A Private Showing
WHEN UPS NEEDED EMPLOYEES at its Louisville hub, the University of Louisville's (Ky.) students presented the perfect candidate pool. UPS sweetened the pot with full scholarships, a 401(k) plan, housing and book allowances, health care services, and union wages. But to be able to work odd hours through the night, students needed a place to crash where their comings and goings didn't disturb normal dorm activities. The state of Kentucky and the university saw one clear answer: bring in a private developer to create, finance, and operate a 1,200-bed housing unit.
It's yet another case of private developers charging to IHEs' rescue. Face it: most universities are land rich but lack equity and practical real estate experience. "Institutions don't want to be developers -they just want to be ranked number 1 in Newsweek," says Juan Reyes, a partner with Hartman and Craven law firm in New York. And when you also face budget struggles on a daily basis and wrestle with tough mandates from state appropriations officials, alternative ways to keep schools growing are music to administrators' ears.
Think of it as a way to get around being boxed in, says Charles Perry, president of Ambling University Development Group in Valdosta, Ga. Ambling's equity has translated to more than 25,000 beds in private housing across the country, and this company is just one player in this space.
No one jumped into this niche to be altruistic. Campuses offer stability, with a higher quality of neighborhoods surrounding them, says Glenn Weaver, director of development at Raleigh, N.C.-based Academic Privatization LLC. "Education is a government responsibility. Even if it's a private college, government is likely to provide future incentives to maintain the quality of the area," he says. Not to mention IHEs attract young professionals, who attract upscale retailers. That livability increases property value and makes the area more attractive to office developers, too. "Your cycle is spiraling upward rather than downward," Weaver adds.
Financially speaking, Perry sees the IHE market as a developer's sweet spot no matter what happens with loan interest rates. "The way these campus project bonds are sold and paid back through the rent, we don't see this niche being especially impacted by those forces," he says.
Finally, developers also receive a shelter from the storm of regulations in these deals. Thanks to an IHE's community facility standing, it represents a chance to break into residential areas typically deemed off-limits to ordinary commercial proposals, Reyes points out.
Partnerships give developers a chance to break into residential areas that are typically off-limits.
Housing makes up the bulk of deals between developers and campuses, but that is changing. These partnerships also build:
Nursing homes near medical facilities
Retail strip centers
It was The Three Musketeers, 21st-century style: a housing developer, a local retail developer and Johns Hopkins University (Md.) agreed to build Charles Village, a complex of student housing and retailers that included Barnes & Noble and a credit union. The university would contribute the site and student consumers. The local developer would finance the building envelope; the housing specialist would put up the dough for the lodging and lease it back to JHU students for 40 years.
But as the pieces fell into place, the partnership fell apart. JHU needed a building that reflected a certain quality and design standard-after all, it was in this for a much longer haul than 40 years, says Larry Kilduff, executive director for facilities management at the university. Unfortunately, its vision and the housing developer's pocketbook weren't compatible. The firm couldn't build to those standards and charge enough in housing rates to cover the expenses. But no sweat, the officials reasoned. JHU could just kick in the extra bucks and everyone would walk away happy. "But that got into the ownership issue, so we decided to finance the piece in its entirety," Kilduff reports.
The university could have extended the lease term beyond 40 years to allow the developer more time to recoup its costs, but such a long-term agreement made administrators squirm.
So JHU picked up the tab and retained the developer on a fee basis rather than on ownership terms.
"We're still better off because we dealt with the city and community uniformly in presenting this project," Kilduff adds. "I don't have any misgivings about either one of the development entities except to say that the decisions were driven by financial considerations more than anything else." In fact, he's open to discussing a private development answer to two other housing pickles on the Baltimore campus.
It's easy for a developer to dazzle his audience with a slick presentation. References rarely share horror stories. So when it comes to selecting the best private developer, IHEs need to employ a few investigative tricks. For starters, phrases like "If you will get out of my way, I'll get it done," or "We don't need everyone's approval," should be red flags, says Glenn Weaver with Academic Privatization. It signals they don't understand the difference between public and private operations, and that can't bode well for an IHE.
Note whether the developer offers to do a market study. Many try to brush this step off, but it's a requirement to get tax-exempt financing, Weaver adds.
And don't be impressed if they want to bring their own architects and contractors, touting the teamwork benefit. A good developer can partner with a variety of personalities, and it's in a college's best interest to have local engineers and designers with ties to the school on site.