The Greenville, S.C., school board struggled for 10 years to find a means to pay for a much-needed construction program that would build or expand 70 different school buildings. Realizing its effort was going nowhere, the board advertised for a construction manager that could offer a creative solution. It found one, locally, when a group of business executives formed their own firm to attack the financial problem and partnered with New York City-based construction manager Faithful + Gould for construction expertise.
Institutional Resources, Greenville, found a way to finance a $1-billion deal, avoid the state’s debt restrictions and provide comprehensive construction management services. The program is on schedule for a 2008 completion, after only 5 years of operation.
Financing was the biggest hurdle for the program because tax rates had tripled recently and South Carolina has a constitutional debt limit for public entities of 8% of holdings, says school board member William Herlong. Institutional Resources won the bid with its financing plan that utilized a third-party holding corporation to circumvent the debt rules.
Financial plan is similar to that of a mortgage agreement with a bank.
The nonprofit company, dubbed Building Equity Sooner for Tomorrow (BEST), is classified by the Internal Revenue Service as a 60-23 corporation, which means that it exists and must function solely to support the school district, says Bob Hughes, chairman of Institutional Resources. BEST is run by a board composed of five members, all appointed by the school board. BEST contracted New York City-based UBS to underwrite $999 million in bonds that it issued for construction of new schools, using projected usage figures as collateral.
“We proved that the school district will always need the schools, that the schools would all be completed, and that it would be very unlikely that the [board] would be able to get equal quality schools for a lower payment,” says Hughes. Those factors allowed BEST to receive an excellent bond rating that made its interest rates comparable to what a school district would expect to pay.
Wall Street investors were happy to see a school district taking a proactive approach to meeting its infrastructure needs. “We were told our bonds received excellent reviews because we are one of the only school districts in the country taking a proactive approach to fixing our inadequate facilities,” says Dennis Braasch, president of locally based Global Performance LLC, a consulting firm that partially owns Institutional Resources.
The arrangement between the non-profit and the school district is similar to that of a homeowner and the bank. “BEST owns the new schools and every school that had work done under the program. As the school district makes payments each year, it buys back one-twenty-fifth of the new schools in the program,” says Braasch.
Annual payments of about $60 million are made from the district to BEST. If the school district defaults on payments, it loses its right to use any of the 70 schools in the program. BEST cannot do anything with the schools, though, if the district were to miss a payment, so both sides are protected, say Braasch.
“The novelty is that I’ve never seen a school district undertake a comprehensive rebuilding of its structures in a single transaction,” says Brent Jeffcoat, bond specialist and partner at Charlotte, N.C.-based law firm McGuireWoods LLP. The model has since been used at three other districts in South Carolina.
Acting as construction manager, Institutional Resources first helped the district develop basic specifications for all of the schools. Then, it bundled the work for 70 schools into 61 work packages, ranging from a few million dollars to $120 million. Don Buck, Institutitonal Resources CEO, says 19 architectural firms and 24 general contractors are working on the program.
CM brought organization, efficiencies of scale to school construction purchases.
The company put its clout as manager of a $1-billion program to use, buying materials on a program-wide basis to ensure best possible pricing. For instance, “Every HVAC unit for the program was in one purchase order to Train,” says Herlong. Bulk price agreements were also reached for floor tiles, ceiling tiles, lockers, and some electrical panels.
Institutional Resources also has contractors rely on prefabricated materials to keep timelines as short as possible. “One of the smartest things that was done was for us to get school board approval for prefab materials. I don’t believe that there is any way that we could have staffed the masons,” says Buck. The company also used prototype designs wherever possible to reduce design time and cost. “We saved $4.5 million on design fees,” says Mike McKinney, program director for Institutional Resources.
“We [also] tried to incorporate as many LEED principles into the schools as possible,” says Mike Magee, assistant project manager for Institutional Resources. Building design incorporates natural lighting, web-based HVAC control systems and a variety of components to monitor and maintain air quality. And green buildings, while slightly more expensive, are already paying dividends in teacher recruitment, says Buck.