Cassia Sookhoo: When Structuring a Student Housing P3, Why Would a School Use an Equity Structure?

Cassia Sookhoo, Senior Associate, Brailsford & Dunlavey Cassia Sookhoo, Senior Associate, Brailsford & Dunlavey

Colleges and universities nationwide are rethinking the delivery of strategic investments. The movement away from traditional financing and design-bid-build transactions is indicative of creative delivery methods involving public-private partnerships (P3s), which take many forms.

A number of these P3s are equity projects — transactions in which typically, a developer designs, builds, finances, operates, and maintains (DBFOM), ultimately owning the improvement or asset funded utilizing their own equity — leaving higher ed professionals scratching their heads and asking:

Why would a school opt for an equity deal? I associate equity with a higher cost of capital and potential loss of control over the design, operations, and maintenance components—all things I want a say in. Plus my university’s reputation is directly tied to this asset, so why would I risk that loss of control and have things go awry? 

This article seeks to answer these questions, but first, some background on the perspectives shared here. We offer this article from the perspective of an impartial advisor to the university. The impartial advisor has no investment in a P3 being the right answer for a school—indeed often it’s not. Nor does the advisor have any investment in an equity deal being the right P3 structure—likewise, often it’s not. We explore opportunities for strategic partnerships and, having advised schools on a variety of projects—some P3s, some not; some equity deals, some alternative tax-exempt structures, some hybrid debt and equity structures, etc.—we have seen why schools that choose equity P3s rightly do so, and have seen the circumstances in which it’s the not the optimal answer.

To best leverage industry expertise, we also interviewed three professionals to introduce unique perspectives from the marketplace:

  • Greystar (formerly EdR) – Julie Skolnicki, Senior Vice President for University Partnerships
  • ACC – Jamie Wilhelm, Executive Vice President of Public-Private Transactions
  • Harrison Street – Michael Leonczyk, Vice President, Infrastructure Acquisitions Lead

Why equity?

In short, equity deals can provide a variety of features and benefits, including:

  • A high-quality, attractive project that preserves a school’s capital and debt capacity for mission-critical purposes
  • Diversify capital sources
  • A solution for unique target populations on campus that don’t fall under the “traditional residential life experience” umbrella (e.g., upper-division students, graduate students, faculty and staff)A product that can be of high quality, but because of economies of scale, can be delivered less expensively
  • A way to monetize what is often a campus edge property
  • An opportunity to add product without upfront institutional capital and corporate debt

This is not to say that the potential loss of control isn’t a factor with equity deals, simply that there are reasons certain schools in certain situations are attracted to this option. Also, because P3s are by nature multifaceted transactions, “loss of control” challenges of an equity deal can sometimes become favorable outcomes to protect the institution’s financial, operational, budgetary, political, and reputational risks.  Or agreements can be structured to allow the university to maintain control of the components they value most (design and residence life as outlined below).

What does mitigating for the potential loss of control and for reputation concerns entail?

There are two types of “loss of control” that schools are generally concerned about with equity deals: design control and O&M control (operations and maintenance). To mitigate for the loss of design control, two tactics can be used—whether in isolation or combination. The first is to put out a robust RFP, the second is to work with an advisor, the third is to select a partner that aligns with the interests of the school. By making some determinations up front—and the right determinations—a school is more likely to not just feel in control, but actually exercise control. The developer will respond in a way that takes the school’s demands and desires into account, offering a suggested solution that works for both parties. Between a strategic RFP and having an advisor looking out for your best interests and offering best practices and creative concepts from around the country, the level of control in an equity deal can look awfully similar to that in an alternative tax-exempt or concessionaire structure. For example, if design is of high concern, the inclusion of robust design guidelines and clear expectations puts the school at the advantage of benchmarking responses.

Much like mitigation for design risk, to mitigate for O&M risk, robust roles and responsibilities expectations must be included in the RFP. Oftentimes, we advise clients to include real assumptions based on their current operations in the RFP. This alleviates the guessing game for partners and allows for a reaction to feasibility of the project. Teams responding to the RFP can provide examples of their O&M portfolio, giving schools the opportunity to see the potential partner’s O&M practice in action.

Jamie Wilhelm, American Campus Community’s EVP of Public-Private Transactions, also notes that control isn’t exactly lost when there is true alignment between partners. “One of the biggest misconceptions about the equity structure is that the university loses control. We’d argue against that assertion quite vigorously, and think the university actually has quite a bit of control. First, if they don’t like the deal, they don’t have to enter into it. But really, when our interests are aligned, we have the same wants—that the asset is in the best shape possible, that it’s attractive to students, that it leases up to 99%, and so on.” We can take from this the idea that when goals are shared, being able to exercise control isn’t as much of an issue.

Julie Skolnicki, Greystar’s SVP of University Partnerships, adds that “our most successful partnerships are those where the University has been part of the architect and contractor selection process and the projects were designed collaboratively engaging students, faculty and staff.  This is essential to alignment of interest and the success of the project and assures that the design is representative of the University’s brand and supports strategic objectives.  This is even more important for honors, first and second year housing where our Partners maintain full control of the student experience: residence life, marketing and assignments.”

Regarding reputation concerns, the partnership may allow for a separation from the school’s residential life perception. For example, students in upper divisions may seek an experience much like the off-campus market, but still want to be proximate to classes. Thus in cases such as these, the reputation of the project is managed by the partner. Alternately, schools may opt for a closer relationship to the project as it may be a way to show students the school’s commitment to investment on campus while not having to write the check. One way this looks is retaining control over more of operations and/or maintenance in the DBFOM spectrum—something that can be appealing for developers, as well. Michael Leoncyzk, Vice President, Infrastructure Acquisitions Lead, Harrison Street, says, “We prefer to blend into the background from a user (student or patient) perspective and allow our partner institution to go about the operation of their core business.”

Where schools seek a closer shared reputation risk, advisory committees may be utilized for the term of the ground lease. The school and partner will include key personnel on the committee and meet on an annual basis to discuss and vote on concerns. This is another opportunity for the school to be in the “know.”

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Cassia Sookhoo has led the effort for strategic partnerships in some of B&D’s most recent public-private partnership efforts at universities and municipalities. She has worked to structure the relationships with owners and development partners to deliver comprehensive asset planning. Her more than nine years of community development experience includes housing, finance, and development. Ms. Sookhoo has underwritten and managed projects ranging from $3 million to $2 billion. Her core competencies include project management, public finance, stakeholder advocacy, and grant management.

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