brinkman, senior vice president of public-private partnerships at American Campus Communities, stresses that choosing a financial plan should not be done the day that a company is hired for a project. “We always encourage an institution that they don’t need to select the form of finance on the day that they’re hiring a company,” he said. “There are a lot of different iterations that you’re going to go through. Where some institutions are going to value the benefits of an equity model — more preservation and debt capacity preservation — some institutions prefer more of the cash flow, and more of a tax and bond issuance.”
“I think from our standpoint, and even an industry standpoint, it’s a determination that you have with your partner after selection because you’re going to build the right product at the right rents for the students that you’re building for,” Brinkman continued. “They’re not going to know the difference on who owns it, so we always fall back on making sure that we do the development the right way and letting the form of finance be figured out later. That’s one benefit of the industry; it’s not a disadvantage that there is so much variety and so much flexibility we can offer back to you.”
Ned Williams, senior vice president for on-campus development at University Student Living, agrees with this outlook. “Each of the tools that we’re talking about are tools — one’s a screwdriver, one is a hammer,” he said. “One is appropriate for each problem and different schools have a different balance of issues, as Noel [Brinkman] was alluding to. Institutions have different priorities and each of these financing methods is different. There is give and take. It’s figuring out what the best fit is for that school and what is most important to them.”
Wachalski notes that financial risk transfer has always been a primary motivation on the institutional side for public-private partnerships. While that is still a large draw, other factors exist that continue to make P3 development an enticing and beneficial option for universities.
“I think speed and delivery has always been one of the motivating factors for universities with a more traditional approach to housing procurement,” said Jones of Capstone. “I remember the first project we did at the University of Maryland, College Park. They were telling us that to do that project in the traditional method, to get in the queue for capital allocation was a 5 to 7 year process at that point in time. We were able to get that project delivered in 2 to 2.5 years, so I think that speed of delivery is an important consideration and has been.”
“Efficiency of construction and design are also important considerations, and the fact that in most cases, in these P3 arrangements, the developer is guaranteeing an on-time delivery within budget and taking the risks if needed as those happen,” continued Jones. “Those are risks that universities are finding advantageous to transfer to their private sector partners.”
Brinkman of ACC adds that there are also operational benefits to P3 development for universities. “We’re seeing a lot of institutions that are relying on the proven players within the sector,” he said. “In some instances, they’re selling their assets or they still want to retain ownership, but they want to partner with the private sector to provide management services. The big fallacy and the misinformation is when you transfer that risk, it doesn’t mean that you’re necessarily losing control. We’re very adept as an industry and as a company to have the hybrid model in which the institution can retain the residence life programming, marketing, leasing — whatever is near and dear to them — and we can retain the rest, whether it’s facilities, operations, bookkeeping. There’s always a give and take that we can work with the institution on.”
Today’s P3 developments are taking on a range of different uses — including the addition of retail, recreation centers, fitness, dining facilities and outdoor spaces. This presents developers with both opportunity and a new set of challenges for development. To this end, Wachalski posed the question of how the companies evaluate these complex projects and whether or not they would consider slicing them into smaller transactions.
“There are certainly advantages and disadvantages to going in either direction,” said Jones. “Simplifying the project to just housing — digestible-sized projects generally makes for a simpler transaction and a simpler delivery challenge. On the other hand, I think one of the trends that we’ve seen is universities taking a more holistic look at what their overall student life facility needs are over a longer period of time and saying, ‘we don’t have many opportunities to do this, let’s do it big, right, well and more comprehensively.’”
“While that can really result in some incredibly invigorating, transformative projects, it does raise complications — it probably takes longer to get all of their stakeholders onboard for multifaceted projects,” continued Jones. “The approval process through boards of trustees and systems are probably more complicated and longer, and then the negotiation of terms gets more complicated when you have a multiplicity of uses. Who is going to handle what revenue and how far can the student rental rate, which is your primary revenue source, be stretched to cover these ancillary components?”
Williams notes that adding in additional revenue-generating uses can be a benefit. “If you look at the UMass Amherst project, it looks like a broad spectrum of different product types, but actually they’re all auxiliaries,” he said. “They all have some sort of revenue attached to them. It’s identifying how much and what that will be the challenge, but they’re not just putting in a bunch of non-revenue generating spaces. You can help yourself by adding space that generates revenue.”
“This addition can be positive from a credit perspective too,” added Leonczyk. “If you have a diversity of revenue streams that are strong in their own ways, as an investor, you start to feel better about your overall demand risk and return.”
— Katie Sloan
A full edited transcription of this panel will be available in the November/December 2017 issue of Student Housing Business magazine.