Private Sector Goes to School

When it comes to selecting a college or university, many incoming students and parents are paying more attention to the frills and amenities that institutions offer. But as universities compete for new recruits—both students and instructors—the reality is that many colleges are short of the cash required to build new dorms, labs and state-of-the-art lecture facilities.

09/01/2004


When it comes to selecting a college or university, many incoming students and parents are paying more attention to the frills and amenities that institutions offer. But as universities compete for new recruits—both students and instructors—the reality is that many colleges are short of the cash required to build new dorms, labs and state-of-the-art lecture facilities.

"The need to upgrade and build new facilities is really critical, but in order for a school to keep pace, they need financial resources," explains Mary Ann Cronin, a senior vice president with Jones Lang LaSalle, Chicago.

Consequently, public-private partnerships have begun to pop up around the country.

"The private sector knows how to deal with [construction projects] better," claims Cronin, who specializes in the financial side of real estate development. "They know how to take risks, how to set it up and how to operate it, whereas this is not necessarily an area of expertise for universities. The private sector can also build faster than an institution of higher education."

Paul Sehnert, AIA, director of real estate development at the University of Pennsylvania, Philadelphia, has found this to be true in his experience. "We've laid off risk," he says. "We're not exposed to any construction, development or financial risks."

For example, Penn is building a $60-million vivarium lab for its school of medicine. The project incorporates a "translational research lab space" concept: Research areas will be available to third-party commercial, non-Penn tenants.

"In essence, we're leasing land to the developer and they're leasing the space back to us," explains Sehnert. "But the developer is taking on the debt and bringing in equity, expertise and a completion guarantee."

Tony Moayed, president of Sacramento-based TMCS, a construction management firm, says more school administrators are exploring such partnerships, which leave construction and real estate details in the hands of the masters. "Frankly, the people with the most experience and highest skills are better compensated in the private sector," says Moayed. "Private firms competing against each other also have greater freedom to innovate and more incentives to find faster, better ways of doing things."

Other non-academic entities are also ready to invest in universities—not necessarily to make money from tenants, but rather, to tap into the brainpower concentrated on campuses. Take Washington State University, for example. Its Tri-Cities campus in Richland, Wash., will soon benefit from the construction of a new 57,000-sq.-ft. research facility that the school will share with Pacific Northwest National Laboratory.

"The biggest benefit [for us] is the economics," states Dr. Gene Schreckhise, WSU's associate dean. "This allows us to have access to $9 million worth of equipment, which we otherwise wouldn't have access to. And they [PNNL] have access to graduate students to get in and do the work."

That being said, whenever a private developer's spin is in play, these new ventures often take on a larger role than just that of research lab. For example, students and researchers at Baltimore's Johns Hopkins University recently moved into the third building of a seven-structure, 800,000-sq.-ft. research campus in nearby Rockville, Md. But in addition to Johns Hopkins tenants—who pay market rates—other tenants from the biotech community, including private companies and government agencies, will be joining university researchers, explains Gary K. Ostrander, Ph.D., associate provost for research. "The primary driver for the idea is that the developer funds the project and takes the risk. This allows Hopkins to focus our resources on other mission-critical endeavors."

With the National Institute of Health—as well as about a dozen federal labs and several dozen biotech companies—close by, the outlook for attracting prospective tenants is rosy.

Similarly, many municipalities and local governments are in on the act in what's most commonly known as an incubator park. According to Jones Lang LaSalle's Cronin, this facility type is "a petri dish of professors and graduate students, supported by the private sector to develop a product like Yahoo."

As was originally the case with Yahoo, these entrepreneurs are initially supported with the infrastructure they require, along with affordable rent and short-term leases, as they prepare to launch their products onto the market.

Win-win

A prime example of this approach is Georgia Tech's Technology Square in Midtown Atlanta. Technology Square, operated in conjunction with the city, occupies three blocks immediately east of Tech's main campus. By extending the campus across the highway for the first time, the project reintegrates the university into the physical and intellectual life of Midtown, a formerly blighted area. Now, it is a place where students, faculty, residents, business people and visitors all meet, attracted by wide, tree-lined sidewalks with benches and bike lanes, more than a dozen retail shops and proximity to public transportation.

The development also expands and relocates the College of Management, which was the second building in Georgia to be certified silver-class Leadership in Energy and Environmental Design building.

Other key buildings in the development, such as the Global Learning Center and Economic Development Institute, enhance the university's goal to create a vibrant center for business development and intellectual interaction. Of course, Technology Square's groundbreaking coincided with the development of an adjacent private class-A office project. That building enabled a much-needed expansion of the university's academic programs and increased its capacity for research. In turn, the creation of inviting public spaces helped accelerate further redevelopment. For example, a Georgia Tech alumnus who acquired the historic Biltmore Hotel next to Technology Square cited the university expansion as a catalyst for his decision to buy and renovate the hotel into office space. Similarly, it's Georgia Tech's hope that its geographical connection boosts relationships with the tenants through educational partnerships and internships. Employees at area businesses will also be able to use the resources at Technology Square, from the executive education classes at the College of Management and the guest suites and meeting space at the hotel to the distance learning technology at the Global Learning Center.

Town gown

A great working relationship between a university and a municipality is key, as the "town-gown" relationship with the neighboring town is critical for public-private development projects to work.

"If the relationship is good, it will be easy for the developer to get approvals. But if not, the developer will have to spend a lot of time in public hearings discussing parking, crime, security and traffic," explains Cronin. In that same vein, universities that are now considering projects such as mixed-use developments on the edge of campus, are realizing that they can no longer be an island unto themselves, according to Gary Paetau, senior vice president for educational real estate services, Carter, Atlanta.

Officials at Nova Southeastern University in Fort Lauderdale, Fla., keyed into this reality and entered an agreement with Broward County to construct a joint-use library.

"This collaboration is a classic example of synergy, i.e., 1 + 1 = 3," states Donald Riggs, NSU's university librarian.

The $43 million, 32,500-sq.-ft. facility, the largest library in Florida, is open 100 hrs. a week to Broward County residents.

"For the first five years of operation, NSU pays 60% of annual operations and Broward County pays 40%. After five years, a study will determine the use of the facility by both entities," Riggs explains. "If the study finds Broward County using the facility as much or more than NSU, then the percentage paid for annual operations will change."

Caveat emptor

While colleges and universities certainly stand to benefit from developers' expertise and experience, it's essential to beware of conflicting agendas.

"It's important to know why you are doing this and understand the business parameters and goals of the private sector players," says Penn's Sehnert.

Cronin adds that the most basic difference is the fact that investors want a quick return on their investment. "On the other hand, the institution is looking 100 years down the line," she says.

Practically, this means that the university will want to take a much more long-term approach when it comes to choosing building products and systems, whereas the developer will be interested in keeping first cost as low as possible.

"It's a struggle between capital and control," says Cronin.

According to Warren J. Hendrickson, AIA, with CUH2A's Chicago office, such power struggles make things tricky for development of high-performance buildings, such as research facilities, which demand a high quality of design and construction. Because developers tend to plan for just a decade or two out—or whatever the terms of the loan are—as Hendrickson suggests, universities may not be receiving the kind of end product they had in mind.

Schools should also make sure that the developer isn't one to reshuffle his portfolio every few years, thereby selling off the campus facility whenever it may suit his needs, warns Charles A. Rodenfels, AIA, senior vice president, URS Corp., Columbus. A beautiful courtship and marriage could end in an ugly divorce, he cautions.

In general, Rodenfels, who is involved with a lot of architectural work at Ohio State Univ., also advises that universities connect with other colleges that have pursued such public-private partnerships to best learn what works and what doesn't work.

Unconvinced

While the number of campus projects being financed by private developers is definitely picking up, Hendrickson isn't convinced that it's such a strong trend at this point.

"We haven't seen much of it in the Midwest and even on the East Coast. I'm not sure that the lease-back idea has found a home yet at a lot of universities," he explains. "A lot of state universities also have very rigid procurement rules they have to follow."

Similarly, Cronin adds that universities tend to have a habit of keeping things internal, "and it takes a long time to get over that."

But whatever the case may be, by virtue of the fact that competition is driving the need to build, public-private relationships are bound to gain in appeal as time goes on.

In general, Rodenfels assesses the higher education market as being consistently strong. "It's a steady volume of work as universities are working very, very hard to enhance their infrastructure and improve student housing, food service, recreation and academic facilities. They're putting lots of money into their bricks and sticks."

Paetau offers a similar opinion: The market will remain strong over the next few years. While he does anticipate that states will continue to face reductions in funding, he is confident that public-private partnerships will make up the difference. In a nutshell, academia is using its brainpower to find needed cash.



Building for Beds

In addition to research facilities, public-private partnerships are also yielding new student recreational centers, parking structures, retail developments and student housing facilities.

These kinds of projects lend themselves quite well to public-private partnerships as private student housing developers offer a full package of financing, development, design, construction and management, according to Gary Paetau of Carter, Atlanta. Student apartments or dorms are also easy to finance, because student rent pays off the bonds.

However, what is being built today is far from the simple, military-style dorm rooms of a few decades ago.

"The average student shows up with 15 to 16 appliances," notes Mary Ann Cronin, senior vice president with Jones Lang LaSalle, Chicago. As a result, newer projects are going far beyond traditional student housing services, says Tony Moayed with TMCS, Sacramento, incorporating such amenities as fully-equipped kitchens, a washer/dryer in each apartment, private bathrooms, Ethernet/Internet access, balconies, fitness centers, game rooms and theater rooms.

In addition, the idea of a student housing village is coming into vogue. "This model includes common and private park settings, accompanied by shared outdoor facilities such as sun decks, BBQ pits, a swimming pool with a Jacuzzi, sand volleyball courts, basketball courts and jogging and biking paths," describes Moayed.

For more on trends in student housing, including a plan for tackling student housing design, visit



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