With the need for more amenities and student life on campus, more colleges and universities are structuring public-private partnerships for the development and management of student housing and other properties.
The structure of public-private partnerships (PPPs) is one of the hottest topics in the student housing industry. Both sides of the partnership — the “public” university and the private developer — have their own demands and lists of wants, desires and outcomes which make each PPP a unique deal. Crafting the deals is getting more complex as developers become more savvy at what it takes to make a project work, and universities understand what it takes to make students happy.
Seeing More Interest
The private side of public-private partnerships continue to see more interest from universities in building student housing through the structures. Some interest is now coming from institutions with large endowments who may have experienced investment losses or who have created more conservative debt management policies over the past few years, reports Jamie Wilhelm, executive vice president of public-private partnerships at American Campus Communities (ACC).
Others are seeing a lot of satellite campuses of large institutions look at the public-private partnership as a way to develop new student housing. The University of Michigan-Flint recently partnered with a foundation to renovate a former hotel near its campus into student housing. The foundation then contracted with Collegiate Development Services (CDS) to help with the programming and management of the facility. Interest in public-private partnerships is also coming on strongly from community colleges, especially those who are growing or transforming into four-year universities. Public-private partnerships are especially important to these schools, who may be entering the student housing arena for the first time, says Josh Smith, director of real estate development at Collegiate Development Services.
Unlike large institutions, community colleges don’t have a residence life department or a full facilities department so they don’t have the necessary staff to handle the project management, so they choose to outsource,” says Smith.
Collegiate Development is currently working with Edison State College in Fort Myers, Florida, an institution that is transitioning from a two-year college to a four-year college and converting to a residential campus. CDS is providing design and finance coordination, construction, leasing and property management services for the university’s new housing project.
“We are essentially acting as their outsourced facilities and residence life department without them having to bring on additional overhead to the staff,” says Smith. “When the project opens, our management group will manage the project while training a new residence life staff and transitioning the management over to the school over a five-year period.”
ACC has continued to see the proliferation of tax-exempt bonds used to finance public-private partnerships for projects of all sizes. ACC recently closed bonds and is under construction on a 600-bed project at Cleveland State University in Ohio and an 856-bed project at Edinboro University in Pennsylvania. ACC has recently signed deals with Northern Illinois University and Illinois State University to develop projects at each university using tax-exempt bonds.
In addition to tax-exempt bonds, developers are also seeing colleges and universities use tools like the American Recovery and Reinvestment Act, which provides for Build America Bonds, as alternatives. The program allows government entities, including state universities, to issue taxable bonds that have a 35 percent federal tax credit. Unfortunately, says Smith, unless congress acts soon, the act will expire on January 1, 2011 (as of press time, there is pressure to extend it for another two years).
Another source of funding that Smith sees is one that is specifically designated for historically black colleges and universities (HBCUs).
“The HBCU Capital Financing Program provides HBCUs with access to capital financing or refinancing for the repair, renovation and construction of classrooms, libraries, laboratories, dormitories, instructional equipment and research instrumentation,” says Smith. “Those qualified institutions able to take advantage of this have been able to get 100 percent financing at a much lower rate than other financial structures due to the issuance of federal guarantees on the full payment of principal and interest on qualified bonds, the proceeds of which are used for the loans.”
CDS is working currently with Lincoln University in Philadelphia to develop a new 600-bed on-campus residence hall for delivery in 2012. The university was approved for the HBCU program in May. The HBCU Capital Refinancing Program is run by the U.S. Department of Education.
Moving Beyond Development — And Student Housing
Like Collegiate Development’s work with Edison State College, the public-private partnership is moving beyond just structuring financing and building student housing. Many RFPs now request the operation and management of student housing, as well as the renovation and operation of existing student housing. Also, many private developers are now getting requests that include mixed-use developments, parking garages and other income-producing properties.
“We are seeing an up tick in requests from schools for mixed-use facilities such as wellness centers, student unions and parking garages,” says Smith. Wilhelm at ACC also reports that his company is seeing schools interested in parking, foodservice and student center projects in their comprehensive student housing public-private partnership capital plans.
The most common example of this in the past has been a dining hall attached to or integrated into a new student housing project. Now, other types of uses are being incorporated. CDS is building a new residence hall and wellness center at Northeast Texas Community College. The wellness center will have cardio and weight rooms, and a multi-purpose aerobics room for yoga, spin and pilates classes.
“The college wanted to start attracting student-athletes from outside their traditional recruiting area,” says Smith. “By offering these new amenities on campus, it will offer the same type of amenities seen at four-year institutions.”
CDS is also working with the University of Louisville to develop an off-campus university affiliated mixed-use project that will feature 700 beds of housing and 50,000 square feet of retail across the street from campus.
“The university has a strong demand for new housing on campus and will be giving the developer an affiliation agreement where the school markets the project as on-campus student housing, without having to fund the project themselves,” says Smith.
Successful public-private partnerships depend heavily on the “private” side of the equation, since they end up managing the intricacies of the deal and, in many cases, the management of the projects after they are complete.
“A successful PPP involves many institutional disciplines including finance, facilities, student affairs and residence life,” says Wilhelm. “The developer must be able to relate to each. The developer must bring the ability to finance the project regardless of prevailing market conditions. Colleges and universities appreciate partners with strong financial foundations that can offer a variety of financing alternatives.”
“If the school’s most critical task is getting new housing on campus, the enrollment is growing, and there is a strong demand, the PPP structure is still the most advantageous route for schools to pursue,” says Smith.
How Universities Are Handling PPPs
How public universities handle public-private partnerships depends mostly on state government and the university structures. While some states have a centralized structure, such as a board of regents, others have decentralized boards that govern each public university.
In Georgia, the Board of Regents of the University System of Georgia controls all the public-private partnerships for the state’s 35 public colleges and universities. A policy decision that the Board of Regents made in 2000 established that funds to build new student housing be raised through general obligation bonds, the proceeds of which are then used to fund public-private partnerships to develop new projects. The Board of Regents also established a public-private ventures program that has since built more than $1.7 billion in student housing projects at most of the state’s institutions.
“In our system, our public-private ventures program is done primarily through cooperative organizations; the foundations of the various institutions,” says Marty Nance, executive director of real estate ventures for the University System of Georgia. “Typically, the foundations set up single-purpose limited liability corporations that serve as the borrower for tax exempt bond financing. That is done through local development or housing authorities. Typical turnaround sees projects put together and closed in a six- to nine-month time period. The project is usually built within an eight- to 12-month time period.”
Georgia has established that only income producing properties, like student housing, parking decks, and student centers, be built using public-private partnerships because of the bond financing. For that reason, not every building that a university develops will be done using the Board of Regents public-private ventures program, says Nance.
In Virginia, where there is no centralized operation of institutional real estate, each university is set up to operate its own real estate needs. One university that has had success in creating new projects under public-private partnerships in the state is the University of Mary Washington in Fredericksburg, whose University of Mary Washington Foundation has created partnerships to develop and own student housing real estate. The UMW Foundation recently cut the ribbon on Eagle Village, a $115 million mixed-use development that is being built with Concord Eastridge as fee developer. Eagle Village includes 624 units of new housing, retail and office space.
Because of politics at the state level, it takes years for student housing projects to make it through in Virginia if they go the old, traditional route, says Jeff Rountree, CEO of the UMW Foundation. Universities like Mary Washington have been forced to launch into public-private partnerships to get projects completed in reasonable time frames and budgets.
“The university would have never gotten the money through the state to do this project,” says Rountree. “The foundation was able to complete this in 496 days. The structure allows the university to get a much better product at a much lower cost than we would through the state. With a foundation who knows what it is doing and a development partner, it can be done in a fraction of the time that it would if we had to work through the bureaucracy at the state.”
UMW has had many other institutions in Virginia and other states look at its program, especially the recent groundbreaking of Eagle Village. Many send groups of officials, including university presidents and board members, to look at the program the UMW Foundation has set up. Because facilities that turn revenue fit better into a public-private partnership model, like Nance, Rountree believes that not every project will fit into the structures.
“The public-private partnership structure won’t completely replace all the building projects at the university,” says Rountree. “But it is gaining interest here in Virginia. At our ribbon cutting [for Eagle Village], we had six other universities in Virginia who came to witness the event and tour the facilities. Three or four of those are sending follow up contingencies.”
From the private side, CDS’s Smith says that the difficulty in finding capital has helped to foster the relationship between the public and private parties in a deal.
“With the absence of the bond insurer and the difficulty in obtaining letters of credit in the current market, the university has to stand behind the project,” he says. “Because of this, universities have become more willing to help support the project to achieve a lower cost of capital. At the end of the day, the higher cost of capital on the project, the higher the students’ rents have to be. These ties are necessary in order to give students the most affordable, cost effective alternative.”
As institutions get more comfortable with the execution of public-private partnerships, they develop preferences. Likewise, each of the private developers has its own preferences and requirements. Both parties have to respond and work together to make a successful partnership.
“As more projects are completed, each ‘side’ becomes increasingly comfortable with the demands of the other. This facilitates increasing more efficient negotiations and transaction execution,” says Wilhelm.