Public-Private Overhaul

By Mike Ratliff, Associate Editor

This past winter, the University of Kentucky (UK) announced it was entering a public-private partnership with veteran student housing REIT EdR to redevelop almost the entirety of its on-campus housing stock. The project, which will bring 7,000 to 9,000 beds of new housing to the campus over the next five to seven years, marks a watershed moment for the student housing industry, as universities nationwide are seeking creative ways to replace aging housing.

UK’s problem stems from 5,100 beds of on-campus housing with an average age of 44 years. The school recognized from  early on that even a massive rehabilitation program would fail to mitigate the issue, says Bob Wiseman, vice president of facilities management.

“We had accumulated deferred maintenance on our housing stock that was pushing $205 million. Why would we put more money into these ageing facilities? Housing is a key component of attracting students, so we considered it a wise investment to move forward with housing replacements.”

Funding such an endeavor was no simple task, as there was no way for the university to take on the debt required for a complete housing replacement initiative without increasing the cost paid by students. Though a public-private partnership was presenting itself as the most logical choice, picking the right developer to demolish, expand and ultimately operate an entire housing stock is not an easy call.

“This was not just a typical RFP where you are selecting a developer for a project,” says Angie Martin, vice president of financial operations and treasurer at UK. “You are looking for someone you can partner with for a very long time. There must be both complete trust and complete transparency.”

More than just a partner

Landing a development gig involving between 7,000 and 9,000 beds is a big deal, even in the age of student housing REITs.

“The sheer magnitude of the development at the University of Kentucky is what makes the project unique,” says Tom Trubiana, executive vice president and chief investment officer at EdR. “This is the first large land-grant institution that has decided to replace all of their housing through a public-private partnership, with the partner essentially owning the leasehold interest over the course of the ground lease.”

In the end, UK’s decision to go with EdR was based on a set of criteria that went  well beyond how well a company could develop and operate a set of assets.

“One of the most important pieces of criteria was experience and the ability to do this deal with a significant portion of the funding coming from equity capital that the firm already possessed,” says Wiseman. “We didn’t want our partner going out and issuing debt specifically to the University of Kentucky.”

EdR met that criteria, and in fact provided 100 percent equity financing, which exceeded what UK had thought possible. This type of structure is becoming increasingly popular with education institutions, especially in today’s economic
climate, says Trubiana.

“Funding from state legislatures is way down,” notes Trubiana. “So are school endowments. The university was looking for a creative way to finance this initiative that did not add to the debt of the state of Kentucky. Financial strength was very important as they ultimately picked a business partner.”

The use of the REIT’s equity on-campus will allow the school to utilize its debt capacity on other campus initiatives, which could include a new science center or updates to athletic facilities. While these other projects have yet to take shape, the phased redevelopment of UK’s housing is already well underway.

On February 12, EdR received an approval for a 50-year ground lease on Phase I of the development—a $25.8 million, 601-bed living/learning community known as New Central Residence Hall. Ground broke on April 17, and the project should open its doors in August 2013. Phase II will begin shortly after and involves replacing 2,000 beds at four separate on-campus sites.

“We are looking to move very quickly because the president and the board of trustees are driving us to replace a tremendous amount of our dorms as quick as we can,” Martin says. “Our plan is to take the ground lease and the affiliation agreement for Phase II to the board of trustees in October. If it passes, then demolition will occur in November and construction will begin with the goal of having all this new housing coming online in August 2014.”

Together for the long haul 

UK’s overall goal is to house both the freshmen and sophomore classes on campus. The old-style shared bedroom dorms are being replaced by properties that feature private suite-style bedrooms, high-speed wireless internet, social areas and even classroom and faculty space. As the dorms come online, the REIT will assume the role of operator, though the goal is to have the parent and student see a singular housing operation.

In New Central Residence Hall, for example, EdR will be building offices for their own operating staff, who will manage the physical plant and business aspects. The residential life component will be staff-managed by the university, compensated with funds coming through the 50-year ground lease agreement with EdR. Additionally, the university is not set up to net much profit from the physical properties.

“Our goal was to provide quality housing to a sufficient portion of the undergraduate student body at the lowest cost that we could arrange,” Martin says. “We have a very transparent relationship with EdR and we do have a stake in how well they do, as we receive a percentage of the revenue, and we get a percentage of the net profit once they hit a certain return.”

EdR expects a first-year cap rate in the 7 to 8 percent range, which is typical for their on-campus projects. The initial rooming rate at New Central Residence Hall for the fall of 2013 is already set at $3,490 per semester. The university capped the rate increase that EdR could charge for the first three years. After that period, the maximum increase is essentially equal to the CPI increase.

The rate for on-campus housing still remains comparable—if not cheaper—than off-campus housing, considering that students living off-campus must sign a 12-month lease and pay for all utilities including the internet. Living on-campus benefits the student’s academic career as well as their wallet, says Dr. Robert Mock, vice president of student affairs at UK.

“Students who live on campus typically have a higher retention rate, higher graduation rate and higher engagement rate. Having 9,000 new beds of housing in these living/learning communities will make our students more academically prepared and involved in campus culture.”

In essence, the entire program should be a win-win-win situation for the university, its students and EdR. Judging by the amount of phone calls the school has received, there are dozens of institutions across the nation looking to make a similar move, and the developers should be ready to start pitching.

“From my perspective, there is a housing boom and replacement boom happening at institutions across the country,” says Wiseman. “We have had 50 to 60 institutions contact us for the documents we put together as part of this process. Clearly there are schools nationwide looking at this approach. We just happened to be the first one out of the gate.”