Like many small, private colleges these days, St. Joseph’s College, in New York, saw the need to build new student housing. Like many small, private colleges these days, it faced two serious challenges to doing so.
St. Joseph’s would probably have a hard time raising the money for student housing through gifts — generally, paying for housing isn’t as appealing to donors as, say, contributing for a new science building. And about $26 million in existing debt made the prospect of borrowing more seem daunting, says Jack P. Calareso, the president.
So St. Joseph’s joined the growing number of small, private institutions entertaining a source of capital that would have been hard to imagine a few years ago. The college is negotiating with an investment firm to finance its new student housing. The details are still being worked out, but the firm would build the $30-million, 300-bed residence hall on the Patchogue campus, on Long Island. In exchange, the college would return most of the revenue from the project to the company, most likely for several decades.
Private financing deals for student housing have become fairly common at big public institutions. But until about five years ago, few small colleges would have allowed a company to have a financial stake in their campus operations, says one consultant.
The financial and enrollment pressures squeezing many small colleges make such deals appealing. But working with private financers is not without its own risks, including new obligations that some institutions may find challenging to meet.
Private financing deals for student housing have become fairly common at big public institutions. The University of Kentucky, for one prominent example, is in the middle of a $442-million, privately financed student-housing revamp that will bring more than 6,000 new beds to its campus.
Until about five years ago, however, few colleges the size of St. Joseph’s — total enrollment under 4,000 — would have allowed a company to have a financial stake on their campus and in their operations, says James A. Kadamus, vice president of Sightlines, a company that advises colleges on facilities. Selling off a share of their housing-revenue stream as a part of such deals “was something that they were not doing,” he says.
But with tight operating budgets and often unpredictable tuition revenue, many small colleges are now loath to take on any more debt for construction. Private-financing deals may now constitute a crucial move for some.
Many small institutions have student housing that’s old or outmoded, Mr. Kadamus says, and today’s students expect top technology, suite-style living, and modern dining facilities. He and his colleagues “are seeing many small colleges saying, ‘If we don’t build those kind of facilities, we’re not going to attract students,’ " he says. Losing enrollment, of course, will make their finances only more precarious.
But if a college does make one of these deals but doesn’t attract enough students anyway, it could be digging itself into an even deeper financial hole.
Reward and Risk
The rough outlines of St. Joseph’s prospective deal are typical of many such arrangements with small colleges. A private firm offers capital and, often, construction services to build student housing on land owned by a college. The college retains ownership of the ground, but the company owns the building and leases it back to the college for a significant percentage of the monthly revenue. That revenue is the key to attracting private capital for such deals. Campus housing comes with steady cash flow. Classrooms and labs do not.
The college typically staffs the new building, and a percentage of the annual revenue is often set aside to cover repairs and long-term maintenance. The percentage that stays with the college can increase over the years of the deal. Ownership of the building typically reverts to the college at the conclusion of the agreement — after 25 years or longer — but some deals feature buyout options to allow the college to take possession of the building earlier.
Middlebury College has always paid for its own student residences, but privately funded projects at similar institutions left the Vermont college “intrigued” by the possibility of trying a similar deal, says Patrick J. Norton, vice president for finance and treasurer. The ensuing discussion among top administrators circled around to questions of “Why not use somebody else’s capital?” he says. “What does that look like? Can we get comfortable with it?”
Many administrators remain wary of such deals, and boards of trustees are even more likely to be dubious. “You can imagine the engagement we had to have with our board,” Mr. Norton says. But after many meetings about the particulars of the deal and making clear that “the college position was very strong in the event of something going south,” he says, the board voted to authorize a deal with Kirchhoff Campus Properties to construct a 158-bed, townhouse-style residence set to open this fall. Mr. Norton declines to share specifics of the contract.
Middlebury’s enrollment has stayed healthy over the past five years. Many other small, private institutions have struggled to fill their classes each fall. While small colleges are eyeing private-capital deals as a way to increase their attractiveness to prospective students without upfront costs, “the danger is you go into a long-term arrangement assuming that you’re going to have the students to fill the beds, and they’re not there,” says Kent J. Chabotar, president emeritus of Guilford College and a founding partner of MPK&D Partners, a consulting firm that works with colleges.
Mr. Chabotar says Guilford considered building student housing with private financing in the late ’00s, when the college was enjoying record enrollments. But campus officials decided to lease nearby privately developed apartments instead, and enrollment has diminished since 2010. If Guilford had entered a deal to build privately financed on-campus housing, “we would have been stuck with an albatross,” he says.
Mr. Calareso, St. Joseph’s president, is confident that the deal his institution is negotiating with Mosaic Capital Group is a good strategic move. The Patchogue campus has functioned as a commuter college because of its lack of housing. Data indicate enough demand among current and prospective students to fill the 300 beds proposed, Mr. Calareso says. If the first phase of the project is successful, he hopes to add 300 more beds in a second phase.
But if the college falls short of filling about 200 beds in the first phase, then it “will have to assume obligations for some of the cost of the project, because it won’t be generating revenue that is sufficient for Mosaic,” he says.
Making It Work
Making a private-financing deal that can work for a college involves more than just a clear-eyed look at the prospective pool of students. Deciding to work with Mosaic involved a long process of “finding the right fit,” Mr. Calareso says.
What’s more, residents and chief financial officers have to consider any deal in relation to their balance sheets, their existing bond covenants, and state regulations, says Mr. Chabotar: “I’d want to know, point blank, when this building goes up, what’s the effect going to be.”
Many private-financing deals return the buildings to the college after 25 or 30 years — which happens to be around the point when most campus buildings need to be renovated or replaced. Making sure that both college and developer are clear on who is responsible for repairs and long-term maintenance, and how they will be paid for, is key for a good outcome, according to Mr. Kadamus, of Sightlines.
For many colleges, the loss of housing revenue is the biggest sticking point in reaching a private-financing deal. It kept Austin College, in Texas, from turning to private developers when it wanted to add more housing.
Marjorie Hass, the president, says the college was directing its fund-raising efforts toward a new science building and was in the middle of restructuring its existing debt. Trustees and donors came to the rescue by putting $7 million into a limited-liability corporation to fund the construction of two student-housing developments, which opened in the fall of 2011.
Austin has since bought the buildings from the corporation, the donors got their money back, and the college has kept all the revenue generated by the 182 beds. “We didn’t want to share,” Ms. Hass says.
Lee Gardner writes about the management of colleges and universities, higher-education marketing, and other topics. Follow him on Twitter @_lee_g, or email him at lee.gardner@chronicle.com.
