parrington hall renovation: stage 2 approval · 2019. 4. 4. · 2019 *estimated debt service on ilp...

F–3 STANDING COMMITTEES Finance and Asset Management Committee

F–3/204-19 4/10/19

Parrington Hall Renovation: Stage 2 Approval RECOMMENDED ACTION It is the recommendation of the administration and the Finance and Asset Management Committee that the Board of Regents, by granting Stage 2 approval to the Parrington Hall Renovation project (the “Project”):

1) Approve the Project budget of $23.8 million;

2) Approve the financing plan including use of:

a) up to $2.42 million of funding from the Internal Lending Program (ILP) for a portion of the construction costs; and

b) the Bridge Program to fund expenditures relating to unfulfilled gifts with a maximum borrowing of $2.6 million and a term not to exceed five years from the date of Board approval; and

3) Delegate authority to the President or her designee to execute contract amendments for construction.

BACKGROUND In January 2018, the Board approved a Five-Year Capital Budget that includes the the Project. In April 2018, the Board granted Stage 1 approval to the Project, authorizing a pre-construction budget of $1.4 million and delegating authority to award the design-build contract. Stage 2 approval authorizes the full financial plan for the Project. Since 1998, enrollment in the Evans School of Public Policy and Governance (“Evans School”) has grown from 223 students to over 500 in 2018 with a core faculty growing from 13 to 40 during the same period. US News & World Report ranks the school fourth in the nation, second among public institutions, out of 266 schools of public affairs and policy. The Evans School has managed growth within the limitations of its existing space in Parrington Hall for the past ten years. The Project will renovate the Parrington Hall interior to meet program needs. This includes the demolition and replacement of existing general assignment classrooms with flexible classrooms that support active learning. Additionally, the Project will create more open staff and graduate student offices and provide increased collaboration areas across the building.

STANDING COMMITTEES Finance and Asset Management Committee Parrington Hall Renovation: Stage 2 Approval (continued p. 2)

F–3/204-19 4/10/19

Attachments 1. Parrington Hall Project Summary 2. Parrington Hall Project Background 3. Parrington Hall Financing Plan and Credit Analysis

Approve Project Budget and Funding Plan

Proposed Budget Proposed FundingConstruction Cost $ 18,231,211 77% State Funds $ 10,000,000 42%Consultant Services $ 2,865,725 12% Donor Funds $ 9,488,849 40%Equipment and Furniture $ 1,012,920 4% ILP Loan * $ 2,411,151 10%Project Management $ 883,632 4% UW Capital Funds $ 1,900,000 8%Other Costs $ 806,512 3%Total Project Cost $ 23,800,000 100% Total Funds $ 23,800,000 100%

UW Denny Hall Renovation: $367/GSF* Rice University Rayzor Hall $340/SF* Denny benchmark data adjusted to align with Parrington scope.

Current Targets Current TargetsNet Assignable SF 27,162 25,776 Construction Cost/GSF $311 $277 Gross SF 58,755 58,755 Project Cost / GSF $405 $340 Efficiency (NASF/GSF) 46% 44% Operating Costs/GSF* $6.99 $6.99

Objectives• Create learning environments that support collaboration, active learning, and faculty innovation• Create space that fosters student engagement, and builds academic community• Reflect the school’s commitment to sustainability and stewardship for one of the oldest, most iconic buildings on the Seattle campus• Create a building that will be useful well into the future, accommodating emerging campus standards for flexibility and density

Approve Pre-construction Budget ($1.4M)Delegated Authority to Award Design Build Contract

* excludes $2,500 issuance fee to be paid from School reserves at closing.

Project Cost Benchmarks

Metrics & Indicators

Schedule

Description

Regent Actions

The Project will renovate the Parrington Hall interior aligning the building to meet the Evans School's program needs for flexible learning and office space. This includes demolition of existing general assignment classrooms and replacing them with flexible classrooms that support active learning, creating more open staff and graduate student offices, and providing more collaboration areas across the building. This project includes upgrades to modernize systems and improve accessibility to better provide for consistent user comfort and flexibility.

Financials

*utility costs within operation budget will be less

Benchmarks are total project costs escalated to 2019

*estimated debt service on ILP is $288.5K/yr

Parrington Hall Project Summary

Stage 1 Actions: April 2018

Stage 2 Actions: April 2019

2018

Jan March June Sept

2019

Jan March June Sept

2020

Jan March June Sept

Planning

Stage 1 Approval Move In

2017

June Sept

Design/Permitting

ConstructionStage 2 Approval

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Parrington Hall Project Background

Project Background

For the past decade the Evans School of Public Policy and Governance (“Evans School”) has

managed student and faculty growth within the limitations of Parrington Hall. The Parrington Hall

renovation will modernize outdated building programs and infrastructure creating flexible

classrooms to support creative learning classrooms and open offices to increase collaboration.

The April 2018 Stage 1 approval by the Board of Regents set a target budget of $20 million. The

Design Build contract was subsequently executed according to this budget. However, due to new

permit requirements which defined the Project as substantial alteration, the original budget was

altered in order to meet both program and building Code requirements.

An increased budget recommendation of $23.8 million aligns project scope with both City

permitting and Evans School program requirements. The revised budget follows the original 50-

percent funding participation by the Evans School which will be strategically allocated to achieve

balanced program and building renewal project goals. The project team continues to work with

the City of Seattle to determine the most appropriate ways to address a variety of Code

interpretation issues while maximizing funds available for academic program enhancements.

Project Schedule

This is a Design-Build (D-B) project, with Absher Construction-Integrus Architecture as the selected

D-B team. The design started in summer 2018 and construction will begin in May 2019 with

substantial completion in August 2020. City permitting negotiations have extended the project

completion date by three months.

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Parrington Hall Financing Plan and Credit Analysis

SCOPE OF FINANCIAL DUE DILIGENCE

Prior to the Administration’s recommending a debt-funded project for Board approval,

the Treasury Office conducts a financial due diligence. The process for due diligence is

well-defined but not exhaustive. It involves a financial risk assessment based on

conversations with the borrower, an in-depth review of provided data, and an

evaluation of the impact of a series of stress tests on the proforma. It is not intended

to replace the work of the management team, and offers no assurance of financial

performance.

Specific due diligence tasks, in partnership with the Evans School and the Office of Planning

and Budgeting, included the following:

Developed a FY2019 - FY2029 project proforma

Identified key risks

Conducted critical stress tests

Identified mitigation plans

Provided guidance on loan structuring

Financing Plan and Credit Analysis

The Parrington Hall is a $23.8 million renovation to the infrastructure and interior of

Parrington Hall (the “Project”), which will help meet the Evans School of Public Policy and

Governance’s (the “Evans School”) needs for flexible learning and office space.

In partnership with the Office of Planning and Budgeting (OPB), the Treasury Office worked

closely with the Evans School to perform a credit analysis to assess the ability of the

department to fully fund the Project through a combination of (a) State funds, (b) a

University capital contribution, (c) donor funds, and (d) an Internal Lending Program (ILP)

loan. The ILP loan will be repaid from net income of the Evans School, followed by available

reserves. Ultimately, the Provost backstops all ILP loans.

Due to the donor funding component of the Project, the University’s Bridge program will

also be used to address the timing gap between project expenditures and the receipt of gift

funds in order to accelerate project construction.

Treasury believes the Evans School has demonstrated the ability to fully fund the Project

and adequately service related debt. While the loan is relatively small in size, it is important

to note that the Evans School’s ability to service the debt is largely due to growth in fee-

based revenue and limited increases in salaries and benefits. Further, the Evans School has

thin reserves to mitigate declines in financial performance. In the event of declining

ATTACHMENT 3F-3.3/204-19 4/10/19

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financing performance, the Evans School will work with OPB to evaluate various

mitigations.

Project Scope and Funding

The Project includes the demolition and replacement of existing general assignment

classrooms with flexible spaces that support active learning, create open staff and

graduate student offices, and provide collaboration areas across the building. This Project

also includes significant structural work as well as infrastructure upgrades to modernize

systems and improve accessibility to provide for consistent user comfort and flexibility.

As shown in the following table, the total cost of the Project is $23.8 million:

Proposed Budget

Proposed Funding

Construction Cost $ 18,231,211 State Funds $ 10,000,000

Consultant Services 2,865,725 Donor Funds 9,488,849

Equipment and Furniture 1,012,920 ILP Loan* 2,411,151

Project Management 883,632 UW Capital Funds 1,900,000

Other Costs 806,512

Total Project Cost $ 23,800,000 Total Funds $ 23,800,000

* Excludes $2,500 issuance fee to be paid from School reserves at closing. Estimated debt service on the

ILP loan after completion is expected to be approximately $288,500/year

Key Assumptions

Two key assumptions behind the financial proforma are the Evans School’s forecast that (1)

fee-based programs will grow at a higher rate than in recent years and (2) salaries and

benefits will grow modestly going forward. Proforma assumptions were vetted with OPB

and align with the Evans School’s budget.

Revenues (FY19-FY29):

Tuition: An average growth rate of 2.2%/year, reflecting expected tuition increases

Self-Sustaining Units: An average growth rate of 8%/year, reflecting growth in actual

and planned programs

Fee-Based Programs: The growth rate for FY20 and FY21 is assumed to be 32% and

21% respectively due to the launch of the Global MPA fee-based program in FY20.

Thereafter the Evans School projects a growth rate of 5%/year, reflecting sustained

enrollment and tuition growth

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Expenses (FY19-FY29):

Salary Expenses: A growth rate of 2%/year

Benefit Expense: A growth rate of 2%/year

FTE Growth: 1 faculty added in FY22, 2 faculty and 2 professional staff added in FY23

Loan Provisions:

10-year loan (useful life of tenant improvements is > 10 years)

Interest is accrued and paid through construction

Estimated debt service on the 10-year loan (after construction) is expected to be

approximately $288,500/year

The Bridge loan will accrue interest at a fixed short-term market rate, and will be

paid monthly (see Bridge Financing Strategy below)

Base Case Proforma (see Appendix A)

The Base Case proforma shows that the Evans School can service the debt related to their

ILP and Bridge loans:

The relative size of the ILP loan is small compared to net income resulting in Debt

Service Coverage (DSC) well above the standard 1.25x. The minimum Debt Service

Coverage (DSC) is 6.2x in FY23 and the maximum is 155.5x in FY20

Unrestricted reserves are well above 1-year of debt service (approximately

$288,500) and are projected to grow from a minimum of $1.9 million in FY20 to a

maximum of $20.7 million in FY29

Stress Tests & Sensitivity Analysis (see Appendix B)

Three stress tests were performed. For illustrative purposes, the stress tests assume no

mitigation is taken by the Evans School or OPB.

1. Revenue Stressor: Fee-based revenues remain equal to FY19 levels (0% growth)

If fee-based revenues remain at FY19 levels, the Evans School is still

projected to generate positive cash flow in all years

Reserves would remain positive in all years

2. Expense Stressor: Salary and benefit expenses grow 5%/year and 4%/year

respectively

If salary and benefits grow at higher rates than in the Base Case proforma,

the Evans School is projected to generate negative cash flow beginning in

FY27

Reserves would remain positive in all years

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3. Combined stress case (both conditions described above)

If both conditions described above occur simultaneously, cash flow will

become negative beginning in FY23 and thereafter and reserves will be

exhausted in FY24

Risk Mitigation Plan

Potential mitigations of evaluated stressors include:

Expense reductions;

Increased philanthropy;

Curtail other capital expenditures and School initiatives; and

Increased support by Central

Bridge Financing Strategy

As of March 15, 2019, the Evans School has received $9.5 million in pledges relating to the

Project, with $6.9 million on hand. The Evans School expects to collect an additional $2.6

million through the construction of the Project. When combined with the other funding

sources, these funds are expected to cover Project expenditures through June 2020.

At that point, Project expenditures are expected to exceed available funds and the Bridge

program will be used to fund expenditures relating to unfulfilled gifts. Based on currently

uncollected pledges, the maximum Bridge loan will be set at $2.6 million. However, under

current collection projections, the needed Bridge loan is estimated to be $1.4 million.

The Bridge loan will accrue interest at a short-term market rate determined at the time of

the initial draw. The interest rate will be fixed for the life of the loan. The interest will be

paid monthly from Evans School net income. The Bridge program is not an additional

funding source for Project costs, and any outstanding Bridge loan balance will be repaid as

donor funds are received, but no later than five years after Regent approval (April 2024).

Ongoing Communication Plan

On-going requirements and communication include:

Enter into a financing agreement with Treasury

Provide periodic financial information as requested by Treasury, OPB, and/or the

Board of Regents

Contact Compliance and Risk Services to determine the appropriate types and

amounts of coverage, if any

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Parrington Hall

Appendix A: Base Case Proforma

(1) CAGR = Compound Annual Growth Rate

(2) Majority of negative cash flow was from spend down of reserves unavailable to Evans School. These were ultimately covered by Central, and therefore do not contribute to reserve balances in FY16

and FY17

Annualized

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029

CAGR (1)

(FY16-FY18)

CAGR

(FY19-FY20)

CAGR

(FY20-FY29)

Beginning Balances -$ -$ -$ 61,316$ 222,039$ 1,890,647$ 3,824,818$ 5,972,441$ 7,582,570$ 9,354,570$ 11,281,829$ 13,374,814$ 15,642,286$ 18,093,240$

REVENUE

Tuition (ABB) 6,750,941$ 6,739,673$ 7,135,073$ 6,985,000$ 7,195,090$ 7,418,500$ 7,559,000$ 7,710,000$ 7,864,200$ 8,021,484$ 8,181,914$ 8,345,552$ 8,512,463$ 8,682,712$ 2.8% 3.0% 2.1%

Research Cost Recovery (RCR) 202,745$ 256,360$ 254,979$ 281,787$ 475,250$ 538,427$ 598,428$ 615,044$ 627,345$ 639,892$ 652,690$ 665,743$ 679,058$ 692,639$ 12.1% 68.7% 4.3%

Self-Sustaining Units 842,835$ 863,620$ 502,768$ 460,156$ 523,164$ 547,322$ 722,688$ 689,222$ 723,843$ 760,203$ 798,390$ 838,494$ 880,613$ 924,848$ -22.8% 13.7% 6.5%

Nonrestricted Annual Gifts 243,691$ 140,600$ 119,930$ 150,000$ 150,000$ 150,000$ 150,000$ 150,000$ 150,000$ 150,000$ 150,000$ 150,000$ 150,000$ 150,000$ -29.8% 0.0% 0.0%

Nonrestricted Endowment Distributions 508,487$ 471,189$ 518,248$ 681,600$ 681,600$ 681,600$ 681,600$ 681,600$ 695,232$ 709,137$ 723,320$ 737,786$ 752,542$ 767,593$ 1.0% 0.0% 1.3%

Fee-Based Revenue 1,246,335$ 1,176,621$ 1,480,310$ 1,806,000$ 2,377,000$ 2,875,031$ 3,018,783$ 3,169,722$ 3,328,208$ 3,494,619$ 3,669,349$ 3,852,817$ 4,045,458$ 4,247,731$ 9.0% 31.6% 6.7%

Total Operating Revenue 9,795,034$ 9,648,063$ 10,011,308$ 10,364,543$ 11,402,104$ 12,210,880$ 12,730,499$ 13,015,588$ 13,388,828$ 13,775,334$ 14,175,662$ 14,590,393$ 15,020,135$ 15,465,524$ 1.1% 10.0% 3.4%

EXPENSES

FTE 57 57 57 53 53 53 54 58 58 58 58 58 58 58

Salaries 6,975,318$ 7,321,583$ 6,996,345$ 6,383,089$ 6,510,751$ 6,640,966$ 6,923,785$ 7,512,261$ 7,662,506$ 7,815,756$ 7,972,071$ 8,131,513$ 8,294,143$ 8,460,026$ 0.2% 2.0% 3.0%

Benefits 1,792,731$ 1,962,143$ 1,826,065$ 1,770,628$ 1,806,041$ 1,842,162$ 1,911,931$ 2,063,582$ 2,104,854$ 2,146,951$ 2,189,890$ 2,233,688$ 2,278,362$ 2,323,929$ 0.9% 2.0% 2.8%Other Operations (e.g. supplies, computers, 1,046,367$ 1,140,945$ 1,127,582$ 2,050,103$ 1,405,902$ 1,528,431$ 1,433,180$ 1,522,126$ 1,552,959$ 1,596,889$ 1,632,237$ 1,669,240$ 1,708,196$ 1,749,377$ 3.8% -31.4% 2.5%

Total Operating Expenses 9,814,416$ 10,424,671$ 9,949,992$ 10,203,820$ 9,722,694$ 10,011,559$ 10,268,897$ 11,097,969$ 11,320,320$ 11,559,596$ 11,794,199$ 12,034,441$ 12,280,701$ 12,533,332$ 0.7% -4.7% 2.9%#DIV/0! #DIV/0!

NET OPERATING INCOME (19,382)$ (776,608)$ 61,316$ 160,723$ 1,679,410$ 2,199,321$ 2,461,602$ 1,917,619$ 2,068,508$ 2,215,738$ 2,381,463$ 2,555,952$ 2,739,434$ 2,932,192$ 944.9% 6.4%

Bridge Loan (Estimated) -$ -$ -$ -$ -$ 31,310$ 25,500$ 19,011$ 8,028$ -$ -$ -$ -$ -$ FAST Loan (Estimated) -$ -$ -$ -$ 10,803$ 233,840$ 288,479$ 288,479$ 288,479$ 288,479$ 288,479$ 288,479$ 288,479$ 288,479$

TOTAL DEBT SERVICE -$ -$ -$ -$ 10,803$ 265,150$ 313,980$ 307,490$ 296,508$ 288,479$ 288,479$ 288,479$ 288,479$ 288,479$

Subtotal: Net Operating Cash Flow (19,382)$ (776,608)$ 61,316$ 160,723$ 1,668,608$ 1,934,171$ 2,147,623$ 1,610,129$ 1,772,001$ 1,927,259$ 2,092,984$ 2,267,472$ 2,450,954$ 2,643,713$

Non-Operating Revenue/Income -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Capital Expenditures -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Cash Flow (2) (19,382)$ (776,608)$ 61,316$ 160,723$ 1,668,608$ 1,934,171$ 2,147,623$ 1,610,129$ 1,772,001$ 1,927,259$ 2,092,984$ 2,267,472$ 2,450,954$ 2,643,713$

Ending Balance (Reserves) 61,316$ 222,039$ 1,890,647$ 3,824,818$ 5,972,441$ 7,582,570$ 9,354,570$ 11,281,829$ 13,374,814$ 15,642,286$ 18,093,240$ 20,736,953$

155.5 8.3 7.8 6.2 7.0 7.7 8.3 8.9 9.5 10.2

Actual

Coverage (Net Operating Income / Debt Service)

Projected

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Parrington Hall

Appendix B: Stress Tests and Sensitivity Analysis

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029

Net Operating Income 160,723$ 1,679,410$ 2,199,321$ 2,461,602$ 1,917,619$ 2,068,508$ 2,215,738$ 2,381,463$ 2,555,952$ 2,739,434$ 2,932,192$

Cash Flow 160,723$ 1,668,608$ 1,934,171$ 2,147,623$ 1,610,129$ 1,772,001$ 1,927,259$ 2,092,984$ 2,267,472$ 2,450,954$ 2,643,713$

Reserves 222,039$ 1,890,647$ 3,824,818$ 5,972,441$ 7,582,570$ 9,354,570$ 11,281,829$ 13,374,814$ 15,642,286$ 18,093,240$ 20,736,953$


Net Operating Income 160,723$ 1,108,410$ 1,130,290$ 1,248,819$ 553,897$ 546,300$ 527,120$ 518,114$ 509,135$ 499,976$ 490,462$

Cash Flow 160,723$ 1,097,608$ 865,140$ 934,840$ 246,407$ 249,793$ 238,641$ 229,635$ 220,655$ 211,497$ 201,982$

Reserves 222,039$ 1,319,647$ 2,184,787$ 3,119,627$ 3,366,034$ 3,615,826$ 3,854,467$ 4,084,101$ 4,304,757$ 4,516,254$ 4,718,236$


Net Operating Income 160,723$ 1,452,505$ 1,729,982$ 1,733,980$ 910,597$ 746,027$ 557,166$ 365,057$ 158,800$ (62,599)$ (300,148)$

Cash Flow 160,723$ 1,441,703$ 1,464,832$ 1,420,000$ 603,107$ 449,520$ 268,687$ 76,577$ (129,679)$ (351,078)$ (588,627)$

Reserves 222,039$ 1,663,742$ 3,128,574$ 4,548,574$ 5,151,681$ 5,601,201$ 5,869,888$ 5,946,465$ 5,816,786$ 5,465,708$ 4,877,080$


Net Operating Income 160,723$ 881,505$ 660,951$ 521,197$ (453,125)$ (776,181)$ (1,131,453)$ (1,498,293)$ (1,888,017)$ (2,302,057)$ (2,741,879)$

Cash Flow 160,723$ 870,703$ 395,801$ 207,217$ (760,615)$ (1,072,688)$ (1,419,932)$ (1,786,772)$ (2,176,496)$ (2,590,536)$ (3,030,358)$

Reserves 222,039$ 1,092,742$ 1,488,543$ 1,695,760$ 935,145$ (137,543)$ (1,557,475)$ (3,344,247)$ (5,520,743)$ (8,111,279)$ (11,141,637)$

Base Case Proforma

Stress Test 1 - Fee Based Revenue

Stress Test 3 - Combined Scenario

Stress Test 2 - Salaries & Benefits

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parrington hall renovation: stage 2 approval · 2019. 4. 4. · 2019 *estimated debt service on ilp...

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