Private Housing or Alternative Financing?
- By Nick Bruno
- October 1st, 1999
Privatized housing, a hot topic in university facilities and services, began in the late 1980s, although it should be noted that the name is not indicative of the results of the process. A more appropriate title would be Alternative Financing of Residential Facilities. With the proliferation of alternative financing of residential facilities construction, very few institutions have built truly privatized residence halls.
History in the Making
The company generally credited with the early privatization efforts, Century Development provided genuine privatized housing. Century leased land owned by an institution, usually for a term of 40 years, constructed new apartment-style facilities and operated these facilities. Universities would share in the net cash flow of the properties. Century provided supplemental housing facilities to universities that were in need of additional capacity.
By the mid-1990s, the number of developers offering various alternative housing programs had grown significantly. Despite this growth, few developers could claim “on-campus” facilities. Companies that recognized the need for high-quality student housing began constructing and managing facilities and marketing these facilities to students; however, these facilities were rarely university associated.
As late as 1997, most developers could offer limited alternatives to institutions wishing to pursue this new housing process. Developers could provide taxable financing (resulting in higher cost to the students), which allowed the developer to rent space to nonuniversity-related renters, and, in many cases, included clauses that made it costly for institutions to buy the facility before the expiration of the land lease. Two additional weaknesses with the process were limited architectural variations and the lack of programs to support the living-learning experience.
Progressive developers recognized the need to become more aware of the institution’s needs for the residential component, architectural design and financing methods that could reduce rent as well as eliminate the penalties for institutions wishing to buy out the project during the lease term. Additionally, many institutions desired new construction, but did not wish to relinquish the management of the facilities to a private company, which was viewed as merely interested in profits.
Current Financing Options
Be aware that the following methods might vary from state to state and/or institution to institution. Administrators should seek appropriate assistance to research feasible options.
Traditional Financing. In Louisiana, this method entails the inclusion of the project within the institution’s Capital Outlay request, followed by approval of the project’s funding by the institution’s governing board, Board of Regents, Division of Administration and the State Legislature.
The major advantages are that funding is tax-free and that the institution maintains the management of the facility, which ensures the support of the university’s academic mission.
The major disadvantage of this method is that it is an on-balance sheet item. Another is time: A typical project funded in this manner could take four to seven years from proposal to completion.
Private Financing. This is the method most frequently used by developers in the financing of both on-campus and off-campus residential facilities. The source of funding for these projects comes primarily from corporate investors. It has numerous advantages and disadvantages.
The advantages of this method are that the institution and/or state’s debt limit is not affected (off balance sheet), process time can be reduced to less than two years from start to finish, management and maintenance remain the responsibility of the developer and risk is borne by the developer.
Disadvantages of this method are higher rental rates as a result of taxable financing, the perception that these privately operated facilities do not contribute to the institution’s academic mission and the cost of early buy-out by the institution.
Developer Foundations. This is one of the newest methods for financing housing construction. Foundations provide the same benefits as the private funding model, with the exception that institutions can choose to finance developments through the developer.
The benefits are tax-exempt financing and the fact that the university may retain management.
The disadvantages are that the developer’s foundation usually charges approximately 25 basis points or a minimum of $20,000 one-time fee and an annual charge of one percent of collected rental revenues for administrative fees associated with the financing above the prevailing tax-exempt rates.
This is a relatively new offering in this field; therefore, the results, benefits and possible pitfalls have yet to be determined. However, this method does provide an institution the ability to take advantage of a private funding method, with the added benefit of significantly lower interest rates.
Private Foundations. This method of financing is not new, but it is under-used. New York’s and California’s auxiliary enterprises and other campus services are administered through 501c3 corporations. The universities do not control these corporations, and their sole purpose is to advance the mission and improve the university.
Most universities’ Development Foundations and Alumni Associations use these tax-exempt organizations to benefit their respective institutions, so their structures and governance are not new to college administrators.
Alternative Financing Success
With the assistance of Lee White of George K. Baum and Co.; Lawrence Sisung of Sisung Securities; and Fred Chevalier of Jones, Walker Bond Attorneys, and the efforts of university supporters, Southeastern Louisiana University in Hammond recently completed its first new residential facilities in 35 years.
Southeastern Oaks Residential Community, developed by Capstone Development Corp., Birmingham, Ala., is a 312-bed facility, consisting of 72 four-bedroom units and 12 two-bedroom buildings. It was financed through a tax-exempt bond offering. The planning and construction of the facility were completed in less than two years. Since this was the first time this financing method was used in Louisiana, considerable time was spent educating various agencies and governing boards as to its feasibility. Now, its success has prompted several other Louisiana institutions to pursue a similar financing model.
The process entailed the leasing of university land to a 501c3 corporation, with the proviso that the corporation would build the facility to suit the university’s needs and, upon completion, would lease the facility to the university. The university would pay the corporation an annual lease, which would defray debt service payments and incidental costs. Since it is a nonprofit corporation, no costs are added, so the rent charged the student is minimized. The university manages and maintains the facility, so the connection to the university’s mission is ensured. However, the flexibility to outsource maintenance and/or management of the facility is an option if the university chooses.
Another significant advantage of this financing method is the ability to purchase the facility at any time for the outstanding debt when the land-lease expires. This model of financing is well suited to any construction and/or renovation project that has or will result in a revenue stream sufficient to support the project.
Nick Bruno is director of auxiliary services at Southeastern Louisiana University in Hammond.