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Privatized student residences to sprout in the near future

Rochester Business Journal
December 21, 2012

See correction below

Examples of privatized student housing exist at Rochester-area colleges and universities, though the majority of local residence halls remain institutionally owned and managed. Developers and legal experts, however, expect that to change.
 
Privatized student housing is on the rise nationwide, says William Mack, executive vice president at LeChase Construction Services LLC. The general contractor and construction management firm has signed one such deal with a North Carolina college but has not yet done so locally.
 
Various factors have prompted institutions of higher education across the country to consider privatizing housing, which involves transferring some or all of the risk related to constructing a residence hall to a builder or developer. The arrangement's ability to alleviate pressure on schools' capital budgets and ease concerns about incurring additional debt is a plus.
 
Pervasive cutbacks in state appropriations have made the prospect more compelling at both public and private colleges and universities. In New York, state funding for higher education fell 7.1 percent in fiscal year 2011-12, according to a study by Illinois State University.
 
Aging campus infrastructure, competition among institutions to have modern facilities and mounting demand from students for certain amenities also have spurred schools to weigh privatization's benefits.
 
One highly visible local example of privatized housing is Park Point, the $72 million mixed-use residential and commercial development on the northeast corner of Rochester Institute of Technology's campus in Henrietta. Wilmorite Inc. was responsible for constructing the property in 2008 as the result of the university leasing 70 acres for the project to the local developer.
 
Park Point, which Wilmorite owns and manages, has been a huge success, says Howard Ward, assistant vice president of student auxiliary services at RIT.
 
"This was an opportunity for students to get back closer to campus and have an on-campus feel, even though it was an independent developer," he says.
 
Ward adds, "It certainly helps to have the different types of options that Park Point has."
 
The property has a dozen apartment layouts and offers residents access to the on-site pool, hot tub, sand volleyball court, basketball courts, fitness facility, cinema and study centers. According to terms of the deal, RIT has the option to repurchase Park Point from Wilmorite, but Ward expects that would happen several decades from now.
 
An example of privatized housing in the pipeline is the Flats at Brooks Landing, a project calling for an 11-story building with a restaurant on the first floor and upper-floor housing for 170 students across the Genesee River from the University of Rochester. The nearly $20 million project is slated for completion in June 2013.
 
The Rochester Economic Development Corp. is providing a low-interest loan of up to $750,000 to Minneapolis developer Ronald Christenson for the project, which will dovetail with Riverview Apartments on South Plymouth Avenue as the only providers of leased space to UR for student housing.
 
Yet another local example of privatized housing is Campus Gate at Finger Lakes Community College. Memphis-based EdR, a leading player in the collegiate housing market, owns and operates the property, which has single, double and triple suites, as well as a pool, fitness center and cinema.
 
Though privatized student housing is not yet widespread locally, the Rochester-area higher education community is "really quite knowledgeable and sophisticated in their understanding of various structuring options for developing and financing (it), including engaging developers to construct, own and operate a privatized project," says Jeffrey Wright, partner at Nixon Peabody LLP and co-leader of the law firm's student housing team.
 
Bruce Baker, also a partner at Nixon Peabody, agrees that the area is not lagging on the issue.
 
"I think the schools are very much in the mainstream in terms of looking at different ways to structure these projects," says Baker, who leads the law firm's student housing team with Wright and has moderated two webinars on privatization recently with him.
 
Baker adds: "The other characteristic about the Rochester market that's different from other parts of the country is that ... most of the colleges and universities have sort of better-than-average undergraduate housing on campus. There are schools in other parts of the country that can only house freshmen."
 
Developers and institutions of higher education can structure housing privatization deals in various ways. One option involves hiring a fee-based consultant, which allows the college to retain full ownership and control of the project but means the college must bear the development costs and risks. Another option has the developer also act as the project contractor and manager for a fixed fee or a fee with fixed and incentive components.
 
Still another structuring option entails bringing on a fee-based consultant that also acts as an investor in the project, which may open up access to pre-construction capital and lessen the college's equity or debt requirements. The developer also could own and operate the housing outright and create a single-purpose entity to enter into a long-term lease with the university for the land.
 
Whether they involve new construction or renovation, residence hall projects tend to be costly. Typical expenses range from financial feasibility studies and market analyses to engineering, architectural and site-assessment services and legal fees.
 
While it has not yet struck a privatization deal with a local college or university, LeChase has such an arrangement for the construction of a residence hall at Belmont Abbey College, a private, Catholic liberal arts college near Charlotte, N.C. Working with Pittsford-based HBT Architects, LeChase plans to complete the three-story, 20,000-square-foot structure by next summer.
 
LeChase is assisting with some financing for the project and facilitated the financing process, Mack says. Similar deals are in the works at the firm, he adds.
 
Local builders and developers have the top-flight skills to enter the privatization market, Baker says. But EdR, Alabama-based Capstone Cos. and Texas-based American Campus Communities are pushing financing deals in a still-fragmented market, he says.
 
"The decision of what developer to engage is typically based upon a combination of qualifications and experience. ... But probably even more important than that is the responsiveness of a developer to a school's particular needs and goals," says Wright.

Sheila Livadas is a Rochester-area freelance writer.12/21/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.
Correction
An article in the Dec. 21 Special Report on privatized student housing contained an error. The Campus Gate project at Finger Lakes Community College is owned by Mascia Development LLC.


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