Why Public-Private Partnerships?

Developing a relationship with a real estate developer may seem like the last thing a college or university might want to do. Many institutions, particularly land-grant institutions that started with 30,000 acres of land even before opening a door to a student, have significant land holdings of their own and tried-and-true ways of building on it. The need for a developer or other third party entity may not be obvious. As a result, relatively few campuses have formed relationships with developers. With recent economic conditions encouraging out-of-the-box thinking, some campuses have begun viewing developers in a new light. 

Establishing a relationship with a developer may help your institution meet its campus goals for several reasons:

1. Developers are sensitive to the bottom line. Colleges and universities are generally large institutional bureaucracies that force projects through a process that a private sector entity can complete quicker. Colleges certainly have reasons for their traditional process, such as keeping the campus community informed, building consensus among their constituencies, and the fundamental project objectives of keeping scope and costs in check. However, the more robust process undertaken by colleges and universities takes time and costs money.On the other hand, private sector entities such as developers are generally bottom-line oriented. If it doesn’t make sense financially, the project doesn’t make sense to pursue. For this reason, developers offer the possibility of a more streamlined, less expensive approach that may have the added benefit of involving fewer campus employees, whether they are facilities, staff, faculty, or maintenance personnel. Bob Rittenhouse, a partner at Aegis Property Group, a project management firm with extensive experience working with higher education institutions, said he starts projects by “setting up a decision-making process and then using the discussion to identify the institution’s project goals, which are often financially critical.”
Institutions that pursue developer-led projects should be prepared to provide the strong campus liaison role necessary to meet the expectations of campus staff and faculty; in some cases, this role can be fulfilled by the developer. Regardless, institutional representatives should be sensitive to the concerns of faculty and staff and be prepared to provide close guidance to the developer throughout the process.

2. Building off-campus can relieve space pressures on-campus. Whether it’s an acquisition or a lease, developers are well suited for determining what options make the most sense for off-campus projects. They consider these transactions day in and day out. Beware the college or university that attempts this alone. “There are lots of elements to deal with,” Rittenhouse said. “We know how the process works and we’re sensitive to the detail issues, like tenant delays or restoration claims.” These issues can surprise the uninitiated institution and derail a project. Understanding the potential for these issues–and their costs–upfront can help all parties better manage the project to meet the goals for success at the lowest cost.”We see the relocation of campus support services to off-campus locations as a growing trend,” said Edmund Klimek, AIA, a partner at KSS Architects. “Moving these functions off campus not only frees up on-campus space for other uses, but these off-campus facilities also offer amenities that are more consistent with non-college peer groups.”
KSS recently designed an off-campus university facility that includes a fitness center and cafe–amenities that, when available on campus, are more geared toward the student than the staff-user. Opportunities also exist for the facility’s entire interior architecture, said Sheila Nall, ASID, LEED AP, principal and director of interior design at KSS, who worked on the project. “We were able to save a lot of space by taking a systems furniture approach to the office layout instead of the traditional private office approach that the staff was using on campus,” she said. “This approach also created a more open office environment that promotes interaction among the staff.”

3. Developers can offer alternative financing structures. Whether it’s a lease-to-own structure, a straight lease, or simply a turnkey approach to a construction project, an institution can work with a developer in many ways to structure a project to suit the needs of an institution, including those that require no capital funds. “We promote this as a partnership,” explains Rittenhouse. “Almost any kind of structure can be accommodated, but it has to be understood and agreed upfront at the very conception of the project.”Institutions can even structure just portions of projects with a developer with the balance being accomplished more conventionally. One institution that wanted to build off campus hired Rittenhouse’s firm to secure the property and land use approvals. “Then the institution proceeded with a design-bid-build approach to the actual construction,” Rittenhouse said.
The key is to understand that partnering with a developer provides the institution options it simply would not have on its own. Some of these options create a revenue stream, such as student housing, which can be used to secure construction funding through a developer when an institution would otherwise be forced to use capital funds or float a bond.

4. Developers can act as the third, straw-party negotiator for the institution. A strategy famously employed by the Walt Disney Company in the 1960s to acquire the land for Disney World in Orlando, Florida, can also be employed by institutions interested in acquiring or negotiating for property “faster and at a lower cost” using a developer rather than their own staff, which Rittenhouse said is an emerging trend.”These deals can be structured in many ways to allow institutions to secure land, buildings, or even to negotiate leases,” he said. “Institutions with good relationships with nearby communities can still have difficulties negotiating even small land deals since the institution is often seen as a deep pockets negotiator with the ability to pay more than what a property might actually be worth. Developers are particularly well placed for negotiating these kinds of deals because they understand commercial property economics. Institutions that are used to 50- or 100-year buildings may not understand the economics of a commercial property, which are typically driven by their lease values.
”In some cases when you add the market value of the income stream to the cost of deferred maintenance and fit-out, it can exceed the cost of a new building,” Rittenhouse concluded.
Institutions may not be prepared to complete such an analysis that thoroughly and consistently questions the value of every portion of a real estate asset. Many would find it easier to use a developer to do so but, regardless, it is essential to be consistent in addressing the institution’s values and mission. “We provide value,” Rittenhouse said simply. But institutions still need to guide the process in a manner consistent with their culture and mission.

Many other opportunities exist for institutions that partner with developers. If you think working with a developer is an option open only to private institutions, note New Jersey Bill S-2548, introduced by Sen. Raymond Lesniak, which recently passed in cash-strapped New Jersey and encourages state colleges and universities to form public-private partnerships to improve their campuses in lieu of floating bonds to secure their own capital funds. The new legislation allows private developers to have financial and administrative responsibility for on-campus construction. In essence this allows private entities to own buildings on state-owned land, which allows institutions to avoid a capital funding issue and to lease the buildings instead.

The bottom line that matters most is that students or faculty members will not know the difference between a building owned by the institution or by its developer-partner. If the building has the capacity to improve a campus–for example, by attracting more students or enhancing their learning–then it helps the institution achieve its long term goals. Institutions that capitalize on this fact by using a private developer to construct its on- or off-campus buildings can reduce its financial exposure without compromising its mission.