Largest minority P3 developer in the USA. (800)896-5502
Largest minority P3 developer in the USA. (800)896-5502
How Historically Black Colleges And Universities Can Make The Most Of Their Property Through New Partnerships
The December 2020 stimulus bill forgave more than $1.3 billion in federal debt for Historically Black Colleges and Universities. The debt had many HBCUs saddled for decades with more than 40 of these institutions carrying federal debt on their books for facility and infrastructure improvements. As part of the Capital Finance Debt Relief Act, Grambling State University reported that it will see $87 million forgiven. According to their website, approximately $80 million of the debt was for student housing. The Arkansas Times reported that Philander Smith College in Little Rock, AR, will receive $22 million in debt relief, while HBCU Sports stated that Florida A&M University will receive $111 million in forgiveness.
These are just a couple of examples of HBCUs that are breathing a sigh of relief after battling with a year-long pandemic that has caused a decline in enrollment and revenues. While the debt relief comes at a much-needed time, many HBCUs are still crippled by significant infrastructure and student housing needs. Many of the facilities built with the debt that is being forgiven are in serious need of repair and replacement. So that begs the question: How can HBCUs as landowners repair and expand their student housing inventory without becoming saddled in debt once again?
Public-Private Partnerships (P3’s) offer HBCUs a unique opportunity to execute substantial student housing renovations and new construction projects without incurring debt or taking a detrimental financial risk. The devil, however, is always in the details. Many privatized student housing developers ask for occupancy guarantees along with other financial considerations that expose colleges and universities to financial risk. A well-structured P3 that is financed in the capital markets can receive an investment-grade credit rating and not require the college or university to make any occupancy guarantees or take on any risk. This type of financial model would be hard to accomplish anywhere other than in the capital markets with an experienced development and finance team. This model also requires a non-profit ownership group and a national conduit issuer to be part of the transaction structure.
Putting The Model To Work
The conduit issuer issues bonds for the transaction. The non-profit project owner borrows the bond proceeds from the conduit issuer which are placed in a project account. The developer then constructs the project. Most private developers are very well capitalized to cover the upfront predevelopment costs. Therefore, the college or university typically should not have to spend any money on upfront costs. The financing is non-recourse and bonds can be sold into the market as either rated or unrated. As part of the transaction, the non-profit enters into a ground lease for the project site with the college or university; or the developer acquires a project site. The non-profit agrees to share the net operating income (NOI) with the college or university in exchange for a letter of support often referred to as an affiliation letter. The split of the NOI is negotiated with the non-profit at the beginning of the transaction. The split can be as high as 100% of NOI. At the end of the financing, the non-profit donates the project to the college or university.
Rated Or Unrated?
In order for the project to receive an investment-grade credit rating without guarantees, the transaction must be structured and submitted to a rating agency for review and a rating. The credit rating agencies look at a variety of factors when assessing a privatized student housing project. There are both quantitative and qualitative metrics to be analyzed by the agency. Land that is owned by the college or university and ground leased by the developer for the student housing project isn’t at risk. If a default occurs, the bond trustee becomes the new lessee and must fulfill the obligations under the ground lease agreement.
When underwriting a privatized student housing project without any guarantees from the developer, college or university, the credit rating agency scores elements that are most essential to their credit decision. The financial position of the property is a key element that accounts for 65% of the credit score. The financial position includes debt coverage ratio, liquidity and reserves, as well as diversity and sources of revenue. Adequate liquidity allows a project to encounter a temporary interruption in revenue without causing a disruption in payment. The debt coverage ratio is also a critical metric that is analyzed during the underwriting process. The debt coverage ratio measures the project’s ability to service current and future debt obligations.
The sources and diversity of income are also critical to the underwriting metric. The diversity and sources of student housing revenues impact the dependability of revenues over time. Projects that rely on volatile ancillary revenues to meet the debt service obligation are viewed as a weaker credit quality than projects that rely heavily on housing rental income.
The project’s market position will also be heavily scrutinized as it is a key driver of project revenues. Demand drivers and project size are the most critical elements of a market position that the rating agencies will review. Student housing projects where the tenants are required to use the units will be viewed as a stronger credit. Larger projects which demonstrate significant demand will also be viewed as having stronger credit than smaller projects. Rental rates that are below market rate are viewed more favorably by the rating agencies than rates at or above the market.
These are just some of the factors that must be considered when deciding if the bonds should be rated or unrated. The selection of an experienced development and finance team that understands the tax-exempt bond market, as well as qualified 501(c)3 bonds, will help HBCUs navigate a public-private partnership. With the many variables to be chosen in each partnership, it’s important to remember that an experienced team will seek to structure a student housing project that maximizes the elimination of risk and the creation of financial rewards for your property-holding college or university.
How Public-Private Partnerships Herald Building Designs With The Pandemic In Mind
While 2020 was a year of unprecedented challenges, it was also a year that presented many new opportunities. This has been especially true among those of us developers and architects who are part of robust public-private partnership (P3) collaboratives.
The vast majority of P3s use an integrated project delivery (IPD) method. Delivering public facilities and infrastructure using an IPD method allows the integration of processes, practices and systems in a collaborative approach that captures the collective intelligence of all stakeholders. P3s that use an IPD method tend to result in the best value to the public sector by maximizing overall productivity through the reduction of delivery time and waste.
The current pandemic is forcing design teams to think outside the box to deliver projects in an accelerated time frame. Using an IPD method in conjunction with powerful online collaborative platforms enables design firms to execute unique concepts that must adhere to rigorous budgetary constraints and timelines. Design firms that are part of P3s are also finding it necessary to hire staff members who are determined and nimble, possess an acute technical vocabulary, have excellent listening skills and are highly collaborative.
The value of an IPD method in P3 projects is that it allows facilities to be designed and delivered in record time. A design-build-finance collaborative can have a project under construction in less than 90 days when the team can deliver a guaranteed maximum price, construction documents and financing virtually simultaneously. Rapid project delivery is paramount during a pandemic because access to essential services such as healthcare is critically important. The current pandemic has forced design and construction firms to operate outside of their comfort zones and trust their teams’ ability to create highly collaborative designs during these very challenging times.
Meanwhile, now more than ever before, agencies realize that new facilities must be responsive to the challenges and needs of the community during a pandemic. P3 collaboratives have the unique ability to assist public agencies in addressing weaknesses in public infrastructure that were made painfully obvious over the last year. Government agencies should look at developing community-based facilities, such as health and wellness centers, that can contribute to the public's long-term health and safety.
Health and wellness centers can be crafted specifically to help combat risk factors in the community and region. These facilities can provide a place for the community to engage in health and wellness activities and receive education on nutrition and other related programs. These facilities can be designed to be converted into medical space that can support temporary hospital beds and can also integrate drive-through infectious disease testing facilities with associated laboratories. The additional hospital bed capacity may be critical for the communities when more capacity is needed to save lives or to address routine healthcare needs during a pandemic.
For instance, my firm is involved with two Arkansas projects. A health unit was designed to respond to the current pandemic, featuring elements like a drive-through test site and laboratory, HVAC and mechanical systems meant to prevent airborne disease transmission, and a courtyard where staff could find fresh air and respite. The coroner’s office was designed to feature a decontamination unit that provides an area for the coroner and staff to decontaminate after encountering a deceased individual who may have had an infectious disease. The morgue also has washable walls and floors to allow for easy decontamination. These are all essential elements of designing these types of facilities in response to the Covid-19 pandemic.
The current pandemic has forced P3 collaborative teams to be forward-thinking in their approach to designing public facilities. The integration of design, construction, financing, people, processes and systems is leading to designs that are more robust and can be delivered quickly and efficiently. The pandemic has also increased the efficiency of holding design charrettes, which are now hosted remotely via Zoom, Teams and other similar platforms. Having all stakeholders at the table from the beginning of the process creates outcomes that can only be achieved through collective intelligence.
Public-private partnerships offer a unique opportunity to redevelop and revitalize smaller communities around the country. A public-private partnership, also known as a P3 or PPP, is an agreement between a private company and a public body that allows for the public sector to transfer certain risks and responsibilities to the private sector. P3s, when structured properly, can provide an opportunity for small communities to develop new facilities and infrastructure, which can be a catalyst for community redevelopment. Two popular P3 delivery methods are known as a design-build-finance (DBF) and design-build-finance-operate-maintain (DBFOM). These delivery methods can be used to relieve significant burdens and risks from the public sector.
Urban communities have gotten a lot of attention in recent years for improving assets using public-private partnerships. The lack of public funding and the abundance of private capital has made P3 a popular tool for delivering public facilities and infrastructure. However, smaller underserved communities also have significant needs for improved facilities and infrastructure. The needs of smaller communities are much more pressing than those of sprawling urban centers.
Complicating the issue is the fact that many smaller communities often have not constructed new facilities or infrastructure in decades. A well-structured P3 shifts risk from the public sector to the private sector while focusing on allowing the construction activity to be executed by local contractors, subcontractors and vendors. A well-structured P3 also allows municipalities to incorporate small and minority-owned business participation requirements that can be managed in a more transparent manner. The use of national resources partnered with the local workforce creates an inherent best value proposition for the community. When the construction dollars stay within the local community, these dollars can turn over six to seven times, creating a significant impact on the bottom line for the community.
Smaller communities typically do not have the technical resources and expertise to deliver capital projects efficiently. Also, the traditional design-bid-build methodology has proven to be a time-consuming and often more costly method of delivering public projects, especially in smaller communities. The lack of sophisticated construction management experience and the lack of integration between the design, construction and finance often results in projects that are over budget and of inferior quality. However, these communities still have a substantial need for new infrastructure, public safety facilities, courthouses, healthcare facilities, parks, museums and much more. The ability to make needed improvements to public facilities and infrastructure results in a better quality of life for the citizens and increased revenues for the public agency.
A well-structured P3 should accomplish a number of important things for smaller communities. In addition to gaining technical expertise, these communities should be able to take advantage of tax-exempt financing as well as no upfront costs for attorney fees, program managers, site acquisition, architectural design, engineering, etc. The private sector is well suited and well-capitalized to carry these upfront expenses, which can be as much as 18%-20% of the total project cost.
P3s also allow the private sector the ability to structure financing for essential facilities and infrastructure in a manner that does not require a pledge of full faith and credit from the public entity. When a public entity does not pledge its full faith and credit, in most states, this eliminates the requirement of a bond referendum and also does not impact the general obligation capacity of the community.
A tax-exempt lease purchase agreement is a common structure used to deliver P3 projects quickly and efficiently and is a perfect structure for small communities. Under a tax-exempt lease purchase agreement, the private sector establishes a special purpose entity to hold the asset. At the end of the lease purchase term, which can be up to 30 years, the government purchases the asset for $1.
Using a tax-exempt lease purchase agreement to fund a P3 project ensures that the private developer is working for a fixed fee and that the community is able to fund the project with the lowest cost of capital. Under this structure, essential facilities and infrastructure can typically be financed with semi-annual payments that are subject to annual appropriations and the availability of funds. Tax-exempt financing also offers long-term fixed rates, which are a much more attractive proposition than commercial bank financing.
Council Post: How Small Towns Can Ride The Public-Private Partnership Wave (forbes.com)
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Dee Brown has been appointed as the National Advisor on Public-Private Partnerships and Urban Redevelopment for the President of the National Bar Association.