Renovations may require bond issue

More money may be needed if the IRS delays Trammell Crow funding. If the Internal Revenue Service doesn't act fast, debt service may become the latest University catch phrase. Although administrators originally hoped to fund part of the University's 10-year, $200 million residential-renovations plan with money reaped from the agreement to outsource facilities management to Trammell Crow Co., the company's decision to delay its payment may force officials to rely on other sources of funding for the long term. Both parties are anxiously waiting for the IRS to approve a newly restructured agreement that would preserve the tax-exempt status of University buildings operated by Trammell Crow. The company took over last week. In addition to the funds obtained from the Trammell Crow payment, most of the renovations' cost will be financed through bond issues -- or borrowed funds which the University must repay -- Executive Vice President John Fry said yesterday. A sizable chunk of the University's recent $200 million bond issue -- purchased by investment giant Merrill Lynch in January -- will fund most of the project, according to Vice President for Finance Kathy Engebretson. She added that the University may issue additional bonds within the next three to five years. Described by Engebretson as the "biggest project we've ever done," part of the 10-year renovation plan includes painting the interiors of certain dormitories, replacing heating and cooling systems and upgrading plumbing and alarm systems. Penn will fund these long-term initiatives with a large portion of the $26 million the University is getting from its October 8 outsourcing agreement with Trammell Crow and through debt service, Fry said. But administrators may have to press the IRS for a ruling if they want to maintain steady cash flow. Trammell Crow has opted to defer its payment to the University until after the IRS approves a newly structured deal, which includes a one-year preliminary term with a stipulation for a second nine-year term. The company pledged to pay the University $26 million up-front under the original 10-year agreement. But a new set of IRS restrictions concerning joint ventures between for-profit and non-profit corporations spurred both parties to restructure the deal and submit it to the IRS in order to "play it safe," according to officials. The IRS will inform both parties as to the possibility of a tax violation as early as the fall, Engebretson said. Once Penn secures a favorable ruling from the IRS -- a likely prospect according to administrators -- the University will be entitled to payment. But Engebretson stressed that the IRS is not tied to a "timetable." She emphasized that several residential projects will be funded through other sources. Engebretson noted that the University's reserve fund for capital projects will subsidize immediate plans, such as about $300,000 to replace furniture in Hill House and a new exercise facility to debut this fall in High Rise South. Next year's 3 percent increase in room rates will also supplement funding for these initiatives, according to Associate Vice President for Campus Services Larry Moneta. The launching of the first phases of the renovation plan coincides with the implementation of the college house residential system -- a program designed to reorganize dormitories into multi-year residential communities with added staff and academic support. All 12 college houses will be fully functional this fall. Distinguished from the 10-year plan for residential renovations, projects under the college house system include renovations in order to implement enhanced programming such as apartments for new faculty masters and house deans, and a new dining facility in High Rise South. The first year of the program carries an estimated cost of $500,000, which will be largely funded by the Reserve Fund.

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