Talking Stick - July/August 2011 - 30

Debt Financing Alternatives
To be sure, housing facilities can be ﬁnanced by means other than debt. Alternative sources include capital reserves, major gift donors, state appropriations to public institutions, and equity capital committed by for-proﬁt developers. Unfortunately, it is uncommon to ﬁnd accumulated reserves of sufﬁcient magnitude for full funding of major new construction and renovation projects. However, reserves can play an important role by providing a portion of the funds needed, thereby reducing the amount that must be debt-ﬁnanced and the annual debt service payments that follow. The result can be a project that otherwise might not be ﬁnancially feasible. As for donors, history demonstrates that their largesse is far more likely to be directed to academic, administrative, or athletic facilities than to residence halls. State legislators seldom are inclined to appropriate scarce capital dollars for residence halls and other facilities that have the capability to be self-supporting. While some for-proﬁt developers and real estate investment trusts have made equity investments in on-campus housing projects, these instances remain exceptions not broadly available. Most for-proﬁt development remains off campus.

ﬁrms, mutual funds, and banks that buy them. The bonds may be marketed through an open bidding process or by a private placement. The buying institutions may retain the bonds or sell them to other investors. The college or university uses proceeds of the bond sale to meet the capital costs of the intended project(s). Legally binding covenants set forth the bondholder’s rights and the borrower’s obligations. These include qualiﬁcations of the borrower to issue the bonds, the repayment schedule, permissible uses of the funds, the revenues that are pledged to repay the bond holders, required reserves, taxability of interest paid to the bond holder, and more. Bonds typically are long-term debt instruments that are amortized over periods that may extend up to 40 years, though repayment over periods of 20 to 30 years is more common. Bonds are usually the preferred form of debt for ﬁnancing one or more large-scale projects. Direct loans from a bank or other lender provide a practical alternative for some projects, particularly ones that do not require many millions of dollars. Typically, such loans are repaid over shorter time periods than bonds and may carry the risk that initial interest rates can re-set to higher levels in the future. However, with these loans, the time and expenses involved in issuing revenue onds bonds are avoided, and the terms of orrowing borrowing may be more adaptable to circumstances unique to a

particular project and borrower. Whether funds are borrowed via bonds or a direct loan, the borrower owes an obligation of service to the lender – namely to repay the debt. Hence, the term commonly used in reference to repayment terms and amounts is debt service.

Judgments of the creditworthiness of a bond issue or loan also have an important inﬂuence on ﬁnancing costs.

Financing Costs
Many considerations determine whether and on what terms a college or university can borrow funds. How much is to be borrowed is a ﬁrstorder question. Fixing that amount eventually will require detailed estimates of project and ﬁnancing costs, but sound order-of-magnitude projections sufﬁce for planning purposes. Funding requirements to be recognized include project design and management, construction, furniture and equipment, capitalized interest, issuance expense, and required reserves.

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Talking Stick - July/August 2011

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