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Capital Ideas

To keep up with facilities demands and priorities, institutions are tapping multiple funding sources and applying high-tech planning tools.

By Carole Schweitzer

More than one attendee at the NACUBO 2008 Annual Meeting, July 12–15 in Chicago, noted that the reality of the ACUPCC commitment is starting to sink in. “We are just beginning to realize,” said Wendell Brase, vice chancellor, administrative and business services, University of California, Irvine, “the scope and cost of what we need to do.”

The popularity—and proliferation—of the conference’s sessions related to planning and financing building projects and retrofits attests to where facilities rank on the leadership priority list. Here are some highlights from a few of the presentations.

Future Taxes Fund Today’s Facilities

Tax incremental financing (TIF) allowed the University of Illinois at Chicago to acquire 80 acres at its southern boundary and build three new residence halls (the first since 1990), a conference center, and mixed-use retail and office space that fills campus and community needs. UIC’s South Campus Project, begun in 2001, “was a way to make the campus safer,” said Ellen Hamilton, UIC’s director of real estate, “and more inviting to the type of students we wished to attract. We wanted to create a sense of place. And the time was right to make the transition from a commuter school to more of a residential university.”

The 200-acre UIC campus “had quietly been growing,” said Hamilton, since it moved to Chicago’s west side in 1965—and later consolidated (1982) with the UIC Medical Center. Much of the campus was adjacent to a less-than-desirable community, including the historic Maxwell Street area, which had deteriorated but was supported by many for preservation. In addition, much of UIC’s infrastructure was 125 years old and in need of urban renewal treatment—although the city was not yet ready to become involved in such financing.

The project got its start with the purchase of 80 acres on the south edge of the campus. By selling off a large section of the acquisition to a private developer, said Hamilton, the university became eligible for TIF tax treatment.

Using TIF. Tax incremental financing, explained Tony Smith, practice leader, S.B. Friedman & Co. real estate and development consultants, “is a municipally sponsored tool—in the scarcity of urban renewal funds—that is a ‘bootstrap’ kind of process.” While mechanics vary from state to state and are established by statute, the general idea is that the state allocates future increases in property taxes (in this case from the private residences that would be built on the parcel of the land acquisition sold by UIC) to pay for public and private improvements up front. “TIF generally applies,” said Smith, “to development taking place within a specific, limited geographic area and is often used for economic development and to eliminate urban blight.”

In Illinois, said Hamilton, “a redevelopment agreement guides the distribution of the TIF.” For UIC’s South Campus Project, the projected incremental property tax is estimated to total more than $120 million over the 23-year statutory period. “We will receive 95 percent of this amount,” explained Hamilton, “the single largest TIF granted by the city—and will use it to pay off the public infrastructure improvements. This was in large part,” she noted, “because the campus was a priority of the late Mayor Richard J. Daley and continues to be a legacy priority of Mayor Richard M. Daley. Also, the university is taking on a lot of work that the city would normally do in the form of urban renewal activity. The money is used to reimburse eligible costs paid from bonds sold by the university to fund the improvements.”

Using TIF along with other financial strategies—for example, retail revenues to pay off bonds for creation of retail space and rental income to pay off bonds supporting office space (including adaptive reuse of renovated buildings)—the university has been able to do the following:

  • Complete three student residences totaling 1,520 units;
  • Adapt outdated buildings for use as retail and university offices;
  • Build 892 private residences ranging in sales price from $160,000 to $1.4 million;
  • Build a “green” parking structure that bridges Maxwell Street; and
  • Complete the UIC Forum, which is a midsize performance and conference center that can host everything from concerts and convocations to graduations.

“Tax incremental financing,” said Hamilton, “is a good fit for university development, since the early years of a project are generally a lengthy run-up to the time when actual revenue begins.”

Bonds Finance Major Renovation

An abandoned industrial bakery hardly seems a starting point for an academic and visual arts center. But Marshall Moore, vice president for administrative and fiscal services, Montgomery College, Montgomery County, Maryland, said the college saw the value in purchasing the nearby structure as part of its ongoing expansion to accommodate a growing population. Current enrollment at the two-year community college includes more than 34,000 for-credit and more than 25,000 workforce development and continuing education students.

Consider consultants. Before proceeding with the project, Montgomery College took the advice of the Montgomery County Government and hired a financial adviser to do a cost-benefit analysis for moving forward. One important issue was whether to raze the building and develop an entirely new structure or to renovate the existing space. “We asked for two separate figures in the request for proposals,” said Moore, “and in the end, it was more cost-effective to do a renovation. And, while using the adviser was somewhat costly, it was a good idea for an expert to deal with some of the complicated details.”

When Moody’s Comes to Call on Community Colleges

“Community colleges are facing some key issues,” said Henrietta Chang, vice president, Moody’s Investors Service. In the annual meeting session “Strategic Use of Debt to Finance Capital Projects by Community Colleges,” Chang identified several common trends, including:

  • Growing enrollment driven by demand for programs and favorable pricing relative to four-year institutions;
  • Heightened competition from four-year institutions for students;
  • Rising demand for student housing;
  • Impact of local demographics and economy on student demand; and
  • Financial aid and tuition affordability.

Community colleges can finance campus improvement and expansion in a variety of ways, including general obligation and other tax-backed debt or revenue-backed debt payable from numerous sources (tuition, auxiliary revenue, fees, unrestricted gifts, and so forth). If the college decides to issue bonds, acquiring a favorable rating from Moody’s goes a long way in giving bond insurers confidence in the college’s ability to handle this form of debt. (For details on the rating scale, go to www.moodys.com).

The Moody’s rating process includes an on-site visit. What do raters look at? According to Diane Viacava, Moody’s vice president and senior credit officer, you can make the best impression for your campus when you provide a tour that includes recently completed or renovated facilities, classrooms with high-quality appointments and technology tools, explanations of the vision and scope for planned projects, and an extensive overview that helps give a sense of freshness and vitality to the campus. “You want raters to know,” said Viacava, “what your college stands for and whom it is serving.”

Figuring out funding. The college’s operating budget is $238.2 million and is funded by the county, state, and student tuition and fees. In addition, notes Moore, the board established in 1992 its Major Facilities Fee Reserve Fund for capital construction costs that are ineligible for state or local support. The board sets the amount of the facilities fee; currently, it is $5 per credit hour, with no limit or cap. The fund, a portion of which was used for the arts center, is restricted and reserved as pledged revenues for the bond issue.

For the arts center project, the college acquired in 2001 the bakery building in Silver Spring (adjacent to the Takoma Park Campus) from Giant Food, a local grocery chain. The purchase price for the property was $6 million, which was $1.25 million below its market value. The Montgomery College Foundation issued a contribution letter acknowledging the college’s donation of the $1.25 million (to offset taxes). In addition, Montgomery County provided a grant of $3.75 million and the college’s reserve fund contributed another $5.2 million to the overall project, which would include art studios, computer graphics labs, lecture halls, community artists’ stalls, exhibition space, and a central computer network operating center and a central heating and cooling plant for three college buildings.

To cover the additional projected cost of the renovation, the Montgomery County Foundation secured a $33 million bond for the building’s renovation. The total cost of the project including the land acquisition was about $44.4 million. The project was completed at slightly less than the budget amount.

Construction and renovation of the art center started in 2005 and ended in spring 2007. The arts center received a further bump in funding when the Morris and Gwendolyn Cafritz Foundation bought naming rights to the building for $3 million.

Overall, the project moved quickly from inception to completion. Moore pointed out that the length of the development process often depends on the level of the board’s understanding of borrowing options, the time it takes to obtain approvals, the amount of effort it takes to explore options, and the complexity of debt-funding issuance. “Our board is quite entrepreneurial,” said Moore, “and often they were pushing us.”

3-D Modeling Supports Sustainability

Learn More About Capital Financing

Are you looking for more effective ways to handle your institution’s upcoming building projects or evaluate your long-term debt options? Then you won’t want to miss NACUBO’s newest program, "Strategies for Capital Financing: Building Institutional Value."

Hear from college and university leaders and outside finance experts about how campuses are benefiting from using different financial structures. Presenters will include an overview of considerations and options available for formulating your institution’s strategy and policy related to facilities issues.

Topics will include the following:

  • Stating financial objectives and identifying issues with respect to debt capacity;
  • Assessing the institution’s debt affordability—current and future;
  • Recognizing the variety of options for developing facilities;
  • Comparing advantages and disadvantages of funding sources;
  • Considering nontraditional sources and partners to support projects;
  • Identifying potential benefits and risks associated with creative joint-venture partnerships;
  • Understanding the ratings agencies and process; and
  • Incorporating sustainability into capital projects.

In today’s market, knowing the essentials is critical. Join fellow chief business officers and their staffs to explore practical techniques for managing capital projects, gain valuable insight on funding sources, and hear an insider’s perspective on future financing trends.

For more information on this and other NACUBO professional development programs, visit www.nacubo.org or call 800.462.4916.

Building information modeling (BIM) literally shows planners their projects in 3-D. According to Scott Jennings, senior director of client services, Holder Construction Company, “Technology allows the various elements of construction projects to become linked such that you can visualize a building or project three-dimensionally.” The result: “Our ability to impact the cost of design—or of design changes—is much stronger at the very beginning of the project.” For example, for the new psychology building at Emory University, Atlanta, the architects had designed anchors for the top of the building for the window-cleaning equipment. Emory’s building and residential services staff invited their window-cleaning vendor to come in. Using BIM, they determined that they could clean all the windows from the ground, eliminating the need for the anchors. This saved the project about $50,000.

Building information modeling is coming online now, explained Jennings, because of advanced technology, greater awareness of building inefficiencies, and a focus on total cost of ownership. Ultimately, it can help owners, including higher education institutions, to positively influence return on assets and support sustainability goals.

Those are some of the reasons, said Robert Hascall, vice president, campus services, why Emory used BIM for the 119,000-square-foot psychology complex, which includes research, teaching, and clinical facilities.

Construction began on the high-profile building at the edge of campus in October 2007. The building is a Leadership in Energy and Environmental Design (LEED) Silver category structure, which is in line with Emory’s vision of sustainable buildings and commitment to reduce energy consumption by 25 percent by 2015.

A new perspective for project development. “The predictability of building information modeling,” said Hascall, “meant fewer revisions and changes than we’ve experienced with other projects.” The 3-D visuals help planners (1) understand architects’ intent in terms of finishes, proportions, and other details; (2) view renderings from any point of view; (3) view nearby buildings for accurate context; (4) study shades and shadows to see their implications; and (5) conduct plant operation reviews.

“The three-dimensional modeling also allowed us,” said Hascall, “to conduct an energy analysis that informed our sustainability concerns.” By reviewing different design options in advance and making preferable adjustments, Emory’s project came in at $1.5 million below its $40 million budget. “Technology-enabled collaboration, by which we can route certain diagrams for review,” noted Hascall, “allowed us to easily share visuals and resolve conflicts among all stakeholders.”

Supporting a sustainability vision. “Our buildings represent 87 percent of our entire energy consumption,” said Hascall. That’s why Emory adopted LEED in 2001 and created its sustainability vision in 2006. The institution created a carbon-footprint baseline calculated on 2005 numbers and hired a full-time director of sustainability initiatives in 2006.

Hascall is well aware of the additional construction costs for LEED-certified buildings, which on average translate to an additional cost of 1.9 percent for LEED Silver construction (according to the U.S. Green Building Council). However, he said, “the calculated energy savings for this project will give us back approximately 14 percent per year.” Costs will be realized through an energy recovery unit, daylight harvesting capability, and high-performance glass.

CONVERSATION STARTER

What strategy is your institution developing to address the facilities implications of the ACUPCC commitment? E-mail editor@nacubo.org.

In addition to committing to energy-sensitive new construction, Emory did a pilot study to determine what selected improvements would cost for five of its existing buildings and what benefits could be expected. The projection is that an investment of $7.1 million to improve 1.1 million square feet of varied-use space will produce a 25 percent reduction in energy costs in the five buildings. The return on investment will be realized in 7.1 years, and estimated savings will be approximately $1 million per year. Suggested improvements include lighting retrofits, water upgrades, mechanical system upgrades, building automation and controls, infiltration improvements, additional insulation, and solar pool water heating. “An energy dashboard in each building,” noted Hascall, “will enable us to track energy variables and make necessary adjustments.” Emory will begin making the recommended improvements this fall.

CAROLE SCHWEITZER is senior editor of Business Officer.