Coakley Michael

P3s – Not a Fad and Here to Stay

by Scott Reid

Across the country, universities are faced with outdated and obsolete housing stock built following World War II for students taking advantage of the GI Bill.

In the 21st century, older on-campus housing is costly to maintain and needs updating, but the construction and maintenance often falls outside a university’s budget. Many uniiversities and student housing companies have formed public-private partnerships (P3s) to build the housing necessary for modern students at institutions large and small. At the recent 3rd Annual InterFace On-Campus Housing conference, in Tempe, Arizona, five professionals from both sides of the partnership reflected on their experiences building this housing, and where it might be going in the future, in a panel session called “P3s — Not a Fad and Here to Stay.”

Coakley MichaelMichael Coakley, president and CEO, Coakley and Colleagues; moderator

Michael Coakley, moderator: Prior to World War II, what student housing at public institutions tended to be for was women, to keep them safe. It was the way society was at that time, and men were expected to live off-campus in boarding houses or with families that would take them in. The institution really didn’t care. After the war, with the GI Bill, with vast number of servicemen and women who wanted to pursue higher education, there was a huge influx of students and the local community could not provide enough housing through boarding houses and families, so the institutions were pushed to provide housing.

At the time, the states released a lot of money to the institutions, allowing them to issue bonds. That’s when the first wave of housing was built, the boxy, double-loaded corridors and common bathrooms, that type of thing. No one really knew how to run student housing at the time, it was a new animal. They turned to quartermasters from the armed services because they had been housing and feeding large numbers of servicemen and women and they replicated that model on a college campus. It seemed to work at that time.

Then in the 1960s, we baby boomers hit the campuses and had much different expectations. We didn’t want house mothers, rules and regulations, to wear collared shirts to dinner, or for the institution to treat us like a child acting on behalf of our parents. That was when the next growth of housing took place, moving away from the boxy double-loaded corridors into something that was more desirable by the baby boomers. At that time, the federal government provided a lot of loans to institutions to build housing on a very small footprint. If the bed was attached to the wall, it became part of the structure and could be covered by the loan, which didn’t cover furniture. That’s when the high-rises with the built-in beds and really ugly dressers came to be.

As the ’80s rolled around, the Echoes started to hit and there needed to be new student housing and some of us got involved with public-private partnerships. Bill Bayless and I tried to work on a project at Wright State, which would have been one of the first public-private partnerships. A lot of schools were sticking their toes in it but they were building garden-style apartments. Institutional people know that garden-style apartments don’t work for first-year students. They are not successful because the students can retreat too far away, and community is too important for recruitment and retention. Now the next phase is happening. There is an uptick in students coming to campus, more students than before, and we have aging facilities and need more beds. Many schools are looking to private partners to achieve that goal. There are a lot of issues that need to be worked through about people’s acceptance of the concept, their willingness to do it and things related to that.

There was a research study recently by Academic Impressions that talked about what the major issues are facing institutions regarding housing. From the respondents, housing was the number one issue they thought they needed to address, with building improved student centers second and recreation facilities third. It wasn’t academic buildings, it was housing, recreation and student centers, with the student experience being so important. The barriers they saw to that were funding, generational change of expectations and the appropriate amenities in housing. When a student has determined that an institution they are considering offers the academic program they are interested in, the next two deciding factors are housing and recreational facilities. We’re at a crossroads where we know we need to deal with housing but we don’t have the capital or the resources to do it. Thus public-private partnerships that have been evolving.

Kyle, can you talk about, from your point of view when you look forward, what the markets are going to be?

Bach Kyle webKyle Bach, president and CEO of Annex Student Living

Kyle Bach, president and CEO of Annex Student Living: Our model is perhaps different from most people  in that we tend to focus on underserved institutions with no housing or very limited housing. Our philosophy is very similar to what they’re building at Division I schools, but our product, atmosphere and experience are delivered into these smaller tertiary markets. We don’t talk about tiers in our office, or allocate a tier to an institution. We think if a student or parent is sending their kid to a regional campus or community college, they should have the same experience that Division I institutions provide. We see a tremendous amount of growth in community colleges, as well as smaller institutions like regional campuses throughout the Midwest. 

Coakley: ACC has been in the game a long time. Noel, how have you seen the markets change and how are they expanding?

Noel Brinkman, vice president of public-private partnerships, American Campus Communities: We were formed in 1993 and have seen the industry through up until its current state. American Campus went public in 2004 and had a couple follow-ons soon behind us. As the industry has evolved in terms of product offering, now you’re starting to see institutions go the full gauntlet of developing honors colleges using public-private partnerships. It’s gone the complete array of delivery services both on- and off-campus, urban environments. It’s no longer a four-letter word that universities are using P3s, but really something they need to embrace for debt capacity, ease of efficiency or speed of delivery. From our perspective, we are starting to see a lot more transactions that are becoming a lot more complex. University of Kansas, Florida A&M and University of California — Merced, have all had procurements recently. They’ve all changed the industry substantially in terms of what universities are looking for beyond student housing. Case in point, at Merced, it’s going to be about a $1 billion development that includes 1,800 beds of student housing and then another half of the campus, including academic buildings, research labs and more. That’s not our core competency as a company, however. We’re going to focus on the student housing portion and let other companies develop the infrastructure.

Coakley: Todd, how do you see the shift in populations in students, with regards to state schools trying to recruit from out of state so they get higher tuition dollars or the influx of international students, primarily from the Asian market. How is that playing out in this arena?

Duncan Todd webTodd Duncan, assistant vice president, Housing, Food and Retail Services, University of Cincinnati

Todd Duncan, assistant vice president, Housing, Food and Retail Services, University of Cincinnati: I think it always puts a stress on those capacities. First the academic capacity, then the housing. Can you get the housing to market quick enough? Is there another delivery method available, like P3s? That’s going to vary from state to state. Some states are very favorable to P3s, others not so much. At the local campus level, they’re faced with this question. They’re searching for those answers. Do they reach out to the existing market as we’ve done the last couple years to block-lease some beds in the interim, to build some inventory? Or are they looking for a partner to come in and develop a property on or adjacent to the campus to satisfy that need, particularly when they see that enrollment growth being very organic and sustainable. Clearly you don’t want to make such investments on a short-term need. You want to make sure that need is going to be there through the development period and finance structures, etc.

Bach: I think what you’re seeing a lot of, too, is big replacement housing of freshman, sophomore-type housing. Traditionally a lot of P3s have gone apartment-style, upper division; that seemed a little easier for universities to let that part go from their campus. I think you’re seeing now a lot of replacement programs out there that, now that we’re replacing freshman halls, what does that mean for a P3? There’s some control things to that that a university doesn’t want to let go of. I think what universities are seeing is that the private sector can be flexible with allowing a university to run their residence life programs and keep the soft-side of the student life experience in-house and let the private sector do the facilities maintenance. Those types of things universities are starting to trust the private sector to do a little bit better than before.

Coakley: To the three developer representatives here: Since the partnerships started to pick up speed in the late 1990s, how have the scope and size of projects changed?

Josh Smith, SVP, Balfour Beatty Campus Solutions: We’re seeing a lot larger projects coming into the market with 1,000 to 3,000 beds. You’re replacing housing built in the 1950s and the deferred maintenance has just become unbearable and unfixable. You’re seeing these large programs and there are efficiencies in doing that. You’re not going to get as much efficiency in operating a 300-bed hall you’ve built as you are with a larger scale project.

Brinkman Noel webNoel Brinkman, vice president of public-private partnerships, American Campus Communities

Brinkman: I agree. The industry has evolved and the companies within the platform have evolved as well. As the institutions are continuing to look at how they become the campus they want to be, they certainly have to look to the private sector to say, ‘we need some help.’ It’s not to say the public-private solution is for every campus, but by and large there are a lot of boards of directors and CFOs that are really starting to embrace a new delivery model, simply because the one they have on campus may or may not be broken. But it’s something that, as they start looking, may become a reality for them to at least consider.

Bach: From our perspective, we’re trying to work with institutions on the front-end and trying to establish their need and demand. The projects we’re pursuing don’t have up to 1,000 beds. We’re more comfortable doing 200 to 300 beds at those types of institutions. We figured out a pretty successful operating model to be able to do that. It’s important for us to get into the institution on the front-end.

Coakley: Ron, with the kind of path that Georgia has decided to go on, I’m sure the Board of Regents and staff had a lot of discussion about financial issues. Can you tell us about the decision making, the research you did and why you chose a particular financial path to go down?

Reed Ron webRon Reed, director of Real Estate Ventures-Development and Office of Real Estate and Facilities, Board of Regents of the University System of Georgia

Ron Reed, director of Real Estate Ventures-Development and Office of Real Estate and Facilities, Board of Regents of the University System of Georgia: The primary reason that we were nudged into the P3 program that is underway today with Corvias Campus Living is the impact of our current privatized portfolio and that debt capacity for the state of Georgia and our credit rating. That’s been a big concern with our lawmakers. We have about $3.8 billion worth of debt currently in our privatized portfolio. The Board of Regents and our campuses can’t borrow money. The State of Georgia is the only one who can borrow money, and the state doesn’t fund student housing projects. We’re left to find ways to fund new construction for student housing and other student life-type projects. The primary way we’ve done that over the years is to go through our institution foundations. The foundation forms an LLC who is the borrower and owner of the facilities, and we have a rental agreement with those LLCs. The Board of Regents rents those facilities from the LLCs. The credit rating agencies recognize that that is off-balance sheet for the state, but is on credit. They see that as an obligation of the state because of that rental agreement. The P3 has allowed us to look at a different model where we don’t have that rental agreement in place. We’ve been able, with this first phase, to take some of that $3.8 billion of debt and place it into the hands of our private partner. So we’re heading in the right direction according to the credit agencies. They are looking at this move favorably, and our lawmakers are very happy that we’re going in this direction.

Coakley: Todd, with the projects on your campus, you have multiple kinds of financial structures. Do you see it leaning toward one particular model, or are we going to see all the models stay and it become really institutional-driven?

Duncan: There’s always going to be a place for institutional-funded projects, the classic model. But the P3 is going to continue to grow, and as we try to find ways to fund other amenities, we’re going to continue to see it grow. The financial structures will be as creative as the minds that come together to put the partnership together. What is the institution looking for? What does the private side bring to it? How can we resolve those local questions? It’s not going to be one-size-fits-all, it never has been up until now, it never will be. Institutions are too broad in their backgrounds, purpose, size and commitments, so each and every deal is going to be unique, and a lot of it is just business terms. Who’s going to run the student life side is just a term of a business deal. Student housing professionals are often concerned that this is a loss of employment or career path, but it doesn’t have to be. P3 is going to be driven by the state many times. On our campus we did P3s before I arrived, but the university was on both sides of the P.

Coakley: Josh, from where you sit, are you seeing one financial model over another as you were with institutions?

Smith Josh webJosh Smith, SVP, Balfour Beatty Campus Solutions

Smith: Most of the projects we go into, the university typically asks for both approaches, either tax-exempt or an equity model. It’s not one-size-fits-all and it really depends on the motivation of the university: is student affordability the key component or cash flow-back? Those are two components that have to be balanced. It depends on the state. There’s really not a one-size-fits-all. I think the equity model has continued to evolve, the tax-exempt model has been around for awhile and in some cases that still works the best. Universities like the control it gives them, they like the cash flow, but sometimes on the equity side it achieves a different motivation for the schools.

Brinkman: I completely agree. We financed about $10 billion of student housing utilizing virtually every form of finance in the industry. The one thing that’s nice about the industry is we can always present back to the institution, What form of financial structure do you want?, and provide them the options and they can make the decision on what makes most sense for their students. The inconsistency you have to stay away from is letting the financial plan drive the design. That’s one area sometimes people get in trouble with. They get so fixated on the financial structure, and lose sight of having to design the right community at the right rental rate to be successful. Parents and students don’t know or care who owns the building, the want to make sure they have good accommodation at a reasonable price. 

Coakley: I know there’s institutions I’ve worked at when they’ve worked with some private partners, that the building meet the grand 100-year architectural scheme of the campus, with brick or limestone. Other schools are only looking for a 30-year possibility, with stick-frame that can be knocked down and replaced easily. As you look into the crystal ball, do you see this changing or not changing? Will institutions go one way or go the other way or keep going both ways?

Brinkman: I’d say they’re going to keep going both ways. Some institutions do want the 100-year buildings and some want the cash flow. Vista del Sol and Barrett Honors College at ASU are the same size with completely different type of construction. Whereas Barrett Honors College produces less ground rent-back to the institution on an annual basis, it was intentionally meant to be the 100-year building they got. Across the street [at Vista del Sol] it’s largely a wood-frame building that produces a tremendous amount of cash flow for the institution. The nice thing about the industry is we have great competitors and great people in the industry that can deliver products, whether it be wood-frame, metal-frame, concrete or a combination thereof, not letting necessarily that drive the product but to the extent a student needs to have the lowest accommodation? (25:51), it’s going to push you more toward a residential construction instead of an institutional one.

Bach: I think something that’s key to all this, between finance, the design and operations, is the ground-lease document. That’s really where the project lives, in terms of what’s going to happen next year, or 50 years from now. How is the asset going to be maintained? How is the university or private sector going to be compensated? How are they going to be maintained, are they really going to be held to keeping that building lasting a long time? I think that’s where the capital reserves and reinvestment account, those types of things that are important, whether you’re building a 50-year or 100-year building, you want to make sure it doesn’t look bad in five or 20 years.

Coakley: In Georgia there’s probably an expectation that they do have that more.

Reed: We’re certainly sensitive that it fit in our campuses’ aesthetics. We are dealing with a lot of 1960s-era student housing facilities, trying to either repurpose them or replace them. That makes us lean toward the short-term more than the long-term when we’re building today, because those facilities are obsolete. They’ve got outdated systems, they’re not energy efficient or water efficient. They’re not good for the programs, they don’t facilitate the programs that residence life wants to utilize today. They don’t have the community or social spaces that we like in our new facilities. Those are 50-year-old buildings that we’re trying to figure out what to do with, and so we don’t want to recreate that cycle for someone else down the road by building 100-year buildings that are going to be obsolete in 30 years. So we lean toward maybe a 40-year window because of obsolescence and master plans. Master plans change from time to time. A piece of property that might be good for housing today might be better suited for an academic use or parking later. Looking more short-term has some advantages that we’re really looking at strongly, and using the right type of construction and saving on some construction costs can keep the rents down as well.

Bach: Regardless of who your financial partners are, it’s an open book. You’ve got a development yield or investor return that your partners want, the cost of building wood-frame is X, and concrete is Y, the way to fill that gap is through income. You’re putting the burden back on the student to pay for the concrete structure. If they’re willing to buy off on that, then the true partnership is, Okay, we’ll build this for you, but it’s going to back on to your student.

Duncan: In terms of designing the 30-, 50- or 100-year building structures, what’s often not recognized up front is the maturation of the campus plan. I’ve worked at universities that are younger than I am. They’re building 30-year buildings and saying, “In 30 years, we’ll take the bulldozer to it because we don’t know what our campus is going to look like then.” Other campuses like University of Cincinnati, everything is urban and compact, so we’re looking at 50- and 100-year buildings. The plan may change over time, but can we build buildings that may be residential now, but the superstructure allows us to come back and renovate that building, repurposing it to academic or assembly space. We have to watch floor-to-deck heights and the structure of the building, so it can be repurposed on the same site 45 years from now. Those design discussions need to happen on the front-end and they may be dictated by the context of the campus, not just finance, but also the maturity of the campus plan and context of the campus, be it urban, suburban or rural.

Coakley: The Association of College and University Housing Officers had an initiative called The 21st Century Project, which was trying to forecast what student housing needs would be in the future. One of the interesting comments from some of the CFOs in the initiative was, How can we come up with a model where the skin and superstructure is financed one way, and the interior is financed another way? That way there would be greater flexibility to change the interior every decade, as students and parents’ expectations change, but keep the aesthetic over time. I think it’s an interesting idea to keep in play, because I think there’s a lot of schools that would like to use that approach. Have you had those discussions with institutions?

Brinkman: Not recently, but I think it’s a path worth going down. The flexibility is going to be the utmost importance as institutions continue to morph into whatever they’re going to be becoming, as remaining flexible for their students.

Smith: I think shipping containers potentially down the road. [laughter] Maybe that’s the solution for family housing. I’ll take credit for solving that today.

Coakley: Regarding the amenity wars, when you’re strictly working for the off-campus market, how do you make those decisions about where to take the amenities to?

Bach: In our models and our products, we’re not competing with a lot of folks. So although the amenity space is important and sexy and marketable, for us it’s how do we deliver the experience for housing? This might be a traditional commuter student that’s coming out of mom and dad’s basement for the first time. We’re talking classroom space and collaborative whiteboards, instead of large fitness centers and lazy rivers. Oftentimes, we’re working so hand-in-hand with the institution that we ask them, what do they need?

Coakley: Is that an issue you’re facing in Georgia, with the haves and have-nots, in relation to the new facilities versus the older ones?

Reed: A bit. There’s always going to be a bit of that. I don’t know how to overcome some of that. We’re going to have older facilities and newer facilities and they’re going to be different. I think our campuses are trying to target the right students to the right facilities. There’s some price differences that are in play as well. Some are more economical. That helps the students accept maybe a little older facility. Also the programmatic elements in the facilities have to match up with graduates, so they feel like their experiences are complete and they’re not sacrificing anything by living in a certain hall.

Smith: I think the have, have-not discussion is interesting because when you look at student satisfaction from where they lived in college, the ones that lived in a double-loaded corridor and closer to their friends later in life, are more tied to the school than ones that lived in private bedroom apartment housing. You build these nice projects with nice amenities, but a lot of times the double-loaded corridor is where the student really grows. In the on-campus world, we’re not building rooftop pools, we’re building classrooms and technology flex spaces. Thats where were choosing to put our money.

Coakley: Noel, looking at ACC’s portfolio, I know you have some facilities that are academic-rich, and some that are amenity-rich. Have you noticed any difference in retention or re-lease up?

Brinkman: Not necessarily, it’s all market by market. The one thing we are starting to see on-campus is the implementation of ‘academicize, not amenitize.’ We’re starting to see a lot more interest from the student consumer who is focused on academic success, so we’re starting to see a lot more spaces brought in to have a heavy communal fabric where you can actually study and hang out together, rather than the big pools and everything. Yes, you’ll always have pools in the off-campus market because they’re sexy and can market really well, but like Kyle said, students really aren’t using those as intended from the front-end. They’re continuing to go back to the spaces that are academically oriented to them, the community labs with boards you can work on with a group, and less so the tanning beds. It’s market by market, but our business approach is to build for the masses not the classes. As we start looking at opportunities, there’s only going to be a certain amount of students who are going to be willing to pay a gazillion dollars in any market. We let whoever wants to build that take those, we would much rather build for the most students that can afford to live there on an ongoing basis.

Coakley: Josh, have you seen a greater number of institutions taking the partnership one step further where they’re willing to provide some capital to create the spaces they’re needing, such as classrooms? Or has that just become part of the deal?

Smith: It depends on what they’re wanting to do, and do you treat it like a retail lease, where you’re condo-ing out that part of the building to them. You’ve got to look at building efficiency, and net rentable square feet is a big part of driving efficiency of a building. The more classroom spaces and extras you put into a building, the costs go up and the rents go up. Any time a university can subsidize that space in some type of way, maybe it’s a dining hall. That just helps not put the rents on the backs of the project. Most housing projects are not project-financed. They’re system-wide. When these projects have to stand alone on the backs of the student, that really drives some of the extra spaces that you can create.

Coakley: If you were able to tour Barrett Honors College, you didn’t know but you stepped over an invisible line when you were taken into the dining hall. ACC built it, but ASU bought that space. There’s an invisible line where you cross from one zone into the other. We also did some projects on two other campuses where we coupled the housing we were doing with our partners to also include the dining facility and some flexible space with other things because we knew they could build it faster and cheaper than we could institutionally, so we coupled that with it. It worked very well using the private partner to be the developer of those facilities. It took a little finagling to make our procurement office happy with that because it was something brand-new and different. I think that’s going to become something more common moving forward with these projects.

From a developer’s point of view, what operational model do you prefer?

Brinkman: I wouldn’t say we have a preference as a company. We certainly manage a lot of on-campus assets, whether we develop them for the institution or the institution engages us to manage the facility itself. If we’re going to manage the facility ourselves, we definitely want to be seamless in our interaction with the institution. Case in point: ASU. At different buildings we have different relationships to different extents. We want to remain nimble and respectful of the institution to maximize their value in the student experience and it’s not really driven by us needing to manage a facility or not wanting to manage it. Some institutions want to manage, and some don’t.

Smith: I think that gets back to the financial structure that’s used. On a tax-exempt structure there’s not an equity investment so you don’t have the private sector saying, You need to operate to this budget to protect our investment and project. The tax-exempt side is more just universities, but the financial structure can sometimes dictate the operational structure. To Noel’s point, I think the seamless piece is the most important, and we don’t want students to say, I’m going to live in a Balfour Beatty community, I thought I was living at the University of Iowa. You don’t want them to feel that. At the end of the day, if there are any issues, the parents are going to call the school. That’s the core of it. The seamless piece of that is what’s really important.

Coakley: Todd, from an institutional viewpoint, what operational model do you prefer?

Duncan: Well, I’m a control freak, so I want to manage it. At the P3s we did at Oklahoma, we did manage the property and collect the rents with a tax-exempt structure. So it was easy enough to do that. Obviously the financial accounting and back-end was separate, as it needed to be. To Josh’s point, going from the P3 housing to the existing inventory was just a room change. There were no barriers, it was all seamless for the students. The P3 at UC that I currently manage and operate for the owner which still exists is the same way. The only variance is the back-end and the financial, not co-mingling the funds. The model where there is equity and the owner is doing things like the facilities operations can work very well. It’s just newer to the market. Most people are more comfortable at the tax-exempt model, but it may not be the best financial structure. So it’s an evolution, as it is with anything in life and any activity that continues to grow and evolve.

Bach: Yeah, I think it’s important from a communications side and protocol if you do have a hybrid like Georgia does where they have the private sector doing some parts of facilities maintenance and operations, and the university’s doing some as well. I think it’s important to sit down with the partner and housing group and sit down and decide who’s doing what and what happens if, and all of those sorts of things very early on because at the end of the day, if there’s an issue you don’t want to be pointing the other way who should have done what or been responsible for it.

Duncan: It’s no different at University of Cincinnati. We’re a split housing system. But we try to make that as seamless as possible to our students and their parents. It’s no different than the partner being ACC. It comes down to the people on the ground, and can you integrate systems at least at the website level and point of entry. Once someone’s in the system you may flow them to the partner, but they never need to know the difference. That’s the key. The staff must also buy into this partnership.

Coakley: Do you think the session title, “Not a Fad and Here to Stay,” is a true statement?

Bach: Absolutely.

Reed: Yes.

Smith: I hope so, or I’ll be looking for another job.

Brinkman: I think it’s expanding and going to be more and more embraced.

Duncan: It’s here to stay and has a long tenure people don’t recognize.

Coakley: I think it’s here to stay too. A survey that was done found that one-third of chief housing officers understand it, embrace it and are willing to do it. One-third what to know more, but are intrigued. And another one-third don’t want to touch it at all. We from an institutional side, as well as the developer and architect side, need to figure out a way to educate our colleagues who are in the housing profession at institutions about this because a lot of them don’t know about it.

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