Private Partners

SAN FRANCISCO – With resources drying up and debt mounting at many colleges, the idea of letting private developers finance building projects is increasingly seductive. But these arrangements are not without risks, and ratings agencies are watching some of them develop with skepticism, panelists told a group of college business officers here this week.

It is perhaps of little surprise that a meeting on alternative ways to fund capital projects was one of the better-attended at the National Association of College and University Business Officers annual meeting this week. As a survey released by NACUBO Monday indicates, chief financial officers describe insufficient funds to support their institutions as their greatest frustration. Most are looking for new ways to finance projects.

One of the more common ways colleges with debt concerns and resource constraints are continuing construction involves leasing land to a developer for building student housing. The developer provides the financial backing, and in exchange is given a fair assurance the rooms will be filled with a captive market of students coming to campus each year. The arrangements are often particularly appealing to public colleges, which can thereby avoid the arduous and time-consuming process of finding state dollars for buildings.

Cecil Phillips, who heads an Atlanta-based company that manages and develops student housing projects, said there are plenty of developers eager to tap into a market that is relatively certain to have a steady stream of customers.

“The price you pay [as the developer] for that advantage is it’s all on your back,” said Phillips, chairman and chief executive officer of Place Properties.

But is it really? Even if a college convinces an outside developer to finance a construction project, it’s unrealistic to say the institution has no stake in whether the project succeeds, said Roger Goodman, vice president and senior analyst at Moody’s Investors Service. If a critical mass of students will be housed in a dorm, for instance, a college may well be forced to come to the rescue if the project hits a snag in development or the dorm deteriorates over the years, Goodman said. Consequently, Moody’s is going to view arrangements between colleges and private developers as relevant to an institution’s overall credit picture, he said.

“We really haven’t come across a project that is completely irrelevant to us,” Goodman said.

Moody’s primary task in evaluating these projects is to calculate how likely a college would be to employ heroic measures if a development got into real trouble. To assess that likelihood for a student housing project, Moody’s examines the percentage of student residencies that a particular dorm will provide. If just 10 percent of students will live in a new residence hall, then the rating impact is limited. Conversely, a project housing 30 percent or more of a college’s students could have a significant rating impact.

Moody’s has been at some pains to explain that arrangements between colleges and private developers are not “off credit,” because they will inform the agency’s view of a college’s debt picture and financial obligations. Moreover, the agency is more likely to be skeptical if the primary purpose for the partnership is to lessen the potential impact on a college’s bond rating – rather than because the developer brings particular outside expertise critical to the project.

“We tend to cringe a little bit when we see it as the leading factor,” Goodman said.

Despite the concerns of some ratings agencies, there are still good reasons for colleges to work with outside developers, said Jay Kahn, vice president for finance and planning at Keene State College.

“We have essentially tried to hang out a shingle and say ‘If you build it, we won’t,’ " Kahn said.

The college’s move toward more partnerships with private developers to build student housing space has been embraced by city officials, Kahn said. The city has adopted the strategy into its own “smart growth” plan, encouraging that housing be concentrated in the city rather than spread out. The city also has a vested interest in keeping properties on its tax roles, so it’s historically been frowned upon when the tax-exempt college – rather than private developers – bought up properties for student housing, Kahn said.

Partnerships with the private sector will become particularly important for public institutions, which will not be able to count on state support to finance growth, Phillips said. States that expect colleges to educate their residents have essentially created an “unfunded public mandate,” but the good news is that there’s “abundant private capital in this country” to fill that gap, he said.

“There are all sorts of ways to be creative about private capital,” Phillips said. “Don’t look in the mirror and lament the passage of the old ways.”