In recent years, more institutions have looked for innovative, outside-the-box methods of funding their investments in the physical campus — including an array of models for public-private partnerships, mixed-use facilities, and (in a few cases) fundraising for renewal and maintenance.
We asked Steven Parfeniuk, vice president of finance and administration at the Sheridan Institute of Technology and Advanced Learning, to offer his insights on public/private partnerships and what institutional leaders need to rethink in order to achieve their capital planning goals. We also invited Kambiz Khalili, assistant vice chancellor for student affairs and executive director of housing and dining services for the University of Colorado at Boulder, to share his lessons learned from CU-Boulder’s innovative approach to leveraging rate increases to avoid the bond market or having to rely entirely on private developers.
Whether you turn to a public-private partnership or develop an innovative plan to leverage rate increases, the key is intentional and pro-active planning for investment in the physical campus.
Public-Private Partnerships
We asked Steven Parfeniuk three questions, and the ensuing conversation was illuminating:
WHAT DO INSTITUTIONS NEED TO RETHINK BEFORE SEEKING OUT A PUBLIC/PRIVATE PARTNERSHIP?
“Let’s start in the right place,” Parfeniuk suggests, “let’s define partnership.”
Parfeniuk stresses that a partnership between entities is one — has to be one — in which both entities collaborate for mutual benefit.
“My partner had to provide something of value to me, and they get something of value to them. This is important: I don’t need to get the highest value, because they won’t get what they need out of the deal, if I do. At Sheridan, our goal was to build while putting in as little initial investment as possible. The partner took on the capital cost, and that cost me revenue on that building for 25 years.
“But if I built the building myself, I’d have a mortgage that would cost me $3 million per year just to service the debt on that building. I would have operated a residence for 25 years, bringing in about $3 million each year, with $0 balance each year.
“Now the private partner has an asset. They’re going to depreciate: $1.5 million a year to service the debt. They have the same income: $3 million for 25 years. But they can write off $1.5 million a year on the building, and with $3 million in income, they now have a new $1.5 million to put together toward projects.
“This is a win for them, a win for us.
“Could I have pushed them into a corner, to get a slice of that income, maybe $100,000 a year? Sure. But you know what? My objective was not to generate income. My objective was to build a residence with as little investment as possible. So I found a partnership where we both benefited.”
“MUTUAL BENEFIT”
“It’s really important to understand what mutual benefit means. It doesn’t mean you both get 100% of the benefit of an activity. You’re both going to get less than 100%, because you have two entities who each have different motives for this agreement. The partner has the goal of making as much profit as possible. They are not in the business of offering institutions residences to save the institutions money; they are in the business of offering institutions residences to make money.
“So you can’t be out to grind them on the money. They want to make money; you want to save costs. So be clear on that before you enter in.”
Steven Parfeniuk, Sheridan Institute of Technology and Advanced Learning
WHAT KEY QUESTIONS MUST INTERNAL STAKEHOLDERS ANSWER TO ENSURE THAT A P3 IS THE RIGHT CHOICE FOR THEM?
Parfeniuk suggests that prior to sending out an RFP, institutions need to ask four critical questions internally:
- What do we most want to accomplish?
Be clear on what you’re prepared to do and what you’re prepared to give up. - Do we want to get “in bed” with the partner for a long time?
“This is a long-term relationship,” Parfeniuk cautions. “I am guaranteeing that this residence is going to be full for the next 25 years. Am I prepared to enter into these terms? If you make a commitment, you need to follow through.” Or consider a 40-year agreement: “If every one of our CFOs lasts 10 years, that’s five VPs who are going to need to live with this deal.” - How long is the agreement? Are we going to renegotiate at intervals?
- Are we willing to enter into an agreement where we will not have the asset that we would otherwise have if we had not entered into that agreement?
In a mutually beneficial partnership, the institution is going to need to give things up. Is your institution ready for that decision? - Are we prepared to pay more in debt service?
Parfeniuk stresses that it is important not to ignore this question. If the institution isn’t prepared to spend millions of dollars of capital on the facility, a P3 can be an attractive option; however, the private partner is not going to be able to borrow at 2% interest. He’s going to need to borrow at 6%. This is important because eventually, in the P3 deal, there will be a date after which the institution will be paying the debt service on an annual basis.
HOW CAN AN INSTITUTION BEST ENSURE THAT REGULATORY AND CULTURAL MEASURES ARE COHESIVE BETWEEN P3 AND TRADITIONAL RESIDENCE HALLS?
One strategy that has worked for the Sheridan Institute is managing all buildings through one organization — so that the student experience in the P3 building would be identical to the student experience in the other campus residences, with identical auxiliary services and amenities. “We specified up front what had to be available; for all intents and purposes, we gave the partner a design to replicate.”
Parfeniuk notes that planning for a P3 is also an excellent time to take a step back and ensure that your facilities are designed in a way that is most conducive to student success: “Talk with your students before you embark. What are they enjoying about the existing residence, and how can you make it better? They are your clients; how do you make the residential experience better for them? Make sure you know that before settling on a design with the partner.”
“Most CFOs out there aren’t happy with most P3s. They don’t ask the three questions that you are asking me. They end up tied to an organization for a long time, aren’t seeing the results they want, and they aren’t sure why.”
Steven Parfeniuk, Sheridan Institute of Technology and Advanced Learning
FROM THE RATING AGENCY’S PERSPECTIVE
For a primer on a rating agency will evaluate the credit impact that any given public-private (P3) project will have on the affiliated university, we interviewed Karen Kedem, the vice president, senior analyst, and co-manager of Moody’s US Higher Education and Not-for-Profit Team. Kedem spoke with Academic Impressions recently about how Moody’s analyzes the credit risks associated with these transactions, as well as how institutions can work more effectively with the agency as they prepare to enter into a public-private partnership.
You can read the interview with Kedem here.
In a follow-up interview, Dennis Gephardt and Edie Behr, two other Moody’s representatives, confirmed that when they work with an institution’s leadership team, what they most want to see is:
- A capital plan that is closely aligned with the strategic plan
- A multi-pronged funding plan
- Clarity around dependencies and triggers for advancing to a given phase in the capital plan (e.g., when the institution has X amount of cash in hand, the institution will start work on Y
Beyond the Bond Market: Leveraging Rate Increases
What if a public-private partnership isn’t the best option for your campus? Kambiz Khalili, assistant vice chancellor for student affairs and executive director of housing and dining services for the University of Colorado at Boulder, took a different route to funding a series of renovations to student housing (along with some new construction). Khalili’s example demonstrates the benefits of proactive, five-year capital planning and the importance of thinking creatively and critically about all of your options.
In a nutshell, CU-Boulder takes one residence facility offline at a time and completes the renovation within one year. To fund the facilities improvements, the institution raises the room and board rate for all housing facilities by 4 percent each year, and reopens the renovated and improved facility at a premium rate (an added 5 percent). The renovation also focuses on improving operational efficiencies to lower the costs of operations and maintenance going forward.
What makes Khalili’s approach possible is very calculated and intentional planning. Khalili recommends:
- Develop a long-term strategy (such as a campus master plan or housing master plan) and then develop a five-year financial pro forma aligned with that master plan. “Plan for what you need to generate, what all your expenses are — not only debt payments but life-cycle costing — and plan for how this will impact your room and board increases. You need a pro forma in hand in order to see what is possible.”
- Know up front what your limiting parameters are. For example, CU-Boulder made the commitment to keep the yearly room and board rate increase low. Knowing your constraints, think creatively about how to work within them.
- Be ready to adjust quickly — do scenario planning, identifying clear triggers to drive specific decisions around facilities investment. For example, how much of a drop of enrollment will trigger the decision to close a residence hall for one year? How much of an enrollment increase will trigger the decision to rent a facility from the city or to pursue some other strategy? Plan for contingencies proactively rather than reactively.
CU-Boulder has 6,400 undergraduate beds, which helps the institution spread the cost of renovating one facility while still keeping the rate increase low. Not all institutions have that volume. But the practical takeaways worth noting from CU-Boulder’s success are the up-front scenario planning and development of a pro forma to guide those decisions you can make.