The State of Higher Education in 2021
In the last 12 months, higher education institutions were faced with numerous challenges. With the benefit of large-scale vaccination programs, colleges and universities are now able to return to normal. This transition is an opportune time for higher ed establishments to reassess their real estate needs. Asset sales, including sale/leasebacks are conventional methods to address excess capacity, but asset monetizations should also be considered.
What is Asset Monetization?
As universities assess their long-term strategies, effective and efficient management of non-core assets should be a primary consideration. An asset monetization is a creative financing structure that should be part of an institution’s ongoing assessment of its non-core assets. It is a very straightforward transaction; in exchange for an upfront payment from the concessionaire, the institution transfers the operation of the underlying assets to the concessionaire while still retaining title to the assets. At the end of the concession term (normally 40 to 50 years), the concessionaire is obligated to return the use of the assets to the institution in a condition similar to the start of the concession. University leadership must be comfortable that the two parties share common values and have similar goals as the concession duration creates a significant, strategic partnership. Done correctly, an asset monetization can generate upfront liquidity for the institution while maintaining long-term control of the assets.
How Does The Process Work?
As a first step, the institutions need to discuss their objectives and address a variety of factors. For example, many universities have used the concession model to monetize their parking systems. While parking may be considered a non-core activity and pursuing parking monetization may seem to be a problem-free solution, institutions need to address any potential cultural impact. Many institutions subsidize parking to reduce the costs to university users. University stakeholders may have come to expect discounted parking and any changes to that may create a negative impression in the minds of the community.
Colleges and universities also need to define the strategic benefits through an internal assessment before devoting significant internal resources. Since the transaction structure effectively transfers the operating, capex, and technology risks to the concessionaire, there is a second benefit to the institution as the transfer of these risks frees up capital resources that can be invested in more mission-specific activities such as research facilities and academic buildings. In addition, any upfront payment can be reinvested in higher priority, mission-specific activities.
Pros and Cons of Asset Monetization
On a plus side, asset monetization can free up more capital than conventional financing structures and still be structured to provide the institution with the flexibility to address its future infrastructure development needs. The institution’s need to take properties off-line as part of a long-term expansion plan can be factored into the underlying assumptions of the concessionaire’s model of how the assets are operated over time. The parties are then able to quantify the impact of removing a specific asset before finalizing any valuation.
However, transferring operational management to a third-party concessionaire can lead to concerns that the new operator may be less sensitive to the needs of the university stakeholders including faculty, staff, students, and alumni.
Using a parking concession as an example, the concessionaire is keenly aware that it needs to deliver a high level of customer service. Through the operating standards included as an integral piece of the concession agreement, the university defines the expected operational requirements. Legacy parking accommodations for groups or specific days in the academic calendar can be preserved through agreed-upon exceptions. These categories can be quite specific and drafted to meet the requirements of the institution without impacting any of the users.
The institution should set up a separate internal process to permit weekly check-ins, identify issues, and discuss possible solutions. The build-out of the financial model and a data room/repository requires coordination across functional lines. The efficient management of this process is a critical success factor.
There are possible disadvantages to the concession structure that need to be addressed in the initial assessment of the structure’s viability. The implied cost of borrowing represents the discount rate used by the concessionaire to determine the upfront payment. The implied borrowing cost may be slightly higher than a general obligation bond issuance. The higher borrowing cost may be mitigated by the net proceeds being greater than with conventional financing. Any perceived residual premium could be attributed to the intrinsic value of transferring all of the operating, capital, and technology risks to the concessionaire.
As is the case with any major strategic decision, an asset monetization has both advantages and disadvantages. Any institution considering an asset monetization should establish an internal process to carefully consider and evaluate all of the considerations. In the right circumstances and for the right institution, these transactions can be an innovative means to generate value that can be reinvested in mission-specific academic programs.
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