DALLAS -- Wayne State University in Detroit has closed on a 40-year partnership with a private developer that may serve as a model for more university infrastructure projects, especially if the pending tax law bans private activity bonds.
The deal, a private-public partnership with Corvias Campus Living LLC that closed last week, allows the school to finance its housing master plan and retire existing debt while also providing $800 million of reinvestment capital over the life of the partnership.
Corvias plans an initial investment of $300 million, which will be used to pay down $102 million of Wayne State's existing debt associated with housing as well as construct and renovate existing housing. Corvias will manage and maintain all on-campus housing facilities.
Johan Rosenberg, chairman of Minneapolis-based Blue Rose Capital Advisors, which advised Wayne State, said he expects deal to provide a model as universities look for funding alternatives to private activity bonds to meet their capital needs.
“There is a lot of talk right now about the elimination of private activity bonds, and that will affect a lot of private universities and healthcare," he said. "This is an example that, even if those are eliminated, there is capital available.”
The fate of PABs hangs in the balance as the House and Senate prepare to reconcile versions of tax reform into a final bill to be signed by President Trump. The Senate bill approved over the weekend spared PABs, which would be eliminated under House legislation. But the bill would retain the alternative minimum tax, which is applicable to PABs that are not 501(c)(3) bonds and makes them less attractive. If the House’s proposal to eliminate PABs makes into the final tax reform measure, interest in deals like Wayne State's may grow.
For decades developers have been buying or leasing land near campuses and forging partnership with universities to provide housing and participate in their housing programs, Rosenberg said.
“Generally speaking there are general revenue bonds, which is on-balance sheet on credit for the university," Rosenberg said. "Then we have the 501 (c)(3) tax- exempt, PABs that has been very well utilized, which are at risk under the GOP sponsored tax bill.”
Core to the PAB deal structure is a long term ground lease and a leasehold mortgage.
“So the security and collateral associated with those deals includes the real estate,” said John Wendling, senior vice president at Blue Rose. “For the Wayne State/Corvias model there is no real estate collateral – it’s all revenue and cash flow based, which is innovative and different.”
As a result of the partnership with Corvias, Wayne State expects to begin leasing approximately 407 new beds in fall 2018 and the remaining 434 spaces by fall 2019. The property will be made up of a six-story south wing, an eight-story north wing and 11-story central tower. Once completed, it will be the largest housing complex on WSU’s campus.
“Wayne State University’s partnership with Corvias is transformational,” said Bill Decatur, the university's vice president for finance and business operations, chief financial officer, and treasurer. “The university achieves numerous strategic goals through our partnership — enhancement of the on-campus student experience, new and renovated student housing, long-term financial support for maintaining student housing, and at the same time improving the university’s financial position.”
Decatur said that from a financing perspective, Wayne’s goal going into the partnership was trying to find a means of financing that would remain off its balance sheet and not add to its credit load. The partnership with Corvias means it can revitalize its housing stock in the face of declining enrollment while reducing housing-related general revenue debt. Wayne State is currently rated Aa3 by Moody’s Investors Service and S&P Global ratings rates the credit A-plus. The university has over $450 million in outstanding debt.
“Shortly after we got into this, Moody’s issued an opinion letter saying they thought that is how they would treat it and it would actually be positive credit to the university," he said. "We have gone through all of the accounting issues with auditors and it’s not going to be considered a component unit and we feel there is going to be no recourse to the university.”
Rosenberg said that the Wayne State/Corvias partnership took about 24 months to pull together.
“The hardest thing about this particular structure is that a public entity like Wayne state has to decide if it can structure a deal where they are outsourcing the rate setting to a private entity," Rosenberg said. "A lot of public entities still want to maintain that control over the asset.”
For the privatization to work, Rosenberg said, “rates do need to be projectable. Pro-forma needs to be established in order for that future revenue stream to be levered into a financing.”
Wendling said part of the challenge of such a transaction is getting investors comfortable with the health and viability of the system.
“The underwriting is different because the underlying security is lighter,” he said. “It also has an effect on accounting for the university because they actually retain the asset on their balance sheet but just use the debt. Wayne State was able to seize $102 million of debt, build new student housing and privatize the remaining systems, allowing for capital investments that funds the demolition of one facility and the renovation of another. It’s that comprehensive approach and strength of cash flow among various facilities that ultimately we were able to get investors comfortable with.”
The challenge, said Rosenberg, is to convince investors that even in a downturn, the assets will perform and pay the debt.
“If revenues were to turn upside down investors can’t foreclose on the buildings they are out of luck and must figure out how to work it out. Investors can’t foreclose on building,” he said.
Another unique aspect of the partnership is a feature of the structure that calls for a reinvestment fund.
It is funded from cash accrued over the life of the partnership and is expected to be reinvested back into the university's housing so that the assets are continually upgraded and don't depreciate over time. A lot of universities and municipal entities in general, have to deal with deferred maintenance, which isn't “politically popular,” according to Rosenberg. Decatur said that universities dealing with facilities issues today can't count on capital appropriations.
Wayne State will next take a hard look at how to use the financing model on energy related projects, Decatur said. “There are several firms here in the state and some nationally that have already talked with us,” he said.
Corvias entered into similar partnerships to finance new student housing with Howard University in January 2017 and the Board of Regents of the University System of Georgia in 2014.
Other universities are looking at privatization to fund other projects. The University of Eastern Michigan for example is looking to privatize parking structures similar to a deal first done by Ohio State University in 2013. The deal would range from 30 to 50 years, transferring operations to a qualified partner in exchange for an upfront payment to the university that would help fund long-term investments in academic facilities and programs.
The Ohio State deal transitioned management of its parking services for a payment that went directly into the university’s endowment and helps fund items such as financial aid, faculty recruitment and facilities. Ohio State also entered into a public-private partnership with Ohio State Energy Partners, a newly formed entity created by ENGIE North America and Axium Infrastructure in 2016.
The partnership is structured as a 50-year concession and lease agreement, under which Ohio State will pay OSEP an annual utility fee and OSEP will manage and maintain the University’s electricity, chilled water/cooling, steam/heating, natural gas and geothermal utility systems. Under the Agreement, OSEP made an upfront payment to the University of $1.015 billion, and committed an additional $150 million to support academic initiatives at Ohio State.