Four Rules of Thumb for Assessing Public-Private Partnerships in Higher Education

Colleges and universities are increasingly turning to private sector partners to meet their capital development goals, build critical campus infrastructure, or generate alternative revenue streams. Public-private partnerships offer innovative answers to decreased public financing or limited debt capacity, and reflect smart growth principles for institutions and their surrounding communities. Before your school enters into such a partnership, crafting a thoughtful strategy and careful examination of the benefits, potential deal structures, and risks can help build a strong foundation for a successful solicitation, negotiation, and long-term alliance.

The sky’s the limit for public-private partnerships

Public-private partnerships and their arrangements take many different forms, but until recently, higher education institutions mainly partnered with the private sector to develop student housing on campus land or adjacent to campus when the college or university had little or no remaining property to develop. But as pressures increase to diversify revenues, state subsidies decrease for public institutions, and debt capacity becomes more limited for private nonprofit institutions, several other types of projects and investments are becoming more common. Some examples include:

• Hotels and office buildings that generate revenues from ground leases or sale of property
• Shared athletic and event facilities
• Mixed-use buildings with a condominium deal structure (e.g., offices and classrooms for university use with ground floor retail for private uses)
• Sale/lease-back structures of existing campus facilities
• Leasing of new space for expanding needs

Consider these four rules of thumb before proceeding with a public-private partnership

As these varied types of partnerships become more prevalent and institutions learn from those who have paved the way before them (literally and figuratively), there are, fortunately, fewer stories of one-sided or soured deals. Colleges and universities that are risk-averse and uneasy venturing into new territory because “we’ve never done it that way before” might pause and rethink the opportunities and options available to them.

Whether your school is a public or private institution, and regardless of the type of project on the table, there are four rules of thumb your governing bodies and administrators should follow when considering a public-private partnership and structuring a deal.

1. Define and gain agreement on your institutional goals and objectives

As you consider the scope of the project, evaluate whether the potential transaction will ultimately advance your institution’s mission and honor your core principles. No deal will serve your school if it doesn’t align with your strategies and long-term objectives or further your capital development goals. This is the first litmus test of any partnership opportunity. If the potential arrangement doesn’t meet these standards, go back to the drawing board.

2. Have a comprehensive framework for assessing the opportunity, risks, options, and potential partners while leveraging the creativity and expertise of the private sector

While the transfer of risk is often touted as a benefit of public-private partnerships, experience shows that both sides assume a level of risk. Before your institution engages private partners, you should have a strategic risk assessment framework in place to provide your governing board and school leaders with a clear view of the opportunities, options, and risks. This framework will also serve as guideposts for selection of and negotiation with private partners, set benchmarks and expectations for each party, and maximize the public benefit while providing an attractive return on investment to the partner.

Most institutions consider these elements before entering into a private-partner agreement, but for some it’s an afterthought that results in project delays, loss of support from governing board members, or a soured partnership — and often after considerable resources have been invested upfront. The framework should present the value proposition and identify how it aligns with your mission, strategy, and capital development goals. It should provide a rubric for assessing the opportunity, trade-offs, and risks (which could be political as much as financial); identify risk mitigation steps; and name partner(s) to address those risks, should they materialize. A solid framework will include agreed-upon performance benchmarks and clearly defined roles, behaviors, and expectations of the parties to the agreement.

3. Exercise due diligence

Develop scenarios and pro forma documents that consider shifts in the real estate market or construction inflation costs if the timeline slips, different financing options and tax implications, impacts on other campus services (e.g., more students living on campus could increase demand on university police, food services, and library hours), and revenue flow projections. Update your feasibility and market studies, and know the value of your real estate asset. While the transaction may end up off the balance sheet, the ratings agencies may view it differently. Understand those implications and triggers.

4. Err on the side of transparency and have a communication plan

A good assessment will naturally identify key messages for communication with governing boards, the community, and campus constituencies. It will provide a roadmap for negotiating the transaction and building a successful partnership.

For additional information, join our "Train Your Brain" webinar series on May 11 and May 17.

How we can help

CLA’s higher education professionals join forces with our construction and real estate people to help colleges and universities identify mission-appropriate projects, evaluate private partners, and structure deals that manage risk and create new opportunities. We can work with your governing bodies and institutional leaders to assess partners and deals from every angle so that you can move forward with confidence.