Private capital for public schools: districts overcome cultural barriers to find non-public building partners

School Administrator, August, 2003 by John M. McLaughlin, G. William Bavin

While the school district has a 20-year lease, it negotiated an early buyback right. Tooker says the district plans to buy the facility in 2006 using a combination of local and state bonds and developer fees--$3 per square foot of new construction, which currently nets the district some $18 million annually.

Entering into a build-lease agreement wasn't easy, Tooker says. "We couldn't find anyone in California who had done this so we were out there on a little bit of faith. ... These types of arrangements are do-able but you have to understand that until it becomes more commonplace, you have to work yourself through the details."

Phil Geiger, president of the Eastridge Companies, collaborated with Tooker and the Natomas community. Geiger, a former superintendent with an education doctorate from Columbia and an MBA from the Wharton School at University of Pennsylvania, served as executive director of the Arizona School Facilities Board before joining Eastridge. Geiger has seen many school districts put off a $50,000 maintenance problem and wind up with a multimillion dollar nightmare.

The tough economic times the states are experiencing are forcing districts to think along new lines. Geiger believes that private capital is going to be used much more frequently for school construction and renovation. "This is really no different than senior housing," he says. "The reliability of the revenue stream is the key question."

But the cultural readiness of schools to use private capital sources is still a question. "Schools don't tend to be pioneers," Geiger adds. "They stick with the tried and true. ... People are more likely to do something different if they have run out of options."

Mother of Invention

Out of options is how one might have characterized the Niagara Falls, N.Y., Public Schools. In the late 1990s, Niagara Falls had a shrinking tax base and many decrepit public school buildings. After a year and a half of evaluation and public input, the board of education determined it needed to build one new facility to replace the 100-year-old Niagara Falls High School and the rapidly aging LaSalle High School.

To accomplish this goal without a tax levy, Niagara Falls obtained special state legislation allowing the district to partner with a private developer to manage the high school project. Honeywell, which had a strong relationship with the district after completing energy retrofit work on 18 of the district's schools, was selected as the program manager. Niagara Falls High School became the first privately financed, privately managed public school construction project in New York state.

Honeywell selected J.P. Morgan to find private capital to finance the construction. One incentive for investors in the deal is the fact that the interest portion of the lease payments is exempt from federal tax. Because Honeywell is not in the real estate business, a special purpose entity was established as the financing and ownership vehicle for the project.

The school district now leases this $80 million state-of-the-art high school, which opened in September 2000, for $4.8 million a year. In 27 years, ownership of the 400,000-square foot facility transfers to the school district. Superintendent Carmen Granto calls the project a revolution in school financing, partnership, programming, leadership and technology."