BRADENTON, Fla. — The University System of Georgia expects to reach financial close next spring on a 65-year public-private partnership to provide alternative financing for college housing.
The $517 million transaction is being closely watched by the higher education, real estate development, and investment communities, and could become a model for other public university systems, experts said.
The concession agreement with Corvias Campus Living, announced Nov. 12, provides for development of 3,683 new on-campus student housing beds and management of 6,195 existing beds at nine institutions in the university system. Commercial close on the transaction was set for Thursday, Nov. 20.
The second stage of closing the transaction is expected next spring when USG and Corvias reach financial terms.
At the same time, the USG expects to defease $325 million of outstanding housing bonds tied to the nine campuses in the first phase of the privatization initiative, according to the agreement.
The Board of Regents launched the initiative earlier this year to help maintain the affordability of housing for students as state funding for colleges declines.
The transaction is also expected to improve the fiscal health of the system, USG officials said.
"We expect our initiative will generate innovation, operating efficiencies, and best practices in student housing to improve the quality of the on-campus housing experience for our students," said Chancellor Hank Huckaby. "Quality, safe, affordable housing for students is our priority."
While there have been other student housing privatization efforts across the nation, Georgia's transaction is larger and more geographically dispersed, said Corvias Campus Living managing director Kurt Ehlers.
The transaction offers the USG a model that allows debt to be defeased, and protects the university system's interests in all aspects of financing, while funding upgrades, modernization, and the replacement or completion of assets, he said. Corvias plans to use an institutional lender at financial closing to reduce transaction costs.
"No other campus housing partnership or program, large or small, has contemplated an existence of an out-year development program, which involves multiple major renovations as well as outright replacement in years 40 to 45," Ehlers said. "We absolutely think this is a national game-changer, and applaud the University System of Georgia for taking a lead on this innovative P3."
Corvias Campus Living is a development and property management division of the privately owned Corvias Group, headquartered in East Greenwich, R.I. The company focuses on P3 financing, construction, and management of student and military housing, and privatized public-sector projects such as storm water infrastructure, according to its website.
The scope of the USG initiative may be the most ambitious of any P3 awarded for student housing in the U.S., said Jason Taylor, vice president for advisory services at The Scion Group LLC, a student housing advisory, program management and operations firm based in Chicago.
"The deal may be most notable for including campuses where the private market didn't believe new student housing development would be sustainable on its own," Taylor said.
"Having the backing of the state university system could tip the balance among debt capacity, student demand, and operational control to make it work, but whether the arrangement successfully delivers on its ambitious goals will be heavily scrutinized by the higher education, real estate development and investment communities in the coming years," he said.
The privatization deal has the backing of Georgia voters, who in the Nov. 4 election approved a constitutional amendment that authorizes an automatic tax exemption for such student housing initiatives.
The exemption becomes effective on Jan. 1, and will allow the USG to more efficiently defease outstanding lease revenue debt while helping to ensure that student rents remain affordable, said Moody's analyst Carlos Calderon.
Voter approval of the amendment is credit positive for the USG, and its existing and future privatized student housing projects, he said.
"By extending current property tax exemptions on USG-owned assets to a private partner, the tax exemption passed on Nov. 4 will enable projects to maintain good yearly net operating income that will enhance the private partner's funding value under the P3 initiative, whether through acquisition or long-term lease of the projects," Calderon said.
"In turn, the improved economics of the privatization transaction will support an efficient defeasance of USG's previous related lease revenue debt, while allowing the private partner to maintain financially viable properties that affordably meet students' needs," he said.
The voter-approved exemption is also credit positive for new construction projects associated with the P3 project because it will provide the private developer with greater flexibility in financing new facilities through debt or equity, Moody's said.
"By preserving the current property tax exemption for existing and new on-campus housing, the implied greater net operating income will provide the privatized projects with greater debt capacity and/or improved debt service coverage," Calderon said. "The property tax exemption will also increase the potential for developer equity financing, as the exemption will enhance the private partner's incentive to invest in the projects due to the increase in expected return."
The exemption also bodes well for other existing and future privatization housing projects established on USG land as it helps ensure that the projects continue to receive the exemption without future challenges from local governments where the campuses are located, he said.
Nine campuses were selected for inclusion in the P3 deal with Corvias.
Seven campuses had unmet demand for new student housing, according to USG vice chancellor of communications Charles Sutlive. Two other campuses were included "to diversify and strengthen the portfolio."
The P3 concession is for housing at Abraham Baldwin Agricultural College, Armstrong State University, College of Coastal Georgia, Columbus State University, Dalton State College, East Georgia State College, Georgia Regents University, Georgia State University, and the University of North Georgia.
Collectively, the nine campuses have a total of $777.2 million in outstanding bonds that were issued for a variety of needs, including recreation centers, parking, housing, offices, and general operating needs.
Only the bonds issued to finance existing housing at those campuses will be defeased, Sutlive said.
Most, if not all, of the bonds were issued through lease agreements with various conduits in the state because Georgia universities are not authorized to issue direct long-term debt.
The USG declined to release financial information provided by Corvias for the P3 concession deal, or explain how the 65-year term was calculated.
The Board of Regents engaged Chicago-based JLL, also known as Jones Lang LaSalle IP Inc., to provide real estate advisory services for the transaction. Wells Fargo was the financial advisor.
Sutherland Asbill & Brennan LLP was legal counsel, while Public Resources Advisory Group also worked on the deal.
Ehlers said there are many benefits of Corvias' privatization model in addition to long-term provisions for housing replacement.
Highlights of the deal include a streamlined governance structure, and a reduction in partnership "barriers" to provide more direct interaction and decision-making.
Instead of implementing limits and controls on Corvias as the concessionaire, Ehlers said the Board of Regents and individual campuses retain control over rents, policies, and use of space.
The base rent is guaranteed, and there are no requirements for the regents or the campuses to provide occupancy or financial guarantees.
The deal also offers a low, fixed, long-term cost of capital with a 35-year amortization and an unencumbered cash flow, while maintaining more affordable rents "directly in line with existing on-campus rents," he added.
"We've heard that many systems across the country are watching this particular P3," Ehlers said. "There are many features of the model that would benefit other public systems or individual universities."
