Oct. 6, 2017, 12:13 p.m. | William Colbert | Deal Review

Universities Look to Private Investors, Developers for On-Campus Housing

The term “public-private partnership” seems to be one of the latest buzzwords in commercial real estate development. In short, public-private partnerships are created when a deal requires the support (whether financial or otherwise) of a public entity to make a private deal happen. Sometimes this involves a land swap or tax break. Sometimes it simply involves municipal support for a project that doesn’t fit neatly into the existing zoning code.

Most often, people associate P3s with real estate developers seeking the support of public entities. But in recent years, we’ve started to see the model shift – at least when it comes to student housing. Increasingly, public universities are tapping private investors and developers to support the construction of new on-campus student housing.

The trend really picked up steam during the recession. College enrollment spiked and universities scrambled to provide enough on-campus housing to meet demand. At the same time, traditional capital markets constricted, university endowments plummeted, and sharp declines in state funding resulted in budget cutbacks and reductions in capital spending. Just when colleges and universities needed to be building on-campus housing the most, the financial considerations made it harder than ever for them to do so.

Enter the public-private partnership.

P3s Deliver Benefits to Both Public and Private Entities

 

Universities started to realize that, when structured in a mutually beneficial way, P3s can deliver tremendous benefits for both the public and private entities.

On the public side, P3s help universities deliver much-needed student housing in an expedited fashion. By engaging a private partner, state colleges and universities can usually avoid the complex web of public procurement policies that tend to delay construction timelines. Furthermore, P3s are a great tool for public institutions that do not have recent experience building new housing, and would, therefore, be better off relying on the expertise of a private developer to manage the project. Doing so reduces the university’s risk and preserves its debt capacity, enabling the university to take on other capital projects (like classrooms, laboratories, or student centers) as needed.

Private investors and housing developers benefit just the same.

P3s can also help to mitigate the private sector’s risk. One of the reasons for this is because on-campus student housing tends to be in highly favorable locations, areas that would otherwise be unobtainable to the private sector. These locations can provide real estate developers with better risk-adjusted returns over the long run.

In some cases, universities will actually put up all of the equity for the deal, which also reduces the private sector’s risk. Developers will instead charge a fee for providing their development services.

 

On-Campus Student Housing P3s Take Many Forms

 

There are a number of ways for investors and developers to enter into P3s with public colleges and universities. These are the most typical deal structures we’ve seen as of late:

  • Ground lease university-owned land to the developer. This is the most common P3 structure being used to deliver on-campus student housing. In exchange for the ground lease (usually between 50 and 99 years), the developer agrees to finance, build, and manage student housing on behalf of the university.
  • Ground lease plus master lease. This scenario is similar to the structure above but provides additional risk mitigation for the developers because the university agrees to master lease the student housing for a set period of time, regardless of demand.
  • Foundation-owned project plus development fee. In this scenario, the public and private entity bring in another partner, usually a tax-exempt 501c3 like a foundation or other nonprofit entity. This third party is independent of, but at least loosely tied, to the university. The foundation purchases the land, ground leases it to the university, and then the university hires the private sector developer to build and manage the student housing project. Doing so allows the project to tap into the wide tax-exempt bond financing market.
  • Joint ownership. This deal structure usually requires both the public and private entity to contribute some sort of risk, and both share in the risk associated with the student housing development. The university might contribute its share in the form of land, requiring the private partner to structure the rest of the equity and line up debt as needed. This structure tends to require more flexibility on both partners’ behalf than the other P3 structures discussed above, as these deals can be more complicated and carry more risk for all parties involved.

 

The P3 Student Housing Pioneers

 

Although a number of public colleges and universities have entered into P3s to develop student housing, a few institutions really pioneered the model: the University of California at Irvine, Arizona State, Portland State, the University of Kentucky, and Montclair State in New Jersey.

For example, Montclair State was eager to build new student housing during the recession. The university was packing three students into dorm rooms meant for just two. They desperately needed more housing. Montclair State traditionally used tax-exempt municipal bonds to finance student housing, but after a decade of ambitious capital improvement projects, the university had piled up a lot of debt. 

“We needed to provide housing for our students, and we needed to find a way to do it,” says Susan A. Cole, Montclair State president. 

So they experimented with a P3, an experiment that proceeded with tremendous results.

In 2011, Montclair State opened a new dormitory complex called the Heights. The on-campus student housing complex spans two buildings, has eight residence hall wings that can collectively house 2,000 students, and includes a 24,000 square foot gourmet dining hall. The project is nearly twice the size of any other dorm at a public university in New Jersey. The P3 was structured using the third model above: the University entered into a 40-year ground lease with the Provident Resources Group, a nonprofit. PRG financed the $211 million project using tax-exempt bonds. Capstone Development Corporation, a developer of student housing, built the project and collected a development fee. PRG will own, operate and manage the buildings through the end of the 40-year period or until the bonds are repaid, whichever comes first.

At Portland State, the university was bracing for a dramatic increase in student enrollment. Between 1998 and 2013, enrollment leaped from 18,000 to 30,000 students. It is projected to skyrocket to 50,000 students by 2030. Portland State aims to accommodate at least 25% of students on campus, so they desperately needed to begin construction on new on-campus housing.

So Portland State, like Montclair State, decided to pursue a P3.

The structure of the deal differed, though. Portland State entered into a ground lease with private developer American Campus Communities (ACC), the nation’s largest developer, owner, and manager of student housing apartment communities. They chose this route because of ACC’s ability to access low-cost capital in traditional capital markets. No public subsidies (aside from acquisition of a leasehold interest in the land) were needed. As a result, Portland State could deliver new student housing without it being a liability on the university’s balance sheet.

In 2012, ACC delivered the $87.8 million “University Pointe” project for Portland State. The 16-story, 978-bed building increased the university’s on-campus student housing capacity to nearly 3,200 beds.

Are P3s the Student Housing Model of the Future?

 

There are many reasons to believe that we’ll be seeing more universities rely on P3s for their on-campus student housing needs moving forward. First and foremost, as the number of these projects grows, there are more case studies for universities to rely on as evidence that P3s can work.

Moreover, private sector interest in student housing continues to climb.

As we recently noted, both domestic and foreign investors are being lured to student housing. Acquisitions of U.S. student housing skyrocketed in 2016, with transaction volume totaling more than $9.8 billion, over $4.2 billion more than the year before. Part of the attraction is that student housing continues to appreciate at record rates. Meanwhile, student enrollment at public colleges and universities continues to grow.

Commercial real estate investors and developers looking for relatively safe, recession-proof opportunities to diversify their portfolios should certainly consider P3 student housing projects with public universities. These projects can be complicated, but also lucrative when done successfully.

Interested in learning more? The Urban Land Institute has put together a fantastic report on 10 Principles for Successful Public/Private Partnerships. Read more.