At many colleges across the country, enrollment numbers are strong, buildings are outdated, and money is tight. That might be bad news for the institutions, but it’s good news for people like Bruce McKee.
Mr. McKee is a principal at Capstone Development Partners, a major player in a growing business: forming partnerships with colleges and universities to build student housing. “I see institutions that five years ago or even three years ago wouldn’t have considered public-private partnerships as a means of doing business but are now calling us,” he says.
And those partnerships are broader than ever. A decade ago, Capstone was doing housing mainly for upperclassmen—students who could handle the independence that might come with private housing. But now “I would say that 80 percent of the developments we have done in the last four years have been for freshman or sophomores or a combination of both,” Mr. McKee says. “It’s core campus stuff.”
Businesses like Capstone are navigating the byzantine and bureaucratic higher-ed landscape to exploit a lucrative market, and college administrators are discovering how easy it can be to use private companies to work around familiar problems.
Colleges are typically bogged down in process, constrained by state regulations—especially if they are public institutions—and focused on their core academic buildings. Many have a daunting backlog of deferred maintenance as well, so even if there is money for repairs and new construction in the budget, there is no shortage of places to spend it.
Those factors have created openings for private developers to provide what colleges increasingly say they cannot: financing, construction expertise, and even continuing operations and maintenance for new multimillion-dollar residence-hall projects—along with the pizazz that students are looking for in modern housing. Such projects, administrators say, would otherwise be on the periphery of the colleges’ core mission of teaching and on-campus research.
Student residences have long been a focus of partnerships with developers, but now the scope and size of the projects are expanding rapidly. In 1996, Prairie View A&M University was the first to strike a deal with a developer to build student housing. The partnership was with one of Capstone’s big competitors, American Campus Communities, to build a residence for 675 upperclassmen. Today the company has built or purchased 117 sites, comprising close to 100,000 student beds, at institutions including Arizona State University, the University of California at Irvine, and Marshall University. Prairie View just added its seventh such residence, for a total of 3,500 beds.
Happy for the Help
William C. Bayless Jr., chief executive of American Campus Communities, doesn’t seem worried about competition from traditional real-estate developers. Colleges, after all, are unique and sometimes difficult institutions, with converging (and sometimes conflicting) interests among presidents, students, parents, facilities managers, residence-life administrators, and faculty members. “It has been very difficult for traditional real-estate-development companies to come in and have success,” Mr. Bayless says.
Nevertheless, other companies are trying, and some colleges are happy to court them. At the University of Nebraska at Lincoln, for example, administrators are hammering out a deal with the Woodbury Corporation, a Utah developer that specializes in retail and office space, to build a research park, conference facilities, and faculty apartments on an old state-fairgrounds site. Nebraska sought a partnership in part because it had spent its money to acquire the property and had little left to develop the site. The state will put in $20-million for infrastructure renovations, and the university hopes to raise up to $25-million for the project, but Woodbury will throw in the biggest chunk: $40-million.
“They do these things for a living—they are probably better at these things than we are,” says Daniel J. Duncan, executive director of the project, known as the Nebraska Innovation Campus. “Woodbury will work on the physical part of the campus, and the university and our governing board will handle the intellectual planning and the environment—that being everything from how the landscape looks to the kind of vibrancy we want on the campus.”
In another unusual case, Western Michigan University plans to form a partnership with a developer to refurbish its historic but unused East Campus. The developer will be able to use the 100-year-old buildings any way it likes (aside from tearing them down) over the next few decades, after which Western Michigan hopes to reclaim the refurbished buildings.
But residences have been the most common projects for these partnerships—and they have gotten more sophisticated in recent years. Princeton University, which sets high standards for all of its buildings, is starting to work with American Campus Communities on graduate-student housing designed by the boutique architecture firm Studio Ma. Ron McCoy, Princeton’s university architect, says the architectural portfolios of housing developers were thin when he started working with them at Arizona State University, where he was university architect before going to Princeton. But the developers caught on and started forming partnerships with prominent design firms like ikon.5.
The scale of new projects, too, is bigger than ever. The University of Kentucky is hammering out a deal to hand over all of its residential buildings to Education Realty Trust, one of the “big three” third-party housing companies working in higher education (Capstone and American Campus Communities are the other two). If the deal goes through, the company will take control of residences with about 6,000 beds; it will renovate or replace those dormitories, which are about 40 years old, and add 2,500 beds. The renovations and new construction, which will match the university’s architectural styles, are expected to cost $500-million, says Angela S. Martin, the university’s vice president for financial operations and treasurer.
At Kentucky, as with most of these deals, expediency and experience were major motivations. If the university had taken on the project, Ms. Martin notes, state rules would have required it to put every part of the process out for bid. Education Realty, which has more expertise in student residences, would get the job done faster. The company also brings to the table money to cover the cost of construction.
Developers Do the Financing
Specifics of the deals with third-party developers vary from institution to institution. Universities often lease ground to the developers, which build housing to the institutions’ specifications. As with most residential projects, the developers recoup their costs through fees for room and board. Sometimes institutions contract with the developers to run residential-life programs in the buildings; sometimes institutions retain those duties. Maintenance is often handled by the companies, which can often do so more cheaply than a university can; contracts frequently require the companies to spend a set amount on maintenance per year.
In the past, such projects were financed primarily through debt taken on by the university or by a nonprofit entity created for the project. A 2010 report from Moody’s Investors Service, however, noted that developers have been financing more and more of the projects through their own equity or through corporate debt.
A partnership can be a tradeoff, says John C. Nelson, director of the higher-education practice at Moody’s. Colleges, particularly private ones, may lose money on their educational offerings and subsidize it by collecting housing fees. “If you are going into a developer relationship, you are sharing a lot of that profit—perhaps most of it—with a private developer,” he says. “That is something that is not attractive to private universities, which is the main reason private universities don’t do this.”
Keeping debt off of balance sheets had often been a major motivation for colleges to use third-party developers, but Moody’s analysts have recently started looking more closely at how these deals affect institutions’ credit ratings even if no traditional debt is involved.
“We would have to look at the specifics,” says Karen Kedem, a vice president and senior analyst. The 2010 report listed a range of potential impacts on credit ratings, depending on how a college and a developer would handle the ground lease, student services, and the marketing of the project, and on whether the college guaranteed that a certain number of students will live in the residence. Generally, the more ties between the developer and the college, the more the project might affect the institution’s credit rating.
Occasional Failures
Possible concerns are not limited to a college’s responsibilities as laid out in a contract. For example, a developer may put up a residence either on the campus or very close to it, then have trouble filling or operating the building.
“You can have a project that just cannot meet its performance targets for whatever reason,” Ms. Kedem says. “Then you have a university that is faced with a situation where it may not be legally obligated to support the project, but there is a moral obligation to maintain the facilities and keep the students happy.”
Projects do fail from time to time. A $34.7-million, 310,000-square-foot residence near the University of North Texas, owned by the Denton Educational Housing Corporation, was built during a housing shortage 10 years ago. But after other housing was built closer to campus, the first project’s owners had trouble making payments on the property. Moody’s analysts say university administrators maintained that the institution had no connection to the project and no intention of bailing it out. HRA University Courtyard, a Seattle-based campus-housing developer, bought the property last year for $27.7-million, $3-million less than what was owed on it.
Keeping a distance can also have risks. The University of Maryland at College Park got involved with private developers in 1999, with a housing complex on university land but off the main campus. Called the University Courtyard Apartments, it is owned and operated by Ambling Companies. The university considered it a separate project, with no residential-life programs, says Deborah Grandner, Maryland’s director of resident life.
In 2001 a tornado hit College Park, doing severe damage to the seven-building complex, which housed 700 students. Some of the buildings were too damaged to live in, and the students needed rooms, meals, and, in some cases, counseling. “We felt that the company that was there at the time really needed the university’s assistance in managing that problem,” Ms. Grandner says. “What was considered to be a hands-off project became ours overnight.”
The experience was a lesson, she says, in the importance of residential-life programs, which can help protect students and guide them in an emergency. The university has not shied away from more public-private housing since—it has put up more housing with the help of Capstone—but all of the developments are stocked with residential-life staff members from the university.
Elsewhere, however, residential-life programs are increasingly a private-business focus. An example can be found at the University of New Mexico, which is working on its second project with American Campus Communities, in an effort to increase residential housing to improve student retention. Following broader trends, the first project was built for 850 upperclassmen in an apartment-style complex, with private bedrooms and shared kitchens. The second project will be more traditional, with suites in which students share rooms and bathrooms, and will be marketed to freshmen and sophomores.
American Campus Communities will run residential programs in the new projects. Walter Miller, the university’s associate vice president for student life, says the company will maintain “community advisers” at the site, while providing some educational programs that mimic what the university offers in its residences.
Mr. Miller and his colleagues are in the midst of working out the relationships between the resident-assistant models in the university’s housing and those in the private housing. “It has to be worked out so that we don’t have different rules and different programs in buildings that are adjacent to each other,” he explains.
Perhaps surprisingly, the company’s Mr. Bayless insists that’s a side of the business that he understands in his bones. He may be in real estate, but he cites his experience as a resident assistant at West Virginia University, a job that led him into this career. “I have never left the student-housing industry,” he says.