UC Merced's win-win public-private partnership: who gets bilked?
UC Merced’s newest chancellor, Juan Muñoz, told the Merced Sun-Star on August 23, that about 500 students will be returning to dormitories owned by third parties, in the university's win-win public-private partnership for growth with the Australian developer, Plenary, and other national and international corporations.
These firms were identified in the August 23 article as “all local companies,” because either the new chancellor or some UC Merced flak told the reporter they were, and the newspaper didn’t care enough about journalism to check. That’s the kind of print journalism you can expect from the former McClatchy chain now that the flag ship paper of the new owners is the National Inquirer. As the pandemic continues unabated and completely out-of-control in Merced County, with about a 10-percent infection rate, how long is it going to be before the dilemma described below in the Chronicle of Higher Education comes to pass at UC Merced? It seems to us that the brunt of the risk involved in these “win-win public-private partnerships for growth,” that have been a hallmark of UC Merced propaganda since before the site was finally decided upon, will be borne by people who were far, far from that table, the actual students and their parents. On the other hand, if the entire housing program is also underwritten by the university, the taxpayers, another group not at the table, will be bilked. -- blj
Chronicle of Higher Education
How Covid-19 Exposed the Cracks in a Public-Private Housing Deal
By Scott Carlson
Mallorie Hunt, a sophomore at Towson U., is caught between the university and the private company that runs her dorm. The company is not releasing students from their housing contracts even though Towson has gone online because of Covid-19.
Julia Depuy loved staying in Paca House during her freshman year at Towson University. So when it came time for her to decide on a place to live as a sophomore, her family signed a lease in February to put her back in that building — in the very same room, in fact.
Then the pandemic hit, and she was sent home with a refund for the rest of the spring semester. In July, even though the Maryland campus still planned to reopen for the fall, she knew that all of her classes would be online, so she and her family sought to cancel the lease. The university doesn’t own Paca House, so the Depuys approached Capstone On Campus Management, a private company that runs Paca and other college housing, which denied their request. As they called around, they learned that a quasi-public economic-development corporation, not Capstone or the university, actually controlled the Paca leases, with extensive obligations to bondholders.
“You disagree with something, you just start moving up the food chain to different decision-makers,” said Scott Depuy, Julia’s father. “And we learned at that point that this same thing was going on at all the public universities in Maryland.”
A dispute in Maryland shows how public-private partnerships, or P3s, can fail to meet their core premise: spreading reputational and financial risk.
In the months since, Depuy, his wife, and his daughter have spent countless hours figuring out the highly complex world of higher education’s public-private partnerships. They’ve also worked as part-time activists, contacting other parents to lobby the university, the state, and the development corporation to get their money back, now that Towson has said it will push all fall courses online. As students like Julia sat in their rooms, locked into their leases, the Depuys could look across campus and watch students in university-owned dorms move out with refunds.
That doesn’t seem fair, Scott Depuy said. His family should be issued a refund of close to $10,000, as should other parents in similar positions.
“Our group of 12 people went to a group of about 80 people within the last four days,” he said last week, when
the first rent payment was due. “We wrote letters, made phone calls to all these people, tried to be both rational and emotional in our arguments.”
So far, the Maryland Economic Development Corporation, or Medco, which secured the bonds for the project and owns the building, has not conceded. The corporation — which is a private state instrumentality, founded by the state legislature — won’t forgive a lease unless the tenant can find another occupant, a difficult prospect in the current environment. Robert C. Brennan, Medco’s executive director, said it is committed to meeting its obligations to bondholders.
“I’m sympathetic to what the parents are going through, but I also have business obligations that I have to maintain,” Brennan told The Chronicle.
It’s a messy situation that highlights vulnerabilities in public-private partnerships, an increasingly popular way for colleges to pay for revenue-generating structures and services such as residence halls and dining. The arrangements, informally known as P3s, vary from institution to institution, but most follow a basic structure: In a residence-hall project, for example, an outside entity puts up money, draws up plans, or offers services in the building, then reaps repayment and profit from the room and board fees associated with project. Often the college is responsible for maintaining a healthy enrollment to keep the residence hall filled. Some corporations, including Corvias and American Campus Communities, have built enormous businesses on the model, with hundreds of properties and tens of thousands of beds under management.
distribution of risk — to reputation, to the bottom line — is a core element of a P3 arrangement. In well-structured agreements, the institution and the private entity share that risk. And if risk is managed under normal conditions, P3s can be effective ways for colleges to expand quickly, without having to lay out money for new buildings or services.
The pandemic, of course, is not normal.
Covid-19 has compromised institutions’ ability to host students on campus, and so it has undercut key components of many P3 business models. The best P3 operations are partnerships, as the name suggests, but an “act of God” like a pandemic — outlined in “force majeure” clauses in many legal documents — may be the ultimate test of the strength of those partnerships.
“Is the partnership set up to handle a force majeure event?” said Brad Noyes, who advises colleges and public-sector entities on P3 deals at Brailsford & Dunlavey. “That is actually the question.”
In many cases, he said, when a force majeure clause is part of the agreement, the parties have been able to work together in good faith to find a way forward. He described how two parties had renegotiated a P3 arrangement after Covid-19 hit: The insurance on the project would not cover the shortfall, so the company gave money to the university to refund the housing costs to the students. Then the university and the company restructured the repayment plan so the company could recoup the loss over time.
In some cases, he said, colleges are absorbing the financial shortfall, even when they are not legally bound to do so. In other cases, partners have held parents, students, or the university to the payments outlined in their leases or contracts, regardless of the unusual circumstances.
The pandemic will encourage colleges and their partners to structure disciplined agreements, where risks are identified, understood, and addressed, he said. But risks will continue to exist in contracts, simply because risk is by its nature unpredictable. “You still can’t structure real-estate transactions to cover all force majeure events,” Noyes said, because that would be far too costly to the parties. “Force majeure is a thing for a reason — it’s not suddenly going to go away from contracts.”
Moody’s Investors Service, the credit-rating agency, released a report last month saying that the growth of P3 projects, particularly ones based on students’ demand for housing or other services, would slow over the next two years — probably not a surprise to anyone. But Moody’s also noted that after the pandemic is over, P3s would probably remain a “growing component of universities’ capital structures” — particularly at public colleges — as a way to deal with infrastructure needs and deferred maintenance in a highly competitive sector.
Many colleges and universities see the long-term value of P3s and their relationships with partners, despite the risks. But there is no way for institutions to divorce themselves from that risk, the report suggests. When colleges closed last spring, Moody’s said, many “elected to cover the costs of these refunds and credits, even though they had no contractual obligation to do so, which illustrates the strategic linkage and reputational importance of these projects to the universities.” The report cites the University of Toledo and the University of California at Irvine as two examples of institutions that made payments to their partners.
Impasse in Maryland
The parties in Maryland appear to be at an impasse, so far, with Medco, the state-founded private entity, planning to hold parents and students to their leases. Brennan, the executive director, said the leases clearly state that the housing units are private. The housing isn’t associated with the university, he said, even though it is on campus.
“Any of the private housing that students have contracted with that’s off campus, they’re not letting students out of leases,” Brennan said. “We have to operate these in accordance with the financing agreements as if it’s the
equivalent of a private housing complex.”
In addition to residence-hall projects at Towson, Medco has similar deals across the University System of Maryland. Disputes are erupting on other campuses, too. At the University of Maryland at College Park, for example, parents have hired lawyers to fight the lease payments, while students have led rallies at the State House, in Annapolis.
In interviews, parents fume about a lack of responsiveness and transparency from college administrators and Capstone On Campus Management, and they say they are frustrated by Medco’s decisions. The situation feels like a political hot potato: When asked for comment, a spokesman at Towson referred The Chronicle to the system office, and the system office, in turn, referred The Chronicle back to Towson. A marketing vice president at Capstone, the building operator, said he needed permission from Medco to comment.
The parents and their lawyers are more than willing to comment. Leonard Lucchi has been retained by about 120 families to fight leases at the Medco properties in College Park, and he is starting to work with parents at Towson. He believes his clients have several
legal arguments in their favor.
The lease is not valid because they can’t warrant the habitability of the apartments, which they are required to do.
“We take the position that the lease is not valid because they can’t warrant the habitability of the apartments, which they are required to do under the lease,” Lucchi said. It’s impossible to stay physically distant in the buildings, particularly in common areas, he said, and the ventilation systems recirculate potentially contaminated air throughout the structures.
The leases are also invalid, he continued, because of “frustration of purpose” — that is, that the purpose of leasing rooms in the buildings is to allow students to live on campus while attending in-person classes. If those classes no longer exist, the lease is void.
Administrators in the system have supported that argument, Lucchi said. Darryll J. Pines, president of the university, signed a letter to landlords in College Park that urges them to let students out of their rent agreements.
“We understand that many students signed leases for the upcoming academic year before we understood the full impact that the Covid-19 pandemic would have on instruction at the university this fall,” the letter says. “Given the critical public-health considerations and the risk to our greater community, we ask that you work with student renters and consider allowing them to terminate leases or sublet to other students who wish to remain in the community. This would allow more students to live elsewhere while participating remotely in their instruction.”
If the university is asking individual landlords to forgive leases, Lucchi said, why wouldn’t Maryland do the same with its P3 partners?
‘Going to Give In’
Not long after Towson chose to move its remaining courses online, students outside the P3 residence halls expressed both weariness and confusion about how their leases work. Mallorie Hunt, a sophomore pre-nursing student, tried to cancel her lease in May but got no response. Her original roommates, for reasons she can’t explain, were able to move out. “I don’t know the difference between me and them,” she said.
She could have easily lived at home, in Havre de Grace, Md., about 30 minutes north on Interstate 95. But on a recent Monday evening, she said she had just moved some things into the room, assuming that she would never get a refund. “I think I am just going to give in,” she said. “That’s $10,000 that I am wasting.”
While Scott Depuy, the parent who is helping to lead the fight at Towson, doesn’t want students and parents like him to absorb the losses, he also doesn’t want Medco to default on the bonds. The bondholders “are Maryland retirees, probably retirees across the whole nation, including my parents,” he said. “I don’t want to jeopardize Maryland’s bond rating and jeopardize future infrastructure projects in the state.”
In the end, it seems that most people in the dispute hope the governor or the legislature will step in to resolve it.
“Figure out how to spread these short-term financial losses across the entire state budget, across all Maryland taxpayers,” Depuy said. That’s the only way to maintain the reputation of the university and the State of Maryland. Depuy has outlined that plan in letters to Medco and state officials. He tells them: “We’re going to deal with it in one or two semesters, and then we’re going to move forward.” But he has received no response.
“It’s fallen on deaf ears so far.”