Advanced Financing For many years, Capstone had been approached by colleges about building on campus, but nothing seemed to be a good fit until it convinced Regents Bank to buy the tax-exempt bonds at small Spring Hill College in Mobile, Ala. The experience taught Capstone a major lesson. In addition to development, schools also needed help with non-recourse financing, a type of debt where the borrower is not personally liable. It also helped Capstone understand that there was a bigger market available for on campus projects.
To do these projects, Capstone needed money. Off campus, Mouron knew he could get loans to cover about 75 percent of costs. But he thought if Capstone could move on campus and set up a nonprofit, charitable 501(c)(3) foundation, he could increase the loan amount for a project. “If you take a pro forma for off-campus housing and move it over on campus, there are three dramatic differences,” he says. “Land goes to zero, property taxes go to zero, and the cost of debt goes from taxable to tax exempt. If you put all of those things in the same pro forma, most of the time, the result will be that it warrants a 100 percent loan.”
Unless a school guaranteed the loan, most lenders wouldn’t give a 100 percent loan. So, traditional loans were out of the question. Mouron then turned to bonds. He knew he could get governmental agencies to issue them for college projects but would have difficulty finding buyers unless rating firms gave them an investment grade.
The company did two on-campus deals where the bonds weren’t investment-grade, but it wasn’t happy with the results. “We saw quickly that there was a need to get these projects investment?grade?rated to reduce the interest rates, which would make it easier to underwrite projects,” says Will Davenport, senior vice president of finance for Capstone. “This means you have more capital available for construction, you can offer the bonds at lower retail rates, and it’s a better financing overall for the university.”
So Capstone took its financing plan to Moody’s Investors Service, which rates bond deals. After a year and a half, Moody’s finally judged a Capstone project at the University of Central Oklahoma in 1999 as investment grade. This was the first privatized student housing deal to which the agency ever gave an investment-grade rating, according to John Nelson, managing director at Moody’s.
The project earned the rating because Moody’s saw market demand for it and recognized its importance to the university, according to the agency. Moody’s also liked what it learned about Capstone. “When you have a developer like Capstone, which has experience building these things, that does help us overcome certain risk factors at the margin,” Nelson says.
Moody’s decision opened the floodgates. Since Spring Hill in 1996, Capstone has built at 38 colleges. This specialty has kept the company so busy that it hasn’t done an off-campus development in four years. Capstone earns 70 percent of its money from development fees for on-campus projects. It gets 30 percent of its fee when the bonds are sold and then the remainder, along with expenses, after the project is completed.
