Avoiding financial problems in P3s

By Howard Zweig, industry chair / attorney, and Karl Camillucci, associate, of Taft. Full bios below.



Increasingly, universities in need of new facilities have turned to public-private partnerships (commonly known as “P3s”) as an alternative to traditional delivery methods for the design, financing, construction, and management of various types of buildings, including student housing, classroom space, laboratories, and athletic and exhibition facilities. Compared to projects procured through a typical design-bid-build process and financed directly by a university, P3s offer many advantages, including a streamlined procurement process; more efficient project design, construction, and delivery; and privatized financing, operations, management, and maintenance of the completed facility. While these attributes of P3s are valuable, P3s also pose distinct challenges with respect to budgeting and finance. Fortunately, universities considering P3s can overcome these challenges by knowing potential pitfalls and planning accordingly.


Budgeting and Finance Challenge of P3s, #1: P3s May Involve Uncertain or Aggressive Underwriting Assumptions

Universities should thoroughly vet the underwriting analysis prepared by their underwriting partners to ensure that the project will be financially feasible. In many P3s, the university will identify a particular revenue source to be generated by the completed project as the primary means of repaying bonds issued to finance construction. An underwriting firm will prepare a pro forma analysis that includes revenue and debt service projections over the term of the bonds. These analyses often rely in part on historical data from the university and from other universities with similar revenue-generating facilities, as well as on other data. Universities should scrutinize the pro forma revenue assumptions and projections carefully, especially if a university does not have an extensive track record operating the type of facility that will be constructed and operated through the P3.

For example, in the case of a P3 student housing facility, revenue from payments made by students to live in the housing facility is often used to pay debt service on bonds, as well as other expenses, such as the cost to operate and maintain the facility and the fees charged by the P3 partner for managing the facility. Underwriters make assumptions about occupancy percentages, the amounts to be charged to live in the facility, the amounts that will actually be collected from students living in the facility, and the costs of operating and maintaining the facility, among others. If any of these assumptions is materially incorrect, then the revenue from the facility may be insufficient to pay debt service and other expenses.

The risk of flawed underwriting assumptions is particularly high in certain circumstances. For example:

  • Universities that historically have served commuting students may not be able to predict with certainty the demand for student housing or the housing fees students are willing to pay.
  • Universities that serve primarily lower-income students may not be able to collect as high a percentage of student housing fees as compared to universities that serve more affluent students.
  • Certain facilities may experience greater-than-expected wear and tear and, therefore, incur greater–than-projected maintenance costs.

All of these factors may result in revenue deficits that can jeopardize the financial health of the project.

Universities may wish to consider advocating for more conservative revenue projections to provide a “cushion” in the event that actual revenues are lower than projected revenues. Although this strategy may reduce the size of the debt that can be financed, it also will reduce the risk that actual revenues are insufficient to pay debt service. The consequences of insufficient revenue can be dire. In some cases, universities may be responsible for paying any shortfall between the amount of available revenue and the amount of debt service due (see below). Such payments may force the university to divert funds from other important uses, which may compromise the university’s mission or disrupt its operations.

Even if the university is not required to pay the shortfall, the university may be required to take other actions to increase revenue available to pay debt service. Those actions may also be costly or disruptive to university operations.

In the worst-case scenario, if debt service cannot be paid, the university’s partner may default on its financing, which could cause the bond trustee to foreclose on the project. In many cases, the P3 partner must grant a leasehold mortgage to the bond trustee in connection with the bond financing. In the event of a bond default, the bond trustee may have the right to foreclose on the leasehold mortgage and become the owner of the project. In that circumstance, the bond trustee may have the power to take various actions to ensure that bondholders are repaid. Such actions could include assuming management of the project or selling the project and using the proceeds to pay bondholders. In that event, a university would lose much control over the facility and the activities within it. Although bond default and foreclosure may be a low-probability risk, the magnitude of harm to a university in the event of default and foreclosure can be severe.

Few good options exist when revenue is less than what was projected to pay debt service. Proper vetting of underwriting assumptions before closing is therefore critical to protect universities. Minimally, universities should engage all university stakeholders who are relevant to evaluating the underwriting assumptions applicable to a project. Those stakeholders may include finance and budget staff, facility management staff, programming staff, student affairs staff, and university counsel. If the project is novel in some way and, therefore, in-house university staff may not have the experience and information necessary to properly evaluate proposed underwriting assumptions, universities should consider engaging an independent consultant who can provide an objective critical analysis of the underwriter’s work. Although many, if not most, underwriters use good faith efforts to prepare accurate assumptions, underwriters do not have a fiduciary relationship with a university. An underwriter’s interest in “closing the deal” may diverge from a university’s interests in more conservative financial planning. An independent consultant can help ensure that the underwriting analysis will not expose a university to undue risk.


Budgeting and Finance Challenge of P3s, #2: P3s May Involve University Liability for Revenue Shortfalls

Because many P3s are financed by the ground lessee, rather than directly by universities, university staff may believe that they have little responsibility for the payment of debt service on the bonds issued to finance construction. In fact, universities often have significant obligations to ensure that revenue is available to make debt service payments. Such obligations vary by project and can fall anywhere along a continuum from an upfront contribution of cash, to a full guaranty of debt service payments, to lesser obligations designed to ensure minimum utilization of the facility (including, without limitation, in the form of master leases, occupancy guarantees, and first-fill agreements), or a combination of such obligations. Performance of these obligations can have a significant impact on a university’s finances and operations.

Failure to be aware of and prepared to comply with such obligations could be an existential threat. Universities must:

  1. have policies and procedures in place to ensure that senior officials with appropriate expertise are aware of the university’s obligations in the event of any revenue shortfall;
  2. take proactive steps to identify potential weaknesses in revenue as soon as possible (and preferably before any shortfall occurs);
  3. have the authority to take necessary actions to prevent a shortfall; and
  4. if necessary, have the authority to comply with the university’s obligations in the event of any shortfall.


Budgeting and Finance Challenge of P3s, #3: P3s Require Succession Planning

Perhaps of greatest importance, most P3 projects will outlast the tenures of the university officials who participate in planning and first implementing them. After the departure of those officials, lost institutional knowledge can lead to critical misunderstandings between the university and its P3 partners or failures by the university to abide by the terms of the P3. The complexity and distinct terms of each P3 project exacerbate this risk. Lost institutional knowledge is particularly problematic with respect to university staff responsible for budgeting, revenue, and finance. If successive generations of such staff do not understand the financial structure of a P3 project and the university’s obligations within that structure, they will be ill equipped to monitor the project’s finances and take appropriate actions to ensure the project is financially healthy. If underwriting assumptions are too aggressive and the project has revenue shortfalls, as described above, issues that are relatively minor at first can quickly become critical problems that are difficult to resolve.

Transferring the knowledge and understanding of retiring officials to their successors is a daunting but critical challenge. Universities should develop detailed succession plans to ensure that future university officials will understand the terms and provisions of, and the university’s rights and obligations with respect to, each P3 partnership and project.



P3s in the university setting became more common within the last 10–15 years. Many projects are only a few years old. As time passes, the university community will continue to learn about the potential financial pitfalls of P3s and actions that universities can take to avoid them. Nevertheless, the importance of careful planning before and after implementation has been demonstrated and documented. P3s are long-term commitments that can significantly impact a university’s finances and operations. Universities should work with counsel and other advisors to understand the proposed underwriting assumptions and financial structure of a P3, and to negotiate and document the P3 transaction structure that best achieves the university’s goals and protects the university’s interests. Additionally, universities should develop policies and procedures, and engage in detailed succession planning to ensure that university officials will be prepared to protect the university’s financial interests and comply with its financial obligations over the entire term of the P3.



HOWARD ZWEIG is an attorney at Taft Stettinius & Hollister LLP, and chair of the firm’s Education Practice Group. He advises higher education and nonprofit institutions in nearly all areas of law that these institutions encounter, from real estate to contracts to general business, operational and authority issues. He works closely with his clients, which include nationally recognized universities, to understand and respond to their unique challenges and needs.

One of the areas in which Howard has significant experience is representing colleges and universities in public-private student housing transactions. He represented five national universities in projects for an ambulatory surgical center, 550-bed facility with a 50,000 square foot academic facility, a 1,000-bed facility, a 900-bed facility, a 440-bed facility and a 325-bed facility, respectively. Each project involved a public-private venture, a long-term ground lease and tax-exempt financing.

Howard is a long-standing member of the National Association of College and University Attorneys and the Higher Education Real Estate Lawyers. Prior to attending law school, he studied architecture and urban planning at The Cooper Union and was the recipient of the Henry Adams Award from The American Institute of Architects.


KARL CAMILLUCCI is a member of Taft’s Public Finance & Economic Development, Real Estate, Land Use, and Local Government groups. Karl focuses his practice on all aspects of obtaining the governmental financial assistance and approvals necessary for the development of real estate, infrastructure, and utilities. His practice includes the areas of municipal bonds and other securities, tax increment financing and other tax incentives, public-private partnerships, land use and zoning, and general state and local government representation. Drawing on years of experience as outside general counsel to units of local government and nine years of experience before law school working in local government, politics, and association management, Karl helps clients navigate complex legal, political, and bureaucratic processes to accomplish their finance and development goals.  

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