Funding cycles come and go, but the need to repair, expand and modernize college and university facilities goes on forever. Universities have a core academic mission to achieve, one that shouldn’t be sidetracked by the need to pour precious resources into new facilities or expensive renovations.
To bridge the gap between dwindling public resources and the growing cost of infrastructure and facilities, a public-private partnership (P3) can be a solution that infuses capital into an overstretched budget and makes new development financially feasible.
However, P3s are complicated by nature, and there are many misconceptions about them. Given the need for new development, now is the time to bust these myths. Done thoughtfully, a well-crafted P3—typically a cooperative, long-term joint venture—enables your institution to tap into the expertise, innovation and efficiency of the private sector, possibly gaining shared revenues or upfront payments along the way.
The following are five common myths and their underlying realities.
Myth: A P3 means privatization.
Creating a P3 is not the same thing as privatization. In pure privatization, your institution does not retain ownership or control of the asset, and has no agreement with a private entity. In contrast, a P3 is a contractual partnership allowing the institution to retain control and oversight while a private sector partner assumes much of the financial risk.
Myth: P3s can be used only for student housing.
Most higher education P3s have been focused on student housing, but the model is also being successfully applied to other property types. A P3 backs the Monroe Street Market at the Catholic University of America in Washington, D.C. The project encompasses apartments, townhouses, street-level retail, restaurants, artist studios and galleries, a dance studio and parking.
In Philadelphia, Drexel University and Brandywine Realty Trust are developing Schuylkill Yards, a six-building, 8 million-square-foot, $3.5 billion development that includes a skyscraper, retail space, educational facilities and medical institutions.
Myth: All P3s are the same.
P3s almost always entail capital investment by a private sector company, and always leave some level of control in the hands of the university. Beyond those commonalities, however, specific structures vary widely. The two most common approaches are concession agreements and lease arrangements through a university-sponsored nonprofit entity.
Myth: Creating a P3 is a prolonged and difficult undertaking.
P3s are highly complex policy instruments that may involve myriad challenges. Yet, a well-designed P3 can typically be implemented more quickly than a traditional development.
Any delays in the P3 process typically arise from pre-planning missteps. It’s important to assess your staff’s expertise and fill in the gaps with specialized real estate, financial and legal advisors who can help smooth the way.
Myth: A P3 benefits the private partner more than the institution.
Typically, private capital comes at a higher price than tax-exempt public debt. However, with most P3 projects, the relatively higher cost of private capital is offset by reduced costs elsewhere, particularly if the P3 includes a guarantee of continued maintenance, repair and replacement of the asset.
A critical success factor is your ability to assess and appropriately divide project risks among partners. Properly structured, a P3 transfers financial risk to the private partner, which is incentivized to perform at a high level because equity and revenue are at stake.
A P3 can provide numerous benefits when supported by thoughtful planning and financial analysis. The bottom line: P3s can bridge funding gaps and make new campus development possible, without full privatization.