Colleges find a new way to finance construction

Small institutions need new housing to boost enrollment, but take on significant risk in private deals

Small, private institutions are increasingly using private financiers to fund student housing construction projects, Lee Gardner reports for the Chronicle of Higher Education

While many large, public colleges and universities have taken on private financing deals to pay for student housing, the practice has been less common among smaller institutions. But facing financial struggles and pressure to increase enrollment, more small colleges are exploring private deals to fund new housing, which is crucial to attracting students.  

Middlebury College had always financed its own student residences, but considered privately funded construction projects after similar institutions began taking on such deals, says Patrick Norton, vice president for finance and treasurer. After many discussions, the board of trustees authorized a deal with a private firm to construct a new residence that will open this fall. St. Joseph's College is negotiating with an investment firm to finance new student housing on Long Island. 

How it works

Typically, a private firm will offer capital and construction services to build student housing on university-owned land. The institution still owns the ground, but the firm owns the building, which it leases back to the institution for a percentage of the monthly revenue. A portion of the annual revenue is often reserved for repairs and long-term maintenance. Building ownership is often returned to the university once the agreement ends, but some deals allow colleges to retain ownership earlier. 

Risky business 

Schools are making big investments in student housing to boost enrollment, but the possibility of losing revenue on construction projects is a major concern for many institutions. 

White paper: Facility styles, occupancy trends, and funding strategies

"The danger is you go into a long-term arrangement assuming that you're going to have the students to fill the beds, and they're not there," says Kent Chabotar, president emeritus of Guilford College and founding partner of MPK&D Partners, a consulting firm that works with colleges.

Chabotar says Guilford considered building student housing with private financing when enrollment was at its peak. However, enrollment has decreased since 2010, and if the college had entered a private deal to build on-campus housing, it would have resulted in a huge financial crunch.

Jack Calareso, president of St. Joseph's College, believes his school's negotiation with a private firm to build on-campus housing is a smart move. He says data has shown there is enough demand enough students to fill all of the proposed beds, and more could be added if the first phase of the project is successful.

Chabotar notes that residents and chief financial officers must take a number of factors into consideration when dealing with private financiers, such as balance sheets, existing bond covenants, and state regulations.

Many private financing deals conclude after 25-30 years, at which point building ownership is returned to the university. This is also the point at which many campuses need renovations. James Kadamus, VP of college facility advising company Sightlines, says it is important that the institution and developer both understand which entity is responsible for repairs and long-term maintenance, and know how such projects will be funded (Gardner, Chronicle of Higher Education, 2/25). 

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