A college or university’s campus represents, physically, its environment for learning—its training ground for future thought leaders. Yet today, many U.S. institutions of higher education lack the appropriate resources and funding needed to develop new infrastructure or to upgrade existing buildings.
To solve this problem, more are turning toward a public-private partnership (P3) model—a practice common in Europe and Australia—to fund such development.
A P3 is a contractual arrangement between a public agency or institution (such as a university) and a private sector company (such as a commercial developer) in which the two entities share skills, risks, maintenance and rewards in the development of infrastructure.
Universities face challenges similar to those common to private sector businesses, including immense competition, modernization and raising capital. A P3 allows universities to develop new structures and to modernize older ones, while retaining control of its property and, in the case of public entities, avoiding complete privatization.
Understanding P3
Several types of P3 agreements have emerged throughout the years. The two most common for universities are concession agreements and nonprofit lease arrangements.
In concession agreements, the university owns the land and the developer holds the rights to build, operate and maintain the facilities for an extended period. In the nonprofit lease arrangement, the developer and university form a nonprofit entity and enter into a long-term ground lease.
Tax-exempt bonds are then issued to fund the project and are repaid through revenues. The developer will receive a fee for overseeing construction and managing the finished property.
Student housing success
The P3 model has primarily centered on student housing. The developer minimizes the project-related risks by obtaining the favorable location of the student residential projects, which are otherwise unobtainable without a P3 arrangement.
This benefits the university in terms of infrastructure development as well as by allowing it to focus on achieving its core academic missions.
The success of the P3 model in student housing has led to the development of other property types.
Drexel University has entered into a P3 agreement with Brandywine Realty Trust to develop a 14-acre community at Schuylkill Yards. This $3.5 billion project will include educational facilities, entrepreneurial space, cultural venues, residential dwellings and even a skyscraper.
The University of California at Merced has also embraced the P3 model and is in the process of nearly doubling its campus in a $1.4 billion project with Plenary Properties Merced. The development includes housing, dining facilities, laboratories, parking lots, recreational centers and a public transit hub.
Identifying goals
While P3s are a viable solution to investing in infrastructure, they are complex in nature. It is imperative for the university and the developer to identify their goals and primary objectives when negotiating their business relationship, and to agree to the assignment and transfer of risk.
A shared vision eliminates the risk of delays in the project goals. To ensure the success of a project, a P3 team comprising a small group of individuals from both sectors is necessary to identify goals, issues and solutions.
Open communication throughout the duration of the project will reinforce shared interests, achieve realistic expectations and build trusting relationships.
When implemented correctly, a P3 can be an effective solution for sustaining and advancing academia’s built environment. By easing the financial burden of development, universities can invest time and resources into better, more technologically advanced infrastructure.
The importance of this to engaging and recruiting the next generation of faculty and students cannot be overstated.
Michael S. Zetlin is a founding partner of Zetlin & De Chiara LLP, specializing in construction and contract litigation. Ramsen Youash is an associate with Zetlin & De Chiara’s New York office.
