According to Ed Broderick, vice president for Gilbane Development Company, these partnerships are an effective way to address governmental limitations, overcome financial constraints, outsource delivery liabilities, and cut years out of the normal delivery cycle.

"Public/private partnerships combine the benefits of tax-exempt financing available to non-profit academic institutions with the efficiencies of private sector procurement and project delivery," says Broderick.

Gilbane Development Company is working with the Rhode Island School of Design (RISD) to transform an 86-year-old, 300,000-sf bank building into the school's new Living/Learning Center, current owned by Gilbane, which will include the main library along with residence spaces for nearly 500 RISD students. The first two floors of the building will house the library scheduled for completion in the summer of 2006. The remaining 10 floors will be used for student housing, including a student dining and social area, all scheduled to open in August of 2005.

RISD, founded in 1877, is a college of art and design with more than 2,000 students from around the world and approximately 350 faculty and curators. Included within the college is the RISD Museum of Art, housing nearly 80,000 works of art in its renowned permanent collection.

Why Form a Public/Private Partnership?

"P3 projects are most appropriate at institutions where capacity issues outpace current building programs and funding resources," says Broderick. "It allows the institution to outsource the project's approvals, delivery liabilities, and collaborate on the planning, yet still maintain control."

Traditionally P3 partnerships are often used for revenue producing projects such as rental housing, parking garages, recreational venues, or hospitality facilities. However, non-revenue producing facilities, such as academic institutions and research buildings, are also ideal candidates for P3 partnerships.

"P3 projects with non-profit institutions offer real estate developers the opportunity capitalize the project with a secure revenue stream from the institution utilizing tax exempt capital," says Broderick. "The non-profit partner benefits financially by having the financing structure be off balance sheet with a portion off credit. Typically, the overall structure delivers the facility to the institution in the future at a steeply discounted price. Also, P3 projects have been shown to save as much as 10 to 15 percent in overall delivery costs through privatized implementation efficiencies."

Broderick also points out however that P3 projects are subject to numerous accounting, state, local, and federal laws concerning tax issues and ownership. The opportunity presents itself whereby the ownership entity does not have real estate tax liabilities, providing another economic advantage to owning the development via a tax-exempt entity.

"Institutions should carefully review with their auditing firm, real estate, and legal counsel prior to entering a partnership of this kind," says Broderick. "For example, in some states the owner of an asset, for tax purposes, must control the property for a period that exceeds the economic life of the asset, and there are often investment restrictions set by local agencies that can vary from jurisdiction to jurisdiction."

Broderick also advises institutions to carefully consider the variety of financing alternatives available to P3 projects. He groups these alternatives into three options:

Private Equity/Taxable Debt—The real estate partner invests capital and assumes responsibility for final delivery. A long-term operating lease, with buyout options, is tailored to the institution's financial objectives.

Privatized Delivery Tax-Exempt Bonds—The real estate partner assumes responsibility for project delivery and coordinates issuance of tax-exempt bonds through a tax-exempt SPE to finance the project. A long-term capital lease is offered to the institution where the asset will revert to the institution upon termination of the lease.

Traditional Capital Campaign—This involves the traditional fund-raising efforts available to academic institutions.

RISD's New Living/Learning Center

RISD chose to use the first financing option, a combination of private equity and taxable debt, to complete its new Living/Learning Center.

In 2002, RISD had received the first two floors of the building as a gift from FleetBoston Financial. These floors will house the new Fleet Library at RISD. The library will expand from its current 16,000 sf to nearly 60,000 sf and will hold more than 100,000 volumes and 400 periodicals.

In 2003, Gilbane bought the upper 10 stories of the building from FleetBoston. Gilbane and RISD agreed to a long-term lease for the property with an option to purchase. The lease agreement states that the facility will be developed per RISD's specifications, with the option to buy the facility back from Gilbane.

Forming the Partnership

"When we first proposed this project to RISD, we knew it would take a lot of imagination to envision converting a nearly 90-year-old office building into student housing," says Broderick. "It turned out to be perfect timing though because RISD was already working with an outside architectural firm on expanding its housing options."

"Since this was RISD's first opportunity to work with a private partner, we did a lot of evaluation to determine whether the arrangement would work for us," says Fran Gast, associate vice president, facilities planning. "At first we were cautious because you do give up a certain amount of control, but after reviewing the financial benefits and quality guarantees, we realized that the approach reduced our risk and actually gave us more student housing beds than we were planning originally."

Gast added that RISD liked the fact that Gilbane was one of the city's largest employers and that they have been based in Providence, R.I., since the late 1800s.

"We felt that Gilbane's commitment to the city of Providence really mirrored our own," says Gast. "It is exciting that the synergy from our partnership will literally rescue a building that is part of the architectural heritage of the city and turn it into a tremendous asset for the future."

Other factors that convinced RISD to form a P3 with Gilbane included:

Single Point Responsibility—Working with Gilbane, RISD was able to integrate all predevelopment planning, design, financing, regulatory zoning and approvals, and construction. In addition, RISD hired a full-time project manager within the facility during renovation to ensure everything is done to RISD's specifications.

Quality Guarantees—In addition to strict scheduling guarantees, Gilbane agreed to meet a set of project performance specifications defined by RISD. The specifications did not define the actual systems, but provided Gilbane with performance requirements related to the facility's electrical, mechanical, and HVAC systems.

Fixed Project Delivery Deadlines—Gilbane guaranteed to meet fixed project milestones so that the project stays on schedule. If Gilbane does not meet the set deadlines it will pay RISD penalties. Conversely the agreement also obligates RISD to adhere to various delivery deadlines as well.

"Because we are a design school, we are probably a bit more demanding about certain design issues," says Gast. "We also have a lot of people who like to add their design opinions, so at times the fixed deadlines helped our team to stay on track."

Gast added that judging from this first P3 project, RISD would consider entering into similar projects in the future.

"Although every project needs to be reviewed on a case-by-case basis, it's hard to dispute the benefits of working with a private partner, including guarantees on both delivery and quality and financial incentives," says Gast. "This would be especially true for academic institutions that are near the limit of their bonding capacity or for schools that want to defer the use of bonds for a particular project."

By Amy Cammell

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