Cal State System Moves to Public-Private Deals

The apartment complex has 386 units and houses both students and faculty.

LOS ANGELES— The California State University system is the newest public entity forging public-private real estate partnerships. Kennedy Wilson recently purchased University Glen, a 386-unit student housing apartment complex, and Town Center for $81 million from California State University Channel Islands . The property is on an 80-year ground lease with the University, which developed the partnership as a way to monetize its real estate holdings and support academic growth. This is the largest monetization of a real estate asset in the California State University system, but, with the success of this partnership, it is not likely to be the last. “During the recession, all states cut back funding of higher education and California did so pretty dramatically,” Bob Hunt , managing director in JLL ‘s public institution team, tells GlobeSt.com. “Now that the economy has strengthened, some of that funding has come back but not at the levels they were getting before. The school is in a situation where they just don’t have the revenue to support their academic programs and growth. This is not unique to Channel Islands; it is a US problem. The school came to us and asked if we could look at their real estate assets to see if there any opportunities for public-private partnerships that could generate revenue to help fund future academic programs and, through the partnership, to improve operations.” Hunt represented the seller along with Javier Rivera , managing director on JLL’s capital markets team. While the transaction was successful and Kennedy Wilson proved to be a perfect fit, forming a new public-private partnership through the school’s board of trustees was challenging. “There were two challenges,” says Hunt. “One was that Javier had to get the market comfortable with the process, because it was a public-private partnership and it is going to take longer and the ground lease. On the other hand, the client ultimately has to get approval through the central chancellor’s office. The client had not been thinking that this was something that could even be done until we started looking at the economics of the deal. Ultimately, we were able to bring the two together in the largest single monetization that has ever been done in the Cal State system.” As a result, the most important component of the deal—which proved to be far more important that the sales price—was the terms of the partnership. “The operating and maintenance was an important part of the negotiation,” adds Hunt. “It gave the university assurance that whoever we brought in was contractually obligated to take care of the properties in the way that they thought was acceptable.” As educational funding becomes more conservative, transactions like this are going to become more common. Cal State Channel Islands, which is a new addition to the CSU system and has 6,000 students, has a diverse real estate portfolio and a large land site that could accommodate future development. The school is still considering—and possibly negotiating, although the brokerage team wouldn’t comment—more private partnerships for other assets. They aren’t alone. The CSU system is also considering more of these types of partnerships on other campuses, and Hunt says that we are likely to see these partnerships in other university systems and in other states. “The CSU system has initiated a task force that is looking at concessionaire agreements, and they are looking at everything from parking to housing,” he says. “That is a way for them to get their skin around this from a policy perspective. The school system is also looking to bring in 14,000 beds of student housing by the year 2020 through public-private partnerships. This is the bow wave of a trend that is hitting California in a big way and that I would argue is going to become a national trend. The financing sources for universities has changed, and so they are going to have to start looking at things like this.”