Public-Private Partnerships as a Competitive Tool for HBCUs

Article

The Mid-Market Report

April 11, 2018

As all colleges and universities seek competitive solutions to attract and retain quality students, student housing has become an even more significant factor. Historical Black College and Universities (HBCUs) in particular are experiencing this challenge more than others, with public-private partnerships being an excellent solution for HBCUs that are looking to make infrastructure improvements without exceeding their budgets. Below, I briefly summarize the history of HBCUs, their current key role in rounding out the higher education opportunities for many students, and the problems that they currently face. I also emphasize how public-private partnerships can be valuable tools for HBCUs to access capital in order to make crucial infrastructure improvements to stay competitive in today’s higher education market.

History of Historical Black College and Universities

HBCUs, whose principal mission was historically and continues to be the education of African Americans, were established to serve the educational needs of African Americans, because social mores and statutory rules prohibited the education of blacks in certain parts of the United States. Before the establishment of HBCUs and for decades afterwards, African Americans were generally denied admission to traditionally white institutions. HBCUs have played and continue to play a critical role in enhancing equal educational opportunity for all groups of Americans and contribute disproportionately to the education of African American students and underserved populations, especially in undergraduate and graduate science, technology, engineering, and mathematics disciplines. HBCUs represent only 3 percent of all U.S. colleges but produce 17 percent of African American holders of bachelor’s degrees and 24 percent of all black scientists and engineers.

Dwindling Enrollment and Its Impact on Infrastructure

That said, due to desegregation, rising incomes, and increased access to financial aid, the share of African Americans attending HBCUs has dwindled substantially. Pursuant to the Pew Research Center, in 1980, 17 percent of black students enrolled in degree-granting institutions were enrolled at HBCUs, but, by 2000, that number declined to 13 percent. It stood at 9 percent in 2015. Taken together with disproportionate cuts to government financial aid, lower endowments, lower financial donations from alumni, and leadership changes, enrollment declines have begun to threaten some HBCUs in new ways.

Despite these financial challenges, HBCUs still must compete to attract new students in order to survive. Having a solid infrastructure is a significant way to compete in today’s higher education market. In fact, when HBCU presidents were questioned about some of their most pressing issues, it was infrastructure (especially new construction and deferred maintenance) that was near the top of their lists.

According to the Higher Education Research Institute (National Norms Fall 2012 Survey), in 2015, 45 percent of incoming college freshman rated their college or university’s social activities as “very important” to their decision, up 21 percent from 1983. Often, these social activities are driven by investments made in the school’s facilities. For HBCUs experiencing budget constraints, this presents a conundrum: are HBCUs willing to permit their facilities to deteriorate and forgo infrastructure investment, thereby becoming less attractive to prospective students and compounding financial challenges of reduced enrollment, or do they seek to attract more students by taking on more debt and raising tuition to finance new construction and renovations? As HBCUs look to attract and retain students without exceeding their budgets, they should consider the private sector and public-private partnerships.

Public-Private Partnerships as a Competitive Tool for HBCUs

Public-private partnerships, also known as “P3s”, are a growing trend that allow schools to fund the construction of new buildings without taking on the debt to do so, and, if desired, turn over maintenance and operations to skilled partners. A P3 is a contract between a public agency or nonprofit (or a university) and a private sector entity, in which they can share skills, technology, and responsibility in delivering a product or service. In the case of a university, the product/project might be student housing, food service facilities, laboratories, parking spaces, combined heat and power facilities, or classroom spaces.

P3s can take a wide range of forms and tend to vary pursuant to the level of involvement and risk that the private developer holds in the arrangement with the university. In the context of student housing, one particular form involves a P3 project utilizing tax-exempt ﬁnancing with §501(c)(3) bonds for the development of a project and subsequently entering into a ground lease with the university. This tax-exempt financing structure has become more prevalent in the student housing area, as public universities look to private developers to build new student housing. In this P3 form, the university ground leases its property (the university must own the property) to a nonproﬁt conduit issuer that, in turn, issues §501(c)(3) bonds to ﬁnance the student housing. The nonproﬁt tenant also enters into development and management agreements with a private sector partner that then develops and operates the project. The ground lease has a term of 30 to 40 years that extends beyond the term of the bonds. At the end of the lease term, the improved property reverts to the university. Through this structure, the university has the ability not only to access tax-exempt ﬁnancing (completely off the accounting books of the university), but to work with a developer with expertise in student housing development without losing its fee interest in the property.

In addition to the tax exempt/ground lease facility lease arrangement described above, other types of P3 arrangements could prove beneficial to HBCUs seeking to upgrade infrastructure in order to become more attractive to potential students. These include: (1) operating contract/management agreements (short- to medium-term contracts with private firms for operating services); (2) demand risk concessions (long-term concessions with private developers to construct, operate, maintain, and finance university projects in exchange for rights to collect revenues related to those projects); and (3) availability payment concessions (long-term arrangements with private developers to construct, operate, maintain, and finance projects in exchange for annual payments subject to abatement for non-performance). The type of P3 warranted will vary depending on the specific needs of the university, but the availability and variety of these arrangements could very well push to completion an infrastructure project that garners renewed positive attention for an HBCU whose enrollment has been on the decline.