# Public-Private Partnership Policy Casebook/University of California Merced (redux)

This case study reviews the University of California Merced 2020 project as a collaborative work of Danielle Harris, Brian Todd, and Karim Delrehim. The casebook is a product of the George Mason University graduate program, as an assignment for the Public-Private Partnership Policy course under the leadership of Dr. Jonathan Gifford. The views expressed here are the product of student research. It does not represent the views of Dr. Jonathan Gifford or George Mason University.
The casebook explores elements such as key actors, event timeline, risks, financial and institutional structures, policy issues, and key takeaways.

## Summary

The University of California, Merced (UC Merced) is a public institution founded in 2005 and is the newest school in the University of California system. It is situated in rural Merced, California focused on serving the students of San Joaquin Valley many of whom are first-generation college students. As of 2020, UC Merced has over 8,800 students across 24 majors, 25 minors, and 17 graduate programs. In addition to serving its students, UC Merced contributes to the economic growth of Central California with an estimated impact of $23 billion since 2000 and currently employs over 1,500 staff and faculty.
In September 2020, the project known as Merced 2020 completed construction and is now labeled the largest social infrastructure public-private partnership in the United States. The project was first conceptualized in 2012 as a mixed-use expansion of the campus on a 219 acre parcel of university-owned land that would nearly double the campus capacity. In 2016, UC Merced selected Plenary Properties Merced (PPM) to design, build, finance, and maintain the project for 39 years. PPM was the first single private development team to take on a multi-year, fast track project for any University of California campus. The development team consisted of financial adviser and equity investor, Plenary; builder, Webcor Builders; architect, Skidmore, Owings & Merrill, architect; and services, Johnson Controls.

## List of Actors
### Public Stakeholders

* University of California, Merced (UC Merced): UC Merced opened September 5, 2005, as the newest campus in the University of California system and the first American research university of the 21st century. Situated near Yosemite National Park, the campus significantly expands access to the UC system for students throughout the state, with a special mission to increase college-going rates among students in the San Joaquin Valley. It also serves as a major base of advanced research, a model of sustainable design and construction, and a stimulus to economic growth and diversification throughout the region.
* Merced 2020 Project Board:This board is advisory to the Chancellor and charged with ensuring the campus and the project meet their overarching objectives. The board provides timely decision making, and acts as a check-and-balance on competing campus interests. The board also proactively manages any organizational changes necessary for UC Merced to be 2020-ready.
* Board of Regents, University of California: The University of California is governed by the Board of Regents which is established under the California Constitution to organize and govern specific areas of legislative control. This group was the approver of the financial budget for Merced 2020.
* Merced City Council: City Council expressed support for Merced 2020 and is looking to capitalize it as a source for revenue for the city.

### Private Stakeholders

* Plenary Properties Merced (PPM): Winning bidder of Merced 2020, PPM is a consortium of design, engineering, construction, maintenance, operations and financial partners.
* Plenary Group: International infrastructure developer and investor in public-private partnership with a portfolio of 73 assets across North America and Australia.
* Webcor Builders: PPM’s lead contractor is Webcor Builders, a San Francisco-based firm whose previous projects include California Memorial Stadium at UC Berkeley, Zuckerberg San Francisco General Hospital and the California Academy of Sciences.
* Johnson Controls, Inc.: PPM’s lead operations and management firm. Providing the operations, maintenance and renewal services to the PPM team throughout the 39-year contract term.
* Skidmore, Owings & Merrill Inc.: Lead architect in coordination with various others including: WRNS Studio, HOK, Page Southerland Page, Mahlum Architects, and Arup North America.
* Initial RFQ/RFP and Procurement Advisors: Multiple advisory firms were brought on during the procurement of Merced 2020 including WT Partnership, Nossaman LLP, Ernst and Young, AECOM, Solomon Cordwell Buenz, JLL, and The Hivdt Group.

## Timeline of Events

Early 2012: Project was first conceptualized and UC Merced invited the Urban Land Institute Advisory Services Panel to analyze potential development options.
Fall/Winter 2012: Students, faculty, and the community were interviewed for input and the Urban Land Institute Advisory Services Panel released their final report including a 7- step plan for project start up.
Fall/Winter 2013: Community focus groups continued and preparation for further analysis commenced specifically looking into project delivery methods, financial structures, project costs, budget, design, and project schedule.
Fall/Winter 2014: The RFQ was released and six teams responded. Three of the development teams were determined to be qualified.
November 2015: An RFP was then released only to the three qualified teams and due by Spring 2016.
Spring 2016: Plenary Properties Merced (PPM) was named the winning bidder.
Summer 2016: The UC Board of Regents approved the project budget
October 14, 2016: Project official start with groundbreaking ceremony
2017: The project received several awards including Best Social Infrastructure Project, P3 Awards, North American Social Infrastructure Deal of the Year IJGlobal Award, and The Americas P3 Deal of the Year PFI Award.
Fall 2018: First phase of project completed including the first four facilities. Will entail 700 new student housing beds, 600-seat Dining Facility, classrooms and 940 parking spaces. Received CASE Circle of Excellence Award for phase one opening event.
Fall 2019: Second phase of project is scheduled for completion adding three new facilities: Wet Laboratory building and Computational Laboratory building with faculty offices, and NCAA-II level outdoor competition field
June 1, 2020: Project completed on-time and on budget. Nine new facilities were added including new Wet Laboratory building with faculty offices and classrooms, research greenhouse, 980 new beds of Student Housing, 630 new parking spaces, Conference Center, dedicated Transit Hub for buses, new Wellness Center, Enrollment Center, expansion of existing Early Childhood Education Center, Competition Swimming Pool, 3 Tennis Courts, and 4 Basketball Courts.
Fall 2020: All fourteen buildings received LEED Gold certification and many obtained LEED Platinum certification.
2055: 39 year contract term ends

## Risk Matrix

School Public Private Partnership Transaction Risk Matrix
| Risk Type | Public | Shared | Private |
| Land Availability, Access and Site Risk | X | | |
| Social Risk | X | X | |
| Environmental Risk | | X | X |
| Design Risk | | | X |
| Construction Risk | | | X |
| Variations Risk | | X | |
| Operating Risk | | | X |
| Demand Risk | X | | |
| Financial Markets Risk | | X | |
| Strategic or Partnering Risk | | X | |
| Force Majeure Risk | | X | |
| Change in Law Risk | X | | |
| Early Termination Risk | | X | |
| Condition at Handback Risk | | | X |

## Contract Type

The UC Merced project used an availability-payment-concession contract type, which is a type of P3 contract that constitutes using a private entity to manage and oversee the design, construction, operation, and maintenance of all the facilities over the contract term. PPM was contracted for a period of 39 years, however ownership remained with UC Merced during this period.
The contract also established a system of milestone and availability payments scheme, this made financing the project more manageable as the system was used to finance the majority of the project cost (around 50-75 percent). However the payments were contingent on the developer’s performance, enabling the owner to reduce the payments depending on their expected outcomes. The contract also included a clause that allowed UC Merced to cancel the agreement at any point.

## Cost

Total estimated development cost for the UC Merced Campus expansion is $1.338 billion as of 2020 and includes offices, classrooms, laboratories, operations, parking, housing, and construction contingency costs. Development costs were further identified by state-eligible and non state eligible funding categories, denoting potential financing sources and tax exemptions. Refer to the Construction Cost Breakdown table below.
Construction Cost Breakdown :
| Research laboratory | Total Cost (USD) | Cost Proportion |
| Academic Office | $133,880,000 | 10.00% |
| Classrooms | $29,910,000 | 2.23% |
| Classroom Laboratory | $49,750,000 | 3.72% |
| Academic Leadership Office | $14,170,000 | 1.06% |
| Colloquy Space | $15,830,000 | 1.18% |
| Enrollment Center | $25,050,000 | 1.87% |
| Campus Operations | $3,000,000 | 0.22% |
| Student Housing | $387,030,000 | 28.92% |
| Student Activity | $101,260,000 | 7.57% |
| Parking | $7,550,000 | 0.56% |
| Owner Costs | $85,340,000 | 6.38% |
| Contingency | $68,750,000 | 5.14% |
| Total Cost | $1,338,480,000 | 100.00% |
* Italicized Cells indicate Non State-Eligible Funding
Based on final campus development conditions, operations and maintenance costs are expected to be on the order of $14.64 million per year.

## Financial Structure

UC Merced 2020 project was funded with an approved budget of $1.338 billion, using a number of funding sources, outlined below: Funding for the project was split between Merced funds/debt and developer funds, using a long-range financial model based on anticipated development and lifecycle costs, as well as anticipated revenue and interest.
| Funding Source | Amount | Borrow Interest Rate (If Applicable) |
| Century Bond | $50,000,000 | 4.858% |
| Tax-Exempt Campus Debt | $400,000,000 | 6.00% |
| Taxable Revenues | $150,000,000 | 7.25% |
| Developer Funds | $590,350,000 | N/A |
| Campus Funds | $145,130,000 | N/A |
Financing repayment began in 2019 with a term of 40 years set to expire in 2059. Projected annual debt servicing and repayment is given below:
| Funding Source | Annual Payment | Borrow Interest Rate (If Applicable) |
| Century Bond | $2,857,000 | 4.858% |
| Tax-Exempt Campus Debt | $26,585,000 | 6.00% |
| Taxable Revenues | $11,579,000 | 7.25% |
| Total | $41,021,000 | |
Campus and developer funds were used to pay debt throughout the construction timeline of the project. Following construction, revenue from the UC Merced expansion among other sources will be used to pay for the debt. In addition to the aforementioned financing structure, financing benchmarks were established to measure various financing metrics of Merced’s debt affordability model.

## Narrative of the Case

With 10 major campuses located across the state of California, over 250,000 students and more than 1.5 million alumni the University of California (UC) is considered one of the major public universities in the US. Given the scale of the university, UC is considered one of the major employers and providers of the health care delivery system in California. One of its newest campuses is UC Merced which opened in 2005 as part of an effort to encourage college education among the residents of San Joaquin Valley.
In 2014, the Merced 2020 project was proposed as a campus expansion and redevelopment consisting of 1.2 million square feet, almost doubling the existing campus area. The project included several new facilities such as new research labs, faculty offices, and 1,700 new beds for students’ accommodation. It included design features such as an academic walk which included educational, retail, and social spaces. To align with the UC sustainability goals of reaching triple net zero, the design aimed to achieve a LEED Gold certification. According to the UC Merced Chancellor, Dorothy Leland, P3 was chosen as the preferred procurement method due to a reduced funding capability, attributed to economic downturns, resulting in an inability to fund campus projects. This choice enabled UC to make the best use of its available resources and was described by UC President Janet Napolitano as a “model for our other campuses."
At the time, UC’s capital operations, academic facilities and deferred maintenance were financed at an estimated $1 billion. In order to finance it UC relies on two types of funding, with a total of $28.7 billion in revenues, which includes: state funding almost 10% of annual revenues and external funding which includes 14% student tuition. However, due to inflation adjusted expenditures the student tuition fees have decreased which has led to a decrease in the annual revenues. For 2015, revenues were $257 million and the expenses $282 million, resulting in a loss of $25 million. However, the projections for continued losses for the fiscal year 2015 till 2017 were anticipated with a positive turn for the years 2018-2020, which was part of an investment plan for UC Merced 2020 project put in place in 2014.
In August 2016 the project officially broke ground, becoming the first higher education P3 project awarded in the United States. The principal agreement was with PPM which included a 39-year contract term for design, construction, operation, and maintenance of the project. This included the following members: (1) Plenary Group as the PPM equity member, (2) Webcore Builders as the lead contractor, (3) Skidmore, Owings & Merrill Inc. as the lead planner, and (4) Johnson Controls Inc. as the lead O&M manager. This was the first time UC has collaborated with a private development team on a fast-track project of this size. As a part of the P3 agreement the developer is responsible for the project’s private financing. The total budget for the project was approved at $1.3 billion; $600 million supplied by UC, $590 million provided by PPM, and $148 million using the campus funds.
The project had a three-phase delivery plan with an estimated total duration of four years; the first delivery dated for summer 2018, the second for summer 2019, and the third for summer 2020. In August 2018 the first phase of the project was completed, adding three new buildings. This included a new 600-seat dining facility named the Pavilion which overlooks Little Lake; it also included two mixed-use residence halls that contained new classroom space, retail space, and mixed-use residential halls. The project at this phase was expected to create an economic impact of $1.9 billion and statewide impact of $2.4 billion throughout its development. By July 2019 the project began the second phase which focused on development of the “Arts and Computational Sciences Building, the Sustainability Research and Engineering Building, a Research Server Container Facility, a regional loading dock, a recreation field and outdoor basketball courts, and additional residential housing”, with each building expected to house over 400 people.
The Merced 2020 project third phase was finally completed in 2020, marking the completion of the largest P3 infrastructure project in the United States. The project adds 1.2 million gross square feet which includes student housing, a conference center, 1,570 parking spaces, a greenhouse, computational labs, recreational fields, and more planned projects for the upcoming phases. The project also managed to achieve all of its sustainability goals, becoming the first higher education campus in the U.S. where all the buildings are LEED certified, with the 2020 buildings being LEED Platinum certified. It is also the first public university to achieve carbon neutrality. Dale Bonner, the executive chairman of Plenary, said “this on-time, on-budget completion of the 2020 Project shows that incredible things can happen when all stakeholders work together with a true spirit of partnership."

## Policy Issues

The completion of Merced 2020 has opened discussions by the City Council of Merced to annex the university’s campus into Merced city limits. Although UC Merced is heavily entwined with the city and the Merced 2020 project was reliant on the support of the City Council, the campus itself is outside of city proper on unincorporated county land near Lake Yosemite. Assemblyman Adam Gray (D-Merced) introduced a bill in September 2020 that would annex the campus and a single connecting road without annexing any of the surrounding properties around the university.
The successful completion of Merced 2020 serves many benefits for this potential annexation. First, student population is expected to increase beyond 10,000 in the coming years bringing further development to the region. Developments within the annexed region will bring more sales tax which the city has relied heavily on during the COVID-19 pandemic and a diversified sales tax pool is a priority of the City Council members in preparing for future emergency situations. Further, it is predicted that UC Merced will continue to be the economic driver of the region and the economic impact from 2018-2019 alone was over $500 million and helped create 5,560 jobs. Annexing UC Merced would help solidify and secure the relationship between the university and the city’s growth.
There are also concerns with the annexation. The development of UC Merced has unintentionally exacerbated housing difficulties characterized by low vacancy rates and high prices that have continued to increase over 2020. There is also a concern that it will become a risk to preserving the farmland in the area and take a focus away from some of the other areas of the city that are in greater need. Lastly, if the UC Merced campus is annexed then students will be able to vote in city elections and there is anxiety among constituents on how that will swing votes and impact the redrawing of city council districts.

## Key Takeaways

* UC Merced is the largest Public-Private Partnership social infrastructure project completed in the United States and was completed on-time and on-budget
* Construction cost was on the order of $1.3 billion, of which, approximately half was financed through long-term loans at varying interest rates
* The Merced 2020 Project effectively doubled the sized of the existing university's campus with its 1.85 million square foot expansion
* Several ongoing financial metrics were monitored, and continue to be monitored to track overall project financing health, and proactively identify financing issues

## Discussion Questions

* What contributed to the success of Merced 2020?
* In relation to the policy issue of annexation, what stakeholders do you believe should be consulted?

## References

* 1 2 3 4 5 6 “About UC Merced.” UC Merced. Accessed October 14, 2021. http://www.ucmerced.edu/about.
* ↑ “Largest Social Infrastructure P3 in U.S. History Completed at UC Merced.” Plenary. Accessed October 24, 2021. https://plenarygroup.com/news-and-media/news/2020/uc-merced-substantial-completion.
* 1 2 3 4 5 "UC Merced 2020." Plenary. Accessed October 14, 2021. https://plenarygroup.com/projects/americas/uc-merced-2020
* 1 2 3 “Campus Announces Major Expansion.” Campus Announces Major Expansion | Newsroom, June 15, 2016. https://news.ucmerced.edu/news/2016/campus-announces-major-expansion.
* ↑ “Project Board.” Project Board | Merced 2020. Accessed October 24, 2021. https://merced2020.ucmerced.edu/about/project-board.
* 1 2 3 4 5 6 7 8 9 Lauten-Scrivner, Abbie. “Merced’s Closer to Making UC Merced Part of the City. What Are the Benefits and Drawbacks?” Merced Sun-Star, March 1, 2021. https://www.mercedsunstar.com/news/local/education/uc-merced/article249342770.html.
* ↑ About. Plenary. Accessed October 15, 2021. https://plenarygroup.com/about
* 1 2 3 “Development Team.” Development Team | Merced 2020. Accessed October 24, 2021. https://merced2020.ucmerced.edu/partners.
* ↑ Global Infrastructure Hub. “School.” PPP Risk Allocation Tool. Global Infrastructure Hub, July 12, 2019. https://ppp-risk.gihub.org/risk-allocation-matrix/social/school/#land-availability-access-and-site-risk.
* ↑ “Greenberg Traurig Represents Investors in Private Placement Financing.” PRWeb, August 23, 2016. http://www.prweb.com/releases/2016/08/prweb13634683.htm.
* ↑ UC Board of Regents. "Briefing Memorandum RE: UC Merced 2020 Project Delivery Options." November 2015. https://regents.universityofcalifornia.edu/regmeet/nov15/j2attach4.pdf
* 1 2 3 4 “Project Funding.” Project Funding | Merced 2020. UC Merced. Accessed October 20, 2021. https://merced2020.ucmerced.edu/financestructure.
* 1 2 Leland, Dorothy. “Building a Path That Other UCs Can Follow.” Merced Sun-Star, July 16, 2016. https://www.mercedsunstar.com/opinion/article91156352.html.
* ↑ UC Board of Regents. "Committee of Finance." Meeting of July 20, 2016. https://regents.universityofcalifornia.edu/regmeet/july16/f3.pdf
* ↑ "Plenary consortium reaches financial close on UC Merced 2020 Project." Plenary. Published August 14, 2016. Accessed October 20,2021. https://plenarygroup.com/news-and-media/news/2016/plenary-consortium-reaches-financial-close-on-uc-merced-2020-project
* ↑ "Merced 2020 Frequently Asked Questions." UC Merced. Accessed October 20, 2021. https://merced2020.ucmerced.edu/faq
* ↑ University Communications Staff. “UC Merced Kicks off Historic $1.3 Billion Expansion.” UC Merced Kicks Off Historic $1.3 Billion Expansion | Newsroom, October 14, 2016. https://news.ucmerced.edu/news/2016/uc-merced-kicks-historic-13-billion-expansion.
* ↑ Leonard, James. “Moving In: First Buildings of Massive Expansion Open to Students.” UC Merced, August 20, 2018. https://news.ucmerced.edu/news/2018/moving-first-buildings-massive-expansion-open-students.
* ↑ Caulfield, John. “UC Merced's Completed 2020 Project Roughly Doubles the Campus' Physical Capacity.” Building Design + Construction, March 22, 2021. https://www.bdcnetwork.com/uc-merceds-completed-2020-project-roughly-doubles-campus-physical-capacity.