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Ohio State Set to Park $483 Million From Lease Deal: Muni Credit

Ohio State University, less than a year after joining elite private schools in selling 100-year bonds, wants to lease its parking operations for five decades as its state funding declines.

The board of trustees for the third-largest U.S. campus by enrollment voted unanimously today to accept $483 million in return for giving up parking revenue and management during the lease. Ohio State, with about 57,000 students, says the venture would be a first among public colleges. Schools including Indiana University are interested.

State money fell to 7 percent of the school budget this year from about 15 percent in 2002 as Ohio cut expenditures. U.S. universities facing similar challenges may mimic the deal, said Peter McPherson, president of the Washington-based Association of Public and Land-grant Universities. The combination of interest rates close to record lows and predictable returns makes the arrangement attractive, he said.

“An idea like this, maybe 10 years ago, people would have thought was too much out of the box,” McPherson, a former banker and Michigan State University president, said by telephone. “These kinds of transactions, given the needs of universities, are going to be thought more and more practical.”

Urban Parking

Municipalities including Chicago and Indianapolis have leased parking in decades-long agreements. New York City is giving private operators until July 31 to show interest in running the biggest U.S. municipal parking system.

State support for U.S. public colleges and universities fell by $900 million, or 13 percent, from 2006 to 2011, while enrollment rose 17 percent, according to the Washington-based American Council on Education.

Parking leases make sense for universities because the service isn’t a core educational function, yet it can be leveraged, said Leonard Gilroy, a director at the Los Angeles-based Reason Foundation. The group advocates free markets and limited government.

Indiana University, with an enrollment of about 43,000, is “in the early stages” of exploring such a deal, Mark Land, a spokesman, said by phone from Bloomington.

“All eyes will be on Ohio State,” Kelly Bartling, a spokeswoman for University of Nebraska-Lincoln, with about 25,000 students, said by phone.

Administration’s Choice

Ohio State trustees approved an administration-recommended deal with QIC Global Infrastructure and partner LAZ Parking in Hartford, Connecticut, to manage 35,000 spaces. QIC, with staff in Sydney and Brisbane, has a portfolio that includes an interest in Brisbane Airport and the Westlink M7 toll road in Sydney.

The funds from the lease would be paid in September and added to a $2.3 billion endowment, Geoff Chatas, Ohio State’s chief financial officer, said in an interview in Columbus.

Assuming the university’s average 9 percent annual endowment growth for the past 30 years, the lease revenue would produce $3.1 billion in investment earnings over the half-century deal to pay for needs such as faculty and scholarships, Chatas said. The university would use separate funds to pay off about $80 million in debt on the parking facilities, Shelly Hoffman, a spokeswoman, said by e-mail.

The lease is less about parking and more about what the proceeds can do for the university and its medical center because “no parking space I’ve ever seen cures cancer,” President E. Gordon Gee said in an interview after the vote. The university also should examine whether to monetize its airport, golf course and land isn’t adding value, Gee said.

“Every university should be looking at every aspect of what they do in order to determine what is a core business, what contributes to that core business, and if it is not, then how can we make it contribute to the core business,” Gee said.

Public Century

To help finance $2 billion in capital projects, Ohio State also issued $500 million of 100-year taxable debt in October. It joins institutions such as the Massachusetts Institute of Technology in issuing such bonds. Unlike Ohio State, most of those borrowers have been private colleges.

Paul Beck, a political-science professor who opposes the lease deal, said he’s concerned that the university is essentially using “forced contributions” from parking fees for its endowment. He’s also concerned that the operator won’t generate enough revenue or that the university won’t earn the needed returns.

“It’s a gamble on both sides,” Beck said in a telephone interview from Columbus.

Crystal Ball

J. Richard Dietrich, an accounting professor at Ohio State’s Fisher College of Business, and three colleagues concluded that the lease would be better financially than having the university run parking if investment returns averaged at least 7.75 percent a year.

“I wish we were clairvoyant and could see the next 50 years, but since we can’t, we have to make a decision using the best judgment available,” Dietrich said.

Even so, Beck pointed to Chicago, where former Mayor Richard Daley’s 75-year, $1.15 billion lease with a Morgan Stanley-led partnership for the city’s parking-meter system was undervalued by almost $1 billion, Chicago’s inspector general said in 2009.

Ohio State is limiting increases to 5.5 percent annually for the first decade and by the greater of 4 percent a year or the five-year average of the Consumer Price Index after that, Chatas said.

Parking deals can benefit both sides, said Thomas Hagerman, chief operating officer for Standard Parking Corp., the largest U.S. parking company and with the Carlyle Group an unsuccessful bidder on the Ohio State deal.

“Ohio State University did what they needed to do,” Hagerman said by telephone from Columbus. “It’s something that’s going to happen more frequently on the university side.”

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