Annex 1

Transcription

Annex 1

Contact information
Brian Allard
Senior Vice President
Ernst & Young Orenda Corporate Finance Inc.
[email protected]
416 943-2665
Richard Simm
Managing Director
Ernst & Young Orenda Corporate Finance Inc.
[email protected]
416 943-2102
Building the student experience
April 2012
Contents
Executive summary ...................................................................................................................... 3 1.0 Introduction ......................................................................................................................... 11 1.1 Background and context..................................................................................................... 12 1.2 Project objective ............................................................................................................... 12 1.3 Project scope and methodology .......................................................................................... 13 1.4 Steering committee on student housing............................................................................... 13 1.5 Who should use this Report? .............................................................................................. 13 1.6 Report use and limitations.................................................................................................. 14 2.0 The state of student housing ................................................................................................. 15 2.1 Challenges and issues ........................................................................................................ 16 2.2 Survey results on housing infrastructure ............................................................................. 18 2.3 Research on the impact of housing on recruitment and retention ........................................... 22 2.4 Organizing for outcomes .................................................................................................... 24 3.0 Student housing models and strategies ................................................................................... 25 3.1 Delivery models defined ..................................................................................................... 26 3.2 Public models ................................................................................................................... 27 3.3 Partnership models ........................................................................................................... 32 3.4 Private models .................................................................................................................. 35 3.5 Summary comparison ........................................................................................................ 40 4.0 Developing a business case for student housing investments .................................................... 41 4.1 Life cycle context .............................................................................................................. 42 4.2 Business case framework ................................................................................................... 42 4.3 Strategic options analysis................................................................................................... 44 4.4 Business case components ................................................................................................. 46 4.5 P3 Business cases ............................................................................................................. 48 4.6 Life-cycle costing elements ................................................................................................ 49 5.0 Conclusion ........................................................................................................................... 51 Annex 1: Survey methodology and results .................................................................................... 53 Annex 2: Literature review references .......................................................................................... 61 Ernst & Young | 1
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Executive
summary
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Background and context
Student housing is an integral part of the overall student experience. This notion is widely accepted by
university administrators and is supported by academic research. The decision however to recapitalize
student housing stock, or invest in new or replacement student housing capacity is more complex and
has several moving parts.
It is in this context that the Canadian Association of University Business Officers (“CAUBO”) formed a
special committee (“Steering Committee”) to research business models for student housing and to
develop guidance documents for development of business cases for the investment in new student
housing (the “Project”).
Project objective
The purpose and objective of the Project is to assist universities in building the business case for
investment in student housing by:
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►
►
►
Providing a national overview of the current state of student housing;
Discussing the relevance of student housing as a means for student recruitment and retention;
Identifying emerging trends in funding and operating models and strategies adopted by
Canadian universities; and
Preparing high-level guidance materials that will assist universities in assessing the life-cycle
costing and business case development for renewal of housing assets.
Ernst & Young Orenda Corporate Finance Inc. (“EY”) was selected by the Steering Committee through
a competitive request for proposal process to research, analyze and prepare a report based on the
Project objective (the “Report”). This report was presented to CAUBO members at a workshop on
student housing held in April 2012.
Challenges and issues
Universities are operating in a challenging and dynamic environment and several interrelated forces
shape student housing outcomes. Based on input from the Steering Committee, discussions with 10
housing stakeholders representing a cross-section of Canadian universities, combined with our
understanding of the post-secondary institution sector, real estate development, and financial markets,
seven major overarching criteria emerge. In order to build the student experience through new housing
investments, universities will need to consider housing models and strategies that best address the
following key internal and external criteria.
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Demand;
Quality of infrastructure;
Government spending cuts;
Operating budget pressure;
Capital and borrowing capacity;
Rents and fees; and
Market developments.
Survey results on housing infrastructure
CAUBO developed and conducted a Survey of its members on student housing infrastructure
addressing physical characteristics as well as overall characteristics of housing for the campus. A total
of 52 universities across Canada of varying size and academic mission completed one or both parts of
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the Survey. Key findings included:
►
By far the bulk of student housing in Canada was constructed during the 1960s. A significant
portion of this has undergone a refit, in most cases since 2000, but there is still a large
overhang of un-renovated buildings from that period.
►
Universities have largely used traditional financing and delivery approaches but are now
looking at alternatives, perhaps driven by necessity.
►
Traditional dormitory style residences still predominate, although a significant number of
apartment style residences have been added in recent years.
►
Some government funding was available historically, but this has effectively disappeared.
While there is an increase in the use of internal funds, debt is still the main source of financing.
►
Debt related building work and major refits undertaken during the 1960s and 1970s has fully
amortized whereas debt that financed new build and major refits since 2001, has an
outstanding term of between 10 and 30 years, which suggests the need to refinance may arise
in the future.
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Routine maintenance and custodial work are the only areas where there is significant private
sector involvement in the delivery of housing operations.
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In general, it appears that smaller operations (by total bed count) generate more revenues
from hotel and convention operations, but this is certainly not true in all cases.
Research on the impact of housing on recruitment and retention
Research conducted on student living and the student experience has revealed many important
findings relevant to a student’s experience at university, and identifies the quality of campus housing
and experience of living in on-campus residences as being among the factors influencing student
choice. The research suggests that facilities and the environment are related to the recruitment and
retention of students, but there is limited research to support the widely held belief that student
housing can have a positive impact on overall student experience and academic success. While this is
not an extensive literature review, a number of research directions could be considered:
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The impact of housing on student recruitment and retention at Canadian universities is lacking
in the research. Given the role that many universities are playing in city building combined with
increasing competition for student and faculty talent in the global context, the field of research
could benefit with increased Canadian context.
Institutional planning and analysis departments at Canadian universities could play a role in
mining data that may exist. Stronger empirical data should assist in the business case for
investing in student housing.
The ACUHO-I Professional Standards and the Housing & Residence Life Program Standards
from the Council for the Advancement of Standards in Higher Education are two sources that
can serve to guide further discussions on the relationship between student recruitment,
retention, and new facilities.
Organizing for outcomes
The development and operation of student housing typically requires cross-functional teams involving
finance, student life, facilities management, housing, real estate, and ancillary business services.
Therefore, a university’s organizational context and structure plays a role in housing outcomes.
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Interviews with stakeholders clearly showed that those institutions that consider their residence
programs successful - programmatically, financially, operationally, and organizationally, for example –
generally made use of cross-functional teams or similar approaches to ensure that all affected services
work to achieve a common outcome.
Student housing models and strategies
As housing infrastructure continues to age, the requirements for replacement and new infrastructure
increase, and building the student experience through housing and campus life programming becomes
increasingly important, universities must find ways of further stretching their infrastructure investment
dollars.
This will require assessing the full range of housing delivery approaches and thinking
creatively to find the most efficient ways of meeting infrastructure needs.
In this Report, three general model classifications are included: public models, private models, and
partnership models. Within each model class various delivery approaches exist based on specific
transaction structures and objectives. Generally, private sector participation in the delivery of the
asset, lifecycle maintenance, and risk allocation increases as one moves away from public models,
though to partnership models and private models. The model classification is illustrated below.
Public
models
Partnership
models
University owned
and operated
Design-build-financemaintain P3
Residence
Trust
Lease-leaseback
hybrid P3
Private
models
Lease-leaseback
operating lease
Private development
Residence REIT
Increasing private sector participation in delivery
Increasing risk allocation to private sector
In simple terms and for consistency, the classification of delivery approaches has been defined by the
following key differentiating features:
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Public models are those where the university retains ownership, control, and responsibility for
the design, construction, financing, operations, and maintenance of the residence;
Private models are defined as those where the housing asset and corresponding liability are
recorded in the account of the private developer, the agreement does not create a capital lease
obligation for the university, and the private developer takes market risk; and
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►
Partnership models or public-private partnerships (“P3”), are those based on a long term,
performance based contract, where appropriate project risks are allocated between the
university and private sector partner under a delivery approach that integrates design,
construction, financing, and maintenance under a single agreement or contract.
Student housing delivery approaches vary across several parameters and elements. The following
provides a summary comparison of the key differentiating features of five illustrative student housing
delivery approaches across the continuum.
Table 1. Summary comparison of housing delivery approaches
Feature
Traditional
university
owned &
operated
Recent Examples1
Western
University
Ownership
DBFM P3
Simon Fraser
University
Operating
lease
Private
development
Residence
REIT
University of
Toronto
American
Campus
Communities
University of
Waterloo
Dalhousie
University
Thompson
Rivers
University
University
University
Developer
Developer
REIT
Design responsibility
University
Partner
Developer
Developer
REIT
Financing
University
Partner
Developer
Developer
REIT
University
Partner
Developer
Developer
REIT
University
Partner
Developer
Developer
REIT
University
University
University or
Developer
University or
Developer
University and
REIT
University
Developer
REIT
Operating lease
Off-balance
sheet
Off-balance
sheet
Operations and Maintenance
responsibility
Lifecycle maintenance
responsibility
Residence life programming
Revenue and occupancy risk
University
University
Accounting treatment
On-balance
sheet
On-balance
sheet
Yes
Yes
No
No
No
Exempt
Likely not
exempt2
Not exempt
Not exempt
Utilizes borrowing capacity
Property tax exemption
Exempt
1 Examples include projects under consideration, or in the planning phase, procurement phase, construction phase, or operational.
2 Illustrative only. Specific transactions will require tax and legal opinions.
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Business case framework
A robust business case framework outlines a process whereby universities can plan for investment in
new housing projects, or develop overall portfolio strategies that link investments to program objectives
and strategic outcomes of the university. A business case framework for student housing investments is
illustrated below.
Public or
traditional
models
Long-term
plans
Housing
program
needs
Strategic
options
analysis
Partnership
models
Business
cases
Board
approval
Private
development
models
Long-term plans, such as the campus master plan, the academic plan and strategic plan will guide
overall student housing planning, establish the key strategic outcomes, and factor into housing program
needs. This is the strategic context.
Following articulation of the strategic context and specific housing program needs, an interim step to
the development of the business case is the strategic options analysis. This high-level options analysis,
which assesses relevant housing delivery options against key objectives and criteria, can be used to
satisfy early-stage diligence requirements and focus the investment decision in an accelerated time
frame. In some cases, and depending on the level of detail, the options analysis may be sufficient to
proceed to the approvals stage and then to the procurement and project delivery phase of the project.
From the options analysis, additional and more detailed analysis is completed in the business case,
which forms the basis of recommendations to key decision makers including administration, the
facilities sub-committee of the Board, and the Board on the overall investment decision.
While the framework is presented as a structured process, it should be noted that business case
planning and investment decisions are not necessarily linear processes; they evolve continuously, with a
range of activities often happening simultaneously.
Strategic options analysis
The purpose of a strategic options analysis is to accelerate the development of the business case by
providing an important initial analytical step in the assessment of the investment opportunity.
The strategic options analysis stage provides an opportunity to include stakeholders from the functional
areas affected by the outcome of the housing investment. This is an important first step. Key inputs
into the options analysis should include, at a minimum, the university’s programming and strategic
requirements, project-level or organizational constraints, as well as articulation of the university’s
objectives. Evaluation criteria – against which to evaluate and differentiate the delivery options - are
developed to reflect the university’s diverse programming, financial, and other strategic / non-financial
requirements. A preliminary affordability analysis is conducted to establish key financial parameters for
the project.
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The relevant range of models is then investigated and evaluated against the criteria. Models should be
specific delivery approaches or transaction structures. Major project risk categories should be
identified during the strategic options stage and a preliminary qualitative assessment made.
Outputs will include an alignment of options against criteria and objectives, a preliminary risk
assessment, cost parameters, a recommended approach and a preliminary project plan.
Business case components
In general, a business case is a presentation or proposal seeking approval for an initiative or project.
The Treasury Board Secretariat of Canada’s definition of a business case is suitable for the university
context. Specifically, “A business case puts a proposed investment decision into a strategic context and
provides the information necessary to make an informed decision about whether to proceed with the
investment and in what form.” This definition guides the underlying components of the illustrated
business case framework.
The following summarizes the key components of a business case. Note that these are not intended to
be a definitive manual that exhaustively provides all of the analytical requirements of a business case
for investments in new student housing. Universities have standards, preferences, policies,
requirements, and experiences that define specific business case form and content. Rather, the list
provides an illustrative guide, informed by a broader market and stakeholder perspective, which
highlights the range components that could be considered when analysing and deciding on new housing
investments3.
Key components
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Strategic context
Delivery and financing options
Evaluation criteria
Financial analysis
Financing requirements
Legal considerations
Risk management
Options analysis and evaluation
Recommendations
Managing the investment
A P3 business case is different than a traditional capital project business case, as outlined above, in
that a P3 business case goes beyond a traditional business case to undertake what is really a
procurement options analysis. The purpose of a P3 business case is to recommend the procurement
option that best achieves the university’s project objectives and value for money.
3 Technical feasibility studies, cost consultant reports, design or engineering consultant reports, environmental reports, and site
planning studies or documents are important factors in the investment decision. For illustration purposes, these have not been
included in the scope of the business case framework presented.
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Conclusion
Many factors influence and constrain the decision to invest in new or replacement residence stock.
These factors and constraints will continue to shape the types of housing models implemented – public,
private, or partnership. No one delivery approach is right or wrong, rather models will be chosen and
tailored in order to meet a university’s unique programmatic, strategic, and project requirements.
In addition to presenting and contrasting the full continuum of residence delivery approaches, this
Report provides a business case framework that outlines a process which links residence investments to
program objectives and strategic outcomes of the university. Central to this framework is the strategic
options analysis, an important analytical step in the assessment of the investment opportunity.
Guidance materials on business case development, risk assessment, and life-cycle costing have also
been included.
For some universities, student housing may be central to its long-term strategic plan, while for others,
student housing may be peripheral to its current strategic agenda. Regardless, universities must
continue to think creatively to find the most efficient ways to meet housing infrastructure needs and
build the student experience.
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1.0 Introduction
“Many Canadian universities consider
student housing to be core to the
accomplishment of their mission.
However, with continual pressure on
operating/ancillary budgets and
increasing capital constraints, will the
traditional business model for student
housing work? What is the current
state of student housing in the sector?
CAUBO/ACPAU is pleased to provide a
forum where these and other questions
can be answered. This workshop brings
together the many people in the sector
who are interested in the topic of
student housing and its future. As
usual , we will learn from each other.”
Jim Butler
Vice President Administration
Wilfrid Laurier University
President
Canadian Association of University Business Officers
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1.1 Background and context
Student housing is an integral part of the overall student experience. This notion is widely accepted by
university administrators and is supported by academic research. The decision however to recapitalize
student housing stock, or invest in new or replacement student housing capacity is more complex and
has several moving parts. Several factors influence and constrain the decisions:
Factors impacting the decision to invest in student housing
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Student demand and requirements
University objectives and strategies
Campus master plan
State of housing infrastructure
Operating budget constraints
Borrowing capacity
Funding sources
Capital, operating, and lifecycle maintenance costs
Revenue streams
Affordability
Local housing market developments
It is in this context that the Canadian Association of University Business Officers (“CAUBO”) formed a
special committee (“Steering Committee”) to research business models for student housing and to
develop guidance documents for development of business cases for the investment in new student
housing (the “Project”).
1.2 Project objective
The purpose and objective of the Project is to assist universities in building the business case for
investment in student housing by:
►
►
►
►
Providing a national overview of the current state of student housing;
Discussing the relevance of student housing as a means for student recruitment and retention;
Identifying emerging trends in funding and operating models and strategies adopted by
Canadian universities;
Preparing high-level guidance materials that will assist universities in assessing the life-cycle
costing and business case development for renewal of housing assets.
Ernst & Young Orenda Corporate Finance Inc. (“EY”) was selected by the Steering Committee through
a competitive request for proposal process to research, analyze and prepare a report based on the
Project objective (the “Report”). This report was presented to CAUBO members at a workshop on
student housing held in April, 2012.
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1.3 Project scope and methodology
Our overall scope and methodology for the Project included the following:
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In-person working session with representatives of the Steering Committee to commence the
Project;
Bi-weekly update meetings with the Project team;
Input into the development of a questionnaire and survey on the state of student housing
infrastructure (“Survey”);
Conducting a review of relevant literature to understand the impact of student housing on
student recruitment and retention and the extent to which this relationship can be measured;
Conducting discussions and interviews with housing stakeholders and summarizing key themes
and findings;
Preparation of guidance materials for use when building a business case for investments in
student housing;
Identification of options and effective strategies as it pertains to funding and operating models
for student housing;
Input into planning for the national workshop on student housing (“Workshop”);
Preparation of a draft report that organized the findings from the Survey, interviews, review of
literature and examination of effective strategies;
Review of the draft report with the Steering Committee and Project team;
Preparation of the final report based on feedback and comments from the Steering Committee
and the Project team; and
Preparation of materials and participation in the Workshop presenting the final Report.
1.4 Steering committee on student housing
The EY team reported through its project manager and engagement leader to CAUBO Project team
leader and the project Steering Committee. The Steering Committee included the following individuals:
Table 2. Steering Committee membership
Member
Institution
Gary Brewer
York University
Dave Button
University of Regina
Gary Bradshaw
Memorial University
Jim Butler
Pat Hibbitts
Simon Fraser University
Nathalie Laporte
CAUBO
George Dew
CAUBO
The role of the Steering Committee was to provide guidance from each of their respective disciplines
and perspectives, to agree with the overall Project objective, scope and deliverables, and to ensure that
the final deliverables and Report met this objective.
1.5 Who should use this Report?
There is no rule dictating whose role it is to produce business cases for investments in new student
housing. Generally, the responsibility lies with the sponsors to champion the project and provide the
impetus behind investment proposals.
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Assembling a business case should be a collaborative effort involving stakeholders across the capital
asset life cycle: planning, project delivery, operations and renewal, as well as those affected by the
outcome of the investment. Therefore, users of this Report could include finance, student life, facilities
management, housing, real estate and ancillary business services, among others.
1.6 Report use and limitations
In the preparation of this Report, EY relied upon information provided by CAUBO, CAUBO members and
third parties, and such information is deemed to be complete. EY has not conducted an independent
review of completeness or validity of the information received from any party.
EY makes no representation, warranty or other assurance, express or implied, or assumes any legal
liability or responsibility for the accuracy, completeness, or usefulness of any information in this
Report, or that any of the findings will be realized.
This Report should not replace the use of architectural and engineering, financial, legal, technical, or
other consultants or advisors when developing business cases or evaluating student housing
investment decisions.
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2.0 The state of
student housing
“With the increase in the numbers of
international students on campus to
meet our strategic plan, the need for
university residences is even more
critical. Some of our international
partners are requiring guaranteed
access to residences as part of the
overall partnership and exchange
agreements. The needs and interests
of international students alone could
consume 100% of or housing stock.
Thus new benchmarks for the amount
of overall student housing needs must
be established.”
Dave Button
Vice President, Administration
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2.1 Challenges and issues
Universities are operating in a challenging and fluid environment with several stakeholders having
influence on student housing outcomes. Based on input from the Steering Committee, discussions with
10 housing stakeholders representing a cross-section of Canadian universities, combined with our
understanding of the post-secondary institution sector, real estate development, and financial markets,
seven major challenges, or themes, emerge.
In order to build the student experience through new housing investments, universities will need to
consider housing models and strategies that best address, amongst other things, the following key
challenges in the internal and external environments.
Demand
Government spending cuts
Demand is changing along two primary fronts.
First, overall domestic demand and long-term
student growth is expected to soften in many
markets. In addition to the operating budget and
cash flow implications, this softening demand will
drive increased competition for students locally
and nationally, as well as for foreign students.
Increased competitive pressure will require
continued differentiation in a university’s value
proposition. Student housing plays an integral
part of that value proposition.
A fragile global economy, European sovereign debt
crisis, volatile financial markets, and a struggling
U.S. economy continue to have spillover effects on
the Canadian economy. Deficit spending is not
economically sustainable and we are now entering
a period of government program expenditure
reduction in Canada. Federal spending cuts have
begun and are expected to accelerate. Provincial
governments are planning across the board
spending cuts, with some early announcements
having been made already.
Secondly,
research
shows
that
demand
preferences have shifted such that housing and
campus life factors prominently into students’
decision and selection criteria. It is no longer
sufficient to view housing as ancillary to a
university’s operations, but rather core to its
academic mission.
In some provinces, universities have benefited
from provincial contributions to housing projects;
however, current experience suggests that this is
now the exception rather than the norm . Some
argue that provincial governments have a role in
funding housing projects – research and
experience shows that housing is core to a
university’s academic mission. Others argue that
a dollar invested in housing infrastructure is a
dollar diverted from funding academic operating
and capital budgets.
Quality of infrastructure
It is estimated that over half of the existing
housing infrastructure at Canada’s universities
was constructed pre-1970. A significant portion
of this housing infrastructure capacity is in need of
renovations and ongoing maintenance, however,
many residences are well past their useful lives
and are in need of major renovations to conform
to some or all of present building codes, universal
access standards, and other health and safety
standards.
As housing infrastructure ages and lifecycle
maintenance is deferred, universities will be faced
with both increasing operating and one-time
capital costs.
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In an environment of government spending cuts
and funding pressure, universities may need to
look to alternative or more creative models if new
investment is to proceed.
April 2012
Operating budget pressure
Rents and fees
Provincial operating funding is under pressure,
capital funding for housing is limited at best, and
unavailable for most, enrollment demand is
weakening in some markets which directly impacts
much needed ancillary revenues, upward pressure
continues on operating costs, and pension
shortfalls are but a few of the major operating
budget pressures.
Affordability is an issue. In the current housing
market, cities such as Vancouver, Calgary,
Edmonton, Regina, Montreal and Toronto have
been, and continue to be more resilient than the
rest of the nation and thus may offer greater
ability for universities to set rents and fees to
recover the full cost of service including provisions
for debt repayment and lifecycle renewal. This also
has to be managed in the context of accessibility.
Conversely, universities in the remaining Canadian
markets expect rents and fees to remain sticky
with limited ability to increase, negatively
impacting overall economics. This is further
compounded by construction, operating, and life
cycle maintenance costs increasing at a pace that
exceeds rents and fees, creating affordability
challenges.
As a result, internal funds will be increasingly
limited for housing projects, requiring new
projects to demonstrate the ability to recover the
full cost of service including provisions for debt
repayment, lifecycle renewal, and indirect
overheads.
Capital and borrowing capacity
Internal capital to build new housing projects is
limited due to several factors, including competing
capital projects and academic priorities, for
example.
Debt financing is an alternative;
however, many universities are concerned about
their overall borrowing capacity, their ability to
service additional indebtedness, and overall
financial strength. On the other hand, debt capital
is widely available in the bank and private
placement markets for universities. The cost of
debt capital is at historical lows which present an
opportunity to secure long-term capital for longterm assets and needs.
Existing borrowing covenants may limit the form
and amount of additional indebtedness and
borrowings. Those universities that have credit
ratings are concerned with the potential for credit
rating downgrades and the impact to the
university’s brand and its cost of capital.
Overall, borrowing capacity may limit or narrow
the available housing alternatives for some
universities.
Regardless, effective pricing strategies for rents,
fees and other ancillary revenues, as well as
project scope and cost budgets will be at the
forefront of any business case for investment in
new student housing.
Market developments
Local housing markets are evolving.
Private
sector developers and investors in Canada view
post secondary education as a new asset class,
similar to that in the United States and Europe.
The private sector is eager to play an increasing
role in the delivery of scale student housing
solutions in Canada, with examples of interest, as
demonstrated by developments in Vancouver,
Toronto, Guelph, Montreal, and Halifax.
The private sector may be a competitive threat or
may be a partnering opportunity; individual
universities will decide.
Regardless, business
cases for investment in new housing will need to
address the role of the private sector in the
delivery of solutions.
Traditional approaches and models may continue to be sufficient to meet current and future housing
needs. However, given the breadth and depth of challenges, alternative or more creative models and
approaches may be better suited in this new environment.
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2.2 Survey results on housing infrastructure
CAUBO developed and conducted a Survey of its members on student housing infrastructure. The
Survey included two independent sections, one addressing primarily physical characteristics (e.g.
construction data, number of beds) and the other capturing overall characteristics of housing for the
campus. A total of 52 universities across Canada of varying size and academic mission completed one
or both parts of the Survey. A summary of the results of this Survey are described below. The Survey
methodology, limitations, and detailed findings are presented in Annex 1.
Summary findings and key themes
►
►
By far, the bulk of student housing in
Canada was constructed during the
1960s. A significant portion of this has
undergone a refit, in most cases since
2000, but there is still a large overhang
of un-renovated buildings from that
period.
Universities have largely used traditional
financing and delivery approaches but
are now looking at alternatives, perhaps
driven by necessity.
►
Traditional dormitory style residences
still dominate, although a significant
number of apartment style residences
have been added in recent years.
►
Some
government
funding
was
historically available, but this has
effectively disappeared. While there is an
increase in the use of internal funds, debt
is still the main source of financing.
►
Debt financed building work and major
refits undertaken during the 1960s and
1970s has fully amortized whereas debt
that financed new build and major refits
since 2001 has an outstanding term of
between 10 and 30 years, which
suggests the need to refinance may arise
in the future.
►
Routine maintenance and custodial work
are the only areas where there is
significant private sector involvement in
the delivery of housing operations.
►
In general it appears that smaller
operations (by total bed count) generate
more
revenues
from
hotel
and
convention operations, but this is
certainly not true in all cases.
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77%
Of universities see the current
housing largely or completely
meeting the needs of their
students
Of universities feel their
current housing only
somewhat meets the needs of
their students
48%
Of buildings built/refitted in
the 1960s are considered to
be in a fair or poor condition
Of buildings built/refitted
from 2001 are considered in a
good or excellent condition
89%
86%
Of universities used a
traditional design-bid-build
model for existing stock
constructed since1991
Of universities are considering
a traditional delivery approach
for new projects
27%
23%
53%
Of universities are considering
partnership delivery
approaches for new projects
Of universities report that
room rates can generally be set
to cover all costs.
43%
April 2012
Meeting student needs
Over three-quarters of respondents view their current residence design and function is largely meeting
their current student needs, whereas 23% see their current residence design and function as only
meeting some of their student’s needs.
Capacity
This majority feeling of contentment is likely driven by an increase in both construction and major refits
that have occurred since 2001. An estimated over 16,000 of new bed capacity has been added from
new construction over the last 10 years. This volume of construction is more than double the
construction in each previous decade until the 1960’s, which saw almost 35,000 beds built. By region,
bed capacity added since 2000 was 18% (Atlantic), 5% (Québec), 24% (Ontario), and 38% (West).
As would be expected, the survey found that debt related to building work and major refits undertaken
during the 1960s and 1970s had fully amortized, whereas debt that financed new build and major
refits since 2001, has an outstanding term ranging between 10 and 30 years, which suggests the need
to refinance may arise in the future.
Delivery and financing models
New construction and major refits over the last 20 years have been built under traditional delivery and
financing models with 89% of projects procured as design-bid-build. In financing terms, government
funding for residence projects has decreased over the past 20 years. From the period 1991 – 2000,
sources of financing included 89% of capital from debt, and 10% from government. However, from
2001 the debt portion has reduced slightly to 86%, while government funding has been eliminated and
replaced with a higher percentage, 12%, from internal funds and 14% from external sources.
Building and room condition and style
When considering building age or year of renovation, in general, the Survey found that the older the
building, the poorer the condition. 48% of buildings built or that underwent a major refit in the 1960s
are now considered by universities to be in a fair or poor condition. Conversely, and as expected, a
large majority (86%) of newly constructed/renovated buildings (from 2001) are considered in excellent
or good condition. Opinions on individual room conditions within residential buildings followed similar
trends, however only 33% of rooms are considered to be in a fair or poor condition, compared to 48% of
buildings build/renovated within the 1960s.
The Survey found a transition to a more balanced portfolio of building types. 84% of new construction
in the 1960s was a traditional dormitory style, whereas 13% was apartment style. From 2001, this
trend became more balanced, with 55% of new construction in the apartment style and 40% in the
traditional dormitory style.
Room rates and cost recovery
Questions regarding room rate and cost recovery provide some general information, but were likely not
sufficiently detailed to capture all the nuances of such operations. While other residence procurement
choices have been consistent across the universities, the basis for establishing room rates has
remained diverse. Room rate diversity is best shown in the table on the following page, however only
29 of the 46 that responded to the question report that room rates can generally be set to cover all
costs – an interesting question arises regarding the definition of all costs, given the variety of room
rate methodologies.
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Of the 46 that responded to the question, institutions indicated they were able to set room rates to
recover the following costs as follows.
Table 3. Room rate recovery methods
Room rates were set to recover the following costs …
% of respondents
Operating and routine maintenance costs
98%
above AND administrative costs of student housing service
96%
all above AND debt service payment
83%
all above AND provision for major maintenance and life cycle renewal
65%
all above AND university overhead charge
43%
Responsibility for providing residence services
Universities remain the predominant provider of services to their residence building portfolio. Only
custodial and cleaning services, and maintenance and repairs had significant private involvement. In all
other responsibilities and services identified, over 93% of universities undertake these internally.
Implementing and operating student life program
Determining student life programming needs
Setting priorities for building renewal
Setting priorities for room renewal
Setting maintenance budget
Setting operating budget
Maintenance and repairs
Custodial and cleaning services
Collection of fees
University
Private sector
Combination
Setting of fees
Room assignment
0%
20%
40%
60%
80%
100%
Figure 1 – Responsibility for providing residence services
Out of season use and revenue generating opportunities
Questions regarding other operations and revenue sources provide some general information, but were
likely not sufficiently detailed to capture all the nuances of such operations. Transient or walk-in
accommodation (such as summer hotels), and summer convention/groups (such as conferences)
represented to the majority of out of season uses and additional revenue generation opportunities.
Such additional uses will require that universities ensure the increased revenue is not outweighed by
increased use and wear and resulting maintenance requirements.
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Of the 53 that responded to the question, institutions indicated the following secondary uses.
Table 4. Secondary uses of residences
Universities use student housing for …
% of respondents
Transient or walk-in (e.g. summer hotel)
79%
Convention or group clients (summer)
81%
Convention or group clients (fall-winter)
30%
Specific educational programs (e.g. executive development, continuing education)
30%
Visiting faculty and guests
51%
Other
22%
Eight of the respondents indicated that net revenues from hotel and convention revenues were not
sufficient to offset the additional wear and tear on the building caused by these uses.
The revenues from these activities varied widely – most institutions indicate that hotel and convention
activities generate less than 10% of total revenues from residences, but in a few cases it is over 20%.
In general it appears that smaller operations (by total bed count) generate more revenues from hotel
and convention operations, but this is certainly not true in all cases.
Student housing operations at some institutions receive additional revenues from meal plans, retail
activities, and parking services. This was identified but not quantified in the Survey.
Delivery approaches under consideration
The period from 2001 saw a doubling of new construction compared to the previous decade. With
some residences approaching the end of their economic useful life (having been built in the 1960s),
universities could be entering a new build era; but one that is taking place in a very different financial
and operating environment.
When considering new construction, an interesting trend shows a consideration towards private
development. Of the delivery approaches under consideration, 21% are private development options,
as either lease/leaseback or private ownership. The majority are considering the traditional design-bidbuild for planned projects, however this proportion has reduced from about 90% seen historically to
51%. Partnership models are also becoming more popular, accounting for the remaining 28% of cases.
Note that these describe the models being considered, not necessarily implemented. Some institutions
will be “considering” more than one model. Notwithstanding, the range of options under consideration
for future housing development is broader than has been the case in the past, which supports the need
for a framework to develop effective business cases.
Financing models under consideration
When considering how new residences could be financed, debt remains the primary source under
consideration (45%) followed by internal funds and external funds. 9% of universities reported
government funding is under consideration for new housing.
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April 2012
Internal
0%
10%
External
20%
30%
40%
Gov't
50%
Debt
60%
70%
80%
90%
100%
Figure 2 – Financing models under consideration for new housing projects
Barriers to growth
When considering the barriers to a new era of growth in new student housing, those ranked as first or
second priority by respondents were:
► Risks relative to student demand (31%);
► Limited debt capacity, need to focus on upgrades to existing stock, and general economic risks
of housing (from 25% to 27%); and
► Absence of provincial grants for housing and insufficient revenues in the May to August period
(23% each).
2.3 Research on the impact of housing on recruitment and retention
Several factors influence a student’s post secondary institution selection decision as well as subsequent
decisions to complete their academic studies. Research conducted on student living and the student
experience has revealed many important findings relevant to a student’s experience at university, and
identifies the quality of campus housing and experience of living in on-campus residences as being
among the factors influencing student choice. However, a limited review of literature and research in
this domain finds few results that specifically address any clear linkage between student housing and
recruitment and retention, particularly in the Canadian context. Furthermore, much of the research is
dated. The following presents a review of the literature. A biographical list of references is provided in
Annex 2.
On student housing and recruitment
Research conducted in the United States through the 1970s and 1980s suggested that student college
choice occurs in multiple phases:
►
►
Kottler (1976) suggests seven stages in the process: deciding to attend college, seeking and
receiving information, making specific college inquiries, applying, being admitted, choosing a
college, and registering.
Hossler and Gallagher (1987) suggest that three broad phases exist which includes the
predisposition phase, the search phase, and choice phase.
Within these phases, the possible impact of housing facilities appears at search / seeking and receiving
information phase.
Specific consideration of the connection between the built environment and learning is made by a
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April 2012
number of authors, for example:
►
►
►
Peterson’s (1999) research suggests that facilities managers should emphasize the
relationship that educators intuitively understand between the condition of the facilities and
the overall learning process, and that physical amenities figure prominently in the recruitment
of students, faculty and staff.
Noel and Levitz (2002) highlighted the relationship between selection and facilities and the
importance of the role of maintenance personnel.
Price, Matzdorf, Smith, and Agahi, (2003) concluded that for many institutions, facilities
factors, when provided at a high standard, are perceived as having an important influence on
students’ choice of institution.
Price et al., (2003) observed selection to be dependent upon course/subject, reputation of
course/department, school, university, league tables, convenience/proximity to home, and location
and facilities/resources, findings not dissimilar to Briggs (2006) study of student choice at six
contrasting Scottish universities.
This and more recent research, including that by Ali-Choudhury et al., (2008); Briggs, (2006) and Price
et al., (2003), for example, has continued to investigate which factors influence student choice, yet
there remains no definitive understanding as to why students select one institution over another.
This is perhaps best summarized by Reynolds and Cain (2006) in their report The Impact of Facilities on
Recruitment and Retention of Students. The report concluded that the campus and its facilities do play
a role in the decision process but they are not necessarily a deciding factor. In some cases campuses
were rejected for missing, inadequate or poorly maintained facilities. It may be safe to say that having
quality facilities is a necessary but not sufficient condition to recruit and retain students.
On student housing and retention
While the above studies focus on student choice of institution – primarily a question of recruitment –
the impact of residence living on the student experience is considered by two prominent higher
education researchers, Pascarella and Terenzini, in How College Affects Students (2005). The
research findings suggest that when compared to students living off-campus, students living on campus
are more likely to participate in extracurricular activities, report more positive perceptions of the
campus social climate, tend to be more satisfied with their college experience and report more personal
growth and development, engage in more frequent interactions with peers and faculty members, and
more likely to persist to graduation
Conclusions
In summary, the research suggests that facilities and the built environment are related to the
recruitment and retention of students, but there is little clear research to support the widely held belief
that student housing can have a positive impact on overall student experience and academic success.
While this is not an extensive literature review, a number of research directions could be considered:
►
►
►
The impact of housing on student recruitment and retention at Canadian universities is lacking
in the research. Given the role that many universities are playing in city building combined with
increasing competition for student and faculty talent in the global context, the field of research
could benefit with increased Canadian context.
Institutional planning and analysis departments at Canadian universities could play a role in
mining data that in some cases, already exists. Stronger empirical data should assist in the
business case for investing in student housing.
The ACUHO-I Professional Standards and the Housing & Residence Life Program Standards
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April 2012
from the Council for the Advancement of Standards in Higher Education are two sources that
can serve to guide further discussions on the relationship among student recruitment,
retention, and new facilities.
2.4 Organizing for outcomes
While the defined focus of this Report covered delivery, financing, operating, and costing models, as
well as the business case context, these cannot be taken in isolation or without consideration of a given
university’s organizational context and structure. Development and operation of housing will involve
cross-functional teams and a collaborative effort involving finance, student life, facilities management,
housing, real estate, and ancillary business services.
Interviews with stakeholders clearly demonstrate that those institutions that consider their residence
programs successful - programmatically, financially, operationally, and organizationally, for example –
generally made use of cross-functional teams or similar approaches to ensure that all affected services
work to achieve a common outcome. Benefits of using cross-functional teams and effectively
organizing for housing projects include potential for:
►
►
►
►
Accelerating project timelines;
Facilitating greater collaboration and innovation in establishing requirements and
specifications;
Better informed work product and recommendations to management; and
Ensuring that a whole-life approach to the asset and project is undertaken from the outset,
thereby minimizing the risk of unintended consequences downstream in the development
process.
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3.0 Student housing
models and strategies
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3.1 Delivery models defined
As housing infrastructure continues to age, the requirements for replacement and new infrastructure
increase, and building the student experience through housing and campus life programming becomes
increasingly important, universities must find ways of stretching their infrastructure investment dollars
further.
This will require assessing the full range of housing delivery approaches and thinking
creatively to find the most efficient ways of meeting infrastructure needs.
In this Report, three general model classifications are included: public models, private models, and
partnership models. Within each model class various delivery approaches exist based on specific
transaction structures and objectives. Generally, private sector participation in the delivery of the
asset, lifecycle maintenance, and risk allocation increases as one moves away from public models,
though to partnership models and private models. The model classification is illustrated below.
Public
models
Partnership
models
University owned
and operated
Design-build-financemaintain P3
Residence
Trust
Lease-leaseback
hybrid P3
Private
models
Lease-leaseback
operating lease
Private development
Residence REIT
Increasing private sector participation in delivery
Increasing risk allocation to private sector
In simple terms and for consistency, the classification of models has been defined by the following key
differentiating features:
►
►
►
Public models are those where the university retains ownership, control, and responsibility for
the design, construction, financing, operations, and maintenance of the residence;
Private models are defined as those where the housing asset and corresponding liability are
recorded in the account of the private developer, the agreement does not create a capital lease
obligation for the university, and the private developer takes project and market risk; and
Partnership models are those based on a long term performance based contract, where
appropriate project risks are allocated between the university and private sector partner under
a delivery approach that integrates design, construction, financing, and maintenance under a
single agreement or contract.
The following sections provide an overview of the various housing delivery approaches, illustrate the
delineation of responsibility, and document key considerations. Models are presented in the context of
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new construction; however, the models could be used for recapitalization, asset sales or monetization.
Note that the models are presented in general terms and do not include all terms and conditions of a
specific transaction or delivery approach.
3.2 Public models
Public models are generally defined as those wherein
the university (as a publicly funded institution)
Public
Partnership
Private
retains ownership, control, responsibility for
models
models
models
financing, as well as a significant share of the
project’s risk, and the private sector is typically
limited to providing defined and non-integrated
services (e.g., design, construction, maintenance) under a service agreement or contract. In addition,
the asset and any corresponding liabilities are recorded in the accounts of the university. The most
common delivery approach, which is the model by which the majority of Canada’s existing student
housing infrastructure has been built and managed, is the university owned and operated model.
Two alternative public models are also discussed; a public residence trust; and an endowment trust.
These latter models could be considered at the institution level, regionally, or potentially system-wide.
University owned and operated
Under a university owned and operated model, the university is responsible for the design, building,
financing, operations and maintenance of housing. Common procurement delivery structures include
design-bid-build (“DBB”) or design-build (“DB”) combined with a traditional corporate financing. For
the purpose of this Report, the DBB model is assessed.
Also referred to as traditional delivery, DBB procurement has been the most common method of
infrastructure procurement by universities and the public sector in general. Under this traditional
approach, the university is fully responsible for the engineering design of the asset. These designs are
either prepared in-house or contracted to a private design firm. This approach is well suited to projects
for which the university can, and has a desire to, specify its exact requirements and therefore seek a
firm, competitive process in the market.
The DBB procurement model requires the development of detailed designs for the project according to
stated specifications and the preparation of contract documents for all the design specification
elements of a project. This documentation forms the basis of the competitive process against which
tenders are then invited for the contract works. Contracts are awarded to the most suitable bidders on
the basis of the outcome of the competitive tender process. In addition, the university will arrange
financing to meet its requirements.
The university then invites bids from qualified bidders for the contract works. The bids are evaluated
and the contract is awarded to the most suitable evaluated bidder. During the construction phase, the
selected construction contractor enters into a contract to undertake construction of the works under
the supervision of resident engineers and /or design consultant representing the university’s interest.
Following completion of the construction, the asset is commissioned and handed over to the university
for operation and maintenance. The university retains responsibility for all residence life and any
ancillary programming.
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A high level overview of a typical traditional delivery structure is set out below.
Illustrative project delivery structure
Element
University
Contractor
Ownership
University
Financing
Financing
Operations and
Maintenance
responsibility
Architect
Contractor
responsibility
Residence life
programming
The bulk of housing stock today has been delivered using a traditional public model. A recent example
of a university owned and operated model is Western University’s new 1,000-bed residence scheduled
for completion prior to the 2013 academic year.
Key considerations associated with the traditional approach are summarized below.
Key considerations
►
►
►
►
►
Provides the highest degree of control and certainty in relation to the
scope and residence life programming
Design, construction and schedule risk is retained along with
accompanying cost implications associated with the failure to properly
manage their integration
Utilizes university’s borrowing capacity
Potential for tenders to be selected on a ‘lowest cost’ basis with no
consideration as to the whole life cost of the asset
University retains responsibility for long term asset maintenance and
lifecycle replacements
Residence trust
An alternative to the traditional approach that maintains public sector ownership and governance,
whilst achieving off-balance sheet status for the university could be a residence investment trust
(“Trust”). A Trust would be incorporated as a charitable foundation without share capital for the
purpose of owning and operating student residences for the university. A Trust would be registered
under the Income Tax Act (Canada), as a registered charity and accordingly, would be exempt from
taxes on income4.
The Trust would be governed by a Board of Directors that would include directors from the university
as well as independent directors.
4 Illustrative only. Requires legal and tax opinions.
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The Trust would be capitalized by debt and internal cash flows and would likely require one or more
credit ratings. No covenant or guarantee of the Trust’s obligations would be provided by the
university. Debt financing could potentially be sourced through university endowment assets; however,
individual investment policies would limit amounts and exposure to this new asset class.
The Trust is responsible for:
►
►
►
►
►
►
Entering into a land lease and purchase and sale agreements with the university for the existing
assets;
Designing and constructing the new residences that meets the university’s requirements and
residence life programming;
Financing the initial capital cost of the residence;
Operating and maintaining the residence over its service life to satisfy minimum performance
standards specified;
Managing the occupancy, revenue and receivable risk; and
Making cost / benefit provisions for lifecycle maintenance and rehabilitation of the residence,
and financing thereof.
Operationally, the Trust would enter into a service agreement with the university whereby the
university would provide many of the services on behalf of the Trust including for example, design and
project management of the construction, maintenance services, operations, staffing, and student life
programming. While the university may provide services to the Trust to manage residence
arrangements with students, it is the Trust that enters into individual residence agreements with
students.
Under a Trust structure, the residence assets, and corresponding obligations, would not be recorded in
the accounts of the university.
A high level overview of the structure is provided below.
Element
University
Trust
Ownership
University
Governance
Financing
Residence
Trust
Financing
Operations and
Maintenance responsibility
responsibility
Contractor
Building
management
There are presently no examples of a Trust structure for university housing, examples exist in the
Canadian hospital sector. McGill University Hospital Centre pursued this structure for its parking assets,
and as well, many Ontario hospitals have placed parking assets in trusts5.
5 Source: EY research.
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Key considerations associated with a public sector Trust approach are summarized below.
Key considerations
►
►
►
►
►
Provides high degree of control and certainty in relation to the scope
and residence life programming
Ability to achieve off-balance sheet treatment – asset and corresponding
liability is recorded in the accounts of the Trust
Requires a governance structure and services agreement that is
acceptable to all stakeholders, including lenders and credit rating
agencies
Requires specific legal, tax, and accounting opinions
Potential platform for regional or potentially a system-wide solution
Debt financing alternatives
Traditional university owned and managed models typically require traditional corporate debt
financing. The Canadian debt financing market has two primary segments: the bank market and the
debt capital markets, both of which have provided significant capital to Canadian universities over the
years. A third, smaller segment also exists, which is the government loan market. Debt products vary
widely within each segment based on investors’ or lenders’ preferences and view of credit risk. The
following illustrates the broad segments and types of products.
Debt capital markets
► Private placement market
► Broadly marketed private
placement market
► Public offering market
Bank market
► Construction loans
► Infrastructure Ontario loans
► Term loans
► BC Government loans
► Conventional mortgages
► Quebec Government loans
Capital markets
A brief overview of each segment follows.
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Government loans
April 2012
Broadly marketed private placement market
The private placement debt capital markets (typically referred to as the “bond market”) have been a
common capital markets platform for university issuers, with over $3 billion accessed in the past ten
years6. A broadly marketed private placement of debentures is a placement of debt with qualified
investors (typically > 10) such as life insurance companies, pension funds, and money managers.
Debt is issued in the form of debentures (unsecured, general obligation) ranging in tenor from
typically thirty to as long as fifty years, and is issuer friendly with minimal covenants. Universities
and their debentures are rated by at least one of three credit rating agencies. Debentures can pay a
fixed rate of interest on a semi-annual basis with the principal amount repaid at maturity (referred
to as a “bullet” payment), or alternatively principal can be amortized over the life of the debenture.
As this form of debt issue is a private placement, the debentures are exempt from most securities
legislation in Canada.
Bank financing
Committed bank financing has also been a common source of capital for university borrowers. The
most competitively priced and maximum commitment period bank financing is typically priced on a
floating interest rate basis, with the ability to fix the interest rate with a forward starting interest
rate swap. Interest rate swaps can be designed and tailored to the university’s cash flow
requirements and risk mitigation objectives.
The current bank financing market is characterized by amortizing loans, with interest only payments
for a limited time period during the commitment period. For investment grade university credits,
bank financing is generally “covenant-lite”, unsecured, and a general obligation of the borrower.
Commitment periods, however, are significantly shorter than that of a private placement bond but
generally exceed 10 years.
Provincial government loan programs
In some provinces, universities may be eligible, but not required, to participate in a provincial loan
program. Under these programs, the Province borrows directly in the debt capital markets (based
on its existing borrowing platform) and relends funds to public sector institutions on matching
terms. The programs aim to use the Province’s credit rating, and its ability to borrow at lower
interest rates for longer terms, to provide lower-cost financing.
Interest rates on the loans are fixed for the entire life of the loan once drawn and loan terms can
reach up to 30 years. In some cases, security may be required and reporting and covenants may be
more restrictive than comparative private placement of bank financing alternatives. This could have
implications for existing lenders or debenture holders. As a result, provincial loans may not be
appropriate for all universities, or self-supporting housing projects.
6 Source: EY research.
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Endowment financing
Endowment financing is a variation of the Trust structure. A university would create an endowment for
the sole purpose of investing in its housing assets to generate market returns that are commensurate
with the risk profile of the asset class. While this structure delivers the benefits of control, governance,
residence life programming, as well as access to long-term, fixed interest rate capital, a university would
utilize its borrowing capacity. In addition, endowment investment policies would have to be considered
and potentially updated to allow for this type of investment. An example of this structure is used by
University of British Columbia.
Municipal financing alternative
A final financing alternative, that may deliver the benefits of public sector control, governance, and
residence life programming, whilst achieving off-balance sheet status for the university, is non-tax
supported municipal financing provided by the university’s regional or local municipality7. This
financing alternative may be worthwhile pursuing at the local level as municipalities are looking at
universities to play an increasing role in city building. The municipally owned and financed residence
could form part of the municipality’s overall housing and city building strategy for the city or region.
The basic delivery structure is a lease-leaseback. Under a lease-leaseback model, the municipality
designs, builds, owns, and operates and maintains the residence on the university's property (which is
the “lease” portion of the lease-leaseback model), and the university enters into a short-term head
lease of the entire residence (the “leaseback” portion of the lease-leaseback model). Subject to
classification, the leaseback obligation would be accounted for by the university as the lessee, as an
operating lease8. Under this structure, the university is responsible for individual residence agreements
with students and can implement its residence life programming objectives.
Under this structure, the municipality incurs debt (likely in the form of debentures) and would pledge
the rents and fees from the university head lease for debt service repayment and life cycle maintenance
provisions.
3.3 Partnership models
Partnerships span a spectrum of models that
Public
Partnership
Private
progressively engage the expertise or capital of the
models
models
models
private sector. At one end, there is straight contracting
out as an alternative to traditionally delivered public
services. At the other end, there are arrangements that
are publicly administered and governed, but within a framework that allows for private design, building,
finance and maintenance and operation of an asset.
The term public-private partnership (“P3”) is typically used broadly to describe any form of contract or
agreement between the public and private sectors, however, carries a specific meaning in the Canadian
context. According to the definition proposed by the federal Crown corporation, PPP Canada Inc., P3
means a long-term contractual relationship between a public authority and the private sector which
7 Provincial Municipal Acts govern municipal borrowing. A review of provincial Municipal Acts to determine authority and eligibility
is beyond the scope of this Report. This financing alternative may not be available for universities.
8 Refer to the Section 3.4 Private models for a description of the accounting treatment under Generally Accepted Accounting
Principles.
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involves: the provision of goods or services to meet a defined output specification (i.e., define what is
required rather than how it is to be done); the integration of multiple project phases (e.g., design,
construction, operations); a transfer of risk to the private sector anchored with private sector capital at
risk; and a performance-based payment mechanism. In this Report and for simplicity in definition,
contractual arrangements that do not include these concepts have not been included in the definition
of a P39.
This area of project delivery offers a range of potential benefits, including the opportunity for publicsector entities to make use of whole-life approach for the asset and private-sector innovations.
However, the chief advantage of partnership models is its potential for risk transfer.
Universities could utilize any the following P3 delivery structures for recapitalization or building new
student housing:
►
►
►
►
Design-build-finance (“DBF”);
Design-build-finance-maintain (“DBFM”);
Design-build-finance-operate-maintain (“DBFOM”); or
Lease-leaseback hybrid P3 (“Hybrid P3”).
The following presents an overview of a DBFM P3 and a Hybrid P3 as potential delivery approaches for
student housing. DBF and DBFOM are variations of the DBFM delivery structure.
DBFM P3
A DBFM is a delivery approach that integrates design, construction, financing, and maintenance under
a single agreement or contract. A private sector partner (typically a consortium of specialized firms) is
selected through a competitive procurement process and has a “whole-life” involvement in the delivery
of the asset including:
►
►
►
►
►
►
►
designing and constructing the appropriate asset that meets the contract requirements;
funding the initial capital cost;
maintaining the asset over its service life to satisfy the performance standards specified;
operating the asset over the long-term to meet specified objectives;
dealing with the risks transferred in the contract in return for an agreed revenue stream;
making funding provisions for the asset; and
handing back the asset in a pre-established condition.
Under a DBFM, the university enters into a long-term ground lease with the private sector partner and
ownership of the asset is maintained by the university throughout the term of the contract.
Correspondingly, payments over the life of the contract are recorded in the university’s accounts as a
capital lease. Contract terms for accommodation projects typically range from 25 to 35 years.
Payments are linked to availability and performance to create an incentive for appropriate
performance delivery.
The procurement process follows four stages: request for qualifications (“RFQ”), request for proposals
(“RFP”), bidder evaluation, and financial close and can take up to 18 months for accommodation
projects.
9 This is consistent with the Canadian Council for Public-Private Partnerships’ and PPP Canada’s definition of P3.
Ernst & Young | 33
April 2012
A high-level overview of a DBFM P3 project delivery structure is set out below.
Element
University
Partner
Ownership
University
Financing
Private Sector
Consortium
Contractor
Debt & Equity
Financing
Facilities
Management
Provider
responsibility
University interest in residence DBFM P3 is growing, with recent examples at Simon Fraser University
and Dalhousie University.
Hybrid P3
A Hybrid P3 is a traditional lease-leaseback but with a performance / availability-based contract. A
lease-leaseback is an arrangement whereby the university as owner of residences leases it to a private
sector developer under a performance-based, long-term ground lease, and continues to lease the
property from the private partner. The university remains as owner of the residence or portfolio of
residences. The terms of the performance-based lease require the private sector developer to operate,
maintain, and repair / recapitalize the residences to agreed-upon standards, provide all long-term bed
needs of the university, and operate any ancillary programming. Typically, the university will lease the
buildings for 25 years, guarantees space take-up, and has the option to extend the lease.
Identifying appropriate projects for P3
P3 delivery does have advantages, but it is not appropriate in every situation. In general, It may be a
feasible option when:
►
►
►
►
►
►
Significant opportunities exist for private sector innovation in design, construction, and life
cycle maintenance;
Clearly definable and measurable output specifications can be established, suitable for
payment under a performance-based contract;
There is potential to transfer risk to the private sector;
A market for private sector bidders can be identified or can be reasonably expected to develop;
The private-sector partner has an opportunity to generate additional streams of revenue (e.g.
charge for private access in off-hours); and
Projects of a similar nature have been successfully procured using a similar method.
A formal screen should be conducted early on to ascertain whether a project has merit or the potential
to deliver value for money as a P3.
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April 2012
3.4 Private models
An evaluation that eliminates private housing delivery
approaches as a potentially viable option on the basis that
an inherent profit and commercial motives of private
enterprise diverges from the interests of the public
institution is inadequate. Likewise, so too is concluding
that the private models are the only solution to student
housing problems and challenges.
Public
models
Partnership
models
Private
models
The private sector will continue to play an increasing role in the delivery of scale student housing
solutions in Canada. Individual university objectives and requirements, access to capital, organizational
and budget constraints, the ability to manage risk, and investors’ appetite for new asset classes are
some of the factors that will drive this growth. For example, in Ontario, Toronto, Guelph, London,
Waterloo, and Hamilton are markets where private development models are advancing to varying
degrees.
Where private models advance, the opportunity exists for universities to play a role in those housing
projects such that, to the extent possible, the university’s requirements are met, design and
programming is influenced, and overall risk to its brand and reputation is mitigated.
Three private delivery approaches are presented below: lease-leaseback, private development and a
private residence real estate investment trust (“Residence REIT”). These can be considered in the
context of new build or in the sale or monetization of existing housing properties / portfolio.
Lease-leaseback (operating lease)
Under a lease-leaseback model, a private developer builds, owns, and operates and maintains the
residence on the university's property (which is the “lease” portion of the lease-leaseback model), and
the university enters into a short-term head lease of the entire residence (the “leaseback” portion of the
lease-leaseback model). Under a lease-leaseback, the residence asset is not recorded in the accounts of
the university. Subject to classification, the leaseback obligation would be accounted for by the
university as the lessee, as an operating lease10. Property tax obligations are also no longer exempt.
The university is responsible for individual residence agreements with students.
For the purposes of procurement, the university would develop minimal design output specifications for
tender by the private developer in an RFP process. A soft market sounding to gauge developers’
interest and capability should be considered in the planning phase and prior to RFP. Following RFP, the
bids are evaluated and the contract is awarded to the most suitable evaluated bidder.
10 An operating lease is a lease in which the lessor does not transfer substantially all the benefits and risks incident to the
ownership of the property. Source: CICA Part II- Accounting Standards for Private Enterprises 3065 Leases.
Ernst & Young | 35
April 2012
A high level overview of an operating lease delivery structure is set out below.
Element
University
Private
Developer
Building ownership
University
Financing
Private
Developer
Contractor
Debt & Equity
Financing
Building
Management
Provider
Operations and
responsibility
Examples of the lease-leaseback structure include University of Waterloo’s graduate residence and
Trent University’s new residence project. In addition, Thompson Rivers University and many colleges
have entered into variations of this structure with a private developer / operator.
Private development
Under a private development model, a private developer builds, owns, and operates and maintains the
residence, enters into a land lease with the university (or alternatively builds on private lands), and
assumes all project risks. Private development may be instructed by the university or may be led by the
private developer with little or no involvement from the university. The private developer is responsible
for:
►
►
►
►
►
►
Designing and constructing the appropriate facility that meets the contract requirements;
Financing the initial capital cost of the facility;
Operating and maintaining the residence over its service life (to satisfy minimum performance
standards / residence life objectives specified, to the extent these exist with the university);
Setting rents and fees;
Managing the occupancy, revenue and receivable risk; and
Making cost / benefit provisions for lifecycle maintenance and rehabilitation of the residence,
and the financing thereof.
For the purposes of procurement, the university would develop minimal specifications for tender by the
private developer in a RFP process. A soft market sounding to gauge developers’ interest and capability
should be considered during the planning phase and prior to RFP. Following RFP, the bids are evaluated
and the contract is awarded to the most suitable evaluated bidder.
Under a private development model, the residence asset is not recorded in the accounts of the
university. Property tax obligations are likely no longer exempt11. As well, the university would not be
responsible for individual residence agreements with students, but would provide access to the
residence beds as an option to students through various channels and media.
11 Each transaction would require appropriate legal and tax opinions.
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April 2012
A high level overview of a private development delivery structure is set out below.
Element
University
Private
Developer
Ownership
University
Financing
Private
Developer
Contractor
Debt & Equity
Financing
Building
Management
Provider
Operations and
responsibility
University of Toronto is in the planning and approvals stage with a private sector developer to
implement this basic structure.
Key considerations associated with a private development are summarized below.
Key considerations
►
►
►
►
►
Does not utilize university’s borrowing capacity
Potential alignment with graduate residence requirements
May be limited to universities in large, diverse urban markets
May be difficult to achieve all residence life programming objectives due
to private sector risk allocation
Potential brand and reputation risk
Asset monetization / leveraging
A variation of the private development model is asset monetization / leveraging. In general, asset
monetization / leveraging is a process of monetizing the value through commercial transactions with a
private sector counterparty. Examples include:
►
►
Selling or leasing part of a building, property or portfolio (e.g., sale, or sale leaseback) to
redeploy capital / proceeds; and
Utilizing excess capacity (e.g., unused space, developing more efficient space standards, mixused development, or off-hour / time use) to generate revenue.
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April 2012
Residence REIT
A system-wide private sector solution, which is widely used in the United States, is a real estate
investment trust. A post-secondary education Residence REIT would be incorporated for the purpose
of developing, owning and operating student residences for Canadian universities (and possibly
colleges). The REIT is a structure
and as such may include or utilize
the services of a developer for
American Campus Communities, Inc. (“ACC”) is a publicly held REIT that is
planning, design, construction and
one of the largest owners, managers and developers of student housing
properties in the United States. ACC’s business spans acquisition, design,
commissioning of the residences.
The Residence REIT would be
governed by a Board of Directors
that would include directors from
Canadian universities as well as
independent directors.
financing, development, construction management,
management of student housing properties.
leasing
and
ACC’s property portfolio contains 104 student housing properties with
approximately 65,000 beds in approximately 20,800 apartment units.
ACC’s property portfolio consisted of 96 owned off-campus properties that
are in close proximity to colleges and universities, four American Campus
Equity properties operated under ground/facility leases with three
university systems and four on-campus participating properties operated
under ground/facility leases with the related university systems.
Communities contain modern housing units and are supported by a
resident assistant system and other student-oriented programming, with
many offering resort-style amenities.
The Residence REIT would be
initially capitalized by equity and
debt and would likely require one
or more credit ratings.
The
Residence REIT would acquire
residence assets at fair market
value from participating universities. No covenant or guarantee of the Residence REIT’s obligations
would be provided by any university.
The Residence REIT is responsible for:
►
►
►
►
►
►
►
entering into required land leases and purchase and sale agreements with the participating
universities;
operating and maintaining the residences over their service life to satisfy minimum
performance standards specified;
delivery of residence life programming on behalf of each university;
making cost / benefit provisions for lifecycle maintenance and rehabilitation of the residences,
and financing thereof;
Setting rents and fees;
managing the occupancy, revenue and receivable risk; and
designing and constructing new residences that meets university’s requirements and residence
life programming.
Under a Residence REIT structure, the residence assets, and corresponding obligations, are no longer
recorded in the accounts of the university.
Participating universities are no longer responsible for entering into individual residence agreements
with students, but could provide management services on behalf of the Residence REIT.
The Residence REIT would not maintain tax-exempt status, currently experienced by universities.
Alternatively, the Residence REIT could be owned by Canadian pension funds and maintain tax exempt
status.
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April 2012
An overview of the structure is presented below:
Element
University
Residence
REIT
Ownership
University
Governance
Financing
Residence
REIT
Contractor
Debt & Equity
Financing
Facilities
Management
Provider
Operations and
responsibility
The residence REIT structure, while proven in the US, would be ground breaking in Canada at a systemlevel. Control over residence life programming, control over ownership, and governance and operations
are key factors impacting this approach12. They are discussed below.
Table 5. Illustrative legal and governance consideration and course of action
Consideration
Course of action
Control over residence life programming
Social: A university will still want to control on-campus
residences from a social point of view.
Allocation: A university will want first year residence
guarantees maintained so they have a competitive
advantage in attracting students. A university will also want
existing lottery procedures for allocating housing to upperyear students.
Maintenance: A university will want to ensure that buildings
associated with the university are maintained to certain
standards.
Naming: A university may be concerned with preserving the
names of certain residences (named after prior donors) and
with maintaining control over the right to name future oncampus residences.
The REIT and the university could enter into a contractual
services agreement whereby the university provides certain
residence life programming/residence staff (or has a say in
what residence life programming is provided by or on behalf
of the REIT).
This issue could be addressed through contractual
arrangements between the REIT and the university.
arrangements between the REIT and the university. The
declaration of trust for the REIT could also require that a
certain portion of funds raised be set aside for maintenance.
arrangements between the REIT and the university.
Control over residence ownership
Voting control: A university may want to maintain control
over ownership of the residence.
Foreign ownership: A university may be concerned with
foreign ownership of what are perceived to be Canadian
public assets.
12 Co-developed with input from the law firm of Fasken Martineau.
Ernst & Young | 39
It is possible to have different classes of shares so that
voting control is maintained by the university. However, such
share structures will change the economic viability of the
REIT as investors will not be willing to pay as much for
subordinate voting shares.
The REIT could include restrictions on foreign ownership so
that it meets the requirements for a mutual fund trust. This
could affect the economic viability of the REIT.
April 2012
Table 5. Illustrative legal and governance consideration and course of action
Consideration
Course of action
Debt level of REIT: A university may be concerned that the
REIT may go out and incur debt, leading to insolvency of the
REIT and sale of the residence assets.
Provisions addressing authorized borrowing could be added
to the declaration of trust for the REIT. There could also be
contractual arrangements between the REIT and the
university.
Governance and operation
Trustee composition: The board of trustees must include
individuals have experience in university operations, but
adding a trustee from a particular university may make it
harder for the REIT to invest in other universities (e.g. if
there is a perception that such trustee’s university will be
favoured with respect to the maintenance, etc., of
residences).
Tax considerations: The REIT must meet the requirements
set out in the Income Tax Act (Canada) if it is to be exempt
from entity-level tax generally imposed on publicly-traded
income funds and partnerships.
The board should include representatives from universities
involved as well as independent trustees. Also, consider
whether a certain percentage of trustees should be required
to be Canadian residents since the residences may be
perceived to be Canadian public assets.
Ensure that the REIT structures its operations to take
advantage of such tax exemption.
3.5 Summary comparison
The following provides a summary comparison the key differentiating features of five illustrative student
housing delivery approaches across the continuum.
Table 6. Summary comparison of housing delivery approaches
Feature
Traditional
university
owned &
operated
Recent Examples13
Western
University
Ownership
Operating
lease
Private
development
Residence
REIT
Dalhousie
University
University of
Waterloo
Thompson
Rivers
University
University of
Toronto
American
Campus
Communities
University
University
Developer
Developer
REIT
University
Partner
Developer
Developer
REIT
Financing
University
Partner
Developer
Developer
REIT
University
Partner
Developer
Developer
REIT
University
Partner
Developer
Developer
REIT
University
University
University or
Developer
University or
Developer
University and
REIT
University
Developer
REIT
Operating lease
Off-balance
sheet
Off-balance
sheet
Operations and Maintenance
responsibility
responsibility
DBFM P3
Simon Fraser
University
Revenue and occupancy risk
University
University
Accounting treatment
On-balance
sheet
On-balance
sheet
Yes
Yes
No
No
No
Exempt
Likely not
exempt14
Not exempt
Not exempt
Utilizes borrowing capacity
Property tax exemption
Exempt
13 Examples include projects under consideration, or in the planning phase, procurement phase, construction phase, or
operational.
14 Illustrative only. Specific transactions will require tax and legal opinions.
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April 2012
4.0 Developing a business
case for student housing
investments
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April 2012
4.1 Life cycle context
The illustrative business case framework for new housing investments is presented in relation to the
four typical stages in the life cycle of a capital asset. Whole-life costing and life cycle asset
management are important features of building the student experience at universities. In addition, life
cycle costing provides a profile against which alternatives can be examined. The interrelationships of
the four primary phases are illustrated and described below.
► Planning – which includes long-term
campus master plans, demand planning,
Planning
programmatic
plans,
technical
&
engineering feasibility studies and plans,
strategic plans, options analyses, detailed
business cases, and specific project
Procurement
Capital
Renewal /
& Project
delivery plans;
asset
disposal
Delivery
life cycle
► Procurement & project delivery – which
includes tendering, acquisition or design
and construction, commissioning, and
installation;
Operating
► Operating – which includes operating and
maintaining the asset, including service
delivery, performance monitoring and
management, and condition assessments; and
► Renewal / disposal – end of the asset’s useful economic life and the decision to renew or
dispose including performance audit, decommissioning, demolition, or sale.
Business cases are one of several activities that fall within the planning phase of the capital asset life
cycle. For the purpose of this Report, an illustrative business case framework is presented. Other
interrelated technical and legal activities, whilst important to the planning of capital assets are beyond
the scope of this Report.
4.2 Business case framework
►Campus master plan
►Strategic plan
►Academic plan
Long-term plans
Housing
program needs
►Demand
►Current stock
►Space requirements
►Residence life
Ernst & Young | 42
Strategic
options analysis
April 2012
The following illustrative business case framework outlines a process whereby universities can plan for
investment in new housing projects, or develop overall portfolio strategies. Its purpose is to support the
development of strong business cases that link investments to program objectives and strategic
outcomes of the university. In general, capital investment decisions in new housing should be based,
first and foremost, on meeting programmatic and project needs, rather than on a specific delivery
method or model.
Long-term plans, such as the campus master plan, the academic plan and strategic plan will guide
overall student housing planning, establish the key strategic outcomes, and factor into housing program
needs. This is the strategic context.
Following articulation of the strategic context and specific housing program needs, an interim step to
the development of the business case is the strategic options analysis. This high-level options analysis,
satisfy early-stage diligence requirements and narrow the investment decision in an accelerated time
From the options analysis, additional and more detailed analysis is completed in the business case,
which forms the basis of recommendations to key decision makers including administration, the
facilities sub-committee of the Board, and the Board on the overall investment decision.
While the framework is presented as a structured process, it should be noted that business case
planning and investment decisions are not necessarily linear processes; they evolve continuously, with a
range of activities often happening simultaneously.
Public or
traditional
models
Partnership
models
Private
development
models
Ernst & Young | 43
Business cases
Board approval
April 2012
4.3 Strategic options analysis
A key purpose of the strategic options analysis is to support universities in thinking creatively to find
the most efficient ways to meet housing infrastructure needs. This approach does not presuppose that
any one delivery approach is insufficient; rather its intent is to capture the full range of innovative and
feasible options to ensure that universities get best value for its stakeholders. Decisions should be
made on a case-by-case basis, supported by analysis of all practical options.
Looking at a full range of options for meeting program and project needs also means considering key
questions, such as:
►
►
►
Is there a way to meet the university’s needs without new capital spending?
Is there a way to better use or manage existing assets that could reduce the need for additional
expenditures? and
Is there a way to allocate or share project risks with a private-sector partner?
Factors that define the range of practical options are broad and diverse.
Factors defining the range of strategic options
►
►
►
►
►
►
►
►
►
►
►
►
►
Housing needs
Objectives
Condition of existing housing
Programming requirements
Size of project
Technical specifications / requirements
Time to in-service
Preliminary cost and affordability
Borrowing capacity and financial impact
Sources of funding
Cost of capital
Preliminary risk identification and assessment
Local housing market factors
Strategic options analysis framework and components
The following illustrative framework outlines a process that universities can use to conduct an options
analysis. Its purpose is to accelerate the development of the business case by providing an important
initial analytical step in the assessment of the investment opportunity. This high-level options analysis,
satisfy early-stage diligence requirements and narrow the investment decision in an accelerated time
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April 2012
Inputs and key activities
► Identification of key project
stakeholders
► Document requirements,
constraints, and objectives
► Identify evaluation criteria
► Preliminary affordability
analysis
► Identify practical range of
options
Public or
traditional
models
Public-private
partnerships
Outputs
► Strategic context
► Alignment of options with
objectives
► Preliminary risk identification
► Recommended approach
► Preliminary project plan
Private
development
models
The strategic options analysis stage provides an opportunity to include stakeholders from the functional
areas affected by the outcome of the housing investment. This is an important first step. Key inputs
into the options analysis should include, at a minimum, the university’s programming and strategic
requirements, project-level or organizational constraints, as well as articulation of the university’s
objectives. Evaluation criteria – against which to evaluate and differentiate the delivery options - are
developed, which reflect the university’s diverse programming, financial, and other strategic / nonfinancial requirements. A preliminary affordability analysis is conducted to establish key financial
parameters for the project.
The relevant range of models is then investigated and evaluated against the criteria. Models should be
specific delivery approaches or transaction structures. Major project risk categories should be
identified during the strategic options stage and a preliminary qualitative assessment made.
Outputs will include an alignment of options against criteria and objectives, a preliminary risk
assessment, cost parameters, a recommended approach and a preliminary project plan.
Preliminary risk consideration
All capital projects carry a certain level of risk that must be identified and mitigated through the life of
the project, therefore a brief discussion on risk is warranted. Risk profiles of individual housing projects
will vary by university, local market factors, and project type and size, for example. The following table
provides examples of major project risk categories that should be identified during the strategic options
stage. A preliminary assessment of risk should be made at this stage based on qualitative analysis.
Table 7. Preliminary risk considerations at the strategic options stage
Risk category
Description
Strategic / Policy
General, strategic, or high-level concerns or risks related to the decision to undertake and approval of
the project. Also includes brand and reputation risks.
Policy
Risk that the project represents or may be affected by a major shift in government or university policy,
or change in legislation.
Public interest
Risk of the project’s impact on public / student health, safety, and security.
Site
Risks associated site selection and acquisition, including any environmental risk.
Ernst & Young | 45
April 2012
Table 7. Preliminary risk considerations at the strategic options stage
Risk category
Description
Design,
construction, and
commissioning
The risk that design deficiencies, changes, or both, prevent the asset from being delivered on time and
on cost. The risk that necessary permits / approvals may not be obtained or may be obtained only
subject to unanticipated conditions which prevent the asset from being delivered on time and on
budget. The risk that events occur during construction which prevent the asset from being delivered
on time and on cost. The risk that either the physical or the operational commissioning tests which
are required to be completed cannot be successfully completed, which prevent the asset from being
delivered on time and on cost.
Financing
Risk of events that could impact the ability to draw the required financial resources, financing risk and
the overall financial viability of the project. Financing risk includes availability risk, interest rate risk,
and credit spread risk.
Market, economic,
and user
Risk of events that could impact the cash-flow during the life of the project.
Operations and
maintenance
The risk and associated cost of periodic maintenance of the asset is not adequate to sustain the
service requirements.
Lifecycle
maintenance
The risk and associated costs of maintaining the asset in good working order and in a mode of delivery
of service or function required. The risk appropriating capital for lifecycle maintenance.
4.4 Business case components
In general, a business case is a presentation or proposal seeking approval for an initiative or project.
The Treasury Board Secretariat of Canada’s definition of a business case is suitable for the university
context. Specifically, “A business case puts a proposed investment decision into a strategic context and
provides the information necessary to make an informed decision about whether to proceed with the
investment and in what form.” This definition guides the underlying components of the illustrated
business case framework.
The following is not intended to be a definitive manual that exhaustively provides all of the analytical
requirements of a business case for investments in new student housing. Universities have standards,
preferences, policies, requirements, and experiences that define specific business case form and
content. Rather, it provides an illustrative guide, informed by a broader market and stakeholder
perspective, which highlights the range components that could be considered when analysing and
deciding on new housing investments15.
Ultimately, the decision being sought as well as the university’s requirements will define the level of
detailed contained in the business case.
15 Technical feasibility studies, cost consultant reports, design or engineering consultant reports, environmental reports, and site
planning studies or documents are important factors in the investment decision. For illustration purposes, these have not been
included in the scope of the business case framework presented.
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April 2012
Component
Strategic context
Key considerations
►
►
►
►
►
►
►
►
►
►
►
Delivery and
financing options
►
►
►
Evaluation criteria
►
►
Financial analysis
►
►
►
►
►
Financing
requirements
►
►
►
►
►
►
►
►
►
►
►
►
Ernst & Young | 47
Current situation, including assets, external
environment, internal environment, and service levels
Project description and investment decision
Scope and nature of the project
Project status
Campus master plan objectives
Strategic objectives
Program objectives
Rationale for the project
Project objectives and anticipated benefits / outcomes
Internal and external constraints
Market precedents / jurisdictional scan
Range of delivery and financing options
Screening of options (strategic options analysis)
Viable options
Overall objectives
Evaluation criteria (e.g., program / residence life,
strategic, financial, technical, service level, time line)
Financial and operating assumptions
► Capital costs
► Financing costs
► Operating and life-cycle Maintenance costs
► Sources of project funding
► Revenue sources
Financial projections
Affordability analysis re/de-scoping
Sensitivity analysis
Accounting implications and considerations
Existing indebtedness and borrowing capacity
Aggregate financing requirements and timing
Financing objectives
Financing alternatives
Financing market capacity and indicative pricing,
borrowing terms and covenants
Advantages / disadvantages
Effective cost of capital analysis
Impact of existing borrowing covenants
Credit rating implications
Interest rate risk mitigation strategies
Optimal financing structure and approach
Accounting implications and considerations
April 2012
Component
Legal
considerations
Key considerations
►
►
►
Risk management
►
►
►
►
►
Options analysis
and evaluation
►
►
►
►
Recommendations
►
►
►
Managing the
investment
►
►
►
►
►
►
►
►
Real property matters
Governance matters
Collective bargaining agreement matters
Risk identification / register
Risk assessment
Risk response / mitigation strategies
Risk allocation
Monitoring
Qualitative and quantitative assessment
Assessment against evaluation criteria and objectives
Alignment with objectives
Comparison summary
Recommended delivery and procurement option
Recommended financing option and strategy
Rationale
Governance and oversight
Roles and responsibilities
Project team, resourcing and budget
Project management and project delivery
Performance measurement
Risk management strategies
High-level project schedule / implementation plan
Stakeholder management
4.5 P3 Business cases
A P3 business case is different than a traditional capital project business case as outlined above. A P3
business case goes beyond a traditional business case to undertake what is really a procurement
options analysis. The purpose of a P3 business case is to recommend the procurement option that best
achieves the public sector’s project objectives and VFM. VFM is the difference in the risk adjusted net
present cost of delivering the project using a traditional method (such as a DBB, for example) and the
anticipated cost of delivering it through the private sector under a P3 (such as a DBFM), measured at
the same point in time16.
In general, P3 business cases will vary based on provincial standards, policies, and requirements that
define specific methodologies, form and content. Typically, P3 business cases will include the following
components17:
16 See Assessing Value for Money: A Guide to Infrastructure Ontario’s Methodology as one example of a VFM methodology.
17 Adapted from PPP Canada’s P3 business case development guide.
Ernst & Young | 48
April 2012
Key components
►
►
►
►
►
►
►
Project description and investment decision
Procurement decision
VFM analysis
Recommendation
Project funding and affordability
Procurement strategy
Implementation plan
4.6 Life-cycle costing elements
Whole-life costing is essential in the evaluation of housing models and the development of business
cases. Better practice has shown that life cycle costing should include an assessment of the costs
throughout each principle phase the asset’s life cycle. The following provides a framework for the
typical breakdown of the costs involved in the whole-life costing of an asset18.
Table 8. Typical breakdown of the costs involved in the four principle phases of whole-life costing
Planning
Procurement & project
delivery
Operating
Renewal / disposal
Occupancy
Facilities management
Routine maintenance
Life cycle replacement
Staff
Financing
Indirect overhead allocation
Decommissioning
Decommissioning
Disposal
Site remediation / clean up
Rents
Fees
Food service net margin
Parking net margin
Commercial rents
Ancillary services
Proceeds from sale
Costs
Engineering studies
Preliminary design
Functional programming
Environmental assessments
Technical feasibility studies
Campus planning studies
Financial feasibility and
business case development
Legal
Land
Permits and approvals
Site
Design
Engineering
Hard construction
Financing fees
Interest during construction
Legal
Supervision
Owner costs
Income
18 Adapted from Whole-life infrastructure asset management: good practice guide for civil infrastructure.
Ernst & Young | 49
April 2012
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April 2012
5.0 Conclusion
Ernst & Young | 51
April 2012
Many factors influence and constrain the decision to invest in new or replacement residence capacity.
These factors and constraints will continue to shape the types of housing models implemented – public,
private, or partnership. No one delivery approach or approach is right or wrong, rather models will be
chosen based on meeting a university’s unique programmatic, strategic, and project requirements.
In addition to presenting and contrasting the full continuum of residence delivery approaches, this
Report provides a business case framework that outlines a process which links residence investments to
program objectives and strategic outcomes of the university. Central to this framework is the strategic
options analysis, an important initial analytical step in the assessment of the investment opportunity.
Guidance materials on business case development, risk assessment, and life-cycle costing have also
been included.
For some universities, student housing may be central to its long-term strategic plan, while for others,
student housing may be at the margin of its current strategic agenda. Regardless, universities must
continue to think creatively to find the most efficient ways to meet housing infrastructure needs and
build the student experience.
Ernst & Young | 52
April 2012
Annex 1: Survey methodology and results
Methodology and objective
In support of the review of student housing, CAUBO developed and administered a one-time survey of
student housing at its member institutions. As it was not based on previous work or in response to
specific data requirements, the survey was considered exploratory and presented a broad range of
questions and subjects related to housing. Some of these were fact-based and reasonably
straightforward, although unexpected nuances were still discovered when reviewing survey responses
and comments. Other questions were more speculative; they were structured around a number of
hypotheses so as to manage the scope of the survey and relate responses to key institutional concerns.
These hypotheses can be summarized as follows:
1. Older housing stock is largely debt-free but in poor condition, while newer stock is in good
condition but highly leveraged. Both exist in significant proportions.
2. There are a number of approaches used to finance new buildings; this will vary largely
depending on provincial support, although institutional characteristics are also important.
3. While universities will consider innovative acquisition models there are few of these in
evidence, largely because of the economics of supporting housing based on the academic year.
There are few examples of private ownership of residences.
4. Universities outsource some elements of residence operations; residence life programming is
rarely outsourced.
5. While hotel and conference (summer) operations are common, net revenues may not be used
to support student housing. Hidden costs (e.g. additional maintenance) of such operations may
not be adequately considered.
6. Student housing fees are sufficient to cover direct costs but not debt service and ongoing
renewal. As a result, older facilities indirectly subsidize new stock.
The survey included two independent sections, one addressing primarily physical characteristics (e.g.
construction data, number of beds) by building and the other looking at overall characteristics of
housing for the campus. A total of 52 institutions completed one or both parts of the survey; three of
these sent separate responses for two distinct campuses. The participating institutions are listed at
the end of this Annex.
Regional representation – reporting universities
The number of institutions responding, and the corresponding number of students and residence beds
represented, is shown below. Student headcount also indicates the percent coverage of total students
for the region (based on latest Association of Universities and Colleges Canada fall headcount).
Region
Institutions reporting
Student headcount
(grad+undergrad)
72,424 (81%)
96,493 (33%)
316,539 (65%)
237,168 (65%)
Total residence beds
Atlantic
Québec
Ontario
West
10
8
20
14
Key results are summarized below.
following considerations:
When using these results, readers should keep in mind the
Ernst & Young | 53
10,393
7,791
44,190
23,899
April 2012
►
►
►
►
Survey participation was optional. While the response rate was very good and covers all
regions to some extent, comparisons among regions may be skewed or incomplete.
Responses were accepted as provided with no formal validation. Individual interpretation of
the questions and definitions may have varied, leading to undetected inconsistencies in the
data.
Not all respondents completed all questions, which could affect any implied correlations within
the results, and gives a smaller sample size for some questions.
The structure of certain questions required respondents to select among limited responses,
which may mask some of the complexities of housing facilities and operations, or hide the
range of responses that could be valid on some campuses.
Age and condition of student housing
By far the bulk of student housing in Canada was constructed during the 1960’s. A significant portion
of this has undergone a refit, in most cases since 2000, but there is still a large overhang of unrenovated buildings from that period.
50,000
West
40,000
Ontario
30,000
Québec
Atlantic
20,000
10,000
0
1960 or
earlier
1961-1970 1971-1980 1981-1990 1991-2000
2001 or
later
Figure 1 - Capacity (bed count) by date of construction
50,000
40,000
West
Ontario
30,000
Québec
Atlantic
20,000
10,000
0
1960 or
earlier
1961-1970 1971-1980 1981-1990 1991-2000
Figure 2 - Capacity (bed count) by date of construction or last major refit
Ernst & Young | 54
2001 or
later
April 2012
“Last major refit” was described in the survey as a refit of major building systems and envelope.
The traditional dormitory style still predominates, although a significant number of apartment style
residences have been added in recent years.
50,000
40,000
Town house (7,422)
30,000
Apartment style (25,731)
20,000
Traditional dormitory (52,203)
10,000
0
1960 or
earlier
1961-1970 1971-1980 1981-1990 1991-2000
2001 or
later
Figure 3 - Building type (bed count) by date of construction
Not all respondents completed this question, causing a small discrepancy in total number of beds
reported.
Reporting of building condition requires some judgement. In order to improve comparability
respondents were asked to base their responses on the following definitions (derived from APPA
standards):
1 - Excellent: Typically, equipment and building components are fully functional and in excellent
operating condition.
2 - Good: Equipment and building components are usually functional and in operating condition.
Service calls are responded to in a timely manner.
3 - Fair: Equipment and building components are mostly functional but they suffer occasional
breakdowns. Buildings and equipment are periodically upgraded to current standards and usage, but
not enough to control the effects of normal usage and deterioration.
4 - Poor: Equipment and building components are frequently broken and inoperative. Normal usage
and deterioration continues unabated.
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April 2012
1960 or
earlier
1961 to
1970
Excellent
1971 to
1980
1981 to
1990
1991 to
2000
2001 or
later
ex: N=8240
Good
Fair
Poor
Figure 4 - Building condition by date of construction or last major refit (bed count)
The same question (with appropriate definitions) was asked regarding room condition. Results were
very similar, although reported room condition in older buildings tended to be slightly better than
building condition, indicating the some facilities may have undergone renovation but not refit.
1960 or
earlier
Excellent
1961 to
1970
1971 to
1980
1981 to
1990
1991 to
2000
2001 or
later
ex: N=8226
Good
Fair
Poor
Figure 5 - Room condition by date of construction or last major refit (bed count)
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April 2012
Existing stock: financing and debt
Sources of financing were reported as a percentage of the total, by building, for construction since
1991. This is shown below as the effective number of beds financed from each source, calculated as
number of beds * percentage of financing, per building, totalled over all buildings.
2001 or later
1991-2000
0
5000
Internal
10000
External
15000
Gov't
20000
Debt
Figure 6 – Financing methods weighted by number of beds
Some government financing was available in the earlier period, but this has effectively disappeared.
While there is an increase in the use of internal funds, debt is still the main source of financing used.
Years’ debt outstanding is shown below by date of last major refit – the refit rather than construction
date was selected on the assumption that this may require re-financing.
45
40
35
30
25
20
15
10
5
0
1950
1960
1970
1980
1990
2000
2010
2020
Figure 7 - Years' debt outstanding vs. date of construction or last major refit
While there are a number of factors to consider in interpreting this data, the more recent (post 1980)
points suggest that 30 year debt is typical. The explanation for the outstanding debt on 1960’s and
1970’s construction and for the apparent outliers on the chart is not clear, and no attempt was made
to obtain further explanations.
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April 2012
For the existing housing stock, the development model reported, by building, was:
►
►
►
(66) – Traditional: design-bid-build;
(5) – Partnership: design-build; and
(3) – Partnership: design-build-finance-maintain.
Plans for future acquisition
The range of options under consideration for future housing development is broader than has been the
case in the past. The following tables show the approaches under consideration for future
development, by region. Note that any given institution may be considering multiple models, so the
total is greater than the total number of survey respondents.
Development models under consideration
Traditional: design-bid-build
Partnership: design-build
Partnership: design-build-finance-maintain
Private development: lease/leaseback
Private development / ownership
Atlantic
4
1
Québec
6
1
Ontario
14
6
4
4
4
West
10
4
4
4
1
total
34
10
9
9
5
Ontario
8
3
1
13
West
8
3
3
11
total
23
13
7
34
Financing models under consideration
Interfund transfers / internally financed
External contributions (non government)
Government contributions
Debt financing
Atlantic
5
2
3
3
Québec
5
7
Operations
As noted in the main report, routine maintenance and custodial work are the only areas where there is
significant private sector involvement – generally speaking, universities prefer to maintain close control
over the operation of their residences. Of the institutions reporting, only two report fully private
operation in key areas ,including room assignment, fee collection, and operation of student life
programming.
All but one respondent (of 47) indicated that student life programming is integral to student success.
Nine consider that it can be delivered by a third party with appropriate oversight; the remainder
indicate that it is a core service that must be delivered by the institution.
Pricing and cost recovery
Six institutions indicated that room rates are based on a twelve month period versus 41 indicating that
they are set on the basis of the academic year. Rates are generally set according to room type
although these may vary from building to building. In some cases (4 of 41) rates may in some cases be
adjusted in consideration of debt service or operating costs of a specific building.
Fifty-five percent of respondents indicated that it is generally possible to set room rates to cover all
Ernst & Young | 58
April 2012
costs. The costs considered when setting room rates include (of 46 responses):
Debt service payment
Operating and routine maintenance
Provision for major maintenance
Administrative costs (student housing service)
University overhead
38
45
34
44
26
There was some ambiguity in the question regarding cost recovery and, while these can be taken as
good general indicators, there was some inconsistency apparent in the responses.
Seventeen institutions indicated that room rates are influenced by local market rates while 30 report
little or no such influence.
Other operations and revenue sources
Questions regarding other operations and revenue sources provide some general information, but were
likely not sufficiently detailed to capture all the nuances of such operations. Broad general conclusions
are summarized here.
Of 53 responses, the following additional revenue sources were identified:
Transient or walk-in, e.g. hotel (summer)
Convention or group clients, e.g. conference centre (summer)
Convention or group clients, e.g. conference centre (fall-winter)
Specific educational programs, e.g. executive development
Visiting faculty or guests
Other
42
43
16
16
27
12
Eight of the respondents indicated that net revenues from hotel and convention revenues were not
sufficient to offset the additional wear and tear on the building caused by these uses.
The revenues from these activities varied widely – most institutions indicate that hotel and convention
activities generate less than 10% of total revenues from residences, but in a few cases it is over 20%.
In general it appears that smaller operations (by total bed count) generate more revenues from hotel
and convention operations, but this is certainly not true in all cases.
Student housing operations at some institutions receive additional revenues from meal plans, retail
activities, and parking services. This was identified but not quantified in the survey.
Ernst & Young | 59
April 2012
Participating universities by region
Atlantic
Memorial University of Newfoundland
University of Prince Edward Island
Dalhousie University
Atlantic School of Theology
Nova Scotia Agricultural College
Université Sainte-Anne
St. Francis-Xavier University
Université de Moncton
Mount Allison University
St. Thomas University
Québec
Université Laval
McGill University
Université de Montréal
Université du Québec en Abitibi-Témiscamingue
Université du Québec à Chicoutimi
Université du Québec en Outaouais
Université du Québec (Québec)
Université du Québec à Trois-Rivières
Ontario
Algoma University
Brock University
Carleton University
University of Guelph
Thorneloe University
Laurentian University
McMaster University
Ernst & Young | 60
Nipissing University
University of Ottawa
Queen’s University
Renison University College
Ryerson University
St. Jerome’s University
Saint Paul University
Trinity College
University of Waterloo
The University of Western Ontario
University of Windsor
York University
Western
University of Manitoba
Université de Saint-Boniface
Luther College
University of Alberta
University of Calgary
University of Lethbridge
University of British Columbia
Simon Fraser University
Thompson Rivers University
Trinity Western University
Vancouver Island University
University of Victoria
University of Northern British Columbia
April 2012
Annex 2: Literature review references
ALI-CHOUDHURY, R. BENNETT, R. & SAVANI, S. (2008) University marketing directors’ views on the
components of a university brand, International Review on Public and Nonprofit Marketing.
Berger, J. B. (1997). Students’ sense of community in residence halls, social integration, and first-year
persistence. Journal of College Student Development, 38, 441-452.
Blimling, G. S. (1993). The influence of college residence halls on students. In J. C. Smart (Ed.), Higher
education: Handbook of theory and research. Volume IX (pp. 248-307). New York, NY: Agathon.
BRIGGS, S. (2006) An exploratory study of the factors influencing undergraduate student choice: the
case of higher education in Scotland, Studies in Higher Education, 31(6).
If Price, Fides Matzdorf, Louise Smith, Helen Agahi, (2003) "The impact of facilities on student choice
of university", Facilities, Vol. 21 Iss: 10, pp.212 – 222.
Gilmour, J., et al. 1978. How High School Students Select a College. University Park, Pennsylvania:
Pennsylvania State University (ED 208 705).
Noel-Levitz College Admissions Study. 2002. Prospective Students on Campus Visits Pay Attention to
More Than Party Life, Survey Finds. The Chronicle of Higher Education, May 3.
Paine, Dorothy E. (2007). An exploration of three residence hall types and the academic and social
integration of first year students (Unpublished master’s thesis). University of South Florida, Tampa, FL.
Pascarella, E. T., & Terenzini, P. T. (1991). How college affects students. San Francisco: Jossey-Bass.
Pascarella, E.T., Terenzini, P.T., & Blimling, G. S. (1994). The impact of residential life on students. In
C.C. Schroeder & P. Mable & Associates (Eds.), Realizing the educational potential of residence halls.
San Francisco: Jossey-Bass.
Peterson, H. V. 1999. The Campus Environment and Learning. Facilities Manager (May/June).
Reynolds, G. L., & Cain, D. (2006). The impact of facilities on the recruitment and retention of
students. Facilities Manager, 22(2), 54-60.
Ernst & Young | 61
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Annex 1

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