University of Kentucky Smart to Explore Private Sector for New Campus Housing

Public-private partnerships are saving taxpayers money and helping universities provide better services.

Ongoing state budget deficits and challenges are putting pressure on state university systems and prompting them to explore ways to cut costs. Higher education officials are desperately seeking ways to keep services, maintain facilities and find less costly and more efficient ways to build and modernize the dorms, academic buildings and other capital intensive facilities needed. To do this, some are turning to public-private partnerships, arrangements in which public entities contract with private sector firms for the financing, design, construction, operation and/or maintenance of public assets.

Universities across the country are already using public-private partnerships to build and maintain a range of student housing, academic buildings and other campus redevelopment projects. Broadly speaking, these partnerships offer a powerful way to put the private sector to work in the business of serving the public interest, lowering long-term taxpayer costs and delivering better facilities to serve the public education mission.

The University of Kentucky (UK) may become the latest university to embrace public-private partnerships. Yesterday, the university announced that UK President Eli Capilouto told its board of trustees the school would begin negotiations with a Memphis-based company to potentially upgrade and expand over 9,000 residence hall beds over the next decade. After reviewing vendor responses to an October request for proposals issued by the university, an eight-member selection committee composed of faculty, staff and students selected Education Realty Trust Inc. as the preferred firm to potentially take over operations of UK’s existing 6,000 residential beds, ultimately replacing them with new, updated facilities that could accommodate an additional 3,000 beds over the next 10 years.

UK officials will spend the next several weeks negotiating with the firm to determine whether a public-private partnership for residence hall operation is the best path forward for the university and students, or whether UK should finance and operate the revitalization project and facilities itself.

This exploration is a smart move, and if UK ultimately chooses to move forward with a public-private partnership (PPP), they will join a number of their peers and can learn from their experiences. For example, some noteworthy recent developments on PPPs in higher education include:

  • Florida Atlantic University (FAU): In August 2011, FAU officials opened the Innovation Village Apartments, a 1,216-bed student residential & mixed-use project on the Boca Raton campus developed under a $123 million PPP with Balfour Beatty Campus Solutions, LLC and Capstone Companies. Accelerated construction on the $123 million project began in March 2010 and was delivered on schedule for the start of the 2011-12 academic year. Under the PPP, the private partner developed the new facility and will co-manage both it and the other existing student housing facilities on the Boca Raton campus in tandem with the university.
  • The Ohio State University (OSU): In November 2011, OSU announced that it had qualified seven of ten consortia submitting responses to a request for qualifications for a potential long-term lease for the operations and maintenance of its parking assets. The university is seeking to lease over 35,000 parking spaces to a private operator in return for a minimum $375 million upfront payment under a concession not to exceed 50 years. Proceeds would be used to pay off university debt and invest in campus transportation services. OSU’s parking initiative is the first project advanced as part of a larger, comprehensive review of all of its non-core assets to see how they could be leveraged to generate additional revenue to support the university’s academic mission.
  • University of California (UC) Davis: UC Davis is using a PPP to deliver its West Village project, a 130-acre project that will provide 343 housing units, 1,980 student beds in apartment housing and 42,500 square feet of retail in a mixed-use development. The university will receive income from both the lease payments for apartments and retail uses and payments by resident faculty in the housing units. Using a PPP allowed the university to leverage its small, direct investment of $11 million into a viable $280 million project.
  • University of Arizona (UA): In May 2011, officials at UA announced the selection of firms to develop two new student housing facilities under PPPs. One involves developing a mixed-use, 720-bed student apartment housing facility with more than 25,000 square feet of commercial space in downtown Tucson, and the other will develop a 320-bed apartment complex nearby that includes 18,000 square feet of commercial space.
  • Montclair State University: In August 2011, Montclair State University announced the completion of The Heights, a new, state-of-the-art residential complex delivered through a PPP. The new $211 million complex was financed by tax-exempt bonds issued by Provident Resources Group-the owner-operator that developed, operates and maintains the complex under a long-term lease-under the auspices of the state’s Economic Development Authority. “The State of New Jersey has not invested any direct capital funding in higher educational facilities in more than 25 years,” university president Susan Cole noted in an August press release. “Therefore, in order to grow and develop as a competitive university, we have had to find creative and cost-effective solutions to build new facilities and make capital improvements to existing structures.”

To be sure, public-private partnerships are a paradigm shift for university systems that are used to relying on appropriated funds and traditional debt financing to deliver assets and services. But moving them towards more cutting-edge procurement models that offer greater flexibility, accountability and give the private sector a much more direct role in the financing and operation of university facilities can be a big win for students, schools and taxpayers.

Oftentimes, these PPPs see the private sector coordinating the financing of university housing facilities upfront and, upon construction, operating and maintaining them on behalf of schools through a long-term lease. A 2007 Reason Foundation study, Privatizing University Housing, explains the typical university housing PPP model further:

[U]niversities have turned to long-term land lease arrangements with private development companies for construction and management of on-campus residence halls. In this framework, a university leases land that it owns to a for-profit or non-profit corporation for a period of 20 to 40 years. The ground lease includes specific rules governing land use as well as construction, operation, and maintenance requirements for student housing on the property. The company typically owns the land for the determined period and collects student rent payments. Usually the ground lessee pays the university net revenues once operating expenses, debt service, and management fees are paid.

As the Reason report explains, this approach allows the private partners to recoup student housing fees to cover their debt service and operations, allowing universities to avoid these costs and stretch their tuition dollars and appropriated tax funds further. Further, the report explains that in 1996 the U.S. Congress authorized the U.S. Department of Defense to launch a large-scale, ongoing program-the Military Housing Privatization Initiative-that has successfully been using similar PPP models to modernize over 180,000 on-base military housing units across the country.

A June 2010 white paper by the Bay Area Council Economic Institute identified several other reasons why universities should explore PPPs for capital projects. For example, the paper notes that PPPs can deliver 15-30% life-cycle cost savings for operations and maintenance, creating more room to fund activities more central to a university’s academic mission. Further, PPPs can be used to deliver projects significantly faster than under typical public procurement methods, as they are designed from the beginning to streamline processes and minimize bureaucratic checkpoints and delays.

Given these benefits and the positive experiences from public higher education systems across the country, public universities in Kentucky and elsewhere are smart to evaluate their planned capital projects and their potential viability for public-private partnerships.

Public-private partnerships can save taxpayers money and provide better dorms and facilities for students, while also freeing schools to focus on their core mission: providing quality education.

Leonard Gilroy is the director of government reform at Reason Foundation. Harris Kenny is a policy analyst at Reason Foundation.