Using Partnerships to Build Green

Building green is challenging. Few universities have the discretionary funds and in-house expertise to accomplish LEED design in today’s world of shrinking budgets. Yet the pressure to build LEED facilities is increasing. What used to be considered going above and beyond in making new buildings environmentally friendly now feels like an expectation, especially for a public university with a strong sense of public purpose close to its heart.

Meeting LEED Standards

Building green can be expensive and complex. This is especially true when building LEED-designed laboratory space or student housing. The cost of design, materials, and construction is higher for LEED buildings. And it is not just the initial design and construction that is pricy. Ongoing maintenance and future improvements on green buildings require staff to be specially trained, and that additional expertise means additional costs. The energy savings of LEED buildings can offset additional costs, but those savings are seen over the long-term, not immediately.

With university budgets shrinking, it is common to defer maintenance, but this is not a viable approach to maintaining LEED buildings. If LEED buildings are not properly maintained, the energy savings that helped the building achieve LEED status may not be fully achieved, resulting in higher operating costs over the long-term.

Failure to adequately maintain your LEED-designed building puts the building’s LEED status at risk. Your university’s investment in green buildings is likely a result of the commitment you have made to the students, parents, and the community. That LEED rating is a matter of reputation, and losing it may harm the green-friendly reputation that you worked to build.

Given that an investment in a LEED building is 40 to 50 years or longer, a related investment in management and maintenance will also run for many decades. Unfortunately, maintenance is often not adequately considered in advance, and when budgets tighten, deferring building maintenance can seem like an attractive option to universities who are trying to stretch their dollars.

So how does a cash-strapped public institution pay for green construction and maintenance?

One Possible Solution

One option to consider is a public-private partnership; a collaboration between a private development team, a private nonprofit organization, and a public college or university. A partnership that helps the university pay for the development and maintenance of new facilities and avoids deferred maintenance on existing facilities.

To be clear, a public-private partnership is not privatization. We are all familiar with stories of local governments, including public educational institutions, selling assets or exclusive rights to operate an asset to a private “partner.” The benefits of those arrangements often heavily favor the private “partner” at the expense of the public entity. To achieve a true public-
private partnership, the university must see a significant benefit.

In my experience, the most successful public-private partnerships have been structured as follows:

  • A private, nonprofit organization creates a single-purpose bankruptcy-remote entity to finance, build, and maintain the project.
  • The nonprofit procures development services from a development team: a developer, architect, and general contractor.
  •  A pre-development agreement is entered into between the nonprofit and the public university to fund pre-development work. During pre-development, the design is developed, a guaranteed maximum price is established, and contracts and agreements are drafted. These agreements are designed to insulate the university from construction and development risk.
  • After pre-development is complete, the nonprofit and the public university enter in to a long-term lease. The nonprofit then issues tax exempt lease revenue bonds and construction begins.
  • During construction, the nonprofit works with the developer to oversee the project with significant input from the university.
  • After construction is complete, the nonprofit maintains ownership on behalf of the university, subject to the lease. The university makes rent payments to the nonprofit equal to the debt service on the bonds, plus actual operating costs. Management of the building is a partnership, with the university actively involved in all decisions.
  • The partnership is maintained for the life of the project’s debt and no longer. Once the bonds have been repaid, ownership of the project transfers at no cost to the university.

Because the work is completed under the ownership of the nonprofit and not by the university itself, and the debt is the debt of the nonprofit, a private development process can be utilized, avoiding the often costly public procurement model. This results in a streamlined decision-making process, leading to savings of both time and money.

We have used this model to build more than 10 LEED facilities for various local governments and public institutions, including a LEED Platinum wet and dry laboratory, a LEED Gold medical office building, LEED Gold and Silver offices, and several LEED-rated student housing communities. All of these projects were completed on time and within budget. All have maintained their original LEED certification.

One project that particularly stands out is one in which we partnered with the University of Washington (UW) and King County to complete a university medical center, a project already underway but that was stalled by a $30M cost overrun after site excavation. The UW and King County officials were concerned about how to fill this budget hole, so achieving LEED status was not even on their radar. Using the public-private partnership model outlined above, we were able to restructure the project and reduce development costs from their projected $800 to $450 per sq. ft. This savings allowed the building to move forward, and the result is a LEED Gold-certified medical center that is privately maintained and operated on behalf of the University of Washington. Deferred maintenance is not an issue, as it is the private sector’s contractual responsibility to maintain the building to its LEED Gold design until the bonds have been paid and ownership transfers to King County and the University of Washington.

The Benefits a Public-Private Partnership

To achieve a true public-private partnership, there must be a significant benefit to the public institution. Each project is unique, and each public university that embarks on a public-private partnership has its own reasons for doing so. Some of the most common benefits seen by public universities are:

  • The university does not take on pre-development or development risk; this is the responsibility of the development team as part of their contractual commitment to the public institution.
  • A guaranteed maximum price contract (GMP). Once a price is set, the university can be confident that the building will be completed within this budget. A GMP provides predictability for the university and reinforces for the private sector their obligation to build cost effectively.
  • The project is financed using tax-exempt bonds, reducing overall project costs.
  • Private-sector expertise, which offers a streamlined pre-development and construction process, results in faster build time and reduced construction risk in building green.
  • Since the building is owned by the nonprofit and privately maintained, maintenance cost and risk is also reduced.

What Type of Buildings?

Projects that are best suited to the public-private partnership model are those that are revenue-generating. These include:

  • Student housing
  • Student fee-supported activity centers
  • Dining facilities
  • Intramural athletics facilities
  • University-operated hospitals
  • University laboratory and research facilities

Perceptions of Public-Private Partnerships

If you decide to explore the public-private partnership option, be prepared for questioning and perhaps even skepticism from university officials. Many people equate public-private partnerships with privatization. But as I explained earlier, when properly structured, a public-private partnership is a true partnership that provides significant benefit to the public university.

There will also be concern about the fact that the building built through a public-private partnership is not actually owned by the university for the life of the bonds. Instead, it is constructed for and leased to the university by the nonprofit until the bonds are paid off. This ownership structure can make some university officials uncomfortable because they perceive that the building is out of their control. Remember, the nonprofit builds the facility, owns it, manages it, and leases it back to the university. All of this is done on behalf of the university, and with the requirement to transfer fee ownership to the university as soon as the bonds have been repaid, at no additional cost. Because the nonprofit is working on behalf of the university, it is the leading voice in design of the building and in management and operations once the building is completed.

With LEED-designed buildings in particular, this ownership structure can provide significant benefits to a public university. Under the public-private partnership structure proposed above, the challenges and risks of managing a LEED facility fall to the nonprofit. This means that for the mutually agreed-upon period that the bonds are active (typically 30 years), the university does not need to worry about deferred maintenance, staff changes, maintaining compliance with LEED certification, warranties on green technologies, and other issues related to LEED building maintenance. And of course, during those 30 years, the university continues to reap the benefit from lowered energy costs and utility costs.

Conclusion

A properly structured public-private partnership can provide tremendous benefit to a public university looking to build green. Establishing a guaranteed maximum price and the involvement of an experienced private team reduces the risk of construction cost overruns. Maintenance and operations risk are decreased because the building is managed and maintained by an independent third party with the guidance and input from the public institution. And the energy efficiency of green building means cost savings on energy bills; a clear benefit to the university’s bottom line. 

John Finke is senior program manager of NDC HEDC Public-Private Partnerships, with more than 35 years of experience in local government, nonprofit management, and in financing public-private partnerships. He can be reached at p3@nationaldevelopmentcouncil.org.

 

 

 

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