Presented By:

Linda Anderson
Greg Strickler

ANDERSON STRICKLER, LLC
1055 Thomas Jefferson St. NW
Washington, DC 20007

© ANDERSON STRICKLER, LLC 1998

1. PRIVATIZATION PRIMER
   
1. Definition of Privatized Housing
   
1. The decision by an institution to contract or outsource with a private vendor to develop and/or manage an auxiliary campus function that is traditionally maintained by a department(s) within its function.
   
2. Since traditional functions vary with size and capacity of an institution, any or all of the following functions could be privatized:
1. Planning
2. Programming
3. Design
4. Construction
5. Financing
6. Ownership
7. Management

2. Reasons for Privatizing
   
   

1. Student preferences
1. Want "residential" facilities and freedom

2. Needs of non-traditional age students

2. Administrative demands
1. Eliminate development and operating costs of new housing
2. Avoid development and operating risks
3. Continuation of a trend
4. Improve retention and recruitment with upgraded facilities
3. State government demands
1. Funding levels
2. Enrollment pressure
3. Regulatory constraints
3. Profile of Colleges and Universities That Have Privatized

4. Major Players in Privatized Housing
   
1. Firms tend to fall into one of three categories, but some do it all
1. Consulting: planning, programming, program management
2. Development: design, construction, financing, operations
3. Management: operations and residence life programming
2. Profiles of Participating Firms
1. National developers/managers with single product
2. National developers with "customized" product
3. Local developers without specific skills in student housing
4. Development teams assembled to address specific projects

2. PROJECT DELIVERY ALTERNATIVES

The approach to project delivery varies with the degree of involvement of the private sector. As private sector participation increases, the greater control the developer will have over the development process. As will be discussed later, control, risk and return go hand-in-hand.

1. Perspective on Risk, Return, Control

1. University project
1. Risk: Moderate
2. Return: High
3. Control: High
2. Fully privatized project
1. Risk: Low
2. Return: Low
3. Control: Low

1. Nonprofit corporation
1. Risk: Low
2. Return: High
3. Control: Moderate

2. Traditional Delivery

1. Basic description: University contracts directly with A/E and GC and controls each step of the design and construction process; linear process to satisfy requirements of each phase before proceeding to the next.
   
2. Reasons for use: Familiar approach used by universities, typically mandated for public institutions; tax-exempt financing available when institution employs this approach.
   
3. Basic structure: Theoretically design/bid/build; frequently design/bid/redesign/re-bid/build; management by university
   
4. Disadvantages: Time consuming, costly, adversarial.

3. Privatized Development

1. Basic description: Land is leased to private developer, who designs, finances, builds and operates the project; returns and minimum control of project by university through ground lease.
2. Reasons for use: Fast delivery required and/or lack of in-house expertise, funding capacity or operating experience.
   
3. Comparison of traditional and privatized methods:
   

Aspect	Traditional	Privatized
Development
Housing Style	Covers full range from traditional dorms to apartments that vary with campus needs and design	Pre-designed apartments with only limited elevations and exterior changes possible
Structure	Covers full range from garden-style, to mid-rise to high-rise	Typically garden-style apartments
Quality	University specifies quality level	University only has indirect control of quality, useful life of building typically only for length of lease
Programming / Planning	Programming and planning can take up to three years	Programming / planning can take as little as two months for pre-designed product
Construction Period	Construction can take a year or more for higher-end product	Construction can take as little as 6-8 months for lower-end product
Direct Project Costs	Typically higher because of procurement process and other regulations	Typically lower than university costs
Indirect Projects Costs / Overhead	University does not account for indirect costs such as staff time and marketing, thereby understating true cost of the project	Included in developer’s budget
Development Risk (lawsuits, etc.)	Borne by university	Borne by developer
Delivery Risk	Borne by university	Typically borne by developer
Financing
Net Revenues	Retained 100% by university	Split between university / developer (typically 50 / 50)
Debt Financing	Provided by University; if available, tax-exempt financing results in lower cost of funds	Provided by developer; if financing is taxable, cost of funds is higher
Equity	To the extent equity is required, little or no return on funds necessary	Market rate of return required
Taxes	Not assessed against project	Usually assessed against leasehold improvements
Occupancy Risk	University at risk	Typically, university at some risk
Management
Housing Experience	Larger, established universities may have experienced in-house staff; smaller universities may not	Typically extensive, either in student housing or in developing / managing housing in a particular market
Educational Mission	University balances educational mission with fiscal concerns	Developer focuses on bottom line of project
Campus Culture	University creates and maintains	Developer may not be required to address significance and impact of campus culture
Budgeting	Controlled by university	Input from university, but controlled by developer
Rental Rates	Set by university	Set by developer, may be restricted
Residence Life	Provided by university	Typically provided by developer at a minimized level as required
Staffing	Controlled by university	Input from university, but controlled by developer
Maintenance and Repair	Controlled by university	Input from university, but controlled by developer
Specialized Operations	University responsible for operations not central to the housing program, such as married student housing, faculty/ staff housing, day care centers, and Greek housing	Developer may also assume responsibility for one or more specialized operations
Responsibility for Students	Parents consider university responsible	Parents consider university responsible

4. Description of common ground lease terms
1. Term: 25 to 50 years
2. Rent: Base rent (nominal) plus a percentage
3. Occupancy Guarantee: Minimum beds or revenue level
4. Ownership: Improvements typically owned by developer for term of lease, except FF&E, which is always owned by developer
5. Development: Design reflects "preference" of university, but developer has control; financing by developer
6. Management/Operations: Governed by university/developer committee with predetermined tie-break authority; day-to-day operations are developer responsibility; developer or university may provide residence life programming
7. Option to purchase: Buy-out during term possible at appraised value or outstanding debt plus cash flow; university typically has right of first refusal if developer wants out
8. Right of first refusal: Developer often has right to do any additional development on campus; may be unenforceable, but eliminates complications when occupancy guarantees are in place
9. Other: Free rooms for RA’s, data communications, etc. may be required of developer; if purchased from university, must be at market rates
5. Variations
1. Ownership of improvements stays with university (UMCP)
2. Development by private developer, but operations are by university (Wright State)
6. Track record
1. Housing directors are basically pleased with results
2. Residence life operations have fallen short of universities’ expectations, but still better than off-campus alternatives
3. Financial returns to the university have been consistently disappointing, generally because of occupancy rates lower than projected

4. Nonprofit Corporation

1. Basic description: Hybrid that establishes a nonprofit foundation as the developer, owner and manager of the project
   
   
2. Reasons for use (when permitted by state law):
   1. University maintains some control over the development and operation of the project
   2. Operates "off –balance sheet" and outside of state procurement regulations
   3. Lower cost due to tax-exempt status
      
3. Basic structure
1. Site is leased to the foundation with term similar to financing
2. Foundation retains development team to design, finance, construct and operate the project
3. University contracts could be with a developer or development manager who provides all services, or university could contract with individual firms directly for each service
4. Agreements between foundation third party operators are limited (e.g., 3 years with 2-one year extensions possible)
4. Variations
1. Independent foundation: may be tax-exempt, but university loses control of operation
2. Research shows that these arrangements are not as successful as a university-affiliated foundation
5. Track record
1. Affiliated-foundations have been largely successful
2. Unaffiliated-foundations, though few, have been bought out by the university
6. Comparison of traditional, privatized and nonprofit forms
   
1. Traditional approach, university has:

• Sufficient excess financing capacity to commit to student housing
• Expertise and desire to develop and manage student housing
• Time and budget for a protracted development process
• Lower division students who are in greater need of university-sponsored programming and oversight

2. Privatized approach, university has
• Limited or nonexistent capacity to finance the project
• Little or no preexisting housing or housing management experience
• Upper division and graduate students who desire housing with more freedom and less oversight by the university
3. Hybrid 501(c)(3) approach, university has:
• Administrative expertise and desire to oversee the process and operation of the foundation
• Need to accomplish off-balance sheet financing without losing all control of the project,
• Need or desire to maximize the value of the project (i.e., cash flows, rent levels, construction quality level, debt service can be varied to meet financial goals of housing system)
• Desire to privatize only part of the development/ management process
• Statutory authority and tax-exempt foundation to implement the project with this approach
3. Privatization Decisions
1. Simple Decisions
1. When an institution must privatize
1. When housing is required within a year
2. When there is no other way to finance housing
3. When the state has mandated that privatization be used whenever possible
4. When the cost of developing and operating housing in the traditional manner is too expensive
2. When an institution should not privatize
1. When privatization mechanism of a ground lease is directly prohibited
2. When traditional means of housing development and operations have already been successfully established
3. When tax-exempt, state-supported financing is plentiful and relatively inexpensive
2. Complex Decisions: Factors That Influence The Decision
1. Factors that favor privatization
1. Affordability: Institution has difficulty developing and operating affordable, self-supporting housing facilities
2. Mandate: Privatization enjoys the support (political and direct) of the state, the university system and the president and board of the institution
3. Demographics: Housing is for upper division and graduate students
4. Auxiliary status: Housing is treated purely as an auxiliary function or as the satisfaction of the basic need for shelter
5. Origination: Campus has been traditionally a commuter campus, and housing is being introduced for the first time
6. Demand: There is a waiting list for housing by returning students, and the a Comprehensive Housing Plan demonstrates the need for housing
7. Red Tape: State procurement regulations are particularly burdensome
2. Factors that discourage privatization
1. Fit: Products available by developers do not fit in the campus plan
2. Culture: Culture of a privately operated facility is at odds with the culture of the existing housing
3. Control: Institution wishes to have absolute control over the development and/or management of the project
4. Quality: Desired quality of housing exceeds that which can be profitably provided by a developer
5. Affordability: Not financially feasible for a developer to develop the project
6. Uncertainty: Demand for new housing is neither present nor sure to materialize
7. Need for cash: Institution believe that privatization is a means for improving cash flow in the near term
8. Attitude: Privatized project would be adamantly opposed by whomever is responsible for the project
9. Space: No appropriate site available for a privatized project
3. Attitudes Toward Privatization
1. Supporting arguments
1. Common sense: it is the right product or the only way to make it happen
2. Risk: least developmental and operational risk to the institution
3. Expertise: allows school to concentrate on what it does best and avoids developing expertise in house
4. Convenience: better product and service for upper division students preparing to enter the "real world"
2. Criticisms
1. Quality: To be profitable, an otherwise comparable privatized project would have to be built to lower quality standards
2. Residential life: Inappropriate for lower division student, who are unprepared for freedom of privatized facility
3. Campus culture: Private developer as a long-term partner is antithetical to nonprofit culture of a campus
4. Money: Promised cash flows have yet to materialize

4. Decision Matrices

 



4. IMPLEMENTATION ISSUES
1. Comprehensive Planning
1. Privatization should be undertaken only within the context of an overall plan for its student housing system, which considers the mission of student housing and the interdependencies of operating more than one housing system.
   
2. Economics of revenue-generating project
1. (Revenue – Operating Cost) = Net Operating Income
2. Net Operating Income ® Debt Capacity ¦ (P, i, n)
3. (Debt Capacity – Existing Debt) ® Type and quality of project
3. Market-driven Planning Model

4. Project Initiation
1. Kick-off session
2. Document requests
5. Mission and Goals
1. Interviews with stakeholders
2. Visioning work session
3. Document reviews
6. Existing Condition Audits
   
1. Operations analysis: Operating Costs
• Staff interviews
• Operating trend analysis
• Peer analysis
• Overhead analysis
2. Market analysis: Revenue Potential
• Focus groups
• Off-campus market analysis
• Peer institution analysis
• Enrollment trend analysis
3. Facility analysis: Capital Costs

• Deferred maintenance review
• Life-safety review
• Renovation and adaptation analysis
• Debt capacity analysis

7. Conceptual Solutions
1. Program development
2. Concept development
8. Market Confirmation
1. Student survey
2. Demand analysis
3. Rent sensitivity
4. Concept refinement (Go to 7.)
9. Financial Model
1. Development budgets
2. Scenario development
3. Financing options
4. Ownership options
10. Comprehensive Plan
1. Analysis summary
2. Master plan of capital projects
3. Strategic plan

• Capital budgets
• Operating pro forma
• Ownership structure
• Management structure
• ScheDule and phasing options

4. Implementation Plan
2. Financing Structures
1. Objectives
1. Obtain the lowest cost of capital
2. Finance as much of the project as possible without equity contribution
3. Minimize the risk to the university
4. Maximize the university’s financial return and flexibility
5. Maximize the university’s control over the project
2. Taxable long-term debt
1. Use: For developer-financed projects
2. Characteristics

• May be rated or un-rated
• Highest interest rates
• Greatest flexibility
• Secured by a mortgage, pledge of revenues and covenants

1. Tax-exempt bonds
1. Use: For projects financed either through the university or a foundation
2. Characteristics
• May be rated or unrated
• Lowest interest rates (200 basis points or more than taxable)
• Less flexibility
• Secured by a mortgage, pledge of revenues and covenants

© Copyright 1997-98 Anderson Strickler, LLC
Design by Coleman Design Group, Inc.
Maintained by Mark Brailsford