Development Management for a Third Party

University Lofts, housing for graduate, married, and international students attending Georgia State University in Atlanta, broke ground on the 25th of April 2001, with occupancy in the Fall Semester of 2002. Nearly a quarter of Georgia State University’s student population consisted of graduate students.

Officials within the University and others connected with University Lofts stated that this project represented the next step forward for colleges and universities in their housing development programs.

“A project such as this is ideal because it allows us to use our precious resources on other priorities such as student financial aid and faculty and staff support. This housing will help us continue to attract outstanding students who want to live near the campus so they can participate more fully in campus life.”

– Dr. Carl V. Patton, President of Georgia State University, 2002

Georgia State appointed Brookwood for Advisory Services and Development Management Services.

George Heery, Chairman and CEO of Brookwood Group at the time recalls, “Dr. Patton told me of their need for this housing but said they had no money to commit to the project in the foreseeable future, had no land for the project, and could have no financial exposure of any nature to the project. We knew further that Dr. Patton and his colleagues at Georgia State felt strongly about improving the architectural character and urban environment of the campus. We knew of their strong feelings about design issues because we were managing the design and construction of the new $35 million Georgia State Student Recreation Center. We knew of Carl Patton’s critique for the architects of that project and knew of his strong background in urban planning and commitment to improving the urban fabric of the City.”

Heery continued, “We found that the University wanted the housing department at Georgia State to manage the project because University officials believed that once their students were directed to the new facility as possible housing, the University would not be able to walk away from management issues. We also knew the University would be concerned about management and operating costs and hoped this project could be the beginning of an attractive university village.”

From Need to Financing

It is relatively easy for a college or university to procure “privatized” housing for its students. There are a number of developers in this field who can arrange financing and can design and build the housing. AU the institution Housing for Graduate, Married and International Students of Georgia State University in Down town Atlanta has to do is demonstrate the demand and agree to “send students”.

However, such a simplistic approach has, in the past, often resulted in problems.

These problems can range from unattractive buildings to high maintenance-cost buildings, high operating and replacement costs for the mechanical and electrical systems, and higher than necessary costs due to the lack of competition for the design and construction as well as higher financing costs.

With these drawbacks in mind, Georgia State University authorities were determined to get better architecture, a better quality building with lower operating expenses, and the lowest financing costs possible. “This is what we feel we are accomplishing with University Lofts”, said Larry Kelley, Assistant Vice President for Finance and Administration at Georgia State.

Here is how the project went from the point of recognizing the needs and the constraints to being fully financed with AAA tax-exempt bonds and ground breaking:

1. Brookwood Group was appointed as the University’s Consultant and Development Manager in early 2000.

2. Brookwood Group (“Brookwood”) reviewed the field of possibilities and, with the University’s concurrence, invited The University Financing Foundation, Inc. (“TUFF”) to be the financing vehicle and non-profit owner of the project. At that time TUFF was headed by J. Frank Smith as its President and Chairman. C.M. Lampman was TUFF’s General Manager. Frank Smith and other directors were Georgia Tech Alumni who originally created TUFF to help Georgia Tech with project financing for income-producing non-profit projects. TUFF had worked with Georgia State on the Rialto Theatre project and was helping other institutions of higher learning both in and outside Georgia. To financially isolate each of its projects from the others, TUFF formed single member limited liability companies for each project; TUFF/Atlanta Housing, LLC was formed to pursue this particular project.

3. Brookwood then designed preliminary prototype dwelling units for the students and defined a search area for the project. It designated a suitable site area in close proximity to the University in accordance with the University’s perception of the desires of students. With these points decided, Brookwood developed a total capital budget for the project, including all hard, soft, legal, and financing costs and contingency funds. It also developed a projected operating proforma for the project, in turn determining the rent required of students. In order to keep the rents as low as possible, Brookwood and TUFF/Atlanta Housing, LLC structured the financing based upon the assumption that the project would not have to pay property taxes and that tax exempt bond financing could be obtained to keep interest rates low.

4. Brookwood then set about determining whether or not there was sufficient demand for the apartments at the rental rates that would be required to retire the debt. As a means of determining demand with a fast and accurate survey, a website was designed, which was novel at the time. The website illustrated approximate location, the different types of units as illustrated by floor plans, and questions regarding desired amenities. The website also explained plans for including furnishings, all utilities, telephone service, CampusNet service and connections for cable television. In advance of finalizing the website with its questionnaire, Brookwood selected Robert Charles Lesser & Co., a real estate market analysis firm, to review the data-gathering plan. Also, TUFF/Atlanta Housing, LLC was asked to review the proposed methodology and survey data. The website was constructed with the help of the Applied Research Center at the University, which also sent out more than the 900 e-mails to 7,700 graduate, married, and international students. Gifts of two Palm V personal digital assistants and three $100 gift certificates to the University Book Store were provided by Brookwood for a drawing from among those responding. Over 350 of the students responded with fully completed questionnaires. Subsequently, 100 of those responding were questioned individually by telephone to be sure they understood the costs and unit types proposed to be in the facility. The results were turned over to Robert Charles Lesser & Co., who, in turn, analyzed the data and gave the conclusions issued in a report. The report indicated a demand for at least 200 units for about 400 students included in the identified categories.

5. It was recognized that finding a suitable and available site near the campus in Georgia State’s downtown Atlanta location would be difficult and expensive in comparison to most other colleges and universities. After exploring in some detail several other alternatives, Brookwood, with the help of President Patton, worked out a long-term ground lease with the Grady Health System (Fulton-DeKalb County Hospital Authority) for a site which was then being used as a surface-parking lot immediately adjoining the Georgia State campus. The site is near Georgia State’s Alumni Hall, which housed the University’s executive offices and other facilities as well as the University’s Child Development Center. Fronting on the South side of Edgewood Avenue with frontage on both Piedmont Avenue and Auditorium Place, the site consists of 1.49 acres. The ground lease is for forty (40) years, the maximum Grady is allowed to grant under its charter.

6. Brookwood then prepared a “Bridging” type RFP (Request for Proposal) and received proposals from three companies. Student housing developers, design-build companies and general contractors (with an architectural firm other than Brookwood Group as their architects under the requirements of Brookwood’s RFP) were invited to submit proposals for the design and construction based on the RFP. Three companies responded --- all general contractors. After negotiations with the low bidder, Beers Construction Company was selected as the design-build contractor with the firm of Lord, Aeck and Sargent as their architects. Lord, Aeck and Sargent had participated earlier with Brookwood under a separate engagement in preparing preliminary designs for the RFP. A Bridging type RFP ties down the project’s requirements and design guidelines in much more detail than is normal in the typical design-build RFP. In this case the RFP was made up of: detailed plans of the apartment units, the number of each required, the building’s appearance and general plan, performance specifications, general and special conditions; and the required form of agreement between the Owner and the Contractor.

7. TUFF/Atlanta Housing, LLC appointed Merchant Capital of Atlanta to develop a plan to finance the project and to serve as Underwriter for the planned issuance of 30-year term tax-exempt bonds. Merchant Capital, in turn, invited the Fulton County Development Authority to be the issuer of the bonds and then set about evaluating numerous financing options. These options included non rated bonds, stand alone “BBB” rated bonds and various forms of credit enhanced bonds ranging from “A” to “AAA” rated bond insurers and letter of credit banks. Although “AAA” rated bond insurance that included coverage of the construction risk was clearly the preferred option it was not certain that this option would be available given the financial and long term contracting constraints that the University was required to operate within.  After discussions among Brookwood Group, Beers Construction, Merchant Capital, TUFF/Atlanta Housing, LLC and Ambac a structure was agreed upon that enabled Ambac Assurance Corporation of New York to issue their insurance commitment insuring the timely payment of the principal and interest on the bonds. This insurance policy, which extends for the term of the financing, allowed the bond issue to receive an “AAA” rating from Standard & Poor’s Corporation thus significantly reducing the interest rate at which Merchant Capital was able to market and underwrite the bonds.

8. In order to meet the requirements of a legal opinion rendered upon the proposed bond issue and enable it to qualify for a tax exempt status, Georgia State University Foundation organized a single member entity, University Lofts, LLC, to act as the Lessee for the facility under a non-recourse lease in order for it, rather than TUFF, to lease the beds in the units directly to the GSU students. In turn, University Lofts, LLC entered into a one-year renewable contract with the University for its Housing Office to manage the housing and parking facility. At the same time the University entered into an “Inducement Agreement” with TUFF/Atlanta Housing, LLC that, in effect, promises to give equal effort to rent the units to students as it does for other University residence halls, to have an effective rent collection policy, and not to compete directly with this project with other similar residence halls unless it maintains the debt coverage ratio specified in that Inducement Agreement.

9. In early April 2001, Ambac issued its rating letter, and on the 25th of April 2001, Bond Counsel, James P. Monacell, Esq. of Smith, Gambrell & Russell, LLP, held the closing, at which time a number of agreements were triggered, including:

• the Ground Lease with Grady;

• the Facility Lease between TUFF/Atlanta Housing, LLC and University Lofts, LLC;

• the Management Agreement between University Lofts, LLC and the University;

• the Inducement Agreement between the University and TUFF/Atlanta Housing, LLC;

• the final Development Management Agreement between Brookwood Group and TUFF/Atlanta Housing, LLC, and

• the Construction Agreement between Beers and TUFF/Atlanta Housing, LLC.

Prior to that time, the Fulton County Development Authority had issued the bonds.

The bond sale took place in New York City on the 6th and 7th of April 2001. The bond issue was for $40,000,000 in tax-exempt and $440,000 in taxable bonds. An average interest rate of 5.1% was realized. The closing was completed by 12:30 PM on April 25th. By the end of the day Beers had already moved onto the site, cleared it and laid out the foundation caisson locations.

University Lofts is a 14-story loft style building for housing 397 graduate, married, and international students with an adjoining 362 space student parking deck. The facility includes street level service retail oriented to students’ needs, a coin laundry, a multi- workstation computer room with document copying and a facsimile facility as well as a conference facility for University conferences and meetings.

Apartment units in the building will vary from 4- bedroom units, with one student per bedroom along with kitchen, living and dining areas, to a majority of 2- bedroom units, to studio style apartments along with one-, two-, and three-bedroom units for married students.

The building’s entire frontage lies along the south side of Edgewood Avenue, between Courtland Street and Piedmont Avenue. A contiguous secure parking facility for the exclusive use of the residents of University Lofts and other students and faculty will be entered from Piedmont Avenue and will include landscaping and trellises along Piedmont and Auditorium Place.

Also, the Piedmont facade of the parking garage has been given architectural treatment in accordance with the City’s new requirements on parking garage design.

The total number of student “beds” in University Lofts is 397. However, the total number of “beds”, counting accommodations for spouses and children, is 499.

“These student apartment units are not anything at all like typical undergraduate housing,” said George Heery. “Using the method of financing and procurement procedures that we used on this project, we can obtain high-quality undergraduate housing in other student housing projects, depending on amenities, in the $400s to $500s per month per bed in low-rise buildings on institution-owned land. This would include furnishings, telephones, cable TV connections and Campus Net service. In this project, however, the students, by survey, indicated they would be willing to pay for these larger apartment units, designed for graduate and married students, in the range of $750 per month per “bed” if the facility were located at the campus; were fully furnished, and all utilities and other services were included.”

One major cost factor in the project was that Georgia State University, located in an urban area, did not have any land available, whereas most colleges and universities can hold down their cost by using land they already own. A second important cost factor, but of lessor importance, was the streetscape improvements required by the City of Atlanta Planning Department in order to issue the Project building permits.

Driving Factors

Even with these large apartments developed on relatively high-cost land, because of the money saved through the tax-exempt bond financing and the arms- length procurement methods employed, the student ends up saving close to $200 per month per “bed” as compared to other furnished, full service apartments in comparable locations.

There would likely be some changes required in the financing structure for a privately owned college or university. Nevertheless, the overall project cost savings to be obtained through this professional development management approach can still be attained and passed-through to the student residents in the form of lower rental rates.

Major Steps in a Typical Student Housing Project

In this example, the college or university will lease land it already owns for the project.

1. The college or university (“Institution”) appoints the Development Manager (“DM”) to represent the interests of the institution as well as the interest of the ultimate project owner.

2. DM and Institution identify project requirements, rental rate targets, participants, and site(s).

3. DM develops project concept including preliminary prototype student dwelling units, other facilities, and amenities. DM and Institution make financing structure decision and site selection. DM then develops preliminary overall capital cost model and an operating profom1a to determine rental rates, debt service and all cash flow needs.

4. DM and Institution, often with involvement of third party real estate survey firm, conduct market study to determine demand for number, type and mix of student dwelling units.

5. DM and Institution select a suitable 50l(c)3 entity to serve as Owner/Borrower and select an underwriter. DM and Underwriter prepare information that demonstrates the demand, mix of dwelling units proposed, other facilities and amenities desired and rental rates for the student housing project for financing proposals.

6. DM prepares schematic design, design development documents and a Request for a Design/Build Construction proposal. DM evaluates bids from qualified teams of housing developers and/or contractors with their architects and engineers and negotiate lump sum price contract with the successful bidder.

7. The DM and the Underwriter complete the legal agreements among the Institution, the project Owner, the property management entity, the Lender and the Guarantor of the project financing and close the financing arrangements. In tax-exempt bond projects this usually involves a bond insurer.

8. Contractor completes the detailed design and engineering for the project, obtains building permits and carries out construction (previous planning approvals having been obtained by OM). DM helps the Institution plan and procure its furnishings and other systems not called for in the Design-Build contract.

9. DM administers the Design-Build Contract work through to completion on behalf of the Owner and the Institution.

10. DM assists Institution in planning the marketing and management of the facility.