Greg Eden is an attorney and investment banker based in Alexandria, Virginia. He serves as a vice president for finance with ISES Corporation, an APPA business partner member. He can be reached at ceden@erols.com. This is his first article for Facilities Manager.

Thirty-three states and growing numbers of colleges and universities currently face budget shortfalls, especially for capital expenditures involving the renovation of existing structures and construction of new student housing, classrooms, and parking facilities. Although state governments, colleges, and universities are usually the last to experience a recession due to their reliance on the direct or indirect receipt of tax revenues, they are also the last to recover from economic downturns.

This experience is particularly interesting in today's environment because of the historic low rates of interest associated with any borrowing for a capital project. The issue that many institutions face is how to stretch existing funding and still accomplish long-term facilities goals for higher education.

A Structural Solution-Public-Private Partnerships
Public-private partnerships have existed as a concept for a number of years. By involving the private sector, risk allocation can be extended from public institutions to the private sector for designing, building, financing, and owning a facility. The goal of any public-private partnership is to recognize what each party does best and then develop a format to achieve the desired result at the lowest cost and in the shortest amount of time.

The Commonwealth of Virginia is one of the first states to specifically adopt legislation for this purpose. The intent of The Public-Private Education Facilities and Infrastructure Act of 2002 is to bring together the creativity and innovation of the private sector to help accomplish public needs in education. The Act is drafted to deliver infrastructure projects in a more timely and cost-effective manner.

Many states currently have legislation that addresses some or all of the issues addressed by the Virginia statute and, to the extent that similar legislation does not exist in other jurisdictions, the Virginia Act can serve as model legislation. A review of the relevant provisions of the Act highlights what many jurisdictions have done in part and what still may be necessary to fully implement the public-private partnership concept for education throughout the United States.

If a particular jurisdiction does not incorporate all or most of the legislative guidelines outlined in the Virginia Public-Private Educational Facilities and Infrastructure Act of 2002, it is important to realize that most, if not all, higher educational facilities can utilize their existing foundations as participants in this process. By doing so, many of the procurement restrictions are avoided and the foundation can facilitate the creation of public-private partnerships employing tax-exempt finance.

Provisions of the Virginia Public-Private Partnership Legislation
The Virginia Act defines a "qualifying project" as any educational facility, including, but not limited to:

• a school building,
• Any functionally related and subordinate facility and land adjacent to a school building (including stadiums and other facilities primarily used for school events), and
• Any depreciable property provided for use in a school facility that is operated as part of the public school system or as an institution of higher education. This broad definition includes new construction and the renovation, expansion, operation, and maintenance of a qualifying project.

A proposal can either be solicited by an educational entity or delivered by a private developer, architect, engineer, contractor, or investment banker on an unsolicited basis. This gives the college, university, or school system the option to highlight specific needs for which proposals from the private sector are welcomed. The private sector also has the freedom to develop a proposal based on one or more innovative methods for solving infrastructure problems. Once a proposal is submitted, it must be advertised by the recipient for at least 45 days to allow competing proposals to be filed.

Proposals submitted under the Act are exempt from Virginia's public procurement act (including the design-build/construction management review board) in an effort to eliminate time and expense and to ensure the success of the process. Any guidelines, regulations, and interpretations of the state's division of engineering and buildings-as well as the actual proposal-can be kept confidential to the extent that only the outline of the proposal needs to be disclosed to other interested participants. Finally, in reviewing proposals, the public entities are not required to accept the low bid proposal.

Proposals may rely on multiple funding sources, including government appropriations, grants and loans, user fees, lease payments, and service contracts. The private developer may issue debt (equity or other securities or obligations), enter into sale and leaseback transactions, and secure financing with a pledge of, security interest in, or lien on, any or all of its property.

The Virginia Act is structured to reduce the time and money spent by the submission of projects to extended boards of review, encourage entrepreneurial activity on the part of the private sector, tailor a project to the particular needs of the user, and encourage the innovative use of tax-exempt and taxable project financing.

Tax-Exempt Leasing
Public-private partnerships enable the contracting parties to allocate ownership risks for a given project. A basic risk for evaluation is the decision to own or lease a facility. Until recently, colleges and universities accepted the risks of construction, ownership, operation, and maintenance of student housing. Today, the trend is toward public-private partnerships where one or more of the risks associated with student housing is assumed by the private sector. The same criteria that is applicable to student housing is relevant in the consideration whether colleges and universities should own or lease parking facilities, classrooms, and steam plants.

The lease-versus-own decision requires the educational institution to decide how to allocate funds. If the decision is to conserve financial resources, the college or university must then decide whether to enter into an operating lease or a tax-exempt lease purchase arrangement.

In an operating lease, the private owner finances a facility at commercial interest rates. It is deemed to be a current expense but does not build equity in the project. A tax-exempt lease purchase is structured so that each payment includes an interest and principal component. At the completion of the financing term, title is transferred to the college or university for a dollar.

If the decision is made by the college or university to own the facility, tax-exempt leasing offers a favorable option to the issuance of general obligation bonds. The tax-exempt lease is not technically defined as debt and therefore does not impact the ability of the state or university to borrow funds. Tax-exempt leases typically contain language that requires the obligation to be renewed at each fiscal cycle during the term of the financing, which can extend as long as 30 years.

In the public-private partnership, the college or university can enter into a tax-exempt lease without the need for a voter referendum, thus saving the time and expense associated with that requirement. Although the tax-exempt lease is not defined as a full faith and credit obligation, the pricing is similar to general obligation bonds given the essential use of the project to the university or college.

Tax-exempt leases can also be employed when the college or university has made the decision to purchase a facility that is currently structured as an operating lease. The total amount of the purchase price of the facility can be financed with the tax-exempt lease structure.

There is also the option of utilizing the tax-exempt lease for a sale-leaseback of an existing facility where the goal is to achieve liquidity or to renovate an existing facility. In this instance (where sanctioned by state statutes), the university or college can sell or lease the facility with a leaseback arrangement that provides immediate cash proceeds as well as the funds for structural improvements.

An Example of a Public-Private Partnership and Tax-Exempt Leasing
The University of Georgia is an example of public-private partnerships utilizing tax-exempt leasing (or non-general obligations such as tax-exempt revenue bonds) as a source of funding. Funds have been borrowed for terms as long as 30 years at low-cost tax-exempt interest rates. Given the cost of funds in today's markets, this borrowing is viewed as a bargain for colleges and universities. It also avoids the process of receiving approval and funding for new construction when the University has to compete against 33 other public colleges for limited public funds.

By engaging the University of Georgia Real Estate Foundation, the University avoids the typical procurement process. When coupled with a conduit issuer such as the Athens Georgia Housing Authority, the university can receive the benefits of tax-exempt funding that is retired with parking fees, research overhead dollars, housing fees or donations. In the case of the University of Georgia, the foundation leases the properties from the Georgia State Board of Regents, which receives title to the facility once the tax-exempt obligations are fully paid.

A Comprehensive Financing Approach
Public-private partnerships offer colleges and universities a range of solutions to ensure the most cost efficient and timely delivery of new, renovated, and expanded facilities. Coupled with this concept of risk allocation and responsibility between the public and private sectors is the recognition that tax-exempt leasing can provide a comprehensive financing approach to this sector.

It is important to note that public-private partnerships to finance and develop higher education facilities succeed because of the enormous flexibility and creativity inherent in the approach. Higher education officers and facilities managers retain control of the risk allocation process and can determine the design and location as well as whether operations and maintenance are retained or contracted to third parties. If the decision is made to contract out services, then standards can be imposed on the contracting parties in the documentation. Ideally, the situation will result in a public-private-partnership that can be implemented and sustained at the lowest possible cost and with the greatest efficiency for all parties to the transaction.