Structuring Development for Greater Community Benefit

Importance of the Financial Model

Importance of the Financial Model 

THE FINANCING SCALE OF THE BERKELEY GLOBAL CAMPUS at Richmond Bay will remain unknown until the finance partners and models are established, but it is estimated to reach $1–4 billion during the full life of the project. As this capital moves through Richmond in the form of a project managed by a public agency, there is a powerful opportunity to structure the financing so that it can support community projects linked to public benefits.

The approach that the University is considering for developing the campus is a conventional public-private partnership model under which a private developer obtains financing from private investors and builds and owns the campus buildings. To examine an alternative to this model, it is necessary to first understand the conventional approach. 

Campus Finance Parameters

Political and financial limits on financing of university projects have led the University to pursue private financing and construction by private developers. Historically, most universities have financed development through funding from a state legislature, endowment, capital campaign, or bonds. In recent years, many public colleges and universities have had to turn to private financing, often because they cannot issue further debt or because of statutory limits or other financial limitations. States are facing their own political and financial obstacles with debt and are not issuing bonds for public institutions.32 In the past, UC Berkeley relied on state funding as its primary source of funding for capital projects. As the state’s financial commitments became more uncertain, the University sought alternative debt and financing strategies. 

The University has also sought taxable financing that allows university facilities to be used by private industry. UC Berkeley, by way of the UC Regents, has issued tax-exempt and taxable bonds to finance, in part or in full, large capital projects. The University generally utilizes two types of bonds: General Revenue Bonds (GRBs) and Limited Project Revenue Bonds (LPRBs). As a non-profit organization, UC Berkeley can issue GRBs and LPRBs as tax-exempt bonds or taxable bonds. While tax-exempt bonds typically offer lower financing rates than similarly structured taxable bonds, the University has taken advantage of taxable financing. With historically low taxable rates in the markets today, UC Berkeley added more taxable bonds to its debt portfolio. Taxable bonds, unlike tax-exempt bonds, do not restrict private activity in buildings financed with those bonds. By borrowing with taxable debt, the University is free to pursue revenue-generating corporate partnerships in more of its facilities. 

However, UC Berkeley and the University of California system are at their debt capacities. As of May 15, 2015, the University of California has a current debt of almost $16.0 billion outstanding under the GRB, LPRB, and medical center pooled revenue bonds (MCPRB) credits.33 According to a scoping memo prepared by the Bay Area Council Economic Institute on the potential of public-private partnerships for financing the development of the Berkeley Global Campus, “public funding for any capital improvement or expansion of facilities in the UC system is at best severely limited. With the state’s debt capacity on a concerning trajectory, the outlook for further issuance of state debt for capital projects is constrained.” Like other institutions pursuing alternative finance models instead of taking on more debt, UC Berkeley has turned toward public-private partnership methods.34

As a project managed by a public agency, there is a powerful opportunity to structure the financing so that it can support community projects linked to public benefits. 

Public-Private Partnership Land Lease Model

UC Berkeley’s proposed approach to financing and developing the new campus is a publicprivate partnership model that involves leasing UCB land to a private developer who secures private financing. Once the University secures funding for a set of programmatic activities at the Richmond campus, such as a new research project or educational program, the University will contract with a developer to build the buildings needed for those activities. The University will offer a long-term lease to the developer for the land where the buildings will be located. The University will commit to lease the buildings back from the developer once they are built, guaranteeing revenue to the developer over something like a 20-year period. The developer will secure private financing and construct the buildings. 

This public-private partnership model allows the University to keep the debt needed for campus development off its books. It also creates a lucrative opportunity and relatively low-risk opportunity for a developer, whose repayment is promised through the education or research funding and therefore not subject to higher risk fluctuations of the market. 

Figure 1 includes a diagram of the Development Process with a Conventional Public Private Partnership Lease-Back Approach

As previously mentioned, private investors in the partnership both finance and manage the project development. Instead of the public university maintaining and operating the facilities, private investors perform this role, usually for a period of 20 to 30 years. At the end of the contract period, the facilities are transferred back to the University. Throughout the project, the private investor accrues revenue in the form of tolls or user fees, revenue guarantees, service fees (e.g. availability payments, shadow tolls, procuring authority), and/or subsidies.35

Incentives reported for private-public partnerships include: 

  • Access to capital. University of California officials have reported that the primary incentive for most university-developer partnerships is access to capital, with the possible added benefit that private partners can build and operate facilities, such as residence halls, at a lower cost and faster than the University can;36
  • Lower long-term operating costs. While tax-exempt public funding has lower initial costs, public-private partnerships can result in lower long-term operating costs through 
  • improved operations and maintenance. Public-private partnerships offer “the transfer of both front-end and long-term risk from the public partner to the private sector that can result in dramatically accelerated timelines, life-cycle savings of up to 30 percent, and performance and maintenance milestones that eliminate or reduce the costs of deferred maintenance often associated with increasingly constrained public budgets and operations capacity;”37 and
  • For-profit ventures. Public-private partnerships also allow for alternative uses of space, such as for-profit ventures, that might be prohibited under tax-exempt bond funding.38

There has been a rise in the use of this conventional public-private partnership model instead of tax-exempt public funding because of a steep decline in private debt cost and increased constraints on public debt. A public-private partnership is the finance model being considered by the UC Berkeley for the development of the Berkeley Global Campus. As of 2010, the University of California system had reported about 60 such partnerships.39 While such a model provides the financial path to development that the University needs, it is critical to note is that the private developer retains the profits generated from the project during the lease. 

  • 32. Kiley, Kevin. 2012. ‘The Other Debt Crisis. Inside Higher Ed. https://www. insidehighered.com/news/2012/04/10/public-universities-will-take-more-debtstates-decrease-spending-capital-projects.
  • 33. University of California, Office of the President. 2015. ‘Bondholder Information; Debt Summary.’ http://www.ucop.edu/bondholder-information/debt-information/debt-summary....
  • 34. Bay Area Council Economic Institute. 2013. ‘The Lawrence Berkeley National Laboratory-University of California, Berkeley Richmond Bay Campus Options and Considerations Regarding Its Development Utilizing Public Private Partnerships.’ http://www.bayareaeconomy.org/media/files/pdf/Richmond_Campus-Scoping_Pa....
  • 35. Engel, Eduardo, Ronald Fischer, and Alexander Galetovic. Public and private financing of infrastructure. EIB Papers: Volume 15, No. 1 (2010).
  • 36. Kiley, Kevin.
  • 37. Bay Area Council Economic Institute.
  • 38. Kiley, Kevin.
  • 39. Kiley, Kevin.