De-Mystifying
Public-Private Partnerships
Sarah Samuels
Jason Taylor
The Scion Group LLC
Shannon Staten
University of Louisville
De-Mystifying Public-Private Partnerships
Session Overview
• What is a public-private
partnership?
• Motivating factors
• Financing models
De-Mystifying Public-Private Partnerships
Basic Concepts
• Types of public-private
partnerships
• Non-recourse financing
• Credit-friendly / Off-balance
sheet
• Impact on operations
De-Mystifying Public-Private Partnerships
What is a Public-Private Partnership?
Generally, a public-private partnership
(PPP) is any one or combination of
management, ownership or financing
provided by someone other
than the school.
De-Mystifying Public-Private Partnerships
What is a Public-Private Partnership?
• Who manages the…
– facility?
– financial operations?
– residence life program?
• Who owns the ground / building?
• Who finances the project?
De-Mystifying Public-Private Partnerships
}
Our focus
Motivating Factors
True or False?
1. PPPs typically provide significant benefits /
advantages. False
2. PPPs rarely provide significant benefits or
advantages. False
The benefits and advantages of PPPs
depend on institutional values,
capabilities and circumstances.
De-Mystifying Public-Private Partnerships
Motivating Factors
•
•
•
•
•
•
Address an urgent need
Expedite development
Gain experience and expertise
Reduce risk
Limit credit impact
Obtain favorable balance sheet treatment
De-Mystifying Public-Private Partnerships
Motivating Factors
By themselves, minimizing credit impact and
obtaining favorable balance sheet treatment are
rarely the sole factors which should compel a
public-private partnership.
De-Mystifying Public-Private Partnerships
Financing Models
100% Institutional
Full control, risk
and resources of
institution
100% “Privatized”
Minimal
institutional control,
risk or resources
Factors
 Planning / site selection
 Residence life
 Financing
 Management
 Construction management
 Marketing / assignments
 Property management
 Learning communities
De-Mystifying Public-Private Partnerships
Financing Models
100% Institutional
Advantages
• College receives all net revenue
• Complete control over construction quality, design,
operations and residence life
• Complete control over pricing decisions
• More favorable interest rates and lower debt coverage
ratio (“DCR”)
De-Mystifying Public-Private Partnerships
Financing Models
100% Institutional
Disadvantages
• School and/or State bureaucracy may be involved
• Capital will be required (no risk transfer)
• College/State bond capacity will be impacted
• Potentially inefficient development and construction
process
• Limited involvement of outside, objective
expertise/specialist
• Incur entire lease-up risk (no risk transfer)
De-Mystifying Public-Private Partnerships
Financing Models
100% Privatized
Advantages
• Avoid some bureaucracy
• Little or no capital outlay by school (risk transfer)
• Limited impact on school/state bond capacity
• Little or no construction delivery risk (risk transfer)
• Involvement of outside expertise/specialist
• Objective test of market demand
De-Mystifying Public-Private Partnerships
Financing Models
100% Privatized
Disadvantages
• Little if any revenue participation
• Exposure to property taxes
• Union considerations / Prevailing wage laws
• Little if any control over quality of construction, design
issues, operations and residence life
• Little if any control over pricing decisions
• Higher interest rates and DCR
De-Mystifying Public-Private Partnerships
Financing Models
100% Institutional
Full control, risk
and resources of
institution
100% “Privatized”
Minimal
institutional control,
risk or resources
Factors
 Planning / site selection
 Residence life
 Financing
 Management
 Construction management
 Marketing / assignments
 Property management
 Learning communities
De-Mystifying Public-Private Partnerships
Financing Models
Public Private Partnership
Advantages
• Avoid some bureaucracy
• Little or no capital outlay by school (risk transfer)
• Lessen impact on school/state bond capacity
• Little or no construction delivery risk (risk transfer)
• Involvement of outside expertise/specialist
• Objective test of market demand
• Possible ownership over some period of time
• Ability to select supports provided to the project
• Possible revenue participation
• Some control over design, construction and pricing
decisions
De-Mystifying Public-Private Partnerships
Financing Models
Public Private Partnership
Disadvantages
• Higher interest rates and DCR
• View of participation and conditions by auditors and
rating agencies
De-Mystifying Public-Private Partnerships
Financing Models
Public Private Partnership
“Affiliated privatized student housing
projects always impact the credit profile of
an affiliated university to some degree.”
Source:
Moody’s Investors Service, Privatized Student Housing
and Debt Capacity of US Universities, March 2010
De-Mystifying Public-Private Partnerships
Financing Models
Public Private Partnership
Characteristics that impact the credit analysis:
•
•
•
•
•
•
Location
Ground lease
Share of student residences
Student market segment
Student services
Rental rates
Source: Moody’s Investors Service
De-Mystifying Public-Private Partnerships
Financing Models
Public Private Partnership
Characteristics that impact the credit analysis:
•
•
•
•
•
•
Marketing and management
Project assistance
Cash flow
Construction risk
Non-compete clause
Guarantees and support agreements
Source: Moody’s Investors Service
De-Mystifying Public-Private Partnerships
Financing Models
Impact of Debt Coverage Requirement
School
1.00
Developer/PPP
>1.25
Revenue
Expenses
Net Operating Income
$3,000,000
$1,000,000
$2,000,000
$3,000,000
$1,000,000
$2,000,000
Max Available for P & I
$2,000,000
$1,600,000
Net Cash Flow
$
$ 400,000
Max Loan Amount @ 6%
$28,000,000
Required DCR
(Debt Service = NOI / DCR)
0
* School could obtain an even larger loan because loan rate would
likely be more favorable than rate for developer.
De-Mystifying Public-Private Partnerships
$22,000,000
Financing Models
Options for increasing NOI
Developer tools
•
•
•
•
•
Increase student rent
Lower construction quality
Reduce services and amenities
Increase density
Eliminate non-rentable space
De-Mystifying Public-Private Partnerships
Financing Models
Options for increasing NOI
With public-private partnership
•
•
•
•
•
•
All of developer’s tools, PLUS…
Long-term master lease
Guarantee occupancy in year one
Donate campus infrastructure
Affiliation or referral agreement
Subordinate campus services to
debt service
De-Mystifying Public-Private Partnerships
Public-Private Partnerships…
• Should be motivated by institutional need, and
executed based on institutional values
• Can provide the institution an optimal balance of
control and risk
• Are not the best solution for every campus
• Are long-term relationships requiring thoughtful,
well-informed planning
De-Mystifying Public-Private Partnerships
Public-Private Partnerships…
“You can privatize your housing, but you can
not privatize your relationship with
students and parents”
De-Mystifying Public-Private Partnerships
Thank You!
Sarah Samuels - sls@thesciongroup.com
Shannon Staten – sdstat01@louisville.edu
Jason Taylor – jat@thesciongroup.com
www.thesciongroup.com
www.louisville.edu/housing
De-Mystifying Public-Private Partnerships