Talking Stick - July/August 2011 - 34

Escalation rates are key factors in projecting both revenues and expenditures and, ultimately, debt capacity.

debt capacity. In projecting revenue, it is advisable to distinguish between anomalies in the income stream and operating revenues that are recurring and reasonably predictable. Income from normal operations will certainly include that generated by the proposed project itself and, in most cases, will also include operating income generated by the institution’s entire housing system. Housing system cash ﬂow is often essential in order to reach the requisite level of debt capacity and to strengthen overall creditworthiness of the proposed borrowing. Room rent, of course, is the main source of student housing income; summer conferences, vending receipts, ﬁnes, and forfeitures are common supplemental sources. In projecting rental revenue, the rate to be charged is one of two primary considerations. The pace at which rental rates are escalated going forward, the number of beds that will not generate revenue, and the rental contract term are also important factors. A good understanding of the housing market – on and off campus – is necessary when setting rental rates for a new or extensively renovated residence hall. The challenge is to balance two often conﬂicting needs: one for rates that produce the requisite level of income and the other for rates that are competitive and acceptable to students.
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The expected level of occupancy is the second primary driver of rental revenue. However desirable new and better housing may be for a campus, debt ﬁnancing for it will depend upon investors and lenders having reasonable conﬁdence that about 98 percent of the beds will be ﬁlled on average across the academic year. Grounds for that conﬁdence might include policies that require some or all students to live on campus, historical and projected enrollment growth, documentation of unmet current demand for campus housing, and a different style of housing that appeals to a student population not attracted to the present inventory. Next, it is necessary to recognize the expenditures that will have claims on the expected revenues. Just as revenues are customarily recognized in reckoning debt capacity, so too must operating nses, t d expenses, debt service, and other fund transfers be taken into account. nses r Expenses for personnel compensation, ies, utilities, supplies, racted d contracted services, and the like are ntial essential for ence residence halls to ate operate and rate generate nue. revenue.

Mandatory fund transfers must be made to annual debt service and, if required by bond covenants, to a repair and replacement reserve. Though not mandatory in the same sense as debt service, additional transfers from housing income may be required as a matter of institutional budget policy. Administrative overhead assessments, apportioned shares of campus-wide expense pools, and allocations to various institutional reserves are some examples. Escalation rates are key factors in projecting both revenues and expenditures and, ultimately, debt capacity. These are the rates by which estimates in present dollars are increased year by year going forward in time. The basic aim is to compensate for general inﬂation. However, institutional circumstances may prompt adoption of escalation rates that depart from inﬂation levels anticipated for the overall economy. For example,

Talking Stick - July/August 2011

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