1. De-Mystifying Public-Private Partnerships Sarah Samuels Jason Taylor The Scion Group LLC Shannon Staten University of Louisville

2. De-Mystifying Public-Private Partnerships Session Overview What is a public-private partnership? Motivating factors Financing models

3. De-Mystifying Public-Private Partnerships Basic Concepts Types of public-private partnerships Non-recourse financing Credit-friendly / Off-balance sheet Impact on operations

4. De-Mystifying Public-Private Partnerships What is a Public-Private Partnership? Generally, a public-private partnership (PPP) is any one or combination of management, ownership or financing provided by someone other than the school.

5. De-Mystifying Public-Private Partnerships Who manages the… –facility? –financial operations? –residence life program? Who owns the ground / building? Who finances the project? What is a Public-Private Partnership? } Our focus

6. De-Mystifying Public-Private Partnerships True or False?  PPPs typically provide significant benefits / advantages.  PPPs rarely provide significant benefits or advantages. Motivating Factors The benefits and advantages of PPPs depend on institutional values, capabilities and circumstances. False

7. De-Mystifying Public-Private Partnerships Address an urgent need Expedite development Gain experience and expertise Reduce risk Limit credit impact Obtain favorable balance sheet treatment Motivating Factors

8. De-Mystifying Public-Private Partnerships By themselves, minimizing credit impact and obtaining favorable balance sheet treatment are rarely the sole factors which should compel a public-private partnership. Motivating Factors

9. De-Mystifying Public-Private Partnerships Financing Models 100% Institutional Full control, risk and resources of institution 100% “Privatized” Minimal institutional control, risk or resources  Planning / site selection  Financing  Construction management  Property management  Residence life  Management  Marketing / assignments  Learning communities Factors

10. De-Mystifying Public-Private Partnerships Advantages College receives all net revenue Complete control over construction quality, design, operations and residence life Complete control over pricing decisions More favorable interest rates and lower debt coverage ratio (“DCR”) Financing Models 100% Institutional

11. De-Mystifying Public-Private Partnerships Disadvantages School and/or State bureaucracy may be involved Capital will be required (no risk transfer) College/State bond capacity will be impacted Potentially inefficient development and construction process Limited involvement of outside, objective expertise/specialist Incur entire lease-up risk (no risk transfer) Financing Models 100% Institutional

12. De-Mystifying Public-Private Partnerships Advantages Avoid some bureaucracy Little or no capital outlay by school (risk transfer) Limited impact on school/state bond capacity Little or no construction delivery risk (risk transfer) Involvement of outside expertise/specialist Objective test of market demand Financing Models 100% Privatized

13. De-Mystifying Public-Private Partnerships Disadvantages Little if any revenue participation Exposure to property taxes Union considerations / Prevailing wage laws Little if any control over quality of construction, design issues, operations and residence life Little if any control over pricing decisions Higher interest rates and DCR Financing Models 100% Privatized

14. De-Mystifying Public-Private Partnerships Financing Models 100% Institutional Full control, risk and resources of institution 100% “Privatized” Minimal institutional control, risk or resources  Planning / site selection  Financing  Construction management  Property management  Residence life  Management  Marketing / assignments  Learning communities Factors

15. De-Mystifying Public-Private Partnerships Advantages Avoid some bureaucracy Little or no capital outlay by school (risk transfer) Lessen impact on school/state bond capacity Little or no construction delivery risk (risk transfer) Involvement of outside expertise/specialist Objective test of market demand Possible ownership over some period of time Ability to select supports provided to the project Possible revenue participation Some control over design, construction and pricing decisions Financing Models Public Private Partnership

16. De-Mystifying Public-Private Partnerships Disadvantages Higher interest rates and DCR View of participation and conditions by auditors and rating agencies Financing Models Public Private Partnership

17. De-Mystifying Public-Private Partnerships “ Affiliated privatized student housing projects always impact the credit profile of an affiliated university to some degree.” Source: Moody’s Investors Service, Privatized Student Housing and Debt Capacity of US Universities, March 2010 Financing Models Public Private Partnership

18. De-Mystifying Public-Private Partnerships Characteristics that impact the credit analysis: Location Ground lease Share of student residences Student market segment Student services Rental rates Source: Moody’s Investors Service Financing Models Public Private Partnership

19. De-Mystifying Public-Private Partnerships Characteristics that impact the credit analysis: Marketing and management Project assistance Cash flow Construction risk Non-compete clause Guarantees and support agreements Source: Moody’s Investors Service Financing Models Public Private Partnership

20. De-Mystifying Public-Private Partnerships School Developer/PPP Required DCR 1.00 >1.25 Revenue $3,000,000 $3,000,000 Expenses $1,000,000 $1,000,000 Net Operating Income $2,000,000 $2,000,000 Max Available for P & I $2,000,000 $1,600,000 (Debt Service = NOI / DCR) Net Cash Flow $ 0 $ 400,000 Max Loan Amount @ 6% $28,000,000 $22,000,000 * School could obtain an even larger loan because loan rate would likely be more favorable than rate for developer. Financing Models Impact of Debt Coverage Requirement

21. De-Mystifying Public-Private Partnerships Developer tools Increase student rent Lower construction quality Reduce services and amenities Increase density Eliminate non-rentable space Financing Models Options for increasing NOI

22. De-Mystifying Public-Private Partnerships With public-private partnership All of developer’s tools, PLUS… Long-term master lease Guarantee occupancy in year one Donate campus infrastructure Affiliation or referral agreement Subordinate campus services to debt service Financing Models Options for increasing NOI

23. De-Mystifying Public-Private Partnerships Should be motivated by institutional need, and executed based on institutional values Can provide the institution an optimal balance of control and risk Are not the best solution for every campus Are long-term relationships requiring thoughtful, well-informed planning Public-Private Partnerships…

24. De-Mystifying Public-Private Partnerships “You can privatize your housing, but you can not privatize your relationship with students and parents” Public-Private Partnerships…

25. De-Mystifying Public-Private Partnerships Thank You! Sarah Samuels - sls@thesciongroup.com Shannon Staten – sdstat01@louisville.edu Jason Taylor – jat@thesciongroup.com www.thesciongroup.com www.louisville.edu/housing