The University of Kentucky Board of Trustees approved a deal Tuesday to let a private developer build an on-campus dorm, setting the stage for a larger agreement that could lead to private construction and management of all of UK's student housing.
UK President Eli Capilouto will sign the 50-year ground lease with Education Realty Trust of Memphis, Tenn. to build a 600-bed residence hall at Haggin Field near the W.T. Young Library.
"I want to thank you for supporting the housing initiative so we can begin a journey that I hope is a sprint and not a marathon, so that we can provide 21st-century living and learning space to our students," Capilouto said to board members after the vote.
The ground lease lays out how UK will interact with EdR as the company finances, builds and manages the $26 million dorm.
Once the dorm houses students, UK is to receive 10 percent of the gross revenue. After EdR starts to receive a 9 percent rate of return, UK is to get 25 percent of the net income. At the same time, EdR would get a 4 percent management fee from UK.
The new dorm, which is supposed to house the honors program and other students, would cost $3,490 a semester. That rate could rise by 3 percent in 2014. Three years later, it could go up by 4 percent.
The agreement is supposed to be finalized in March, when negotiations also will begin for an affiliation agreement that would lead to a broader deal to eventually replace almost 6,000 outdated beds at UK and add 3,000 more. Construction is scheduled to begin in April.
UK Treasurer Angie Martin said the deal came down to "alignment of interests, transparency and trust. We have to keep all these things balanced."
If the two parties eventually move forward on the second phase of the agreement, EdR's management fee on the first dorm would drop to 2 percent, and UK would get 12 percent of the net income.
Trustee Bill Gatton said he didn't like that provision of the lease.
"I would like to see the university be able to buy the building," Gatton said. "Those dorms are in deplorable condition, but I thought there might have been a more inexpensive way to do it."
EdR vice president Tom Trubiana said his company is accepting low returns on the first dorm "because we wanted to be part of UK for the long term."
"The uniqueness here is potentially that we could be the sole-source housing for UK for the future," Trubiana said. "That's why it absolutely needs to be a home run."
If UK and EdR agreed to build a theoretical $10 million dorm, a financial model presented on Tuesday shows that UK would get $239,000 in revenue during the first year of the deal, and EdR would bring in about $239,000. However, the model shows that EdR would not start to make a profit until year 11 of the deal. By year 50, UK would make almost $2 million a year, and EdR would make $1.1 million, an 11 percent profit.
UK and EdR are deciding whether they will pursue an exemption from property taxes on the new dorm. Those taxes are built into EdR's rates of return, Trubiana said.
"Any benefit would go to UK students in the form of lower rents," he said.
As of last week, Fayette Property Valuation Administrator David O'Neill said he planned to put the new dorm on the property tax rolls.
Under the deal, UK will not make money if EdR doesn't make money. However, the lease states that UK doesn't have to pay any refunds to EdR if the company doesn't meet its expected rate of return.
The ground lease allows several ways for either party to get out of the deal. For example, the lease can be terminated at the 20th, 30th, and 40th anniversaries of the signing, with two years notification. It also allows another company to take over the lease after six years if EdR, a publicly traded company, is bought out.
"We have no desire to do that at all," Trubiana said. "There is no vision for that.
EdR must pay prevailing wage rates to construction workers, but it is not subject to UK's bidding rules. However, EdR has agreed to promote competitive bidding, including opportunities for women and minority owned businesses.
UK holds the naming rights to the new dorm, and it would keep any revenues from selling those rights.
Trustee Pam May, a Pikeville lawyer, said she read the lease closely.
"It is a daunting challenge to sign a lease that protects us over a 75-year term, but I think they have done it," she said.