Privatization Solves Housing Woes

• By Gregory V. Johnson
• 04/01/03

If you’ve been around higher education for any length of time, you’re aware that, in the ’90s, enrollment at colleges and universities (especially public institutions) experienced sizeable growth. Baby boomers, as they have in so many other marketing revolutions, were at the foundation of this phenomenon.

In looking at projected campus population figures between now and 2020, enrollment is expected to continue its upward march. This is based on data showing that there are nearly 60 million children enrolled in grades 1 to 12. When they graduate into college freshman status, they will represent the second baby boom.

From a school administrator’s point of view, not only will there be more children of college age than ever before, but more of them will be going to college than at any time in U.S. history.

While the ever-increasing college head-count should delight those charged with running colleges and universities, the budget crunch that nearly every state is facing is having the opposite effect. The monetary woes most states face extend to their ability to fund higher education. Administrators, in turn, face a dilemma as to whether the funding they do receive should be allocated to classrooms, libraries, teacher salaries, laboratories or residence halls.

Privatization, as a method of funding college housing, is allowing universities to allocate tax dollars into more mainstream higher-education needs, while not ignoring their housing needs.

While privatized housing has been a reality for some time, the ’90s increased its popularity as administrators recognized the upcoming head-count crunch. They (and college housing developers) also examined the inventory of residence halls and found them lacking in creature comforts and modernity (most were built before anyone ever heard of the Internet, thus they weren’t wired for today’s cyberspace students).

Privatized student housing is a fairly simple concept. It allows administrators to undertake student housing projects using the efficiencies and creativity of the private sector while maintaining control over the design, operation and quality of the project.

Typically, the college enters into a ground lease with a nonprofit corporation. Under the ground lease, the college is able to exercise design and operational control over the project. The nonprofit corporation participates in a tax-exempt bond issue to provide financing to build the facility. The bond issue is secured solely by project revenues. The bonds are not secured in any way by the college.

Once built, the project can be managed by a private company (or the college’s housing system if desired) in accordance with university guidelines. The college gains the benefit of a quality residential product at competitive rates without incurring a debt obligation on its balance sheet.

Privatization’s popularity received a boost from, of all institutions, the IRS. While not normally seen as a charitable government agency, the IRS late last year confirmed its earlier issuance of the tax-exempt status 501(c)(3) of national housing nonprofit corporations. This makes it possible for colleges to participate in privatized student housing projects without having to go through the time and expense of creating their own nonprofit corporations.

A current example of privatization at work is at Odessa College in Texas. In a project called Century Commons, housing is being built for more than 200 students in two- or four-bedroom units. Opening this fall, the four-bedroom units will be 915 sq. ft. and cost $368 per month on a one-year lease. Two-bedroom apartments will be 615 sq. ft. and cost $406 per month on a yearly lease.

Rent includes local phone service, electricity allowance, basic cable, water, Internet access, service and maintenance. Residents will enjoy a swimming pool, laundry facilities, 2,500-sq.-ft. clubhouse, private club, study rooms and more.

Gregory V. Johnson is a partner specializing in public finance in the Denver office of Patton Boggs, LLP, a law firm based in Washington. He can be reached at [email protected].