The Potential Unaffordability of 3rd Year Housing
The construction of a third-year housing complex could threaten the University’s financial health. An examination the University’s hopes for the project against typical industry pricing suggests that the new third-year housing could cost more than initially expected. To pay for the project, the University could require artificially high rental rates, seriously harming the affordability of W&L.
In 2013, the median per bed cost for a residence hall was $67,973, according to College Planning & Management’s 2013 College Housing Report. For projects of a similar scale to what the University intends to build (200-500 beds) the median cost rose to $79,595. The new complex will likely be built by W&L rather than a private firm, a factor that could also push the price tag higher. This comparison is not to suggest that we let a private firm take over the project, but rather to help estimate what the complex might cost. Today, many private firms—like Capstone Companies—build and own dorms that are then rented and operated by a University. This scenario is both unlikely and probably undesirable for W&L, but the data show that on a per bed basis in 2013, residence halls built by a college cost nearly 28% more than one built by a private firm.
In 2013, residence halls built by colleges not only cost more than those built by private firms but also contained significantly fewer single occupant rooms, including single rooms within a suite. Double occupant rooms, as one would expect, require less overall space per bed, and thus are cheaper on a per bed basis. The style of housing the University has been pushing – townhouses and apartments – would likely require a much larger proportion of single rooms in order to facilitate the proposed “transition” to adulthood. This larger proportion of singles would likely further raise the cost per bed of the new housing complex.
Other factors that could make the project more expensive include the cost of clearing the forest and developing the site for the new housing, the cost to environmentally redevelop the Woods Creek area after its demolition, and the cost of all the new amenities the University intends to provide. Furthermore, there could be costs to maintaining architectural parity with the rest of the institution – long gone are the days when something that looks like Leyburn Library would even be presented to the Board. A former trustee has confirmed that this project could cost more than initially expected, suggesting a likely cost of at least $130,000 per bed.
The construction of dormitories, dining halls, and other revenue generating projects are almost always financed through debt rather than donations. It is extremely difficult to raise money for a project that should pay for itself, and thus the per-bed cost becomes very instructive, giving us an idea of what the University will need to charge for rent. Assuming a per bed cost of $130,000 and that the University issues a 30-year note at 4.5% to finance the construction, the University would face monthly debt costs of $660 per bed or annual debt costs of $7920 per bed.
This figure – which is already higher than the current rate ($7200) of a single room on campus – does not include utilities, housekeeping, maintenance, security, etc. If we allot $2500 for operating costs the total annual cost per bed – and estimated break-even rental rate – becomes roughly $10,400. Spread over the calendar year this is equivalent to $860 per month; spread over the 9 month when the student is actually allowed to occupy the room, the rate becomes an astounding $1150 per month.
Universities across the U.S. are building fancy dorms and racking up loads of debt. Even W&L’s 2011-2012 Financial Report attributes this institution’s recent success to its focus on academics and the fostering of moral character and a reluctance to use its resources to create a “country club environment.” College as a four-year “country club” is not a sustainable model. In the coming years, graduates from colleges that focused on dorms rather than teachers and professional training will be bogged down with student debt and no job. As online education improves in both reputation and effectiveness, students and parents will start seriously questioning the price of attending a private college. Students will shun pricy private colleges for more affordable but still reputable universities like UVA and UNC. W&L is certainly capable of withstanding competition from state universities and online education, however building an expensive new housing complex undermines its ability to do so on at least two main levels.
First, if the above estimates prove even reasonably accurate, this project seriously harms the affordability of attending W&L. Anecdotal evidence suggests the annual cost of renting in Lexington falls typically between $4000-$7000, and even on the lower side of the range, students very rarely need to share a bedroom. The Residential Life Task Force’s report suggests the higher housing rates will not be too much of a deterrent because they are similar to those at peer institutions. Yet affordability remains one area where we need distinguish ourselves, where we need to lead. Were the University to charge the market rate in Lexington it could markedly distinguish itself for its affordability, however that would require a substantially lower per-bed cost.
Second, easing the exorbitant costs of W&L housing through financial aid would effectively mark a detrimental reallocation of endowment income. Returns from the endowment fund about half of the University’s financial aid, which in turn helps students fund both their tuition and their living costs. As housing becomes more expensive, the University will need to use a higher proportion of its endowment returns to subsidize its self-inflicted artificially high residential costs. The University needs to apply its resources towards improving and sustaining its academic prowess, because education and professional training, not fancy dorms, will define the University’s ability to resist future competition.
W&L could ease the price of the new housing through alumni donations or through designing a less ambitious complex. However, alumni remain critical of the University’s new housing policy. Such unpopularity in addition to standard difficulty of raising donations for a revenue generating project leave the prospect of funding or subsidizing the housing complex somewhat unviable.
Lowering the actual cost of the project would likely require a much larger proportion of double occupant rooms, marking a divergence from the University’s previous proposals of “independent living.” This means the school would need to force juniors to live in a double occupant room, when they otherwise could very affordably have a room to themselves in an off-campus house. The University should also remain exceptionally frugal as it thinks about adding new amenities to the suburb. Students will still likely spend the majority of their leisure time at their fraternity or sorority houses, and thus such amenities could likely prove not only costly, but unnecessary.
The most effective step the University could take to maintain affordability while fostering independence is requiring juniors to live only within the City of Lexington. While requiring less construction and new debt, this would still keep students in town, fostering “community” and lowering the risks of drinking and driving. Furthermore, this would incentivize the University to compete with market rates and help improve the affordability of W&L.
 The University’s earlier high range cost estimate was $108,000 per bed. At this cost the annual rent would need to be over a still steep $9000.