Student Housing Privatization - A Valuable Option for Addressing Student Housing Shortages, Increased Student Enrollments, Reduced School Budgets and Changing Student Needs
 
December 24, 2003
 

“Privatization,” sometimes referred to as “public-private partnerships,” has achieved increasing prominence among universities and colleges seeking to improve their delivery of various services that are critical to their students. Privatization already has become relatively common in the operation of school bookstores, dining services and laundry services. More recently, use of privatization has expanded to address one of the greatest challenges currently confronting higher education – providing attractive, “technologically advanced,” and affordable student housing during times of increased student enrollment and reduced budgets.

Privatization generally refers to the process by which public and private institutions enhance their delivery of services by transferring to outside entities control over certain assets and “peripheral functions.” In the student housing context, privatization has involved schools transferring responsibility for some or all of the following housing-related functions:

• land control
• project ownership
• property management and operation
• design and construction
• project financing
• residence life

Many recent student housing privatization transactions have involved a ground lease arrangement between the university, as ground lessor, and the housing provider, as ground lessee. Specifically, land owned by a university (or a closely affiliated organization like a university housing foundation) is leased for a period of 20 to 40 years to a non-profit corporation, a for-profit corporation, or a governmental conduit. The ground lease imposes a number of requirements governing the use of the land and the construction, maintenance and operation of the student housing located on the land. Typically, the ground lessee owns the housing on the leased land and collects rent payments from the students occupying the housing units. The university then receives as ground rent most, if not all, of the net revenues from the project that remain after payment of debt service, operating expenses and management fees.

The ground lessee is often part of a team assembled by a developer to undertake the project. The developer, who receives a development fee for its services, is usually responsible for procuring the project's financing, and for the oversight and management of the project’s design and construction. The management agent (often an affiliate of the developer) typically will assume responsibility for managing the project after construction completion. In some cases, the management agent will also provide some of the residence life services.

The movement among universities towards privatization of student housing has been driven by a number of different forces. Many schools are now experiencing the effects of the so-called “echo boom” – children of the “baby-boomers” who are rapidly becoming college-aged. The United States Department of Education forecasts that enrollment in degree-granting institutions will increase by about 15 percent in the next decade due to the echo boom and increasing numbers of immigrants attending college.

The rash of state budget deficits is also contributing towards more privatization of student housing. Most states are now experiencing the worst budget deficits at any time in the last fifty years. These deep deficits have prevented many public schools from undertaking significant capital projects such as building student housing. Additionally, many private schools are suffering from reduced public funding and dramatic reductions in investment income from their endowments.

Students’ expectations with respect to their housing and the related amenities are also undergoing major changes. Many students are no longer satisfied by aging dormitories with “double-loaded corridors” and shared bathrooms that were built in the post-war boom of the 1950s through 1970s. Today’s students often feel they need their own bedrooms, private bathrooms, high-speed internet access, computer access to the library, cable television and other modern amenities.

Advantages of Privatization

Privatization provides a number of important benefits that help universities meet their student housing needs. While not an exhaustive list, the benefits include:

• Time efficiencies: Many schools, particularly public universities, are subject to extensive rules governing procurement and construction of large capital projects such as student housing. According to some university officials, these requirements can add two or more years of excess time to complete a project when compared to privatization transactions. These delays also mean the loss of two or more years of additional housing revenues for the university. In privatization transactions, contracting is expedited because the developer's contracts with architects, engineers, contractors, lenders, lawyers and other members of the team are typically outside the university's procurement and contracting requirements.
   
• Improved Housing Services: Providing student housing is not a desired “core competency” for many universities and colleges. Many school personnel are not well-versed in recent developments relating to housing design, construction materials and practices, management and operation responsibilities and/or financing options. By pursuing privatization, schools are able to work with a team of professionals that typically offer a wide range of recent experience in areas critical to student housing projects.
   
• Focus on University’s Core Mission: Through privatization, school officials are able to focus on their schools’ core academic responsibilities such as developing effective academic programs, as well as attracting and retaining students, professors and other professionals and staff.
   
• Preserved University Debt/Credit Capacity: Some privatization transactions may be structured in a manner that allows a portion of the project's construction and permanent debt to remain off the university’s balance sheet. This so-called “off-balance sheet” financing helps universities preserve their ever-important debt capacity and credit rating for other borrowing.
   
• Use of Tax-Exempt Financing: Many privatization transactions allow schools to take advantage of tax-exempt bond financing. The interest rates on many student housing privatization bonds are typically not as favorable as bonds backed by general university revenues. However, the use of tax exempt bonds still enables the university to realize lower borrowing costs than those required in taxable transactions. Also, since bonds backed by other university revenues are not required, public universities can preserve their revenue bond capacity.

Protecting the University's Interests

Of course, student housing privatization is not without some drawbacks. For example, some schools have expressed concern that, through privatization, they will lose control over the loss of their student housing. Also, many schools have come to recognize that, even if their housing is privatized, the school retains ultimate responsibility for the housing and student/parent complaints. While these issues can be significant, they often can be mitigated by ensuring that the transaction documents provide:

1. a construction management plan that ensures quality control in design and construction of the project (and, hopefully, prompt project completion);

2. a real estate operations and management plan, including a performance incentive program, that effectively meets all of the university's expectations with respect to the day-to-day operations of the project;

3. a facilities maintenance plan (and capital repair and replacement plan), including a performance incentive program, that ensures that the housing units, common areas, and other facilities are maintained in a manner that fully satisfies the university's requirements;

4. a program that enables students to regularly provide constructive feedback to the university regarding the students' level of satisfaction with their housing and the related amenities and services; and

5. financial reporting requirements that enable the university to maintain a complete understanding of the project's revenues, expenses and overall operations.

In the years ahead, the movement towards student housing privatization will likely continue to grow at a rapid rate. Schools with current or projected student housing shortages should carefully consider how privatization can best be used to their advantage. Many of those schools that pursue privatization will find that it greatly enhances their ability to meet the needs of their schools and their students.

For more information, e-mail Stephen Niles at stephen.niles@hklaw.com or call toll free, 1-888-688-8500.

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