Public-Private Partnerships (“P3s”) have become a commonly considered method of funding, developing, and often operating much-needed capital projects in higher education. P3s projects can take many forms, including but not limited to student housing, energy infrastructure, parking assets, or modernizing other campus facilities. The principal motivations for higher education institutions to look to private sector partners is to share risks, provide financing, and deliver projects more efficiently and timely. While the potential benefits of these partnerships are significant, both the primary P3 transaction itself and the subsequent ongoing relationship can present a variety of challenges to colleges and universities. Institutions considering a P3 path should carefully consider the trade-offs to determine whether a P3 truly aligns with their strategic objectives and if it is the most appropriate method of financing a particular project in the short- and long run.
What Are P3s?
P3s are typically long-term contractual arrangements where a private entity designs, builds, finances, operates, or maintains (“DBFOM”) a public asset. The private entity could provide all of these services in a full DBFOM arrangement, or just some of them. Instead of relying solely on traditional university debt, or “on-balance-sheet” financing, the higher education institution leverages private capital and expertise while retaining some degree of control or oversight. For tax-exempt financed P3 transactions, the project typically establishes a “special project entity” (“SPE”) non-profit 501c3 organization to own that project. This preserves the non-profit status and related mission (e.g., housing enrolled students) to maintain the tax-exempt status of the financing.
The Case for P3s: Advantages for Institutions
1. Access to Capital and Flexible Financing
Many universities face tangible limits to their debt capacity due a combination of incremental cashflow constraints, downward pressure on credit ratings, and other covenant hurdles. By shifting project financing to a private partner, P3s enable institutions to pursue strategically important facilities without directly burdening their balance sheets (although, importantly, P3s may still not necessarily qualify as “off credit”). At a time when competition for students is intense and the demand for better facilities and housing accommodations is high, a P3 engagement can be a useful tool to unlock important projects that further institutions’ missions.
2. Efficiency and Cost Savings
P3 projects across all sectors are more likely to be delivered both on time and within budget. This efficiency stems from several factors inherent to P3 transactions, including bundling design, construction, financing, and operations into one single agreement. Typically, private partners are invested long-term in the success of a particular project or facility, incentivizing the P3 partner to minimize cashflow expenses over the lifetime of the project instead of just at the initial construction phase. In addition to these efficiencies, a P3 arrangement can sometimes permit institutions to use separate procurement rules and regulations. This feature often allows a faster timeline to delivery by allowing public colleges and universities to avoid mandated, lengthy bidding processes. This expedited speed to delivery also tends to bring down the overall cost of the project
3. Risk Transfer
A well-structured P3 allows institutions to transfer construction, financing, operating, and maintenance risks to the private sector. Of course, it is important to ensure that the agreement truly accounts for promised risk transfers, or that risks do not materialize as the transaction reaches the final stages. For example, under a ground lease or concession agreement, the developer may assume responsibility for cost overruns (often limited to the guaranteed maximum price, or “GMP”), occupancy risks, or deferred maintenance obligations. These risk transfer agreements can provide stability for institutions seeking to avoid financial surprises down the line and clarify the responsibilities of each party in the agreement ahead of potential risk events in the future.
4. Innovation and Expertise
Private developers and operators that are part of the P3 partner group typically bring specialized expertise in facility design, project management, and maintenance that traditional colleges and university staff may lack. Even for universities that maintain sophisticated capital planning and campus maintenance staff in-house, P3 development teams still often enhance complex projects by delivery innovative thinking and unique operational experience.
The Trade-Offs: Risks and Challenges of P3s
1. Loss of Control
P3 arrangements necessarily result in a shift of control away from the institution to the private partner. These long-term agreements, which can stretch from 30 to even 75 years (though agreements may contain buyout opportunities), mean universities and colleges must accept limitations on their ability to manage or repurpose facilities. Contract terms often set the required baseline rent levels and occupancy thresholds, for example, with limited representation for the higher education institution within the controlling apparatus of the 501c3 nonprofit entity.
Despite the loss of control, the college or university must still maintain some level of oversight over the operations of the facility. This may not come naturally to the higher education institution’s employees who are used to managing facilities directly but now must work with a partner to manage a standalone project “business.”
2. Financial Impacts and Revenue Trade-Offs
Most P3 arrangements cause institutions to forgo incremental revenue streams such as parking fees or student housing rent. In student housing projects, for example, the private partner may collect rents for decades in exchange for assuming development and operating responsibilities. Over time, this can amount to a significant opportunity cost for the higher education institution. The primary trade-off for the risk transfer and construction efficiency of a P3 is typically an overall increase in the cost of capital of the project, both upfront and throughout the life of the project.
In addition, rating agencies such as Moody’s, S&P, and Fitch increasingly scrutinize P3 agreements to determine how arms’ length they truly are. Moody’s, for example, includes both debt and equity associated with P3s in its “adjusted debt” calculations when projects are primarily for university constituents and revert to the institution at the end of the contract. Depending on the level of affiliation, a P3 is likely to still affect the university’s credit profile, given the moral obligation an institution might have to see the project (which may be on campus land and serve its students) working in good order. In addition, recent changes to lease accounting rules have caused many long-term lease agreements with a P3 partner to be capitalized on balance sheet.
Finally, the overall cost of borrowing for the P3 project may be higher than if the institution were to pursue the financing on balance sheet. P3 bonds are typically structured so that they achieve an investment grade rating.
3. Potential for Misaligned Incentives
Private partners seek returns on investment; their goal is to maximize revenue, which may not align with a university or college’s mission and/or student affordability priorities. When projects become stressed from the revenue side, P3 partners may be tempted to reduce operating costs (such as maintenance) or allow a backlog of deferred maintenance in order to increase current net income. Balancing financial efficiency with institutional values is an ongoing challenge in P3 relationships.
Does a P3 Make Sense?
P3s are not a one-size-fits-all solution. They tend to be most beneficial when:
- Institutions face limited debt capacity but urgent capital needs.
- Projects are large-scale, complex, or involve specialized expertise (e.g., energy infrastructure).
- Well-specified risk transfer provides tangible value, such as protecting against occupancy volatility or deferred maintenance.
- A long-term partnership can be structured to preserve affordability and align with institutional goals.
- Speed to market is a crucial factor for college or university stakeholders.
Conversely, when control, mission alignment, and/or incremental revenue retention are top priorities, conventional university financing will remain the optimal route. A best practice during a P3-transaction evaluation is to appraise, in parallel, the alternative of a fully on-balance-sheet transaction on the institution’s own credit. This allows decision makers to fully understand the true cost of pursuing the P3 route versus financing the project on their own.
Conclusion
Public-Private Partnerships have proven their ability to deliver facilities on time, on budget, and with meaningful risk transfer. For higher education leaders under pressure to modernize campuses while preserving institutional assets and capacity, P3s offer a compelling option.
Of course, P3s are not without trade-offs. Institutions must carefully evaluate whether the efficiency gains and potential financial flexibility outweigh the potential loss of control, complexity, and revenue implications. P3 transactions are inevitably more complex than traditional project financing. They require extensive due diligence, detailed financial modeling, and thoughtful contract negotiation. From the very beginning, higher education institutions must clearly articulate objectives, manage evolving project requirements, and shield the institution against terms that disproportionately favor private partners. Without experienced advisors and strong internal governance, universities risk entering into agreements that may not serve their long-term interests.
Meet the Authors:
John Elliott | [email protected] | 312-332-1336
Mr. Elliott serves as Vice President and Chief Compliance Officer at Blue Rose. He provides analytical and research support and project management for Blue Rose’s P3, strategic consulting, and debt advisory practice. Mr. Elliott joined Blue Rose’s California office in 2021.
Prior to Blue Rose, Mr. Elliott worked as a research associate for a non-profit think tank in Washington, DC and as a compliance consultant for federal contractors.
James McNulty, CTP, CAIA, CFA, CFP | [email protected] | 312-332-1336
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