Tax-Exempt Bond Financing

American Campus has extensive, experience with project-based, tax-exempt bond financing. We have assisted colleges, universities and higher education systems nationwide to finance their projects.


Under a tax-exempt bond financing structure, a qualified not-for-profit organization, such as a university foundation, acts as the borrower and owner of the project through a ground lease from the university. The borrower’s 501(c)3 status exempts the bonds’ interest from federal income taxes, resulting in a lower cost of capital than traditional taxable financing. Lower cost of capital means more money for your project.

Additionally, if the project is on university land and owned by a not-for-profit, it is exempt from local property taxation. Because the project is not directly supported by the institution or system’s financial resources, the cost of capital in this type of transaction is typically greater than a traditional university borrowing.

Credit enhancement can be utilized under certain circumstances to further lower the overall cost of borrowing and narrow the gap between traditional university system financing and project-based financing.


Project-based, tax-exempt bond financing has the following advantages
  • Cash Flow: The university receives or directs distribution of all of the project’s annual net cash flow.
  • Control of Land: At no time is the institution’s land subordinated. University land can’t be taken away in the case of a default.
  • Credit Enhancements: Credit enhancement may be purchased from a commercial bank or bond issuer to enhance the project’s credit and obtain a lower interest rate. The terms of the enhancers vary but can be discussed in great detail later during the financing process.
  • Foundation Ground Lease: The proposed on-campus site is ground leased to a qualified not-for-profit organization (the borrower). The not-for-profit can be a university-affiliated foundation, a newly created foundation or a national foundation.
  • Management Control: At the election of the institution, the borrower may enter into a management contract with the university (Housing or Residence Life Department) or an acceptable third-party manager.
  • Ground Lease: The ground lease is usually for 30- to 35-year period that automatically terminates upon full repayment of the debt. Upon full amortization of the debt, the institution owns the project free and clear. We usually recommend a 30-year amortization to permit lower rental rates and the most attractive and sustainable community.
  • Minimized Impact: The debt is non-recourse to the institution and the foundation and is structured to minimize the impact to the institutional balance sheet as much as possible.


Typical covenants required by rating agencies and credit enhancement providers for non-recourse, privatized student housing projects include:

  • Debt service coverage and annual rate maintenance test of 1.20 times annual debt service
  • One year’s debt service reserve fund
  • Leasehold mortgage on improvements and project revenues
  • Capitalized interest during construction period plus the first semester of operations
  • Limited ability to issue additional bonds and certain limitations on building “competing facilities”
  • Repair and replacement reserves funded at required minimum levels annually.