UK hopes to create a new norm in dorms with expected deal Tuesday

private-management deal likely Tuesday; School aims to be model for efficiency

lblackford@herald-leader.comFebruary 19, 2012 

University of Kentucky officials plan to sign a contract on Tuesday with a private developer that could change the face of student housing at UK and eventually alter dorm life across the country.

Under the deal, UK would enter into business with Education Realty Trust, a publicly traded company based in Memphis that has built and managed dozens of dormitories at campuses for the past several decades.

In the initial phase, which the UK Board of Trustees is expected to approve on Tuesday, EdR would sign a 50-year ground lease to build and manage a 600-bed, $26 million dorm on Haggin Field.

The board also is expected to approve an affiliation agreement that would lead to a broader deal to eventually replace almost 6,000 outdated beds at UK and add 3,000.

Negotiations have been ongoing for months, and UK officials said the university will still be able to exit the contract if necessary.

"We can stop it at any time," said UK Treasurer Angie Martin, who has been leading negotiations with EdR.

But both sides desperately want a successful partnership. UK officials said working with EdR is the only way to affordably build in a short amount of time the kind of modern, technology-laden housing that is crucial to student recruitment and success.

In addition, UK predicts lower overall rent payments for students if EdR builds any new dorms. And EdR's housing at more than 57 campuses in 23 states has had lower rental-rate increases than UK's in recent years, according to the school.

"We've got excess demand," UK President Eli Capilouto said, adding that roughly 4,000 students a year sign up for the 600 residence-hall beds at UK that are considered "modern."

"This company has a track record of success of providing quality housing," Capilouto said. "Our interests are aligned in that regard — it is the crux of the matter; your interests have to coincide."

EdR officials did not respond to numerous requests for comment, but UK officials have said EdR hopes the deal will become a national model.

"Both the university and EdR must do well for this agreement to work," said UK spokesman Jay Blanton. "... Clearly, one of EdR's interests in working with us is that an innovative partnership to build and manage residence halls across an entire campus may create a model that other universities throughout the country may replicate."

Under the contract for the first dorm, UK and EdR would sign a 50-year ground lease, meaning that UK still owns the land but the new building would be owned by EdR.

EdR would construct the $26 million dorm, financing it with its own cash and equity. UK would put up no capital in the deal, which was important to them because of the need to issue debt on academic buildings. Rating agencies such as Moody's have been somewhat vague about whether these kinds of projects might eventually be held against the school's credit rating.

Once the dorm was up and running, UK would receive 10 percent of gross revenues. After EdR receives a 9 percent rate of return from rents, then UK would get 25 percent of the net income. At the same time, EdR would receive a 4 percent management fee for operations in addition to the remaining net income.

If the two parties eventually move forward on the second phase of the agreement, EdR's management fee would drop to 2 percent, and UK would get 12 percent of the net income.

Any revenues returned to UK would go back to its housing division, most of which would be used to continue to pay off bonds for the four dorms that were built most recently.

When building the new dorm, EdR would pay prevailing wage to all workers. UK officials said EdR has already hired Sherman Carter Barnhart as the architects and Messer Construction as the general contractor. Sherman Carter Barnahrt referred all calls to EdR.

Construction plans call for a geothermal energy system, which harnesses the Earth's steady temperature to heat and cool buildings. Roughly 130 wells that are 500 feet deep could be dug near the parking lots around Haggin Field. Geothermal wells cannot be dug near buildings.

The new dorm also would include classroom and meeting space. EdR would give UK $250,000 to outfit the learning space.

There would be 601 beds in double-occupancy rooms with one bathroom between every two rooms. EdR would set aside $260 per bed, per year for deferred maintenance.

UK would still oversee all resident-life issues, including the hiring of resident advisors.

EdR would hire its own janitorial and operational staff. UK officials said this would not result in any layoffs because high turnover in the maintenance department means people could be reassigned. However, new maintenance staff hired by EdR would not receive UK benefits.

For students, UK predicts the deal will eventually work out in their favor.

UK's average yearly increase for housing has been 5.4 percent since 1997, while EdR's has been 3.4 percent since 2006.

UK officials acknowledge that rates for the new dorm will be about $300 more than UK's current premium rate. But if average yearly rents continue growing at the same pace, the EdR dorm would be cheaper than UK's premium dorms by about 2016.

Members of the Board of Trustees have been briefed throughout the process and are expected to approve the contract, said chairman Britt Brockman.

"The board will see this is a very positive way," Brockman said. "We don't have time on our side. We can't build piecemeal dorms. We need to have good learning and living spaces for the students."

Linda Blackford: (859) 231-1359. Twitter: @lbblackford

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