Archive for July, 2011

Higher Ed Market Struggles, P3s Prosper at UC

Thursday, July 28th, 2011

With state funding to California’s public universities cut by 23% in 2011, and private donations still lagging due to the economy, the University of California system is looking for innovative ways to achieve its capital improvement goals.

At the same time, public-private partnerships (P3s) are a growing presence in the delivery of higher education infrastructure projects throughout the system. At latest count, UC has successfully employed P3s to deliver approximately 60 projects ranging from medical office buildings and research facilities to student apartments and hotels.

But is this a cause-and-effect relationship? In other words, is the emergence of P3s the direct result of the fiscal crisis or for a different reason altogether? Either way, what does this mean for AEC firms and how can it work to their advantage (or disadvantage, if they’re not careful)?

Gordon Schanck, director of the University of California’s Real Estate Services Group, suggests that more of the system’s project might be P3s were it not for the current economic conditions. In a July 2011 interview exclusively for the new publication, The 2011-2012 AEC Market Guide to California, Schanck says that the competitive bidding environment for design and construction services, along with the system’s access and ability to provide favorable financing for capital projects often rule out the P3 option. “There’s an inherent loss of control in P3 projects and we still have a strong capacity to deliver projects in house,” he says.

Yet, in a 2010 paper on the subject, Schanck advises UC staff involved in capital development projects to carefully weigh the P3 option whenever possible. “The evaluation of a P3 as an alternative to traditional delivery methods should begin when the business case analysis suggests a capital solution. A P3 is then considered as an alternative, alongside other capital solutions such as new construction by the owner, renovation, and purchase/lease of an existing facility,” he writes.

The primary motive to use a P3 for most public entities is access to capital. At UC, however, Schanck says the decision to go with a P3 is often driven by the specialized expertise that a private developer brings to a specific type of project, as well as the transfer of risk (construction, operational and financial). “P3s ought to be considered, routinely, as one of the means for delivering UC capital solutions,” Schanck adds.

For AEC firms, the P3 trend in California higher education projects offers opportunities as well as challenges. Most notably, firms may need to consider the following aspects of these projects differently than when ownership simply begins and ends with the university.

  • Profit. Profitability, or at least the need to meet financial incentives, is typically a much stronger driver in P3 projects than it is when the university is the owner. It’s why private developers get involved in P3s.  This may affect all other aspects of the project approach, including schedule, building materials, design concepts, and so on.
  • Project delivery. Often, P3 projects use design-build or some other alternative to design-bid-build to maximize profit, shorten schedule, or address certain complexities in the project. They also typically are not required to adhere to low-bid requirements or other constraining factors that strictly public projects may face.
  • Schedule. The timetable on university projects is likely to be a focus no matter who the owner is, but private developers may push harder to begin receiving a faster return on investment.
  • Financing. The source of financing could affect payment schedule, contract terms and other business aspects of the project for the AEC firms involved.
  • Risk. AEC firms new to the P3 process must consider whether they face a higher level of risk than they are accustomed to and, if so, what steps they should take to minimize that risk.
  • Longevity/Durability. Private developers with a long-term commitment to the project structure – as opposed to those who build it and move on – will naturally be more concerned with issues such as longevity, durability, ease of maintenance, and so on. 

For AEC firms working in the higher ed space, the good news is that P3s may broaden the universe of potential clients for campus projects. The key is knowing the process and identifying the players and best P3 opportunities.

In the interview for the Market Guide to California, Schanck asserts that auxiliary P3s – which are revenue-generating projects – are more successful than programmatic P3s (i.e., projects serving a specific mission for the campus). “Programmatic projects have proven to be a little more difficult to do than auxiliary projects,” he said.

The best projects for P3s, he adds, are built on land not on or owned by the campus, are likely to generate stable income, and are a building type commonly developed by private developers.

Schanck’s July 2010 paper, “Private Public Partnerships at the University of California,” co-authored with Tara Lamont, offers three case studies illustrating the point. It concludes, “The use of P3s in the delivery of generic projects for auxiliary use, such as student housing and medical office buildings, has proven effective and beneficial to the University. The programmatic-use research laboratory project has been less successful in schedule and cost savings primarily because as the first project of its kind, new contractual and legal documents had to be developed.”

Schanck defines P3s as “projects where the University has contracted either to lease its land to another party to develop a project which has programmatic benefits or serves auxiliary needs (Ground Lease) or contracts to purchase a build-to-suit facility in the community or on campus (Build-to-Suit) on a turnkey basis. Other variants include Donor Development where a donor develops a facility on UC land for donation to UC upon completion (Donor development); Space for Lease deals where in exchange for waiving ground rent, the University receives a significant dedication of space in the building (Space-for-Lease); Master Lease Arrangements (Master Lease); and transactions where the University leases (Lease with purchase option) a facility with an option to purchase (or leases back the facility in the case of a project on Regents land—Ground Lease-Leaseback).”

Schanck adds that UC’s P3 project – particularly programmatic projects – require “a well-thought through ‘Basis of Design’ document (BOD) that delineates design specifications and operating parameters. Also critical is a thoroughly vetted set of transaction documents that effectively represent both parties’ interests.”

For more information about P3s in California, the higher education market, and much, much more, order The 2011-2012 AEC Market Guide to California by clicking on the link on the home page.