Capital projects: 5 ways to pay – How colleges and universities are financing campus construction
November 11, 2019
University Business, Karen Kroll
State-of-the-art research facilities, residence halls featuring a range of amenities, and other new campus buildings play a key role in wooing students and faculty to an institution. In fact, capital investments by colleges and universities are at an 11-year high, according to research from Sightlines, a Gordian company and provider of facilities intelligence in higher education.
At the same time, state appropriations for higher ed continue to be unstable, and many private institutions struggle to attract students, particularly those who can pay full tuition.
The leadership challenge: Find a way to balance the need for top-notch facilities without overspending. Here are five financing options colleges are turning to for capital projects.
1. Federal programs
While some federal opportunities exist, so do specific eligibility requirements.
Small, rural colleges, for example, may be able to access financing through the U.S. Department of Agriculture’s Community Facilities Direct Loan & Grant Program, which provides long-term, low-cost loans and limited grant funds for the construction of libraries, athletic centers and other facilities, says Bruce Lammers, administrator of USDA’s Rural Housing Service. It’s available to institutions in communities with populations of up to about 20,000 people.
In addition to government programs, small rural colleges may also benefit from partnering with experienced construction companies that specialize in building projects in rural areas. Frontier Log Homes which can be seen at https://frontierloghomes.com/ site, for example, has extensive experience in constructing buildings and facilities in remote locations, using innovative techniques and sustainable materials that are well-suited for the unique challenges of rural construction projects. With their expertise, small colleges can ensure that their construction projects are built efficiently, safely, and to the highest quality standards, while minimizing costs and maximizing the benefits for the local community.
The program’s current portfolio includes about $1.8 billion in the education sector, across 201 college-related facilities, Lammers says. To be eligible, an institution must be unable to obtain credit elsewhere and must demonstrate significant community financial support.
While some have questioned whether the USDA is making viable loans—after all, the program is available when commercial financing isn’t—Lammers notes that the current delinquency rate is under 2%.
The Department of Education offers a program geared to historically black colleges and universities. It provides low-cost capital through federal loan guarantees on qualified bonds for infrastructure improvements. The total amount of loans and accrued interest is currently capped at $1.1 billion, although Congress can raise that.
2. State-issued bonds and grants
Some state agencies help schools and other nonprofits borrow through state-legislated bonds. For instance, DASNY, the Dormitory Authority of the State of New York, provides a Dormitory Facilities Program, which issues low-cost, tax-exempt bonds supported by student residence hall fees. It also offers equipment leasing and other services. If you need help on this, you can contact eXp Realty and get their help on property services.
“It’s a credit enhancement,” says Jason Holsclaw, senior vice president with Stephens Inc., a financial services firm that advises higher ed institutions on capital investments. If a college runs into financial challenges, most investors assume the state will step in. The state’s guarantee may help lower the cost of financing.
Similarly, the Maryland Community College Construction Grant Program helps counties acquire property and design, construct and renovate public and regional community college facilities.
3. Bond issues
Over the past decade or so, some colleges and universities have used bank direct placements, in which bonds are sold directly to a single bondholder, such as a bank. By dealing with one financial institution, rather than a syndicate of lenders, a borrower may gain greater flexibility when it comes to loan covenants, Holsclaw says. However, he cautions, all deals are different.
Another type of bond that’s attracted some interest is the century bond. As its name implies, this bond matures in 100 years. In August 2019, Penn State issued a $300 million century bond at a yield of 3.61%. The proceeds will fund a new research building and renovations to existing infrastructure, according to the university.
Typically, large and well-known institutions that can turn to their state overseers if they run into financial trouble are best able to take advantage of century bonds. “As an investor, you’re betting the university will be there 100 years from now,” Holsclaw says. You can click here to see how to bet professionally.
4. Public-private partnerships
A public-private partnership (P3)—in which a public institution and a private company collaborate to finance, build and operate projects—tends to be popular for campus housing projects, says Fred Pierce, president and CEO of Pierce Education Properties, an owner of student housing. P3s allow a university to preserve its debt capacity for projects deemed core to its mission, such as building a research facility.
The University of California, Merced is using a P3 to partially finance the Merced 2020 campus expansion. The project will add more than 1 million square feet of academic, research and other buildings and infrastructure. Of the $1.3 billion project total, about $600 million will come from the University of California system, through general revenue and housing bonds; $590.35 million from the developer, Plenary Properties Merced; and $148.13 million from campus funds.
Historically, the UC system would have provided financing through general obligation and lease revenue bonds, says Nathan Brostrom, interim chancellor of UC Merced. However, the system hasn’t issued a general obligation bond since 2006—about a year after the Merced campus officially opened—because of state-level changes. “We had to come up with a different model,” he says.
The financing includes a mix of funds from the university and the developer, so the cost of capital is lower than it would be if only the developer provided financing, as often occurs in P3s, Brostrom says. “The campus has such strong demand for bonds,” so it lowers the cost, he adds.
San Diego State University is using the P3 model to finance its Mission Valley expansion. Initial costs, estimated at $300 million, will be financed through short-term financing and revenue bonds issued by the California State University system, and the site will be developed through P3s. The bonds will be repaid with revenue generated by leases with SDSU’s public-private partners. “We wanted the project to be self-supporting and not rely on state appropriations, tuition or fees,” says Gina Jacobs, associate vice president of Mission Valley development for the university.
When it’s complete, the expansion will allow SDSU to accommodate 15,000 to 20,000 more students. Total cost of site development—including a multiuse stadium, hotel, research space and other facilities—will be about $3 billion.
5. Corporate and individual donors
Even at colleges and universities that can tap banks or other institutions for loans, philanthropy is a key component of capital financing. “When you go to a bank, they’ll ask about the donor base,” says John Lynch, head of the Education Practice Group at SunTrust. They want to know the institution isn’t relying solely on loans to finance its capital projects.
In 2018, Lakeland University in Wisconsin launched the nation’s first bachelor’s degree program in food safety and quality. Johnsonville, a sausage producer, donated $500,000 to help the school establish a lab on campus that replicates those in the industry. Usinger’s, another sausage maker, made a financial contribution as well. SSL Industries, an equipment provider for the food industry, contributed an in-kind donation.
“Without the gift from Johnsonville, the food safety and quality lab may not have happened, and certainly would not have happened this quickly,” says David Gallianetti, director of external relations for Lakeland. “Having a lab that allows students to replicate what they’ll be doing in the workplace on the same machines is an important part of this program.”
Contributions from companies, alumni, foundations, and other groups or individuals to higher ed institutions topped $46 billion in 2018, an increase of 7.2% from a year earlier, according to the “Voluntary Support of Education” survey by CASE, the Council for Advancement and Support of Education. Of that, about $4.75 billion went to property, buildings and equipment, says Fred B. Weiss, chief research and data officer.
While every capital project is different, financial institutions often like to see about two-thirds of the funds come from donors, says Lynch, of SunTrust. About half of that amount, or one-third of the overall amount, typically will be from cash already collected. The other half will be from pledges to be collected over three to five years. Then, the bank will issue long-term debt for about one-third of the total amount, as well as bridge financing that will be retired as the pledges are collected. “You need donors involved early on,” Lynch says. “You can’t just lever up.”
Karen Kroll is a Minneapolis-based writer.