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Innovative Financing Helps Universities Grow

Posted by Mary Scott Nabers on Tuesday, October 13th, 2015

Written by Mary Scott Nabers
President and CEO, Strategic Partnerships Inc.

Texas A&M University Campus - Photo by Texas A&M UniversityTexas A&M University recently announced plans to expand its student housing capacity by more than 3,400 beds with a unique agreement between public and private partners worth over $360 million. The announcement is similar to dozens just like it throughout the country. Student housing on university campuses is an extremely large, growing marketplace and most of the new projects are collaborative efforts called public-private partnerships (P3s).

Many such projects are launched because of a growing student population and because many P3 engagements generate substantial revenue for the school. By entering into a P3 engagement, universities are also able to shift all risk and assign management chores to private-sector partners.

Student housing facilities are extremely good targets for P3s, but perhaps no more attractive than new and/or expanded parking garages on college campuses. There are huge needs for both.

Public-private collaborations often also provide incredibly attractive tax breaks, making them even more appealing to private firms. Brazos County Attorney Rodney Anderson has asked the Texas Attorney General’s office for an opinion on the property tax status of the yet-to-be-built A&M project. The county is asking a question that is being raised in many states – addressing property tax status for student housing developed via public-private partnerships.

The answers provided will be extremely important because of high demand on university and college campuses as well as high interest from industry leaders. Universities and community colleges desperately need new and expanded facilities and without private-sector capital, the construction will likely not be possible.

Not surprisingly, there are no easy answers. While increasingly more popular, private development of facilities on university property is not new and tax implications have always been a concern. As early as 2001, the Internal Revenue Service was fielding requests from developers seeking 501(c) 3 status for various types of projects. Those inquiries resulted in the establishment of a fairly restrictive set of guidelines that essentially say private developers do not qualify for federal tax-exempt status unless there is a substantial “charitable” component to the project. The rule, however, has paved the way for a variety of different financing approaches – commonly, the establishment of a separate (but university-affiliated) 501(c) 3 to take advantage of tax exemptions – as is the case of the Texas A&M project. Other options often include ground-lease arrangements between the schools and private developers or joint ownership contracts. All of this is simply to say that tax benefits are definitely possible.

Construction work on the new home of the Texas A&M Executive and Professional MBA programs at CITYCENTRE in Houston. [Photo: Mays Communications]Some municipalities now offer explicit property tax exemption as an incentive for developers. In 2013, the Tucson City Council voted to approve a Government Property Lease Excise Tax-Incentive (GPLET) to support the development of a 196-unit student housing development in downtown Tucson near the University of Arizona campus. Although the development was not on university lands, the city was able to promote the benefits of a tax-exempt arrangement in support of larger urban revitalization goals.

The property tax exemption question became contentious in Kentucky last year when county school board members realized a new private student housing development at Eastern Kentucky University had been granted tax-exempt status through an agreement with the university. The school board decided to pursue legal action to force payment of approximately $100,000 in tax revenue – a liability the university disputes.

Meanwhile, in Georgia, the state’s General Assembly provided assistance for a planned nine-campus expansion within the University of Georgia System. Legislators passed a statute specifically establishing tax exemptions for private buildings on public lands. The university system is no stranger to public-private partnerships, as it already holds about $3 billion dollars’ worth of these projects. The 2014 bill (approved in a public referendum in November) refers to any “student housing or parking held by a private party that is contractually obligated to operate such property primarily for the use or benefit of public college or university.” These projects are now considered “public lands” under law for the purposes of ad valorem taxation.

The University of Georgia, struggling with over $4 billion in debt and increasing enrollment, has reached out for assistance by engaging with private firms and structuring lease arrangements that extend to 65 years in some cases. Under the planned contracts, the system retains ownership of the facilities, while private companies operate, maintain and collect revenues related to dormitories and parking garages.

The demand for new and expanded campus facilities in the near future is projected to grow very quickly. It creates a marketplace that should not be overlooked.

Mary Scott Nabers is president and CEO of Strategic Partnerships Inc., an Austin-based business development company specializing in government contracting and procurement consulting throughout the U.S. and author of ‘Collaboration Nation.’ .

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