Using Innovative Financing and Delivery for School Modernization

Built in the 1920s, James F. Oyster Bilingual Elementary School was on its last legs by the early 1990s. The school's strong academic record stood in contrast to a structural crisis-leaking roofs, building code violations and accompanying shutdowns, lack of computer hookups and limited space. Yet the District of Columbia didn't have the $11 million required to build a new school, nor did it have the borrowing power. The District had to make a hard decision: shut down the decrepit building and relocate students, or find another way to bring the school up to code.

What the District lacked in financial assets, it made up for in physical assets: the school sat on 1.67 acres of prime real estate within walking distance of the National Zoo. The District converted its underused physical assets into a financial asset by dividing the property, half for a new school and half for a new apartment building-both designed and built by the private sector. In exchange for giving the private sector partner the development, operation and maintenance rights for the new apartment building, the District got its first new school in 20 years-a state-of-the-art facility with double the space. The bond issue that financed construction is backed by the incremental revenue generated by the project, which consists of the taxes and other payments by the private partner generated from the operation of the apartment building.

In 1996 the Houston Independent School District used a lease-leaseback arrangement with a private developer to obtain two new schools for $20 million less than the budget and a year earlier than originally planned. Besides solving the financial problem, potential benefits of increased private sector participation in school modernization include faster construction, innovative design and more time for school administrators to focus on core educational goals rather than facilities management.

In 2006 the Rensselaer, NY, school district, lacking sufficient public borrowing capacity, executed an innovative "land swap" transaction to build a new school to replace its old, overcrowded facilities. The old school sat on prime waterfront property, and a private developer held land in another location that was not as desirable for residential or commercial purposes but was appropriate for the school. Through a financing vehicle that raised tax-exempt debt secured by lease payments, the parcels were swapped, and the new school was constructed by the developer who in turn received development rights on the waterfront parcel. In addition to a new, modern and larger school, the city of Rensselaer will also have a redeveloped commercial and residential section on its highly desirable waterfront, further contributing to its economic recovery. Essentially a design-build PPP, this project demonstrates how innovative thinking between the public and private sector can meet multiple goals of both parties and create "win-win" situations.

These examples point to an important and growing strategy for meeting school infrastructure needs: innovative partnerships with the private sector. PPPs can be structured in a number of ways to meet school modernization objectives. Private firms typically finance, design, construct, and operate a public school under a contract with the government for a given time period, usually 20 to 30 years. Businesses usually provide non-core services such as school transport, food services and cleaning, while the government assumes responsibility for teaching. Common PPP models can include the sale of development rights on unused property, and sale-leaseback or lease-leaseback arrangements. In these solutions, school districts can sell or lease surplus land to a developer who then builds a school and leases it back to the school district.8

Source: William D. Eggers and Tiffany Dovey, "Rebuilding America's Schools" Education Week, January 24, 2008