Creativity is Hallmark to Financing the Higher Education of Tomorrow
The Mid-Atlantic region is a hotbed of higher education. New Jersey, the most densely populated state in the Union, has more than 50 colleges and universities. To continue to grow, many institutions are turning to creative development and financing to build the kinds of accommodations (room and board in the parlance of education) and amenities that serve both student and community alike. They are working in tandem with private developers to leverage their capital dollars and build campuses of the future to better position themselves in competitive markets and appeal to the increasing demands of potential students. In New Jersey, two recent projects have set the standard for public/private educational real estate development.
In Central New Jersey, The College of New Jersey has just completed a 12-acre mixed use residential development project on TCNJ’s Ewing, NJ campus, adjacent to the school’s main entrance. The $120 million project, developed by the PRC Group of West Long Branch, provides 278,000 s/f of living accommodations for some 612 upperclassmen, and includes 80,170 s/f of ground level retail and office space with a 14,000 s/f Barnes and Noble that serves as the school’s outsourced book store. In South Jersey, Rowan University has embarked on a similar mixed use project that is the largest municipal redevelopment project in the state. The Rowan Boulevard Project connects Rowan’s campus to the business district in Glassboro, NJ with a 1/3 mile retail corridor featuring a 129-room Courtyard by Marriott and a massive, 36,000 s/f Barnes and Noble Superstore. Spread across 26 acres, the project has taken place in several stages. The first, which was completed in 2011, can accommodate 1,164 students. The second phase includes a 316,000 s/f building developed by Nexus Holdings known as 220 Rowan Boulevard, which consists of 119 student housing units (accommodating 456 students), 12 affordable units and 47 market-rate apartments, as well as ground level retail and 27,000 s/f of medical office space. Two other phases are planned for 2017 and 2018.
These public/private partnerships work because they help shift construction and development costs from tax payers to third parties who have the real estate expertise to finance, build and deliver world-class properties. Moreover, many colleges and universities have discovered that these projects improve town and gown relationships by drawing students from off-campus housing where conflicts can arise with the community. And finally, they often serve to reinvent and reimagine the campus atmosphere, providing contemporary study, live and play environments. But all is not easy in the world of public/private educational development. Higher education comes with its own world of expectations, standards, and administrative functions unknown in private development. For lenders and developers looking to tap the university market, here’s what they need to know:Income streams are unlike typical cookie cutter private multi-family development. Understanding the room and board process is critical to supporting a deal. As cash-flow lenders on these deals, banks such as M&T, which financed both the TCNJ development and Phase II of the Rowan project, must understand the university’s current capacity and future enrollment projections. To some degree, students may seem a captive market, but competition exists everywhere. We carefully evaluated both on campus and comparable off-campus housing, determining current rents and projections for future increases. Also factored into the equation is the way rent gets paid--by the month or semester, through the academic or calendar year, and whether these residences will be included in the school’s housing lottery. All are keys to understanding potential cash flows and the financial viability of the projects. Bankers need to understand grants and tax credits and their impact on feasibility. Making these projects work often requires local, county and state financial support. Understanding the interplay of these outside sources of capital are key to their feasibility. At Rowan, for instance, financing depended on state tax credits that were at risk of expiring if legislation was not renewed. By understanding the status of the legislation and the attitude of the legislature, M&T was confident that the tax credits would be renewed in time for the project to move forward. The success of public/private development often hinges on this kind of local knowledge. Know that local rules can go beyond zoning. Local development rules govern more than curb cuts and parking spaces. New Jersey towns are under significant pressure to provide affordable housing, and overall project approvals can depend on such add-ins. On the Rowan project, the developer was required to set aside some units for affordable housing, limiting the number of market-rate units available and ultimately changing some assumptions about the project. Public construction regulations may impact financing. Rules and regulations for public construction often outweigh and outnumber those in the private sector. Understanding these rules is half the battle. Developers and their lenders must also be willing to accept the cost implications of their implementation. For instance, New Jersey requires developers on public projects that are awarded tax credits to use prevailing wage labor, which adds to both labor and compliance costs. At TCNJ, state law requires developers to issue a letter of credit as surety that the project would be completed and another letter of credit to ensure that labor will be paid – a sharp contrast to private rules and more costly than typical bonding requirements. Work with a finance source sophisticated enough to manage the entire lifecycle. Creative finance at the college and university levels requires both short-term and long-term vision. As projects move from the planning through the financing and construction stages, there are multiple boxes that must be checked. At Rowan University, M&T financed the tax credits, provided a bridge loan for construction, and then successfully positioned the project for long-term institutional financing. In such cases, it’s imperative to structure the deal correctly from the outset to enhance its long-term attractiveness. At TCNJ, M&T Bank served as lead lender, partnering with smaller lenders to deliver the deal. Sometimes, project timelines can become significantly longer than typical commercial deals and their financing stacks, comprised of public and private funds, can take time to piece together. For instance, financing at TCNJ started in 2011. The deal closed in 2014. In the end, these projects represent important initiatives to meet growing enrollments and the needs for higher education in the state. Rowan’s enrollment has grown by an astounding 20 percent to about 16,000 students over the past two years and is expected to increase to 26,000 students over the next ten years. The public-private partnership model gives public entities the ability to meet their growth plans without adding to balance sheet liabilities. Mike Saraco (VP, Relationship Manager) and Jim Morris (Admin VP, Group Manager) are commercial real estate financing specialists for M&T Bank.