Eastern Michigan University is making P3 play transform dormitories

Eastern Michigan University’s efforts to bolster the attractiveness of students through housing refurbishment reached a milestone this week in financing, with a projected underwritten issue price of $ 210 million.

To reduce financial risk and maintain an off-balance sheet loan, the university turned to a public-private partnership. The revenue bonds will be sold by the Public Finance Authority, the national customs services agency based in Wisconsin, on behalf of Eastern Michigan University Campus Living LLC as part of the university’s Welcome Home 2025 plan.

The university is looking to renovate almost all of its student housing stock after decades of neglect that have lowered its attractiveness to attracting students, retaining high school students and attracting graduates to campus life.

Rendering of the renovation of Eastern Michigan University student housing, built through a public-private partnership and funded by municipal bonds worth $ 210 million.

East Michigan U.

“This is a key milestone for the university and the quality of our student experience, and I look forward to seeing how these new spaces will support student growth and success in the years to come,” said James Smith, president of Eastern Michigan University in October. groundbreaking project.

The Ypsilanti School, 40 miles west of Detroit, is the second-oldest of Michigan’s 15 public universities. It opened in 1849 as a teaching college and has evolved into a comprehensive undergraduate and graduate institution with operating revenues exceeding $ 385 million in 2022 and 14,000 enrollments in the fall – dropped drastically from 19,000 in 2018.

The $ 210 million tax-exempt series offers a mix of serial and term bonds maturing in 2042, 2047, 2052 and 2055 with a small taxable series of $ 709,000 maturing in 2025 that will fund some reserve fund and certain issue costs.

Barclays is Senior Deal Valuation Manager Thursday. Rieth Jones Advisors is a design advisor, and Ponder & Co. is a financial advisor. Build America Mutual will provide insurance coverage.

Moody’s Investors Service gave the bonds a base bond rating for the Baa2 project based on a bond structure that includes some “speculative” elements, and an A3 university rating and stable outlook, which it confirmed. Eastern Michigan has $ 330 million in outstanding debt. Moody’s downgraded the university from A2 in March, recording losses in enrollment.

S&P Global Ratings has rated AA bonds under BAM insurance.

The underlying collateral for an off-balance sheet loan comes from a pledge of the project’s net proceeds, but the university also provides under the lease a subordinated unsecured general income in the event that the project’s income fails to meet a one-time debt service commitment.

The only member of EMU Campus Living is the Community Facility Public Private Partnership. The project team includes Gilbane Development Company as a developer, Gilbane Building Company, Clark Construction based in Michigan and AVB Inc. as designers.

“This is a first of its kind, a truly holistic campus modernization project,” said Edward Broderick, general manager of Gilbane Development Company. The company was selected through a competitive selection process.

Under this structure, EMU will lease the land on which the facilities are located to non-profit borrowers for up to 35 years.

“The EMU carefully weighed the pros and cons of self-financing the over $ 200 million needed to modernize its student facilities, but rejected this approach for several reasons,” according to an online presentation to investors.

“Self-financing of this transformative student-centered initiative would require the EMU to absorb significant debt of more than $ 200 million, which would have a negative impact on the University’s credit rating. debt burden ”, according to the presentation.

Taking on the annual debt would force the school to “drastically cut expenses on academic and other essential functions”, and a gradual approach to renovation of the housing stock would increase construction costs and delay benefits.

The University’s Board of Regents approved the final lease agreement and other documents in June, paving the way for the bond issue. Under the agreement, EMU Campus Living will design, build, renovate, maintain, improve and operate most aspects of the buildings in the University’s housing system for 35 years.

In 2018, the university conducted a survey among students, research on the housing market and engaged lecturers who studied housing changes.

The university halted the planning process in 2019 due to a faculty request, and halted again in 2020 to deal with the COVID-19 pandemic. The school resumed planning last year, selecting Gilbane as the operating partner of the system.

Late last year, the project faced criticism from departments as some faculty questioned whether the university was privatizing its apartments through a public-private partnership.

Under the terms of the lease, housing rates will be approved by an audit committee made up of representatives from the university, EMU Campus Living and the property manager of Gilbane.

Transaction assessment “reflects the large scope of the project, primarily a lien on the project’s net proceeds, its relevance to the university’s long-term strategic plan, and the subordinate unsecured nature of the university’s lease payment in the event of a net shortfall to make debt service payments,” said Moody’s.

“Due to the university’s commitment to paying the rent, the rating is strongly linked to the credit quality of the university and its commitment to the project,” said Moody’s. The debt structure is provided by a debt service reserve fund that offsets potential temporary operational disruptions and occupancy is paid for before the reserve is disbursed.

The two-tier distinction between university rating and bonds reflects the riskiness of the project, which has a speculative component, given the limited challenges of university declarations and recruitment, as well as a subordinated commitment of the university’s unsecured income to pay for the lease. -fold coverage of debt service.

Long-term annual enrollment losses have a negative impact on the school’s credit profile and high financial leverage with moderate short-term debt amortization, as well as potential future support for the EMU Properties housing project weighs on the school’s balance sheet.

As part of a public-private partnership, another construction of new student housing at Eastern Michigan University is planned.

East Michigan U.

Moody’s expects university margins to remain low, double-digit in fiscal 2023, with direct debt service coverage of at least 1.5X, with incoming class sizes remaining stable and full-time recruiting losses low single-digit level in the fall of 2023. and the construction and implementation of the housing project will be in line with the expected deadlines and cost estimates.

The renovation will transform almost all of the college’s housing stock, with the exception of one recently refurbished building.

The project requires the construction of two new residential buildings on campus, the renovation and modernization of eight existing halls and apartments, and the demolition of seven existing facilities. The implemented project will reduce the number of beds from 4,307 to 3,041. A market investigation has shown a need for at least 3,500 beds.

Most of the buildings were built in the 1960s and had not been modernized in three decades.

“The Welcome Home 2025 EMU plan is a capital initiative that will transform student housing on campus to provide EMU students with access to high-quality and affordable housing with modern technology that meets the requirements of today’s academic world,” the school says about the project on its website . The goal is to open facilities for the Fall 2024 class.

“Recent and projected declines in enrollment reflect Michigan’s high school graduate population and the region’s competitive higher education landscape,” reads the investor presentation. The school has tried to turn the tide by better engaging with local universities, expanding online programs and targeting international students.

CreditSights views the decline in subscriptions as worrying and a risk factor for future reductions, even though it believes the risk of default is low. Using the canal outside of Michigan also reduces demand from borrowers in the state.

“We have no doubt that the improvement in housing conditions will increase the attractiveness of the EMU to future recruits, but we are concerned that the decline is severe enough to permanently undermine the attractiveness and performance of the EMU,” CreditSights said in its new release report.

“The downgrading risk and lack of tax exemption in the state suggests taking advantage of the fact that while BAM insurance packaging will help support future liquidity in the secondary market, potential investors should demand an incremental spread to protect against future liquidity losses,” report authors John Ceffalio, senior city research analyst; Patrick Luby, Senior City Strategist; and Sam Berzok, an analyst, said.

“Between revenues, debt service provision, EMIU guarantee, AA bond insurance, default on these bonds is extremely unlikely,” they wrote.

CreditSights also negatively evaluates questions about how the university deals with allegations of sexual assault in relation to fraternities, as they raise “management issues and bad press negatively affects student and faculty recruitment.”

EMU is sued in federal court by people who accuse the school of concealing reports of alleged sexual assault. The school denied any offenses related to the incidents and said it handled the complaints properly.

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