Seeding a Campus Transformation
To carry out its vision of renovated campus amenities to attract an academically stronger student body, the University of North Georgia in Dahlonega created a special-purpose foundation that supported development of the new campus properties.
By Frank “Mac” McConnell and Brian Terrell
The physical transformation of the University of North Georgia (UNG) campus in Dahlonega since 2008 has been a key element in attracting a student body that achieved higher SAT scores, increasing alumni giving, and strengthening freshman enrollment. A three-phase campus renovation project—including upgrades to student housing, parking, and recreational and social amenities—has greatly improved the campus experience for students, faculty, and visitors.
Since the project's completion, which was achieved in only five years, the university has seen a 50-point increase in average SAT scores of undergraduate admissions, and a 42 percent increase in alumni giving. While we recognize that this performance can't be wholly attributed to any single factor or program, the upsurge in interest from future and former students coincided with the completion of the campuswide project.
While some might argue that this kind of growth puts strain on the higher education business model, we've seen no detrimental impact on any of our programs. Our projections and pro formas planned for modest annual growth of 3 percent, capping at around 17,000 students. We project that our investment in student living and learning space will continue to attract quality students and that we will see continued improvement in graduation rates.
Working in our favor was the fact that we had a clear vision, a solid work plan, alignment with a strong university foundation, and a development team that remained consistent throughout the project. We were also seeing rising demand for both our undergraduate and military cadet programs, fueled in part by the popularity of Georgia's HOPE Scholarship program.
Working against us, of course, was the timing: The 2008 economic recession froze credit markets and reduced opportunities for large donations, leaving us with insufficient seed capital to carry out the vision. Additionally, the state of Georgia was instituting budget cuts for higher education operations; and competition from other Southeastern schools was greater than ever before-a trend that intensified over time.
To overcome the funding barrier, we developed a public-private venture that combined tax-exempt bonds and ground leases with a special-purpose foundation created to serve as developer and owner of the new campus properties. Such foundations are becoming more common, with legal requirements varying by state.
The public-private venture worked this way: Jones Lang LaSalle (JLL) was selected as the development manager through an RFP process. JLL brought Ambling University Development Group on board as the developer, which acted as the bank, providing capital for UNG from inception to the point where bonds were sold as construction started. This is the "cost of entry" for developers when bidding on projects in the Georgia University System. While the developer does not charge interest or make a profit up-front, there is the risk that costs will not be reclaimed (for architect, engineer, preconstruction work, and so on), if the project doesn't close.
As a result, the university assumed no construction risks or out-of-pocket costs for the new buildings. The entire $120 million project is financially self-sustaining; at a certain level of occupancy, rent covers the debt associated with the bonds that were sold. The bonds were issued by a local development authority through the UNG's real estate foundation and sold in the public market.
As the state of Georgia is responsible for the debt and the risk, the state's university system is required to step in and pay the shortfall if the project fails, and thus there is no impact on UNG's balance sheet and income statement.
Setting the Stage for Transformation
Established in 1873, UNG is one of only six senior military colleges in the United States, and its Corps of Cadets exceeds 800 students. With a total enrollment of more than 15,000 students (including the cadets), UNG has a strong academic standing, including the third-highest grade point average for freshmen admitted to its baccalaureate programs among the 31 institutions comprising the University System of Georgia.
The university's Dahlonega Campus is located in the picturesque foothills of northern Georgia, near the historic small town of Dahlonega—about an hour's drive north of Atlanta. It offers a charming campus environment, but university leaders realized that the outdated campus facilities were making it increasingly difficult to attract the brightest student candidates.
The 112-acre Dahlonega Campus was previously known as North Georgia College & State University. In January 2013,as part of a higher education trend to merge campuses and operations, with the goal of increased efficiency, it consolidated with Gainesville State College to become the University of North Georgia. Of UNG's four campuses, it is the only one with a residential component.
Prior to its facilities upgrades, the Dahlonega Campus offered only inadequate housing, parking, dining, recreational, and support facilities, many of which were built from the 1940s through the early 1970s and were in need of serious repair and modernization. We understood from the start that strong campus amenities are an important complement to academic excellence in attracting top students. Transformation through development of nonacademic facilities required bold planning and prudent execution to minimize risk and maximize institutional value.
The solution was an integrated program to create additional recreational amenities for students and to enhance the visual appeal of the campus, while respecting the historic design of the existing buildings.
One of the first steps was to commission a feasibility study that looked at factors such as demand, competition, cost, and capital availability. This preliminary data was necessary to engage internal stakeholders, alumni, students, and the board of regents, all of whom, we knew, would have legitimate concerns and questions about this major capital investment.
Establishing a Fast-Track Development Team
On behalf of the university, Jones Lang LaSalle leaders assembled a design and project development team, starting with the developer. JLL serves as the university's representative and advocate in guiding other development partners as well as helping to position the project positively with internal and community constituents. JLL's expertise in upgrading university campuses includes developing some of the first "gateway" campus expansions at the Ohio State University and Georgia Tech, as well as projects that transformed the University of Pennsylvania and, more recently, Roosevelt University in Chicago.
Working together, we identified other design, development, and financing partners to form a collaborative team that would be with us throughout all phases of the project. To round out the primary team, we selected Lord, Aeck & Sargent as architects and Choate Construction as general contractor. All four organizations collaborated on the overall development site plan and in the design and construction of the three phases of the project.
We conducted financial, legal, and state agency due diligence and considered multiple development scenarios for adding the housing, parking, and amenities. A key design goal was to maintain the historical and pastoral integrity of the existing campus, while adding modern architectural features that would enhance functionality and aesthetic appeal without seeming out of sync with the rest of the campus.
Integrating the Design and Construction Process
We achieved an estimated savings of 18 months on the project by fast-tracking both the design and construction processes. In a traditional development approach, architectural plans are completed before a contractor is on board, resulting in a competitive bid process. In theory, this approach allows the owner to negotiate the lowest priced construction-but that theory is often not the reality. When contractors must bid competitively to architects' specifications, their bids must include pursuit costs plus some buffer for uncertainty, since material costs can fluctuate. In addition, the traditional design-bid-build approach may take longer because of the time lag between completion of the drawings and the start of preconstruction.
The advantages of integrated project development were the following:
- Choate executives with specialized knowledge of the cost and availability of construction materials and infrastructure equipment were able to advise us on ways to reduce costs and ensure that materials and equipment could be delivered on time.
- The understanding that the company would have work for several years supported putting a strong team in place, including its own workers and subcontractors—which might not have been the case if it had to pursue each building development competitively.
- With JLL's development experts on hand to ensure that pricing was in line with market conditions, we knew we were not overpaying for the contractor—or underpaying, which can also create problems with quality and schedule.
- Beyond the direct cost benefits, the integrated development approach allowed us to fast-track the construction and begin, for example, ordering long-lead items, such as steel, which needs to be purchased well in advance and is subject to significant price fluctuations. In addition, knowing a building's footprint and size enabled the contractor to order the steel while specifics of the building's layout and infrastructure were still being finalized, saving time and costs.
A phased approach. Another factor that sped up the development process was the phased construction approach. Once we determined the total planning components, the team focused on designing first-phase structures so that advance buying of materials and other fundamental construction activities could begin, while the design team moved on to the second and third phases. This kept the project moving forward at a brisk and steady pace, and minimized the impact on students and faculty, as construction was under way at only a few locations at a time rather than throughout the campus simultaneously.
Although phasing construction saved time, we didn't want to break up the process into too many parts. While projects may vary in this regard, for us, bundling multiple buildings and structures into one project enabled our team to get better pricing on materials through bulk purchasing.
Integrated design and construction and fast-track development were key to our ability to keep the development on time and under budget, but these processes are becoming increasingly common for large or complex developments. Another key element in our success is less commonly employed: the financial structure that enabled bond financing with no cost or risk to the university. As noted earlier, the University System of Georgia holds the risk. It currently holds a total of $3 billion in public-private partnerships; this is only one of them.
Financing Transformation Without Assuming Risk
We formed a 501(c)(3) real estate foundation to act as developer and owner of the new buildings. It is affiliated with, but not legally part of, the university, so its liabilities and obligations are not associated with UNG or the board of regents. Within the foundation is a limited liability company (LLC), which acts as owner, thus shielding the foundation from liability as well. (The LLC holds the risk, and technically, the bondholders are ultimately at risk—except that the University of Georgia System won't allow the project to fail, stepping in should the project default, although it is not legally bound to do so.)
Multifaceted financing. The foundation structure facilitated UNG's ability to use tax-exempt bond financing under the University System of Georgia's Public Private Venture/Public Private Partnership (PPV/P3) program, which has been used throughout the state to fund 175 projects, most of which involve student housing and all of which were supported by an independent income stream. All of the buildings and structures developed via the program are supported by some form of income—monthly rent for housing and parking, and per-semester fees for the use of recreational and dining facilities. The money from those operations goes to the university, which forwards the contractual amount to the foundation, which in turn pays the bond trustee. Ongoing maintenance on the property is carried out by the university. A portion of the rent collected goes directly into a separate account that funds ongoing maintenance and operations.
The university and real estate foundation negotiated rental agreements for the buildings and land, wherein the university pays the foundation a portion of the rents and fees collected from students, and the foundation pays the university a nominal amount under the terms of a long-term ground lease. This way, UNG retains ownership and long-term control over the underlying land, while the foundation takes on responsibilities of ownership and ensures that bondholders are repaid. (See the figure, "University System of Georgia Public Private Venture (PPV) Financing Model," for an overview of the funding model.)
Many seats at the funding table. If this structure sounds complex, it is. There are many seats at the table, and while all of them know their business, it helped that we also understood the roles of each player. For purposes of financing, the university and the board of regents were considered one legal entity that was shielded from liability. Its role is mainly to collect rents and fees from students and forward a portion to the foundation under the terms of the rental agreement. Besides the university, the foundation and the program manager who helped coordinate the process, the key players included:
- The credit enhancer. Typically with tax-exempt bond financing, bond buyers expect to have a third-party guarantor of the bonds. Credit enhancement adds slightly to the cost of issuance but ensures that the bonds are investment-grade, which effectively lowers the interest rate, resulting in a far better execution than without the enhancement.
- The issuer. The actual bond issuer is a municipal entity with the authority to issue tax-exempt bonds for projects with socially beneficial purposes. The issuer receives the proceeds and lends them to the foundation.
- The underwriter. An investment banker markets and sells the bonds. Often, the underwriter determines the terms of the issuance, including the size, structure, and pricing as determined by the interest rate on the bonds. The UNG program bonds were all priced on a 30-year basis, but at different interest rates depending on the state of the bond market at the time.
- The rating agency. Moody's examined the quality of the bonds and provided an independent opinion of their investment grade.
- The trustee. An independent third party carries out key activities on behalf of the foundation and bondholders, such as holding bond proceeds, collecting debt service payments, and making interest and principal payments.
By holistically planning and executing the project phases all at once, the university was able to complete the entire project under one bond issue, although the interest rates were different for each phase, based in part on the current conditions of the bond market.
Development by the Numbers
With a plan and financial structure in place, the construction process flowed smoothly, with only a few challenges along the way. For example, a new student recreation center was built adjacent to a historic theater, and there was concern regarding damage to the foundation to that building during construction. To mitigate the risk associated with this potential issue, sensitive vibration sensors were placed on the historic structure to monitor movement—and no damage occurred. Furthermore, due to low existing floor-to-structure heights, special soffits were designed to house mechanical/electrical systems so as not to compromise the aesthetics during the renovation of an historic military dorm.
To summarize the facts and financial data of the program:
- The dollar-per-bed cost varied by building, but ranged from $35,000 to $45,000.
- In the first phase, we completed a 54,000-square-foot student recreation center and adjoining 569-car parking deck, in 2008. With a hard- and soft-development cost of $25.9 million, this phase was funded by $31.2 million in 30-year bonds at an average rate of 4.75 percent and an average debt coverage ratio of 1.15 times. The bonds are paid back by revenues from the buildings, consisting of recreation center fees of $83 per semester per student and parking fees of $55 per semester per student.
- The second and largest phase, completed in August 2010, included a 1,064-car parking deck; a dining hall with 1,084 seats and special event space for 250 people; and two suite-style residence halls: Patriot Hall, a 352-bed building for cadets, and North Georgia Suites, a 600-bed residence hall for undergraduate students. Built at an overall cost of $62.9 million, this phase was funded by $78.8 million in bonds with an average 30-year rate of 5.53 percent and a 1.29 coverage ratio. The bonds are repaid by proceeds from individual student bed rents of $440 per month, parking rates of $105 per semester, and a meal plan costing $890 per semester.
- The $29.2 million final phase included the 47,000-square-foot Chestatee Building housing the student bookstore, infirmary, and retail and administrative office space; as well as the new 264-bed Liberty Hall for cadets, and the renovation of Gaillard Hall, a 166-bed suite-style residence also for cadets. The Chestatee Building and Liberty Hall were completed in the last half of 2011, and Gaillard Hall was rededicated after completion in September 2012.
This funding model worked extremely well. The public-private partnership program has provided a campus transformation and revitalization that was critical to the university's future. With a niche in higher education to provide exceptional value to students, we offer unique residential, nonresidential, senior military, and nonmilitary student pathways. We have long been known for our academic quality; with our program completed, we have now reestablished world-class student space that supports and enhances the instructional mission.
The state of Georgia is now looking at other models that provide effective financing solutions, particularly important in the current fiscal environment. At the same time, there is no "best" finance solution. Institutions must evaluate all financing and privatization models available to them.
Thoughtful planning and solid execution ensured that the University of North Georgia project was completed without major incidents, within the budget parameters, and within our aggressive timetable.
FRANK "Mac" MCCONNELL is senior vice president for business and finance, University of North Georgia, Dahlonega, and BRIAN TERRELL is managing director of Jones Lang LaSalle's national Higher Education Project and Development Services practice.