Opened in 2005, the University of California, Merced (UC Merced) recently reached financial close on an unprecedented $1.3 billion project — dubbed the UC Merced 2020 Project — that will nearly double the physical capacity of the young campus by fall 2020. This past summer, the university selected Plenary Properties Merced, a multi-disciplinary development consortium, to design, build, partially finance, operate and maintain approximately 1.2 million gross square feet of new teaching facilities, research laboratories, student housing, faculty offices, infrastructure, athletics, dining and student life amenities through a customized, 39-year P3 variant known as an availability payment concession.
Financing for the project will include a combination of bonds issued by the University of California system, campus funds and privately placed bonds and equity arranged by Plenary. During construction, the university will make predetermined progress payments to Plenary. Once the buildings become available for use, the university will make performance-based availability payments that cover remaining capital costs, as well as the operations and maintenance of major building systems.
The university’s goal is to add the physical capacity to accommodate 10,000 students by 2020 (up from 6,600 during the 2014–2015 school year) and to expand in-state enrollment — especially among underserved residents in the state’s San Joaquin Valley. NCPPP asked Daniel Feitelberg, UC Merced’s vice chancellor for Planning and Budget, to describe challenges and lessons during the procurement of the university system’s first large-scale DBFOM P3 project.
NCPPP: Why did UC Merced decide to develop this project through a P3?
DF: UC Merced is the youngest campus in the University of California system and was fortunate at its inception to have built modern and environmentally sustainable facilities that currently accommodate approximately 7,000 students.
If we were to both fulfill our academic mission and keep pace with the increasing demand for admission caused by California’s population growth, we needed to quickly build new facilities on a greenfield site. At the beginning of the project we looked at many different development strategies and compared those strategies across several different factors.
One primary driver was that we had time-sensitive needs across a wide range of categories, from housing to academic facilities to basic infrastructure. We also determined that bundling the development of these asset types together into a single project enabled a unique programmatic opportunity to capture economies of scale and functionality in a short time frame.
But most importantly, the campus was committed to identifying an infrastructure management strategy that achieved multiple objectives. We believe that this structure will help us deliver and manage facilities that achieve good building performance throughout their life cycles, including the maintenance and operations of major building systems. It enables us to share performance and financial risk over the life cycle of the facilities. And, our process fostered market competition across the total cost of ownership.
NCPPP: How does a P3 help the university achieve its goals for this project?
DF: Everything UC Merced does is rooted in our mission to foster opportunity for the next generation of Californians. More than 60 percent of our students are the first in their families to attend a four-year institution, 60 percent come from low-income families and we have a critical need for space in order to expand our unique mission.
Without new facilities, enrollment would have been constrained after fall 2016 — just at a time when the demand for a UC education has never been higher.
By delivering the project in four years, faster than we could have done using a traditional design-bid-build method, the 2020 Project will enable UC Merced to expand its promise to serve California’s young people. In return for building a significant public infrastructure project, the private developer will provide approximately $700 million of its own funds (with the balance provided by UC bonds and other financial resources) and will assume much of the risk of construction, as well as the operations and maintenance of the new facilities, for decades to come. Since the contract covers life cycle costs, it gives the university predictability in budgeting, as the developer carries future maintenance costs for the 39-year term of the agreement. Going forward, the structure will enable UC Merced to focus new initiatives on the academic, faculty and student success pillars of our mission – without the distraction of deferred maintenance risk.
Finally, our hybrid financial model captures the time and cost advantages of the design-build method of developing buildings and then effectively adds a preventative capital maintenance program and capital renewal program. It does not transfer the university’s property rights, does not assign revenue streams and is not a lease.
NCPPP: Did you encounter any difficulty in obtaining authorization for using this procurement method? If so, how did you overcome it?
DF: A key element of the University of California’s overall enrollment strategy is growth at the Merced campus. As a result, there was never really a dispute as to whether we should grow — the real question was how.
Our team spent a significant amount of time consulting with decision makers at all levels of the system, with policy makers and with stakeholders regarding the model that we had determined was well suited for the project. This took time — and the institutional governance and consultation process should be incorporated into the process for anyone considering this type of procurement. But the questions we received led to refinements to the project that resulted in a better outcome. We believe that having the flexibility to accept good ideas that will still enable you to meet your long-term objectives is a positive attribute.
NCPPP: Three developers were shortlisted for UC Merced 2020. Why did the university choose Plenary Properties Merced as the project developer?
DF: Plenary Partners Merced produced a creative, compact, efficient and environmentally sensitive design that blended with our existing campus, facilitated our multidisciplinary teaching and research methods and provided flexibility for future growth and for changes in building usage. Their proposal came the closest to meeting a wide range of design specifications and performance standards within the affordability limits the university had established for the project. The multi-layered process of review and analysis we developed gave our project selection committee the confidence to make a decision with support from internal and external subject-matter experts on technical, financial and qualitative issues.
NCPPP: Did the university encounter any opposition to this project — either from within the university system or outside it — and, if so, how did the school address these concerns?
DF: Most questions regarding the project were voiced as concerns or requests for clarification — which we solicited through proactive, transparent consultation. In our structure, existing environmental, labor and transportation agreements between the university and various stakeholders were maintained. For example, in the area of labor, the developer will be responsible for the operations and maintenance of major building systems with strict performance and hand back specifications. Yet the university remains committed to hiring university employees for key services, including custodial, landscaping, information technology and security services, to ensure integrated operations across the campus.
NCPPP: How did the surrounding community — which stands to benefit from the project, both in terms of increased education and job opportunities for residents — agree to contribute to the project? How vital will the community’s participation be and how did the university go about soliciting it?
DF: Public support was critical in providing assurance to the market and to system leadership throughout the two-year procurement process and the reaction has been overwhelmingly positive. Given the project size, independent economic consultants have estimated that the total one-time economic impact of the 2020 Project will be nearly $1.9 billion in the San Joaquin Valley, and almost $2.4 billion statewide.
This project enjoyed universal recognition that its scale would be an opportunity to bring economic development to a region of California with historically high unemployment. We recognize we are an important member of our community, so the agreement includes significant requirements for local hiring, apprenticeships and contracting with small businesses.
NCPPP: How has the project scope evolved from the initial plans? Has the developer brought modifications to the table that will be incorporated into the final plan?
DF: When we first went to the market with the project, we released an aggressive program request designed to meet a fixed delivery schedule of fall 2020 delivery that would maximize the number of potential facilities that could accommodate 10,000 students and further our academic goals.
But the real unsung element of this project is that throughout we remained committed to a holistic financial framework based on the fiscal rigor of a capital strategy based on both initial capital costs and life cycle costs.
This influenced our decision making in positive, creative ways. During the procurement, we modified technical requirements that turned out to be in excess of our needs while maintaining quality, gained efficiencies we had not considered while still maintaining the academic mission, and developed a hybrid financial structure to reduce cost. For example, through value engineering we changed specifications that allowed three small buildings to be combined into one, which lowered development and operations and maintenance costs. We also managed to balance risk transfer by deciding not to have the private developer provide all of the project financing. The UC Board of Regents is contributing $600 million, which allows us to take advantage of low interest rates available to the university.
NCPPP: The current project is but one phase of UC Merced’s more ambitious expansion plans. Can you describe planned or envisioned future phases or other projects the university is considering and whether you would conduct them through a P3?
DF: With the 2020 Project underway, we are turning our focus and attention to executing on our core mission at a size of approximately 10,000 students. Just in the past year, we received our Carnegie Classification as a Research University with High Activity designation, the second highest classification for American universities the Carnegie Foundation confers. We have also been recognized by the national media as one of the top five campuses for social mobility. So we have a strong foundation for nurturing academic distinction and strengthening student success. With new capital facilities and their future maintenance addressed, we will be well positioned to achieve the size and research breadth we need to establish ourselves as a major and significant teaching and research institution.
While the long-term vision of eventually enrolling 25,000 students at full build-out is unchanged, the campus recognizes the ongoing need for capital investment by the system at our nine sister UC campuses. This means that once the 2020 Project is complete, the financial capacity to pursue an additional expansion of UC Merced will likely require significant additional public investment in our higher education system.
NCPPP: Do you think that other schools in California’s university systems are likely to follow UC Merced’s example by using P3s to develop complex, large-scale development projects on their campuses?
DF: California’s public universities have developed and managed capital assets under many different structures. Past projects have deployed more traditional design-bid-build, construction manager at risk and design-build strategies, to forms of public-private partnerships that include ground leases and lease-leaseback transactions. The availability payment concession model provides another alternative for campuses to examine when they determine the best strategy to develop and manage capital assets.
We believe that the availability payment concession model was the best choice to develop the second phase of the UC Merced. While I do not know whether other this delivery strategy will prove to be the best choice for future projects, we look forward to sharing the benefits and risks we examined as we developed our project.
NCPPP: What advice would you have for your counterparts at other schools who might be considering this procurement method?
DF: The 2020 Project actually expands on innovation already occurring across the UC system to manage our infrastructure.
The development approach for the 2020 Project was customized for the needs of UC Merced and helps us achieve the goals of the project. It brings together several functional and financial benefits of different alternative delivery strategies for education infrastructure. As we move forward, we are committed to sharing the lessons learned from our experience.
Editor’s Note: Additional details about the 2020 Project are available at merced2020.ucmerced.edu.