Avoid over-borrowing: 5 steps to take before investing capital dollars

The need to finance campus building projects is a reality for most higher ed institutions, but college leaders must ensure that projects are worthy investments
By: | Issue: November/December, 2019
November 11, 2019
LONG-TERM PARTNERS—Building through public-private partnerships helps institutions such as University of California Merced to grow. The Merced 2020 expansion involves a 39-year agreement with a single private development team from Plentary Properties Merced. Granite Pass Residence Hall is one part of the plan; a two-phase project; its northern phase was completed in 2018 and its southern portion is scheduled for opening in 2020.LONG-TERM PARTNERS—Building through public-private partnerships helps institutions such as University of California Merced to grow. The Merced 2020 expansion involves a 39-year agreement with a single private development team from Plentary Properties Merced. Granite Pass Residence Hall is one part of the plan; a two-phase project; its northern phase was completed in 2018 and its southern portion is scheduled for opening in 2020.

While many colleges are boosting their capital investments, the question of whether they’re borrowing too much is up for debate.

“We see some growth in debt, but for most, it’s not in excess of growth of overall revenue, and overall cash and investment growth,” says Susan Fitzgerald, associate managing director with Moody’s. “For the most part, schools are being very prudent in their use of debt.”

Moreover, “strong academic and research schools have no shortage of access to capital,” says John Lynch, head of the Education Practice Group at SunTrust. Many investors are happy to invest in these schools.

Yet, the outlook is more troubling at some colleges, particularly small private institutions that are trying to attract new students. “A lot are throwing a Hail Mary to beef up their curb appeal,” Lynch says.

They’re taking a “build it and they will come” approach, adds Pete Zuraw, vice president of market strategy and development for Gordian, the parent company of Sightlines, which provides facilities intelligence in higher education. “For some, it may work. For others, it will accelerate their debt.”

Here are five steps to take before investing in capital dollars to help ensure that your college or university is spending wisely.

  1. Evaluate your current facilities portfolio. What assets does it include, and how efficiently are they being used? Sightlines has found space utilization at some universities is below 40%, says Pete Zuraw, vice president of market strategy and development for Gordian, the parent company of Sightlines, which provides facilities intelligence in higher education.
  2. Conduct an analysis of the investment. How will the new facilities further the university’s goals, and how will the institution manage the debt service?
  3. Consider ways to lower or maintain expenses, or to boost revenue, that don’t require a capital investment. Adding night classes can make greater use of existing space, and offering online courses may increase revenue without requiring much space, for example.
  4. Estimate the total lifetime cost to build and operate a proposed new building. What will it cost to operate and maintain as well as reinvest in the building, and to service any debt needed to construct it? “Don’t invest in new physical plant unless you can afford to sustain it, along with all the existing physical plant you already operate,” Zuraw says.
  5. Evaluate the debt already on the university’s books. In addition to the amounts, check when they’re coming due. For instance, a college with a balloon payment coming due in 10 years will have limited ability to handle additional debt payments at the same time.

Read the main article: Capital projects: 5 ways to pay.