Public Private Partnerships for Developing On-Campus Assets

Over the past 20 years, procuring and developing on-campus projects through public private partnerships with private developers (“P3’s”) has become an increasingly attractive option for colleges and universities, particularly those seeking alternate sources of capital funding and more efficient delivery options for on-campus buildings. The primary focus for P3s to date has been student housing – after all, the inventory of on-campus housing at most U.S. campuses is aging, with considerable deferred maintenance and functional obsolescence. Over the last few years, however, with increasing pressure on endowments and budget cuts for state institutions, P3s have expanded to everything from athletic facilities to on-campus mixed use developments.

There is one common element behind all P3 transactions: there must be a revenue stream available to repay the development team and their financial backers (the “private” portion of the P3) for their investment in the project. That revenue stream can come from the deal itself (e.g., student housing fees or ticket sales) or from other university funds (e.g., tuition to support a P3 classroom building).

How do P3s Work?

College / University

Owns the land, procures the development team, (sometimes) manages project long-term

Development Team

Designs and develops the project, procures financing, (sometimes) manages project long-term

Investors

When applicable, provide development team with financing for project in exchange for cash flows from project

Management Team

When applicable, manage and maintain the project over the life cycle of the ground lease

P3s will involve either a sale or a ground lease by a higher education institution to a special purpose entity (typically controlled by a developer and their investors) that “owns” and develops the building on the project site. The cash flows from the project repay the developer (and their investors) over time. At the termination of the P3, there is typically an “exit event” (involving a payment by the university to the development team – which can be as little as a dollar for a 40+ year P3 or run into the millions for a shorter term P3).

In most cases, P3s are particularly appealing to university finance offices because they are “off balance sheet” transactions – in other words, someone from outside the university is paying for a building on-campus, and the only obligation the university has in exchange is the need to pay rent to that third party. This means P3s typically do not count towards university debt limits and – if structured properly – may be a way to get a building built without impacting credit ratings.

The P3 Process – a Stepwise Explanation

Scope the Deal

Your first critical step is framing out what you want your P3 to look like, and who you’ll be collaborating with to execute.

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STEP 01-A

Plan Your Scope

What do you want included in your P3 – upgrades and management of all housing on campus? Building a single new research facility? Doing a mixed use development off-campus on land the university owns? Keys here are (1) working with campus planners and architects to craft the vision for what you want your P3 to look like, (2) identifying (and vetting) potential sites for your P3, and (3) identifying your ideal mix of potential use cases for those sites. 

STEP 01-B

Frame your RFI/RFQ/Invitation to Proposal

The best way to identify potential P3 development partners is to have a “concept package” pulled together around your ideal development scenario. You can then put this concept package out – either to a handful of groups you’ve researched that appear best qualified to undertake the project (“invitations for proposals” which are more common for private universities) or through a broader, public request for information/qualification process (which are more common for public institutions). 

STEP 01-C

Identify your Development Partner

Thanks to your solicitation process, you’ll have identified some prospective development partners on the deal. Before making a selection, ask them about their prior experience with similar deal structures, how they would assemble a financing package for the transaction, what control rights they provide the university during development and management cycles, and how they envision the economics of the deal.

Negotiate the Deal

There are two critical elements to every P3: (1) how control works between the development team and the institution and (2) how the development team (and their lenders, investors, and capital providers) get paid back.

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STEP 02-A

Structure Expectations and Controls

Typical P3s involve ground leases from the institution to the development team. Critically, that means the institution retains ownership of the “dirt” under the project – and if the development partner fails to perform according to expectations, the institution retains rights under the ground lease to speed up performance, change out development teams, or even take the project back. Institutions and developers need to be clear from the start about what these “milestones” look like during the development cycle and the management cycle, and both sides need to be comfortable with the remedies (from suspended developer payments to retaking the project site) that could occur if milestones are not met. 

STEP 02-B

Structure the Economics

There are three determinations a university needs to make before it can engage in a P3: (1) the source of funds to pay rent over the lifetime of the project, (2) the source of funds to exit the P3, if necessary (e.g., escrow funded by project revenues, borrowing money, alumni donations, etc.), and (3) what amounts are reasonable for the university and sufficient to provide an adequate return to the development team and their investors. For more on (3), see the Building a Capital Stack and Identifying Capital Sources Guidebooks. Cost savings make a huge difference to developers, so where universities can facilitate those cost savings, deals are easier to do.

Examples include:

  • Opportunity Zones: Locating projects in Opportunity Zones (provides a developer’s investors with substantial tax savings)
  • Property Tax Relief: If developers can claim the institution’s tax-exempt status when buying materials, the savings can be huge, and avoiding massive annual property tax payments can make or break a deal. 

STEP 02-C

Structure the Funding Package

It is typically the responsibility of the private developer to provide 100% of the funding necessary to complete the project and to take the risk of an on-time, within-budget delivery. Insulation from these real development/delivery risks is a key motivator for the institution, which also typically benefits from the schedule and cost efficiency of the project delivery by the experienced developer. It may help your negotiation process to understand how a developer builds a capital stack for a typical P3. See the Building A Capital Stack for more insights. The last critical step in assembling the funding package is validating it with interested third parties, like creditors, ratings agencies, state officials, and others who can opine on its legality and whether it creates the “off-balance sheet” deal that most institutions want from a P3.

STEP 02-D

Negotiate and Execute Governing Agreements

Once an institution selects its P3 development partner, the parties negotiate a ground lease, development agreement and operating agreements which set forth the roles and responsibilities of the parties independently and shared for the development and operation of the new community over the term of the ground lease. Those documents should finalize the financing package, deal structure and economics.

Fund & Build the Project

Once your terms are negotiated and your structure is settled, it’s time to fund the P3 and build it. The developer is almost always responsible for both of these items in a P3. They bring a team of architects and engineers, a general contractor, and finance and management specialists to the project, who work with the university’s specialists in close collaboration to design and deliver the project. These design-build processes typically take from one to four years to complete, depending on the size and complexity of the project.

Maintenance Mode & Exit

Upon completion and delivery, an on-campus P3 project is operated as seamlessly as possible with the rest of campus. The development team is responsible for identifying the proper management structure. In some cases, that will mean private management by a private management company, and in others it will be some hybrid of university management and private management. If the project is housing or recreational, it will often be managed in collaboration with the Division of Student Life or Student Affairs. If it is a mixed use development, it will be often be managed in collaboration with the university’s existing food and beverage vendors. These operational partnerships are envisioned to last for the entirety of the ground lease term, generally in the range of 40 to 60 years.

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