The Advantages of Using an Outside Developer for Capital Projects
It’s no trade secret that there is a growing trend of colleges using developers to construct student housing. A number of universities, particularly public institutions, are finding it advantageous to work with large real estate developers.
However, based on my years of experience, the advantages of working with private developers go well beyond public universities and construction of student housing.
Over the past decade, I have been involved in a number of college development projects both on and off campus. Private developers were instrumental in virtually all of these projects in one way or another. And in every instance, these projects were successful.
So why don’t college and university trustees and administrators use private developers more?
There are several reasons. First, university finance offices will argue that colleges, as non-profits, have access to cheaper money than private developers. It is true that institutions with the strongest bond ratings can borrow money more cheaply than a private developer can secure from the private capital markets. And developers seek development fees, in return for their risk in being involved in a project. But one should not discount the fact that experienced developers can access other private funds, such as governmental grants, loans and tax credits, which can reduce the cost of projects for the institution.
A second argument that is occasionally levied against these arrangements is regardless of the structure of the partnership, it can ultimately show up on the college’s financial records, potentially can affect its bond ratings, and therefore is virtually no different from going to the bond market to finance a project. While a long-term lease commitment is a financial liability that has to be factored into university accounting, a lease or lease-purchase arrangement is a relatively cheap way of addressing a space need and often results in a tangible asset accruing to the university’s benefit. By using the developer’s capital source the university actually preserves its funds for other purposes while acquiring a tangible asset.
Also, it can be debated that many colleges and universities have in-house staff who can manage capital improvement projects better than an outside private developer. Possibly, but in most cases these in-house resources are dedicated to on-campus repair and replenishment projects. They don’t necessarily have experience in the creative reuse of buildings, sustainable development and other innovative design elements that can make a project distinctive. And many college and university facility staffs, senior staffs, college attorneys, provosts and presidents are simply not equipped or sufficiently experienced to handle these issues.
Despite these concerns, there are some obvious advantages.
Private developers can often offer a variety of fresh ideas, a sense of entrepreneurialism, and fiscal expertise. Perhaps most important, they can also attract private capital to a project. In many cases, the private developer can help refine the vision that a college has for a project. They have the talent and resources that can often spell the difference between a pedestrian project and one that becomes a community landmark.
Several projects at Bucknell University serve as prime examples. The relocation of the university bookstore into the downtown business district of Lewisburg was aggregated over seven different funding sources and involved the conversion of an under-used building.
While Bucknell obviously has been building buildings for decades, we did not have the expertise to address the complicated real estate development and financing issues incumbent in this project. The Radnor Property Group was able to utilize state grants, which in turn triggered federal tax credits, making the project not only feasible, but also allowing the architect to design a unique building.
Bucknell probably could have built the bookstore without the assistance of the private developer, but the results would not have been nearly as economically beneficial, nor would the building have been nearly as attractive. In the end, the building cost Bucknell substantially less than it would have cost had the university used only its own resources. The result was a building that is one of the most unique and interesting college bookstores in the country, and the community has a new landmark anchoring its downtown business district.
As a community asset, Bucknell’s bookstore became a regional destination for a much broader demographic market. By working with a developer experienced in creative financing and familiar with college communities, Bucknell was able to access resources and tax benefits that it could not have secured on its own.
The bookstore’s success led to a continued relationship with Radnor in developing three other related community projects: conversion of a historic post office building into an administrative office building to relieve an office crunch at Bucknell, the rehabilitation of an art deco movie house into a performing arts center to enhance and enliven the arts and cultural offerings at the university, and the construction of a small business incubator in a blighted building owned by the university to generate the intellectual property and research and development space to build a stronger regional economy.
In retrospect, there was initial resistance at Bucknell to using a private developer in any aspect of the projects. But over time, Radnor and the Bucknell staff were able to establish a collegial working relationship. That is not to say that there wasn’t tension. But judging by the results, the partnership was extremely beneficial for the university.
As a newcomer to the campus, the developer was able to provide fresh ideas and challenged the traditional Bucknell philosophies and methods to undertaking project development. This provided for dynamic discussions on all aspects of the development process including programming, design, financing and construction. It forced the team partners to think outside of the box, resulting in creativity and innovation that are now evident in each of the buildings.
The bookstore, for example, is a historically sensitive project, creatively reusing and recycling an existing building using sustainable practices, which is now an exciting retail venue benefiting the students and community. The Campus Theatre, with its restored art deco murals and new sound and projection system, has already become a regional icon, hosting film festivals and jazz concerts in the first months since reopening.
What should a college or university consider if it elects to use a private developer?
It essentially distills down to what does that developer bring to the table to supplement university resources.
It is helpful for the developer to have a broad array of services that can support a number of aspects of any project. Radnor was able to assist Bucknell in creating a vision for its downtown involvement that reflected and reinforced the broader vision articulated in university’s strategic plan. Radnor conducted a property analysis, identifying buildings that might suit Bucknell’s purposes, and in one instance, actually made a straw purchase on behalf of the university, which ultimately saved Bucknell money. They identified and secured state grants and federal tax credits, helped assemble the team necessary to secure these funds, and managed all of the application and reporting requirements.
They engaged the architect for the bookstore project, who ultimately was recognized by the Pennsylvania section of the American Institute of Architects for the building design. The standards established for the bookstore project carried over to the other three projects. Finally, Radnor actually owns and operates the bookstore project, which will eventually be transferred to university. They will remain engaged with downtown Lewisburg and Bucknell for at least six more years.
When considering a private develop, an institution should consider:
- The array of services the developer can bring to the table. Can they help access third party financing? Will they manage the complicated processes that are often inherent in complex financing arrangements? Will they collaborate with the university in developing the property by opening their books and allowing university construction experts to assist in project development?
- A commitment to quality. The bookstore project at Bucknell has won other recognition, beyond the award from the AIA. Significantly, the collaboration between the university and the private developer ensured that each of these buildings was also constructed to the university’s standards and that each represented a creative reuse of existing, largely under-used buildings.
- Experience and reputation. Choose a developer that has worked with numerous schools. These developers tend to understand campus culture and community revitalization.
Relationships can be structured in a number of different ways. The developer can retain ownership of the property, buy the building and then lease it back to the university. The Bucknell Bookstore partnership offers Bucknell the opportunity to purchase the building at a reduced cost after a period of tenancy, driven largely by the requirements of the federal tax credit program. Sometimes, the university elects to purchase the property at the outset, after the developer has financed construction. This is how the Bucknell bookstore was handled. Some colleges have used private developers in mixed-use projects – facilities that combine say student housing and faculty offices or even retail ventures. The arrangements and management structures are only bound by the imagination of the parties (and of course applicable laws).
Adding private development to the mix of options to be considered can have beneficial effects, even if the project isn’t ultimately developed by the private entity. The private developer can bring technical resources and expertise, which may enhance the project. And the right developer can enhance the vision for the project and ultimately, the quality of the result.
My experience has been that partnerships between colleges and private developers have often resulted in a better, more distinctive project at a lower cost. Certainly that was the case in Bucknell’s partnership with Radnor. In a recession economy, colleges and universities can no longer prudently afford to live in a world they wish existed. Don’t be afraid to try such a partnership.
—Brian C. Mitchell formerly served as President of Washington and Jefferson College and Bucknell University.