A Public University/Private REIT Partnership in Portland

Portland State University (PSU), the institution of higher learning with the highest enrollment in Oregon, is an urban university downtown experiencing dramatic growth. Since 1998, enrollment has increased nearly 67 percent from 18,000 to 30,000 students and is projected to hit 50,000 by 2030. To pursue its objective of having 25 percent of its students living on campus by that time, PSU has partnered with Austin, Texas–based American Campus Communities (ACC) to build University Pointe at College Station, a 16-story, 282-unit, 978-bed building that opened last September and increased the campus’s housing capacity to about 3,200 beds.

Though the building is taller and its $87.8 million cost higher than that of the ten-story, $47.4 million Broadway student housing project immediately to its west and completed eight years earlier, its impact on the area has been softened through design. University Pointe was divided into five stacked “neighborhoods” of about 55 units each, making the college dormitory living experience far less formidable. Each neighborhood has a three-story social lounge with glass walls overlooking downtown Portland; the upper two floors of each neighborhood have balconies overlooking the lounge. A laundry area for each neighborhood adjoins the lounge, and study rooms are stacked above it.

The neighborhood concept was developed for this project in a Portland design charrette conducted by Portland-based SERA Architects, PSU, and ACC to address their objectives for interaction in a vertical community. They attempted to re-create in each three-story neighborhood the visual socialization that can be achieved in a low-rise campus community, which is the form most of ACC’s units take. The neighborhoods promote social interaction and healthier living, which can be important for personalizing undergraduate education in a large urban university.

ACC’s primary experience is in developing garden apartment–style student housing. All but ten of its 173 student housing projects fit that more typical low-rise university campus model. Truly high-density urban universities are rare.

The neighborhood concept greatly increases spatial efficiency while necessitating fewer common facilities on each floor. It also reduces the number of elevators needed and increases their efficient operation. One elevator skip-stops at only the first floor of each neighborhood, and wide stairways connect the floors within the neighborhood, encouraging walking and socializing. Two other elevators stop at each floor to provide handicap access and ease moving and loading. The internal organization is clearly visible from the exterior in the stacked articulation, with brick bands defining each neighborhood on the facades, designed by SERA.

Four types of unit layouts replace the older model of shared rooms with only a common bathroom off a long hallway. The most prevalent is an 858-square-foot (80 sq m), four-bedroom, two-bathroom unit with a common kitchen/living and dining room. At only 8.5 by 11.5 feet (2.6 by 3.5 m), each bedroom is small and private. Bathrooms are similarly compact: four divided sinks are flanked on each end by a 5-by-7-foot (1.5 by 2.1 m) compartment with a fiberglass tub/shower and a toilet. An L-shaped kitchen/living room/dining room expands its visual space by incorporating the hallway that leads to the bedrooms and bathrooms.

Over 57 percent of all the units at University Pointe are of this four-bedroom/two-bathroom type, and they are the most prevalent at other ACC projects as well. At University Pointe, they rent for $599 to $629 per student per month. That may seem low, but with four students in each unit, the minimum monthly rent is $2,396 per unit, or $2.79 per square foot ($29.95 per sq m), which is higher than for most luxury apartments in Portland. ACC’s practice is to make rent liability purely individual, rather than use joint and several liability, as is common with other apartment units. All the University Pointe units are secured by a parental guarantee—which helps ACC secure its income stream—unless the student can show evidence of income that is three times the rent obligation during the lease.

There are also two types of two-bedroom, two-bathroom units at University Pointe with a common kitchen/living and dining area. The 759-square-foot (71 sq m) units have bedrooms on opposite sides of the unit, each with its own bathroom. Rent ranges from $794 to $824 per student per month, which is $1,588, or $2.09 per square foot ($22.52 per sq m). These are less profitable than the four-bedroom, two-bathroom units, which is why only 30 were included.

More than double that number of four-person, two-bedroom, two-bathroom, 1,033-square-foot units were built—62 units accounting for 248 beds—with a common kitchen/living and dining area. Though these have the lowest rents per student at $519, or $2.01 per square foot ($21.64 per sq m), they were the slowest to rent. ACC converted more than three-quarters of them on a temporary basis the first year into deluxe two-by-two units by removing a bed from each shared bedroom. That would not have been necessary if there were insufficient demand for the four-by-two units because the unrented bedrooms would simply have been locked, inaccessible to the other occupants.

Thirty units have 450 square feet (42 sq m) of space and are intended for single occupancy; rents range from $1,224 to $1,259 per month, or $2.72 per square foot ($29.28 per sq m).

Most units at University Pointe are furnished for an additional $30 per month. All utilities are included, and a 46-inch flat-screen TV is installed in every unit. Beds in each bedroom have double dressers built under them.

PSU insisted that both classrooms and retail space be included at the 371,100-square-foot (34,476 sq m) University Pointe, which also benefits ACC because it provides an anchor tenant. A 100-seat lecture hall is situated on the ground floor, and three smaller classrooms, each seating 30 to 40, are located on the second floor. The academic space occupies 10,015 square feet (930 sq m), which PSU leases from ACC for $251,176 per year, or $25.08 per square foot ($270 per sq m), plus a $5-per-square-foot ($53.84 per sq m) common-area charge. All tenant improvements were provided by ACC, except for information technology equipment.

In addition, 5,447 square feet (506 sq m) of retail space on College Street is leased to Joe’s Burgers, TartBerry frozen yogurt, and Einstein’s Bagels, and there is a break room for TriMet transit drivers. A 9,600-square-foot (892 sq m) commons area, including a fitness center and a computer business center, is located in the interior of the first floor adjoining a sustainably landscaped community courtyard.

Ties to Transit

The genesis of the project occurred in 2004 when TriMet, Portland’s regional transportation agency, and the city of Portland began moving forward with major expansions to bring the MAX Yellow and Green lines down the Transit Mall to PSU and extend a new Orange Line through South Waterfront to Milwaukie, 7.2 miles (11.6 km) south. The South Corridor Project was designed to bring light rail to the southern central business district and PSU. To complete development of light rail along the blocks between Southwest Fifth and Sixth avenues between College and Jackson streets, TriMet used its power of eminent domain to acquire land for a turnaround and for a construction staging area.

Because the University Pointe project would be located at the MAX terminus—MAX trains turn around just south of the project, creating a public plaza within it—and would provide no parking, TriMet could designate the project a transit-oriented development and help PSU obtain the land for less than its original cost of acquisition and demolition. In addition, the city gave a density bonus of a 16th story when ACC guaranteed it would integrate green building features such as eco-roofs to absorb rainwater, a rain garden, and a community courtyard.

As part of a joint development agreement between PSU and TriMet, PSU agreed to purchase from TriMet for $7.5 million the former staging area after light rail construction was completed. But, like strapped public universities nationwide, PSU did not have the funds to acquire the land and develop student housing on it, even though operation of student housing by PSU has positive cash flow. That made selection of a private partner critical. As an equity real estate investment trust (REIT), ACC has access to publicly traded capital markets. Its subsidiary, American Campus Equity (ACE), is the largest developer and owner of student housing in the country, owning more than 70,000 beds in 114 properties as part of ACC’s management portfolio of 173 properties.

The essence of the deal structure of the public university/private REIT partnership is the removal of development, financial, and managerial risk from the university in exchange for exclusive access to a stable market of tenants for the developer. The developer shoulders all development costs and pays ground rent to the landowner for the duration of the lease. In turn, the developer requires access and support for a stable, predictable, and profitable college consumer market.

ACC’s ability to access relatively inexpensive real estate equity through public capital markets—its stock yield in December 2012 was below 3 percent—meant that it could bring its own equity to the table rather than rely on a third party and would require no public debt other than for acquisition of a leasehold interest in the land, which it leases from PSU. This was important to PSU so it could be an off-balance-sheet transaction not engaging the university’s credit.

According to Jason Wills, ACC senior vice president for campus development, this is an all-equity project. Moreover, even if there were to have been senior debt, it never would have been subordinate to the university’s ground lease. ACC has nine other ACE all-equity deals and two more under construction, Wills says. Moreover, unlike the case at University Pointe, a ground lease structure is more common when the ownership is through a tax-exempt entity in which ACC performs its financing, development, construction management, and operational services for a fee. ACC has structured and developed more than 60 communities under this not-for-profit ownership structure through a ground lease.

The base $597,000 annual lease payments by ACC cover the debt service incurred by the Oregon University System (OUS), PSU’s parent institution, issuing Oregon Section XI-F(1) bonds up to $8 million for land acquisition.

In addition to base rent, the ground lease provides for what it termed out-performance rent, which is 25 percent of the gross revenue received by ACC in any year in excess of a specified schedule of annual gross revenue hurdle rates, extending to 83 years. The term of the lease is 65 years with two ten-year options. Upon termination of the lease, PSU will own the building.

Variable rent starting in the 31st year is set according to a formula as the average proportion of prior base rent for the previous five years to the annual gross revenue in those years. ACC pays all taxes and assessments that may be charged against the land for its commercial activity, even though the land is owned by a public entity.

While PSU’s risk is greatly reduced by the public/private partnership with ACC, this benefit comes at a potential opportunity cost. The ground lease expressly precludes PSU from acquiring, leasing, developing, marketing, or managing any new student housing itself without the express consent of ACC. And while ACC may not unreasonably withhold its consent, it has acquired exclusive development rights at a fast-growing urban university. These rights even preclude support by PSU of any competing project, even an existing one, unless PSU provides ACC with a housing study that demonstrates adequate demand and that PSU’s support will not materially harm University Pointe. This right is typical of ACC’s deals, Wills says.

To offset some of its grant of exclusive development and operation rights, PSU does have the right to exercise an option to purchase the project after ten years at fair market value as determined by mutually selected appraisers. However, it may be unlikely that PSU would be able to generate adequate financing to be able to exercise its option. And, notes Mark Gregory, PSU negotiator and associate vice president, “PSU’s core competence lies in its academic programs rather than in housing development and management.” Besides, PSU does not currently have adequate capital to be able to develop equivalent student housing alone.

Moreover, University Pointe has catalyzed other private developers to build more student housing. Just to the east of University Pointe, Eugene, Oregon–based Master Capital Management has begun construction of a mixed-use building that includes 4,200 square feet (390 sq m) of retail space on the first floor, plus 54 units with 129 bedrooms, which it plans to rent separately, on the additional seven floors, creating a total of eight floors and 56,951 square feet (5,291 sq m) of space. The upper seven floors are divided into two-, three-, and four-bedroom units. Each has a kitchen area, a private bath, and a laundry closet. Because PSU did not initate, approve, or assist the Master Capital Management project, ACC has no veto over its development.

University Pointe was completed just as the 2012–2013 academic year began. Its late finish and 12-month leases may have impeded initial occupancy, but despite increasing PSU’s available housing by about 50 percent while eliminating beds through the temporary creation of the two-by-two deluxe units, University Pointe reached 90 percent occupancy in its first three months, according to Don Forsythe, PSU executive director for capital finance and business services. Students from nearby Oregon Health & Science University and Portland Community College were permitted to lease about 10 percent of the units to allow ACC to reach its occupancy targets.

While initial results might have been more robust, University Pointe has created a new stacked neighborhood model for high-rise student housing for ACC and yielded its first project in the Pacific Northwest at the largest and fastest-growing university in Oregon. PSU has gained nearly 1,000 student beds in a transit-oriented high-rise rated Gold under the Leadership in Energy and Environmental Design (LEED) program—a structure that it will own outright eventually and that will attract more residential students, many of whom will pay out-of-state tuition rates. Public/private partnerships such as this one demonstrate the mutual benefits that accrue to cash-strapped universities and risk-averse developers.