The University of Tennessee Board of Trustees approved an agreement with a private developer to build two residence halls on the Knoxville campus on Friday, the first time a public-private partnership will be used on a dorm construction project.

The agreement calls for the developer to assume all the financial risk associated with the project.

The new residence halls — one on Caledonia Avenue and the other on Andy Holt Avenue — would ultimately be owned by a management company on land owned by UT through a ground lease agreement. A third residence hall will also be built in the future through a public-private partnership, known as “P3” in development shorthand.

“The state has never done a P3, ever, for higher education,” UT System President Randy Boyd said. “We’re doing something that is groundbreaking, and when you do something that is groundbreaking in the state of Tennessee, as my government relations team will attest, it’s hard.”

The State Building Commission awarded the projects to RISE Real Estate, based in Valdosta, Ga., in May, and approved a pre-development agreement in June. The trustees signed off on the details of the project at their Fall Meeting on Friday.

The two residence halls will add 1,920 beds to UT-Knoxville’s inventory in an attempt to keep up with a growing student population and the increasing number of sophomores and juniors who are opting to live on campus. Demand for on-campus housing has gone up 11 percent per year since 2020. UT-Knoxville housing currently has about 8,300 beds.

The project will add a seven-story residence hall with 754 beds at the intersection of Andy Holt Avenue and 20th Street, and a housing complex with two eight-story buildings providing 1,166 student beds between Caledonia and Terrace avenues. Both are scheduled to open in the fall of 2025.

The residence halls will be valued at a combined $240.4 million, or $125,220 per bed. “That’s a good value for this project,” said Austin Oakes, UT’s assistant vice president for capital projects.

The development structure and financing are complex. UT will offer ground leases for the property, meaning it retains ownership of the land but not the buildings. Oakes said RISE has developed about 100 similar projects totaling approximately 57,000 beds. “They’re a significant player in this space,” he said.

Though RISE is overseeing construction, the completed buildings will be owned and operated by Provident Group, a nonprofit that has been involved in numerous public-private residence hall projects.

Provident Group will issue tax-exempt bonds to pay for the project and bear all the financial risk. “These will not be backed by UT or the state in any way, they will not be on our financial statements in any way,” Oakes said.

The ground lease will be effective for 40 years, though it could extend to a maximum of 50 years. As payment for the ground lease, UT will receive the surplus cash flow from the project — the revenue remaining after the payment of all expenses and debt service, and accounting for project reserves. 

Projections provided to the Board of Trustees show the payments are front-loaded, with UT expected to receive nearly $5.1 million in 2025 and between $278,000 and $826,000 a year through 2034.  

If Provident Group defaults on the debt, UT can take ownership of the buildings but would not have to pay off the original debt. “Ultimately, if the project does not perform, that’s a risk the bondholders will take,” Oakes said.

Senior Vice President and Chief Financial Officer David Miller said that protection is possible because of UT’s strong enrollment growth and the revenue model.

“This is really unusual for the developer to take 100 percent of the risk for the 40-year term, so it’s a tremendous opportunity,” he said.

When the ground lease expires, ownership of the buildings will transfer to UT. UT will also have an option to purchase the buildings after five years. 

Though Provident Group will operate and maintain the physical buildings, UT will handle leasing the units to students. UT will be responsible for marketing, billing and collecting rents, and is required to market the project’s units as it would other units in the university housing inventory. The ground lease requires that UT conduct market studies that demonstrate need before building new student housing in the future.

Many universities have turned to public-private partnerships for residence hall construction in recent years. Officials said the UT projects are structured to avoid problems that have arisen at other schools.

One of the most notable was a Provident Group project at the University of Oklahoma called Cross Village, a 1,200-bed hall with 40,000 square feet of retail and dining space and a 1,000-space parking garage. 

Provident Group sued OU in 2019 for breach of contract, alleging that OU had not leased out enough units to students, and had not filled the retail and dining space. The lawsuit was eventually settled out of court.

There are key differences between the UT and OU deals, UT Vice Chancellor for Student Life Frank Cuevas said. At OU, the agreements had to be renewed annually because of state law and a new university president hired after the agreement was made thought the deal was unsustainable. The UT project doesn't include retail space and the agreement runs for the entire 40 years of the ground lease. OU had also demanded lease payments up front instead of in annual installments.

Bill Rhodes, who chairs the trustees’ Finance and Administration Committee, praised the UT deal, saying, “I think it’s a very well done design and financing structure.” 

The State Building Authority has also approved RISE as the developer for a third residence hall to be built at the corner of Lake Loudoun and Volunteer boulevards next to Circle Park. That project should be ready for occupancy in 2026, Oakes said, and would need separate approval from the trustees.

The hall was originally going to be built next to Lindsey Nelson Stadium and include an indoor baseball practice facility, but the site would have made it financially challenging, officials said. The Lake Loudoun Boulevard residence hall would add another 1,000 or so beds to the inventory, up from 750 expected at the previous site.

“In my view, we can’t build them fast enough,” UT-Knoxville Chancellor Donde Plowman said. “Our concern is net new beds, but we’re also very concerned about replacement beds.”

The university is planning other projects to be built through public-private partnerships, including a hotel and entertainment district adjacent to the south end of Neyland Stadium. Miller said UT is also making plans to demolish a large number of older dorms and replace them with new residence halls. Half of UT’s residential bed inventory is at least 60 years old.

“We have to be cautious, in a planned way, so that we don’t overbuild,” Miller said.