A Simpler Housing Solution
If your student housing situation needs improvement, consider pursuing a public- private partnership.
By Anna Marie Cirino
Paul Brailsford, of Brailsford and Dunlavey, advised participants to begin with a needs assessment to determine the number and mix of beds, including rental rates for 9- and 12-month leases. An assessment helps make a case to your governing board for approval and is useful to the rating agency for the sale of the bonds. It also serves as the basis for the underwriting and feasibility determination. A study can range from $30,000 to $40,000, for which the institution is reimbursed at closing since the fee is considered a transaction cost.
Brailsford presented a decision matrix for evaluating a potential student housing project’s relevance to the institution’s mission in relation to performance. In conjunction with evaluating where a project falls on a spectrum that ranges from mission central to mission irrelevant, performance—ranging from poor to excellent—is the other axis of this matrix. Performance is evaluated based on an institution’s needs pertaining to five elements: project development, financial capacity, operating risk, ownership, and management skill.
Joan J. Millane, of Millane Partners, described nontraditional development and financing models. Participants learned how colleges and universities use private-sector developers, expertise, and money to provide cutting-edge student housing while protecting the institutions’ interests for future administrations.
The structure of the project financing has a significant impact on operations, which presents the business officer with numerous decisions. Patrick Gibbs and Eileen Kennedy Byrne, both of the University of New Orleans Foundations, walked participants through the fundamentals of project financing, the composition of the financing team, and how best to match a route to funding with the special needs of a specific project.
Focusing on best practices to optimize campus communication on privatized housing issues and suitability for students, Eliot Chenaux, Texas A&M University, and Robert Lovitt, University of Texas–Dallas, described the different perspectives of the student affairs officer and the business officer. A practicum on operating and maintaining housing explored problems that need to be anticipated and considered. Other issues addressed included marketing, compliance with contract terms, budgeting, lender concerns, and institution-developer disputes.
Steps in the Right Direction
At 15 years old, California State University–San Marcos (CSUSM) had no on-campus housing. Surrounded by fields, the campus had a small food service operation, no library, and no student union building. Through a lease program, the institution had some off-campus housing, which had become increasingly difficult to manage and control.
So where to start and how to do it right? Marti Gray, executive director of the CSUSM Foundation, highlighted several key steps that led to completion of University Village’s 475 beds in August 2003.
- Build a university team. Support from the president was critical, as was involving the right people and having committed team members.
- Do your homework and be realistic about your campus. CSUSM looked at campuses in the area and also conducted a demand study, which determined that 500 beds were needed.
- Find the right partner. Gray outlined the process that CSUSM used to select its partner. She noted that it’s important to begin by determining what you need from a partner, such as financing, construction, or operations. Because of the costs incurred when a company submits a proposal, CSUSM sent a request for qualifications to 14 companies. After paring down this list, the institution invited four firms to respond to an RFP. Using a scoring sheet to evaluate the submitted proposals, CSUSM invited the three companies that responded to make presentations to the university team. Gray noted that selecting the top candidate comes down to whom can work best with your team.
- Prepare for construction. Once the partnership was negotiated with Allen and O’Hara Development Company, a subsidiary of Education Realty Trust, the university team changed, with certain members rotating off and others joining. This on-campus team secured the necessary approvals, got contracts in place, prepared the site, and got legal and financial documents agreed to and signed. The site was not as prepared as CSUSM had thought, so preparing it properly was an additional expense the university absorbed, as was the resulting delay.
- Obtain the necessary documents. These included a ground lease, a development agreement, an operating agreement, a campus financial guarantee, and numerous financial documents. The campus financial guarantee is an agreement whereby the institution assumes a certain amount of responsibility should the beds not be leased up to an agreed-upon minimum. This guarantee is in place for the first three years; so far there has been no need to invoke it. CSUSM financed the project, and the bonds were issued through a 501(c) foundation.
- Involve staff. During the construction phase, the university team evolved yet again. Student and residential life staff was involved in the construction team. This team defined responsibilities, had authority to make changes, and monitored construction deadlines. The CSUSM Admissions and Enrollment Committee decided that in-state students would be a higher percentage of total admissions, which caused University Village to scramble for students. To prevent future disconnects, there is now a representative from student and residential life on the admissions and enrollment committee. William Harris, president of Allen and O’Hara, attributed the operational seamlessness to the close working relationship between his staff and the residence life staff.
Following a Developer’s Lead
The University of San Diego faced student housing challenges and turned to Capstone Development to help the institution reach its objective. Roger Manion, USD’s assistant vice president for facilities management, identified the involvement of residential life staff as a key factor in the project’s success.
USD’s master plan was created in the late 1990s, which required approval from the city of San Diego. While the university’s governing board wanted in-house project management, resources were limited due to multiple projects occurring simultaneously.
USD faced a fast-tracked schedule and wanted a guarantee of budget and project completion. Capstone guaranteed delivery by August 2003; the university itself could not deliver faster than that. With Manion serving as USD’s contract administrator, Capstone was responsible for consultant management and brought solid experience with the developer-led approach, which USD found to be a valuable attribute.
In this model, outlined by Paul Vawter of Capstone, the developer determines project feasibility; coordinates financing, planning, design, and construction; and removes much of the risk from the campus by guaranteeing project costs and delivery date. Institutions often question whether a developer is needed if the institution is financing and managing the project. One concern is that it will increase costs. An experienced developer can add significant value by serving as a single source of responsibility and providing a partnership approach.
This translates to increased efficiencies, a solid understanding of student trends and needs, and knowledge of various design and construction types. Most importantly, the developer leverages working relationships with architects, general contractors, and vendors. The architect USD selected had extensive housing and university design experience and a solid reputation. Manchester Village is on campus, so USD wanted a customized design that would be consistent with the campuswide 16th-century Spanish renaissance style.
USD’s agreement with Capstone included a “liquidated damage clause,” which specified that if the project was not ready for occupancy by August 2003, Capstone had to house the students within five miles of campuses and transport them. In fact, in January 2003, Manion thought the delivery date was unlikely to be met and indicated that Capstone should prepare contingency housing for 357 students in September. Capstone did so quickly; Manchester Village, however, was completed on August 28, 2003, and students moved in the next day.
The project was not without its challenges. A 72-inch storm drain had to be emptied and relocated. The site was previously an uncontrolled landfill, resulting in the need to export 40,000 cubic yards of native material. Sensitivities of the location, particularly during construction, included its proximity to USD’s baseball stadium and child development center.
In seeking the highest quality possible for the price, the tight site area required a concrete subterranean parking structure. A two-pipe central mechanical system was developed for heating. USD had planned on air conditioning for Manchester Village but decided to forego it in exchange for cost savings. The climate was conducive to making this a reasonable compromise.
Complexity Calls for Collaboration
How did Columbia College Chicago, DePaul University, and Roosevelt University come together to create a “fourth culture” in a new $151 million, 1,720-bed facility in downtown Chicago? As Kenneth McHugh, president and CEO of Institutional Project Management and executive vice president emeritus of DePaul University, pointed out, collaboration and leadership were crucial elements in the University Center of Chicago (UCC) becoming a reality.
These three institutions as well as the City of Chicago came together to mold like needs into a common goal. More than a decade ago, the city tore down a parking structure that was in a state of disrepair and issued a bid for development of the lot. The Educational Advancement Fund (EAF) was formed by the participating institutions with McHugh as its founding president. Based on extensive research, it was evident that unmet demand was nearly double the planned capacity of UCC.
Forming a coalition to acquire the city’s lot meant that several components of the project would be eliminated, including the traditional developer role, academic space, recreation and athletic space, and parking. The original developer was reimbursed for pre-development costs, and the building was simplified to 1,720 beds plus amenities above a retail base. Parking was not required due to the downtown location.
Through collaboration, the institutions worked to achieve balance in addressing quality, student affordability, sustainability, institutional control, flexibility, use of scarce institutional resources, the missions and goals of three diverse institutions, and the city’s redevelopment goals. A hybrid solution combined the best attributes of traditional and public-private partnership models. These attributes included a low debt cost (although still higher than general obligation debt), a high level of institutional control, and a minimum impact on the balance sheet and debt capacity. UCC required a custom solution due to its specialized aspects, which took into consideration the involvement of three institutions; the site’s location in an urban, mid-rise location; and the final objective of a mixed-use building.
It was decided that the institutions would serve as codevelopers through EAF membership, and EAF decided the building would be operated as a business. An independent rating of EAF’s project debt was secured. Investor risk was mitigated by offering key institutional support. The institutions provided first-year guarantees and ongoing residence life support. The individual institutions handled housing contracts and collections.
Robert Bronstein, of the Scion Group, which constructed the project and was later selected to operate and maintain the building, discussed the design challenges presented by the institutions’ varying needs. In creating the program and pro forma, they reached agreement on unit types, common areas and amenities, and revenue-generating spaces and other revenue opportunities. Music practice spaces and art studios, for example, called for design compromises.
The city did not convey the real estate until shortly before project financing, thereby necessitating pre-development financing. Using letters of credit, the institutions guaranteed a pre-construction bridge loan of $6 million to be repaid out of bond proceeds.
The EAF member institutions met with rating agencies early in the process. The project’s demonstrated strength was based on the overall demand for beds among EAF members, the additional non-EAF demand for beds, the relative flexibility of the project, the strong cash flows and sources of alternative revenue, and the evident local support.
Security for the bonds was based on a pledge of net revenues from the project plus a guarantee from EAF members to take the first year’s allocation of rooms at established rental rates. The rooms were allocated as follows: 40 percent each for DePaul and Columbia and 20 percent for Roosevelt. Knowing that each institution would grow at different rates and be subject to other forces that might change their desired allocation, they agreed on a methodology for changing the allocation after the initial year. This methodology has been successful to date.
|Read More About Partnerships|
|To learn about effective housing solutions at North Carolina Central University, San Jose State University, and the University of Georgia, visit www.nacubo.org in July to read our online exclusive.|
Among the lessons learned was that it is effective to let each institution conduct its own marketing. Another was the need to focus on annual (12-month) leases rather than shorter, academic-year leases. Particular care was taken in blending the expectations of the three institutions and in negotiating campus housing assumptions, including creation of a “fourth culture.” For example, the institutions had three distinctly different alcohol policies. These were blended to create a fourth culture student handbook.
Such compromises illustrate the many considerations that must be taken into account when more than one party is involved. Collaboration and leadership are the cornerstones of fruitful public-private partnerships.
Author Bio Anna Marie Cirino is associate director, financial management policy, at NACUBO.
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