Officials from the University of Kentucky and a private development firm broke ground Tuesday on a $26 million, 600-bed residence hall that is expected to usher in a new era in student housing.
UK President Eli Capilouto has pushed the public-private partnership as part of a renewed commitment to undergraduate education that includes upgrading UK's aging housing stock.
UK and Memphis-based Education Realty Trust are negotiating the second phase of the deal, which would replace or build 9,000 beds on campus. That agreement — which would put all of UK's housing under private management — has garnered national headlines as universities continue to struggle with ailing budgets and multiple construction needs.
For the first new dorm — an honors residence hall complete with classrooms — EdR is putting up all the equity, meaning UK will incur no debt.
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On Tuesday, Capilouto called the deal "the boldest housing initiative in higher education today."
It's not yet clear, however, whether EdR will be paying property taxes on the property.
EdR's chief investment officer, Tom Trubiana, said the issue of property taxes has been left to UK.
"Our commitment is, to the extent there is relief, it's to the benefit of UK," he said shortly before the groundbreaking. "It's for the university to decide what, if anything, should be done."
Trubiana said the company ran financial models showing revenues with and without property taxes. No property taxes could mean lower rents for students or more financial return for UK. He said that EdR makes money with more efficient construction and management, but property taxes could make the project more expensive.
"It's my hope something will be worked out," he said.
UK Treasurer Angie Martin said UK is evaluating all its options. The school rejected the usual route for private development by universities — starting a non-profit foundation that would be able to issue tax-free bonds and be exempt from property taxes. However, those bonds would still be counted against UK's total debt capacity.
"We chose not to do that because we did not want the debt on the university's balance sheet, so the university is exploring different avenues," Martin said.
If UK can figure out how to get tax-exempt status for the new dorms, the rent costs for students would be lower, Martin said.
UK does have General Assembly approval to issue as much as $175 million in debt for the next few phases of the rebuilding plan with EdR, so it's possible UK could form a foundation in the future.
David O'Neill, the Fayette County property valuation administrator, has said he thinks any privately developed dorms would be put on the tax rolls because they would be owned, through a long-term ground lease, by a private company.
Property taxes are divided by school systems, city governments and state government, with the majority going to public schools. Fayette County taxes about 1 percent of a property's assessed value. Approximately 68 percent of that goes to Fayette County Schools, 13 percent goes to the state, 9 percent goes to the city, 3 percent goes to the public health department, and 7 percent goes to LexTran. Less than 1 percent goes to UK extension services and soil- and water-conservation programs.
O'Neill estimated that a $26 million dorm could bring in about $283,000 a year in property taxes, depending on the taxing district and whether the entire building was assessed. Phase II of the UK-EdR partnership could bring in hundreds of thousands more to city and school coffers.