Putting the Deal Together

for Anchor InstitutionsUnderstanding their Roles and Constraints

Presented by Joan J. Millane, Principal Millane Partners, L.L.C.

19 West Barre Street, Suite 400, Baltimore, Maryland 21201-2465 Direct: (410) 294-7037 Office: (410) 727-2866 Fax: (410) 727-1664

jmillane@millanepartners.com www.millanepartners.com

Anchor Institutions ConferenceBreakout 2a

October 9, 2007 ● Penn Institute for Urban Research

Millane Partners Real Estate Results

•How to Put the Deal Together- RE101

•Focus on PPP Ground Lease Transaction Structure

•Market Lease Rates Drive Development Budget

•Team, Legal Documents and the Numbers

•Lessons Learned

Objectives

Today’s Institutional Needs:• Housing- employees, faculty, students• Classroom and Office Space• Research Space• Parking• Stadiums and Recreational Facilities• Mixed-Use Projects

- Apartments- Offices- Hotel/Conference Centers- Retail: Shops, Restaurants, Movie Theaters- Parking

Institutions Partnering with Private Sector (PPP)

• Institution thinks there is a need and believes the market place can meet the need

• Market study- Determine Market Demand and Rents

• Site is determined, hopefully via Institution’s master plan

• Generally on land contiguous to the Institution

• Institution engages and oversees Developer

• Developer engages and oversees GC, Architect, Engineers

• Developer programs, budgets, designs, constructs

• Institution must oversee developer, manage contract, interface with Institution’s constituents to protect integrity of master plan, compatibility with nearby architecture, utilities, security, roads, parking

Why Now?• Limited State Resources- Institutions seeking

-new revenue streams (from underutilized land), -lower costs (not built to 100 year standards), - shorter time frames (Institution engages developer who in turn engages GC, Architect, Engineer).

• Consulting Services- Institution’s employees are fully engaged; third parties can develop the project and not have to be employed long term.

• Economic Development- To reinvigorate nearby deteriorating and unsafe neighborhoods so as to not detract from Institution’s reputation or to make surrounding areas safer, more pedestrian- friendly.

Should we do a Public Private Partnership?

• First, there has to be a revenue stream • Meaning there has to be a user who brings a cash flow• Then there has to be land available to ground lease• Then we determine:

– Who owns it?– Who finances it?– Who markets it, leases it and collects rent?– Who operates it?– Who keeps the profits, if any? – Who fixes it if revenues don’t cover operating

expenses and debt service?

In Public/Private Transactions the answer could be the Institution or Third Parties for one, some or all of the above.

Public-Private Partnership Student Housing Off-Balance Sheet Transaction (Project Financed)

Institution

DevelopmentTeam

GC Builds ApartmentBuilding

ConduitBond Issuer

Lender/Bond Investor

Ground Lease

501 (c) 3 Foundation

(Tax exempt)

Ground LeaseTitle Debt

Management Agreement

Development Agreement

GC Agreement

Lease

trustee$

$ / loan docsUnderwriter

Students

Credit Enhancer and Bond Insurers $

Draws $

$

Prop.Mgr.

$

Mixed Use- Housing/Retail/Office/Parking Public/Private Transaction (Project Financed)

Institution

Developer Team

(Leasing/Prop. Mgmt)

Mixed Use

Project

Lender

Ground Lease

Developer LLC(Taxable)

GLBuildings

Debt

Equity

Development Agreement

Leasing & Management Agreement

GC Agreement

Lease

loan docs

Employees, Students,,Admin, Private Rent

Title

Tenant

$$$ConstructionDraws

customers

Purchases

Equity Investor

Guarantees, LOC, Insurance

Off Balance Sheet and Use of Institution’s Debt Capacity*

• Today, Institutions might find that the debt on a developer’s project may utilize its debt capacity from a rating agency perspective.

• Even though it may be off balance sheet.

• Even though its lease is considered an operating lease, not a capital lease.

*See Moody’s Special Comments

What Does the Developer Get from Public Private Partnerships?

• Market Rate Development Fees • Market Rate Property Management Fees (optional)• Easing of barriers to entry- land assemblage and

zoning • Minimization, not elimination, of development risk• Institution facilitates tenant awareness of availability

of new project• Location, Location, Location

How Much Can We Build?Assumptions

Rent= 500 beds @ $450 per month, 9 month leases Expenses= $6psf for 135,000sf project Loan= 6.5% Interest Rate, 30 years fully amortizing Loan Amount Available = Development Budget

Required DSC 1.2

Rent $2,000,000

Expenses $ 800,000 includes management fee

NOI $1,200,000 NOI/DSC

Max Debt Service $1,000,000 (based on required debt service coverage)

Net Cash Flow $ 200,000 (goes to Institution as ground rent)

*Max Loan Amount: $13,000,000/500 beds=$26,000/bed =Max Available for Development

Mixed-use Housing/Retail/Classroom

Rendering of Charles Commons, Johns Hopkins University (Image: Johns Hopkins University)

What They All Have In Common:• Available Land that Institution is willing to Ground Lease

– Please Don’t Sell Adjacent Institution Land– Developer Can help Assemble Land at no cost to Institution

• Ground Lease Document (memorializing the deal and containing all the controls, rights and obligations of the parties)

• An Economic Engine: ability to provide “enough” revenue to the project to cover the cost of operating expenses, debt service, required reserves and sometimes return on equity:– Tenant leases (housing)– Student fees (dedicated to rec center)– Tenant leases (office, classroom, research, retail, entertainment)– Institution purchases (goods and services from a bookstore,

restaurants, hotel/conference space)

• Urgent Need - Please get an objective, credible market study

The Players• The Institution• The (501)(C)(3) Owner Entity or Developer LLC• The Developer-including Architect, Engineers, General

Contractor, Subs and Suppliers– Or perhaps a Design Build Team if Institution is

providing Financing• The Underwriter• The Bond Issuer (Conduit)• The Credit Enhancer or Bond Insurer (sometimes)• The Bond Trustee• The Bond Buyer or Traditional Lenders, etc• Their Real Estate and Bond Attorneys• Owner’s Rep for the Institution • The User / Occupants

Transaction Documents(Almost Everything is Negotiable)

Legal Document Parties to the Agreement

• Ground lease Institution & 501 (c) (3) Foundation

• Development Agreement Foundation/LLC & Developer

• Bond Documents Foundation/LLC & Bond Buyers’

Trustee

• Building Title Foundation/LLC

• Management Agreement Foundation & Developer/Prop. Mgr.

Tenant Lease Developer/Manager and Occupants

• Service Agreements Developer/Manager and Institution

Facilities Management, IT,

Security, Shuttle Bus, & Other 3rd

Parties

• Resident Life Agreement Developer/Manager & Res Life

Developer of Public Private Partnership

• Development Team Must show: – Past experience with housing, retail, office product,

with similar institutions & their neighborhoods– Equity source – Access to financing/secondary markets– Teamwork and Understanding of Institution Mission– Vision– Desire for Long Term relationship

Mixed-Use Office/Retail

Dartmouth College mixed-use building in Hanover, N.H. (Image: Dartmouth College)

Institution’s Issues

• Roles and Responsibilities• Fear of Change/ Fear of the Unknown• Rental Rates • Property Management and who’s standards?• Who’s the user, and how have input?• Ground Rent Income Distribution• Town/Gown Relations: Traffic/PILOT/ Zoning

Tips for working inside your Institution

• Foundation, Administration, Real Estate, FM and the User together need to determine roles and priorities

• Get OIT voice/data people involved early in design

• Get Security division involved early in design• Include Parking staff early in design• Bring your sense of humor

What a Developer can bring to the Institutionin terms of Resources and Expertise

• Project Management and Leadership

• Design

• Development

• Financing

• Construction

• Marketing

• Leasing

• Property Maintenance and Operations

University of Maryland Town Center PPP

• Slide Courtesy of Foulger-Pratt / Argo Investment Company

Lessons Learned:• These are complex, and time consuming, especially when you and your staff

are already working a full time job.

• You must have a Senior Manager who has the political will and credibility to champion the transaction.

• You need one responsible point person, reporting to the Senior Manager, who must include all stakeholders in the planning very early in the process.

• The transaction should be program-driven, supporting the Institution’s mission and in line with the Master Plan.

• Select a Developer that has experience working with other similar-type institutions.

• Developers can get control of land on behalf of the Institution which can be purchased as part of development budget, The Institution then takes title simultaneously with financing and ground leases it to the Developer.

• It is a much more complex negotiation when developer has his own money in the deal, unlike student housing which is 100% tax exempt bond funded.

• No need to recreate the wheel. Many of your Colleagues have done these and can and will give you their RFP’s, Ground Leases, Development Agreements and Tenant Leases to use as models and can recommend legal and financial advisors.

Joan J. Millane, Principal, Millane Partners, LLC has a broad range of experience in the field educational, research and governmental project delivery. She was formerly responsible for the asset management divisions for both the Resolution Trust Corporation and the Carlyle Group in Washington, DC, and more recently Executive Director of Johns Hopkins Real Estate and Assistant Vice President for Asset Management at the University of Maryland.

Currently, Ms. Millane owns a consulting firm which assists private sector, government and higher education entities to implement their real estate and financing transactions, particularly for public private partnering, purchases, sales, and leasing of housing, research parks and mixed use projects, negotiating the real estate and financing documents to win win conclusions while protecting the interests of the institution for today and for future administrations.

On behalf of the Johns Hopkins University, Joanie structured a public-private development for potentially 750,000 square feet of laboratory, classroom, office and conference space at the 35-acre Johns Hopkins Montgomery County Campus. The transaction’s first 115,000 square foot office, classroom, research building opened August 2004 at no cost to the University. Representing the university’s interests, Ms. Millane was also responsible for structuring the first two University of Maryland public-private student housing transactions for over 1,800 beds, negotiating the ground leases and the financing documents with private sector developers and is currently working with the University to develop more.

Joanie has served as faculty, teaching public private real estate and financing concepts for various national organizations such as the Association of University Research Parks (AURP), the Urban Land Institute (ULI), the Lincoln Institute for Land Policy, the National Association of College and University Business Officers (NACUBO), and the Society for College and University Planning (SCUP) and is an elected member of Lambda Alpha, a national land use and preservation honor society. Ms. Millane received her undergraduate degree from Cornell University and an MBA from the Wharton School at the University of Pennsylvania. Please learn more at www.millanepartners.com.

Joan J. Millane, Principal Millane Partners, L.L.C.

19 West Barre Street, Suite 400, Baltimore, Maryland 21201-2465 Direct: (410) 294-7037 Office: (410) 727-2866 Fax: (410) 727-1664

jmillane@millanepartners.com www.millanepartners.com

Millane Partners Real Estate Results