Privatized Housing: A Market Matures

The privatized housing market has been around long enough to mature and produce the fruit that comes with maturity. “Initially, all projects were off-campus, traditionally financed projects,” offers Bruce McKee, executive vice president for Campus and Urban Developments with Birmingham, AL-based Capstone Development Corp., which focuses on the development and management of student housing communities and related facilities. “In the last 10 to 15 years, we have focused more on on-campus housing.”

And while many campuses have stepped into the privatized housing waters, there are still many out there that haven’t. Here are two that are experiencing privatization for the first time, along with the key administrators’ observations and experiences.

University of Louisiana at Lafayette
“We needed additional housing for two reasons,” says William Crist, AIA, director of Facility Management for the University of Louisiana’s Lafayette campus. “We had just 11 percent bed capacity for our student body of 16,500. We felt it needed to be closer to 20 percent. When the project is complete, we will be close to 20 percent capacity, with 3,000 beds. Also, our existing housing stock was substandard — we needed to upgrade our quality.”

University administrators chose privatized housing to build 1,812 new beds, renovate existing residence halls, build a parking garage, and more. They’re working with Ambling Companies, Inc., a Valdosta, GA-based developer of privatized university housing. “The privatized mechanism lent itself well to moving the projects forward more easily than if we had gone through the state funding process,” says Crist. “Also, it’s probably going to be more cost effective in the long run than if we had taken the state route.”

The project is financed through Raging Cajun Facilities, the University’s 501(c)(3) corporation, which signed a property lease with the University for the area where the housing is being built and secured the financing. “Raging Cajun owns and is building the housing,” says Crist. “When it’s complete, they will lease the project back to the University for the cost of the bond indebtedness.” Once the 30-year ground lease is paid, the project becomes state property, free and clear of debt.

“The benefit of privatization is that it minimizes the debt impact on the University’s balance sheet,” says Jeremy C. Doss, LEED-AP, vice president of Business Development with Ambling. “A project’s success comes through the underwriting, with the early years being the most critical. As years pass, a project builds more and more strength and is projected to make more revenue.”

In this tough economy, Doss notes that Lafayette administrators were careful to let the public know that no state or university funds were used for the project, and that it was self-funding. They also noted that the University benefits from improved housing with improved enrollment and that the excess income is an auxiliary.

Crist has two pieces of advice for other administrators who may be considering building privatized housing. First, it’s a great way to move a project along quickly. “We signed a contact in mid-December 2010 and will have students in a portion of the new housing on August 1,” he says. Second, use a project management firm. “Not properly managing the negotiations and construction can be a nightmare. We believe the project management firm paid for itself just through the contract negotiation phase, and it certainly simplified my life in trying to handle a $105,000,000 project.”

Montclair State University, New Jersey
“We have had a housing shortage for quite a few years,” explains Donald D. Cipullo, vice president for finance and treasurer for Montclair State University, New Jersey. “We were housing students at a local hotel. Because we weren’t able to guarantee housing, it was, to some extent, affecting our enrollment growth.”

Like Lafayette administrators, Montclair administrators chose privatized housing, working with Capstone. They’re adding 2,000 beds and a parking deck in a single 14-month phase at a cost of $21M. As an added bonus, the project will be LEED Silver certified.

The project is financed by Provident Resources Group, a 501(c)(3) corporation chartered to own housing across the country. An interesting component of the project, notes McKee, is that, in order to get as much capital into the project as possible, a vast majority of Capstone’s income was deferred through a subordinate bond. “It allowed us to put the money back into the project initially and get paid over the long term only if the project is performing,” he says.

Cipullo notes that the University went with privatization for two reasons. The first is that administrators felt a private developer could get the housing completed more quickly than if they went through the state and, clearly, a 14-month turnaround is quick. “The second reason,” he notes, “is we felt it was a way to bring a significant number of new beds on campus and not have the cost of it on the University’s credit. It was important to the University to reserve debt capacity for other projects.

The difference between the two projects is that the Montclair project is the first privatized transaction in the state of New Jersey, which is a result of the state’s 2009 Economic Stimulus Act. Before the Stimulus Act, which was passed when the economy hit rock bottom, public schools could not lease land to private individuals or organizations.

“I can’t say we were nervous about it,” says Cipullo. “However, because we were the first in New Jersey, we didn’t have any previous transactions to model against, so it took a little longer than we thought to work out the details. It wasn’t a new concept, just a new process in New Jersey.”

Both Crist and Cipullo have become privatized housing believers. “If you manage the process properly,” says Crist, “there are no negatives.”

Cipullo notes that the process on his campus has progressed smoothly: “The developer and contractor, and now the management team that is going to operate the facility, have been excellent to work for. It has been a good experience.”

McKee is not surprised, noting that the market has matured and become more sophisticated since its inception about 20 years ago. “They are true commercial-quality developments and all that implies relative to the developments and product.”

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