Policy Analysis | April 2015

Public-Private Partnerships (P3s) with a Design-Build-Finance-Operate-Maintain (DBFOM) Clause Related to Higher Education Buildings

Sujit CanagaRetna

Ongoing fiscal pressures on state budgets are increasingly causing states to focus on P3s as a means to generate funds to initiate essential infrastructure projects. Despite this growing reliance on P3s for major infrastructure projects, few states have offices dedicated solely to reviewing the feasibility of different P3 projects. Among the limited number of states with these independent offices, several SLC states stand out: Florida, Texas and Virginia. While P3s related to transportation infrastructure have gathered the most attention in recent years, a growing number of state and local governments also are authorizing P3s – with a DBFOM provision – in the arena of higher education-related infrastructure investments.

Specifically, seven states have laws pertaining to public-private partnership funding for state-level educational facilities: California, Florida, Kentucky, New Jersey, North Carolina, Texas and Virginia. The following sections outline the provisions of those laws and, where relevant, applications of the law to provide private funding for university facilities generally. In addition, the American Institute of Architects offers a Legislative Resource Guide on Public-Private Partnerships for Public Facilities.

California

California law has provided for P3s for transportation infrastructure since 1989, and expanded its application and authorized public entities since. In 1996, the state granted local governments authority to enter into fee-producing infrastructure projects and the broad definition of local government includes university systems:

“The phrase ‘local government agencies’ is broadly defined under the [public-private partnership] P3 enabling statutes and includes: ‘a city, county, city and county, including a chartered city or county, school district, community college district, public district, county board of education, joint powers authority, transportation commission or authority, or any other public or municipal corporation.’ California Gov’t Code § 5956.3(a)

Under this definition, the University of California has used P3s to build student housing, a medical office building, and a research lab, among other projects. A 2010 report issued by the University’s Budget and Capital Resources Office found that the research lab development was less successful than the other projects, due in part to a lack of precedent and accompanying legal framework and documents, which had to be newly developed.

The University of California’s Merced campus, the newest campus in that state’s higher education system, provides another example of the P3 approach with the DBFOM option. Given that the campus quickly realized its need to grow, i.e., double its size over the next six years, with a building program that involves some 1.9 million square feet of academic, housing and research uses, it plans to fund the expansion using a P3. In fact, this project has been termed the largest so-called social infrastructure P3 project in the United States with an estimated value of about $1.2 billion. Additional details on the project may be reviewed here.

The Washington, D.C.-based Reason Foundation prepared a report covering P3 projects and legislation in the Golden State. This document may be viewed here.

Florida

In 2013, the Florida Legislature passed a bill to extend P3s to non-transportation public development projects. The bill also created a task force to issue guidelines for a uniform process for local-level P3s. The 2014 final report recommends the authorization of the state’s University System for P3s. As the attached articles document, interest in P3 projects – including university buildings – increased substantially shortly after the legislation was enacted.

Kentucky

The 1998 Privatization Law (KRS 45A.550 to 45A.554) in Kentucky grants state agencies broad authority to enter into privatization contracts. In 2012, the University of Kentucky’s Board of Trustees authorized the University to enter a contract with a private company to build, maintain and manage all dormitories.

New Jersey

The New Jersey Economic Stimulus Act of 2009 granted the state’s universities the ability to enter into P3s, pending the review of the New Jersey Economic Development Authority, and authorized private entities from initially financing the project in total while the university maintained ownership of the property. Senate Bill 2501, signed into law by Governor Chris Christie in 2012, extended P3s for universities, including the management and operation of facilities. Several universities in the state, including Rutgers, Montclair State University and The College of New Jersey, have used public-private partnerships to fund the construction of dormitories, a multiuse campus quad, and high-rise restoration.

Included in New Jersey’s Economic Stimulus Act of 2009 were provisions to allow the use of P3s to design, build, finance, operate and maintain higher education facilities.

New Jersey’s New Jersey’s Economic Stimulus Act of 2009 allowing the use of P3s to design, build, finance, operate and maintain higher education facilities, was a significant departure from previous approaches to establish and operate higher education facilities in the state. In fact, experts studying this trend in New Jersey and other states are considering whether this is the beginning of development in terms of the role of P3s in funding physical infrastructure projects.

According to this 2009 New Jersey law, a state or county college may enter into a P3 that permits the private entity to assume full financial and administrative responsibility for the on-campus construction, reconstruction, repair, alteration, improvement or extension of a building, structure or facility of the institution. The project must be financed in whole by the private entity even though the state or institution of higher education retains full ownership of the land upon which the project is completed. While proposals for higher education P3s are eligible to be submitted to the New Jersey Economic Development Authority within 19 months of the law’s July 2009 enactment for review and approval, the proposals must include, at a minimum, the following:

  • A public-private partnership agreement between the state or county college and the private developer;
  • A full description of the project;
  • The estimated costs and financial documentation for the project (including a long-range maintenance plan);
  • A timetable for completion of the project extending no more than five years after consideration and approval; and
  • Any other requirements that the Economic Development Authority deems appropriate or necessary.
Continuing the assessment of New Jersey’s foray into this financing strategy, a monthly publication entitled Public Works Financing, published in Westfield, New Jersey, completed a report in May 2012. This report explains how a state P3 agency could procure higher education facilities under a DBFOM approach in the state. This report may be viewed here.

North Carolina

North Carolina General Statutes § 115D- 20 (13) provides community college boards of trustees the power “to enter into a public-private partnership in which all of the following conditions are met:

a. The agreement is approved in advance by the State Board of Community Colleges;

b. The board of trustees agrees to lease community college land to a private entity on condition that the entity constructs a facility on the leased land;

c. The facility will be jointly owned and used by the private entity and the community college;

d. The board of trustees is not authorized to lease the facility as lessee under a long-term lease or capital lease from the private entity as lessor;

e. The board of trustees is not authorized to finance its portion of the facility by entering into an installment contract or other financing contract with the private entity;

f. State bond funds shall not be used to pay for construction of that part of the facility to be owned and used by the private entity; and

g. The provisions of G.S. 143-341(3)a. apply to the construction of a facility under this subsection.”

The state’s public contract law was amended in 2013 by HB 857 to include provisions on P3s outside of the Department of Transportation, the traditional state government agency that experienced activities related to P3s. Importantly, this new law is not meant to affect the existing statutes, regulations, or practices for projects administered by the North Carolina Department of Transportation, nor is it meant to apply to any contract between the University of North Carolina or one of its constituent institutions.

Texas

The Texas Facilities Commission offers guidelines for P3 developments, as required by the 2011 Public and Private Facilities and Infrastructure Act, which altered Texas Government Code § 2267. The law includes institutions of higher education within its definition of governmental agencies able to finance qualifying projects through P3s, and lists the development of new education facilities within the chapter’s declaration of purpose (Texas Gov’t Code § 2267). University of Texas at Austin is evaluating a public-private partnership for the development of research facilities.

Virginia

The Public-Private Education Facilities and Infrastructure Act of 2002 allows public-private funding of any education facility, given approval by the responsible public entity.

Initiatives Promoting Greater Collaboration between Universities and Corporations via Business Incubators

Many universities and corporations benefit from co-locating and capitalize on the research, funding and energies of each entity; while universities provide the intellectual capital and energy to embark on cutting edge research in important fields, corporations have the potential to fund these initiatives and then take advantage of marketing the technologies that emerge. In an assessment of SLC states that have promoted start-up facilities, the Georgia Institute of Technology (Georgia Tech) and University of Texas at Austin provide two successful examples of housing start-up incubators. Notably, both these institutions have been highly successful in promoting start-up incubators, though Georgia does not have a law allowing P3s for educational or public facilities, while Texas does.

Georgia Institute of Technology

Adjacent to its main campus, Georgia Tech’s Technology Square houses as many as 40 start-up companies and innovation labs for established companies such as AT&T, Panasonic, NCR, Worldpay and The Home Depot. In late March 2015, there was speculation in the Atlanta media that aerospace giant Boeing was scouting sites in Midtown Atlanta for a possible research center at the Georgia Tech research hub. The flurry of new research and development centers and corporate campuses in Midtown Atlanta reflect the desire of companies to tap into Georgia Tech’s rich student and faculty talent. For Georgia Tech, the moves create a pipeline of jobs for graduates and possible private sector research dollars at a time when federal research money is harder to find.

The companies at Technology Square, literally on the campus of Georgia Tech, benefit from the network of companies in the area – start-ups can readily pitch products to larger companies – as well as Tech students and researchers. This hub of technology and business development is managed by the University’s Enterprise Innovation Institute, or EI2, which claims to be “the largest and most comprehensive university-based program of business and industry assistance, technology commercialization, and economic development” in the nation.

EI2 houses 14 programs toward technology transfer and economic development, including Startup Ecosystems, which helps governments develop strategic plans for start-up development and universities create faculty start-up programs, and Flashpoint and VentureLab, which offer organizational development tools, resources, and facilities for select start-ups.

Currently, Georgia law allows the state’s Department of Transportation to fund projects through public-private partnerships, but does not yet have a law allowing direct public-private funding for education facilities. The Georgia Tech Foundation, a 501(c)(3) corporation, built Technology Square, and EI2 is operated by the University. In the 2015 legislative session, the Georgia General Assembly passed a bill to expand the use of public-private partnerships to public facilities. The bill is pending the Governor’s signature.

University of Texas at Austin

The University of Austin at Texas has a similar branch, called IC2, which hosts the Austin Technology Incubator (ATI). In 2012, the ATI received grant money from the U.S. Department of Commerce’s Economic Development Administration to evaluate the potential for a public-private partnership to build wet lab facilities for biomedical and biotechnology start-ups. An initial feasibility study concluded the wet lab facilities would generate between $41 million and $109 million and create between 694 and 1,832 jobs. The University is collaborating with the engineering and construction firm Balfour Beatty and Estrada Hinojosa & Company, Inc. to develop additional P3 models.