New enrolment

American universities are going back to school. As budget shortfalls start to widen, they are increasingly turning to outside help for campus improvements – fashioning their own iterations of public-private partnerships with private developers that see a stable return opportunity.

Investors and developers active in the US university PPP market have found a niche building campus projects that provide long-term returns or availability payments for relatively low-complexity projects. And public universities, which have seen student enrolment skyrocket over the years, are turning to the private sector for quick and cost-effective developments or to replace ageing facilities.

“Student higher education is rising on a national level. A lot of facilities are ageing on existing campuses. State funding is declining in many cases, and the private sector is one of the options that is being more realistically explored,” states Seth Lehman, a senior director at Fitch.

As more opportunities to invest in assets on American campuses appear, the private sector is trying to nail down a textbook PPP model that will work with related public entities.

The concept may be picking up steam in the US, but it is not entirely new. The UK embraced the idea years ago, but most deals have been in student housing. According to JLL, £2.4 billion ($3.06 billion; €2.74 billion) has been invested in these PPPs. Around 17 percent of all public university housing in the country has been developed in partnership with the private sector, the investment manager estimates.

Student housing has been the most common campus PPP in the US as well, but developers are exploring other types of assets.

In 2012, Ohio State University agreed to let Australia’s QIC build a parking garage under a 50-year lease worth $483 million. That came after the University of California, Davis awarded two real estate developers – Carmel Partners and Urban Villages – a $300 million lease to develop mixed-use housing and commercial assets in 2011.

“There are many, many dozens of universities that have indicated it’s on their radar, but some projects will take time to get to a financing stage,” Fitch’s Lehman says.

Christophe Petit, president of Star America Infrastructure Partners, acknowledges that universities have all sorts of ageing facilities and growing needs but notes that the industry must first learn how a PPP model can work on campus. Star America, along with developers Wynne/Jackson and Balfour Beatty Campus Solutions, is currently building and financing a $67 million mixed-use project at the University of Texas in Dallas.

“We think it’s going to go way beyond accommodation and student housing,” Petit says.

Balancing the needs of a growing university with a PPP model that draws in private sector participation is one reason why deals have been slow to emerge.

Universities fear a loss of control when signing long-term leases to developers, unsure of what their land needs will be years down the road, when student enrolment is expected to continue increasing.

Another cog in the machine is that most campus PPP projects are one-off deals. What the private sector develops through campus PPPs has mostly been limited to assets that generate fees, such as housing, parking or retail. Classrooms and laboratories, which do not generate revenue in themselves, are still in the university’s purview.

This has led to most campus PPPs falling between $30 million and $60 million in deal size, according to Bob Shepko, division president of Balfour Beatty Campus Solutions.
“These very large billion-dollar, several hundred million-dollar programmes are not really what exists in the space yet,” he explains. “The hard part is trying to find projects that have the ability to be self-sustaining to some degree, that don’t require the university to pledge a lot of revenue toward its support.”

One deal that has broken this mould is Plenary Group’s Merced 2020 project. The Australian firm, active in the North American PPP space, closed last year a $1.3 billion campus redevelopment deal with the University of California, Merced.

Dale Bonner, executive chairman of Plenary Concessions, which holds the group’s North American portfolio of infrastructure project companies, calls the deal a “first of its kind” in higher education that bundles together a “collection” of buildings in a single project, including assets that normally do not attract the private sector.

What first made the deal possible, Bonner says, was “a clear need” from UC Merced. The university quickly outgrew a new campus it opened in 2005, to the point that classes assembled in rec halls, in the evening and on weekends.

UC Merced raised approximately $600 million of privately placed debt for this project, Plenary senior associate Sam Hull says, highlighting another angle to the deal that signals private sector interest.

“Across the country, there are scores of colleges and universities looking at the opportunity to use the model. But it’s a new approach that we’re hoping to see scaled in some way,” Bonner adds.

Balfour Beatty’s Shepko says he has seen campus PPP projects increase steadily over the years, and he expects that to continue. There probably won’t be a plethora of deals like Plenary’s Merced 2020, but as universities become familiar with the model, Shepko says, new clients with diverse needs will likely emerge.

“Before, a lot of it was driven specifically by public universities coming out and doing their types of procurements. Now we’re seeing several more private universities looking for similar types of situations,” he explains. “We’re seeing changes in product type, but also in terms of the size or type of campus coming out with this request.”
Underlining the same trend, Petit notes that along with its University of Texas project, Star America could close two more campus PPPs this year.

“There is definitely a growing interest among a growing number of universities,” he explains. “There is also more understanding of the model. It’s not a privatisation. It’s not about selling away assets but rather entering into a long-term partnership and transferring risks – like design, construction, financing and maintenance – to the private sector.” ?