F–5 VII. STANDING COMMITTEES

B. Finance and Asset Management Committee

Denny Hall Renovation – Approve Revised Budget and Finance Plan

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D INFORMATION 2013 2014 2015 2016

PHASES

2013 2014 2015 2016 ACTION J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

May 2007 January 2008 January 2015 Select Architect Adopt Budget Approve Revised Approve Use of Budget and Approve Alternative Public Debt Funding Works Delegate Award of GC/CM Contract Note for duration of project: Semi-annual reports in January & July

RECOMMENDED ACTIONS

It is the recommendation of the administration and the Finance and Asset Management Committee that the Board of Regents:

1. Approve a decrease to the Denny Hall project budget from $56.9 million to $52.9 million; and

2. Approve the debt funding financing plan, including the use of up to $16.16 million of general revenue bond proceeds toward the project.

PROJECT BACKGROUND

Constructed in 1895, Denny Hall is the oldest building on the campus and is listed in the State Heritage Register. Denny Hall has been prioritized as part of the University’s ongoing “Restoring the Core” renovation program to restore and modernize buildings in greatest need of renovation. The last major structural and interior renovation of this over one hundred-year old building was in 1957.

F–5/201-15 1/8/15 VII. STANDING COMMITTEES

B. Finance and Asset Management Committee

Denny Hall Renovation – Approve Revised Budget and Finance Plan (continued p. 2)

The 89,745 gross square foot building currently houses offices and programs for the College of Arts and Sciences, including the Departments of Anthropology, Classics, Germanics, Near Eastern Languages & Civilization as well as the College’s Language Learning Center. Denny also houses 12,000 square feet of general assignment classrooms totaling 765 seats.

State funding of $2.3 million was provided in the 2007-09 biennium for the predesign and design phases. The project construction phase funding was anticipated in the 2009 – 2011 biennium. Due to the economic recession, the project was not funded. The project was subsequently put on hold in the spring of 2009, at the completion of the design development phase. In the 2013-2015 biennium, the legislature appropriated $30.6 million, and authorized the to issue bonds in an amount not to exceed $20.0 million to be repaid from the state appropriated UW Bond Retirement Account for total project funding of $52.9 million.

PROJECT DESCRIPTION

The University has evaluated other alternatives and determined that a total building renovation is the most sensible and cost-effective alternative for preserving and restoring Denny Hall to a safe and useful condition. The planned renovation work will address structural, seismic, life safety, hazardous materials, accessibility, other code deficiencies, and will repair the building enclosure (windows and masonry systems) to ensure the long-term preservation of the building and safety of its occupants. The building foundation will be exposed, waterproofed, and a new footing drain installed to eliminate the water seeping into the basement.

The project will also upgrade all major building systems including mechanical, fire protection and electrical systems to improve performance and energy efficiency, and upgrade communications and interior finish systems to meet modern classroom and academic program needs. There will be some reduction in the assignable square footage to address the necessary improvements to the building. In accordance with the requirements of the state of Washington, the project will be designed to achieve Leadership in Energy and Environmental Design (LEED) Silver certification or higher.

When the project was restarted in January 2014, cost reduction strategies were explored and the functional program was reexamined to update it based upon a reduction in necessary laboratory space and pedagogical changes. Some of the

F–5/201-15 1/8/15 VII. STANDING COMMITTEES

B. Finance and Asset Management Committee

Denny Hall Renovation – Approve Revised Budget and Finance Plan (continued p. 3)

functional changes include a reconfiguration of the teaching areas to create fewer, more efficient, and larger teaching and seminar spaces, including an interactive collaborative teaching space for 100 students. Small study alcoves were created along with corridor seating. A study area was configured in a new open entry lobby area. A wider central open stair reflecting the original 1895 configuration was adopted. The two large dormers on the north side of the central building core are being restored from louvered air intake/exhaust vents to the original window configurations. This is made possible by constructing new in-plane roof intake/exhaust vents that match the slope of the existing roof.

SCHEDULE

The original schedule included a 21-month construction schedule and anticipated occupancy at the start of Autumn Quarter 2011.

Architect Selection May 2007 Predesign July 2007 -December 2007 Design April 2008 - January 2009 On Hold February 2009 -December 2013 Design Completion January 2014 -May 2015 Construction June 2015 - August 2016 Occupancy and Use August – September 2016

An accelerated 14-month construction schedule with occupancy at the start of Autumn Quarter 2016 is planned. The accelerated construction schedule is made possible through detailed coordination of the design through the use of BIM, early equipment procurement and the use of the MC/CM and EC/CM process during the design phase. Extensive site investigations of the interior and foundations have been completed to provide additional coordination and information on the existing conditions.

BUDGET

The revised budget is $52.9 million. With estimated costs of issuance of $160,000 on the General Revenue Bonds, the total cost is $53.1 million.

To meet the revised budget of $52.9 million, much more than $4.0 million in savings were needed. Several strategies were used to identify cost savings due to escalation. To meet existing research needs, two of the laboratories planned for Denny Hall were reconstructed in Kincaid and Raitt Halls using College of Arts

F–5/201-15 1/8/15 VII. STANDING COMMITTEES

B. Finance and Asset Management Committee

Denny Hall Renovation – Approve Revised Budget and Finance Plan (continued p. 4)

and Sciences funds of approximately $2.0 million. Only a portion of the new laboratories could be realized as cost savings to the Denny Hall project, because of the inefficiencies of doing smaller projects and the need to renovate the space in Denny, although at a less intensive use. Numerous other cost savings in the project were identified and approved to reduce the project cost. These include changing from hydronic (water) to electric baseboard heating; reductions in the amount of casework; wall, ceiling, and floor finish changes; and reconfiguration of laboratory/teaching spaces to create more efficient and less expensive space.

A goal of the project is to procure all new furniture. The project cost forecast reflects only the partial cost of the new furniture. If additional cost savings in the project are not achievable, the College of Arts and Sciences will fund the difference from its reserves.

The building occupants will be surged to Condon Hall for the duration of the construction phase. The forecasted cost for moving the occupants and making tenant improvements necessary to support the departmental needs for office, research, and teaching spaces is estimated at approximately $500,000. These costs will be funded separately from this project using Central Funds.

The project does not include donor-naming opportunities.

FINANCING PLAN

The source and uses for the project are as follows:

Sources of Funds State Contribution $32,892,000 University Funds $ 4,000,000 University Debt (General Revenue Bonds) $16,160,000 $53,052,000

Use of Funds Design/Construction/Contingency/Other $50,700,000 Furniture, Fixtures and Equipment $ 2,192,000 Estimated cost of bond issuance $ 160,000 $53,052,000

Estimated annual debt service (30 year amortization at 4.50%): $983,000 Repayment source: Primarily student building fees

F–5/201-15 1/8/15 VII. STANDING COMMITTEES

B. Finance and Asset Management Committee

Denny Hall Renovation – Approve Revised Budget and Finance Plan (continued p. 5)

FUNDING

The Denny Hall project will be funded from three sources. The State will use cash and/or State bond proceeds to fund $32.9 million of the project. The rest will be funded from a combination of University reserves ($4.0 million), to reduced debt funding requirements, and General Revenue Bonds issued by the University ($16.2 million). Altogether, the total project cost is expected to be $53.1 million. State proceeds and University reserve dollars are expected to be spent first, followed by University bond proceeds. Since the primary source of repayment for the bonds is student building fees, an appropriated local fund, by policy the debt is excluded from the Internal Lending Program (ILP).

CREDIT ANALYSIS

In partnership with the Capital Projects Office and the Budget Office, the Treasury Office performed due diligence on the financial plan for the Denny Hall Renovation project. This process included creating a base case pro forma, evaluating key risks, performing stress tests, and identifying appropriate mitigation strategies.

Base Case Assumptions and Pro Forma

The base case pro forma is shown in Attachment 2. The pro forma captures revenues that flow to a State fund that is available for appropriation by the State legislature. The State legislature can also allow debt service for approved projects to be repaid from this account, which are reflected as expenses. Primary revenue sources include student building fees and transfers from the Metro Tract. After paying debt service, the remaining balance is available to fund deferred renewal and facility modernization throughout the University (estimated backlog of $1.8 billion).

Key pro forma assumptions include:

• Assumptions that influence building fee revenues, including: o Tuition: undergraduate resident (3%), nonresident undergraduate (1%), resident graduate (3%), nonresident graduate (0%), and other graduate and professional resident/nonresident (3%), and

o Enrollment growth: flat at Seattle campus, with 8% annual growth at Tacoma and 6.5% at Bothell

F–5/201-15 1/8/15 VII. STANDING COMMITTEES

B. Finance and Asset Management Committee

Denny Hall Renovation – Approve Revised Budget and Finance Plan (continued p. 6)

• Net Metro Tract transfers are assumed to increase by $2 million / year beginning in FY16

• Expenses: o The interest rate on the General Revenue Bonds is 4.50%, which is 1.00% higher than current interest rates. This allows for rate fluctuation between now and when the bonds are anticipated to be issued in June 2016.

Stress Tests

As shown in Attachment 3, three stress tests were performed to help evaluate the risks associated with this project. They include:

• A revenue stress, in which building fees were assumed not to increase over a four-year period (FY16-19);

• A cost stress, in which construction inflation costs are 10% instead of the forecast 4%; and

• A combination of the revenue and cost stress.

F–5/201-15 1/8/15 VII. STANDING COMMITTEES

B. Finance and Asset Management Committee

Denny Hall Renovation – Approve Revised Budget and Finance Plan (continued p. 7)

Results

The chart below summarizes the results of the base case and stress pro formas: Impact on Deferred Renewal and Facility Modernization Funds Projected 2017 Debt through 2026 (in Scenario Coverage millions) Base Case 5.4x - Flat Building Fee 4.9x ($63.0) Higher Construction Inflation 5.2x ($2.5) Combined 4.8x ($65.5)

The size of borrowing is relatively small and will have a modest impact on the University’s debt coverage and debt capacity. This can be seen by looking at debt service coverage levels, which are sufficiently strong in every scenario, ranging between 4.8x and 5.4x. The true risk related to this project is not related to debt repayment, but rather on the University’s ability to meet deferred renewal and facility modernization needs.

Funds available for deferred renewal and facility modernization needs will be reduced under all four scenarios. In the base case, debt service will reduce available funds by approximately $10 million through 2026, or $1 million per year. This amount is reduced even further should any of the stress tests occur ($65.5 million in the combined stress scenario).

Mitigations for Stress

Potential mitigations of evaluated stressors include:

• Reduction in project scope; • Cash contribution from College of Arts and Sciences; and • Less money spent on deferred renewal and facility modernization needs.

F–5/201-15 1/8/15 VII. STANDING COMMITTEES

B. Finance and Asset Management Committee

Denny Hall Renovation – Approve Revised Budget and Finance Plan (continued p. 8)

Impact on Institutional Debt Capacity

The Treasury Office reviews three key financial ratios when assessing the impact of a project on institutional debt capacity:

1) Expendable Resources to Debt; 2) Debt to Operating Revenues; and 3) Debt Service Coverage.

The chart below shows these ratios assuming the University borrows $16.2 million in June 2016 for the Denny Hall Renovation project, and benchmarked against projections if the project is not approved. Shown in the chart below, key University ratios remain favorable as compared with peer institutions1.

Debt Capacity Ratios as of FY16 4.0 3.5 3.62 3.62 3.0

2.5 2.47 good 2.0 good good 1.5 1.63 1.62 1.0 0.8 0.5 0.57 0.48 0.48 - Expendable Financial Resources to Debt to Operating Revenues Debt Service Coverage Debt

Ratios Ratios Peer Comparison Without Denny With Denny

1 The peer institution with the least favorable ratio in each category is listed as the “peer comparison” in the chart.

F–5/201-15 1/8/15 VII. STANDING COMMITTEES

B. Finance and Asset Management Committee

Denny Hall Renovation – Approve Revised Budget and Finance Plan (continued p. 9)

PREVIOUS ACTIONS

May 2007 Appoint Architect and Delegated Authority to Award a Design Contract January 2008 Approve the Budget and Funding, Approve the Use of Alternative Public Works, and Delegated Authority to Award a Construction Contract

Attachments 1. Capital Projects Office – Summary Project Budget 2. Base Case Pro Forma 3. Stress Case Comparison 4. Campus Map

F–5/201-15 1/8/15 UNIVERSITY OF WASHINGTON CAPITAL PROJECTS OFFICE - SUMMARY PROJECT BUDGET ALTERNATIVE PROCUREMENT (GC/CM)

PROJECT: Denny Hall Renovation Project Number: 202039

ESTIMATED DATE OF COMPLETION: August 1, 2016

Project Budget Total Escalated Cost % of TPC*

Pre-Schematic Design Services $ 265,000 0.5% A/E Basic Design Services $ 3,174,000 6.0% Extra Services $ 1,155,000 2.2% Other Services $ 631,000 1.2% Design Services Contingency $ 372,000 0.7%

Consultant Services $ 5,597,000 10.6%

GC/CM Construction Cost $ 34,900,000 66.0% Other Contracts $ - 0.0% Construction Contingencies $ 3,342,000 6.3% Sales Tax $ 3,671,000 6.9%

Construction $ 41,913,000 79.2%

Equipment & Furnishings $ 2,194,000 4.1% Artwork $ 88,000 0.2% Other Costs $ 710,000 1.3% Project Management $ 2,390,000 4.5%

Other $ 5,382,000 10.2%

Total Project Cost (TPC)* $ 52,892,000 100.0%

Included in Above: Escalation at 4% per year through July 2016 $ 1,715,000 3.4%

F–5.1/201-15 ATTACHMENT 1 Page 1 of 1 1/8/15 Base Case Pro Forma

Base Case

Fiscal Year CAGR (4) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 (FY14-26) Beginning Fund Balance Building Fee Balances 11.9 16.6 22.4 17.7 7.8 8.6 8.4 ------

Revenues Building Fees 23.0 26.6 28.7 30.8 32.5 34.4 35.5 36.7 38.0 39.3 40.6 42.0 43.4 44.9 46.4 4.1% Net Metro Tract Proceeds (1) 4.0 6.0 5.0 5.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 Unspent Appropriations and Reserve Balance (2) - 1.0 7.0 2.9 .1 .1 ------UW Permanent Fund Income 1.2 1.2 1.4 .3 1.1 .3 1.1 .3 .3 .3 .3 .3 .3 .3 .3 Interest Income .1 .1 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 Sale of Property - 9.0 ------Other Income/Adjustments .9 .8 1.8 .5 1.0 1.0 .5 .5 .5 .5 .5 .5 .5 .5 .5 Total Revenue 29.2 44.6 43.9 39.6 41.7 42.8 44.1 44.6 45.8 47.1 48.5 49.8 51.3 52.8 54.3 1.8%

Expenses Existing Building Fee Debt 2012 Bothell Phase 3 ($30m) - - 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 2009 Molecular Engineering ($53.5m) 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 2010 Balmer ($37.5m) .9 1.9 2.0 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 2010 UW Tacoma ($7.45m) .2 .4 .3 .4 .4 .4 .4 .4 .4 .4 .4 .4 .4 .4 .4 Subtotal: Existing Debt Service 4.3 5.5 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 Plus: Estimated Denny Hall Debt Service - - - - - 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Total Debt Service 4.3 5.5 7.0 7.0 7.0 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 1.0%

Funds Available for Deferred Renewal and Facility Modernization Needs (3) 20.2 33.3 41.6 42.6 34.0 35.0 44.6 36.6 37.9 39.2 40.5 41.9 43.3 44.8 46.3 0.9% Subtotal Expenses 24.4 38.8 48.6 49.5 41.0 42.9 52.6 44.6 45.8 47.1 48.5 49.8 51.3 52.8 54.3

Ending Fund Balance 16.6 22.4 17.7 7.8 8.6 8.4 ------

Debt Service Coverage (Total Revenues/Total DS) 6.9 8.1 6.3 5.7 6.0 5.4 5.6 5.6 5.8 5.9 6.1 6.3 6.5 6.6 6.8

Growth Rates Building Fee Revenue 15.8% 8.0% 7.4% 5.5% 5.6% 3.4% 3.4% 3.4% 3.4% 3.4% 3.4% 3.4% 3.4% 3.4%

(1) Per RCW 28B.20.382, net proceeds from management of the Metro Tract property are to be transferred to the University of Washington facilities Bond Retirement Account. Currently, $8M/year is transferred, but beginning in FY16 this will increase to $10M/year. Debt service for the Law School Building is paid first from the Metro Tract net proceeds (about $3M/year) and the balance is transferred to the building fee account and is appropriated by the state for capital projects. (2) Required minimum reserve balance reduced by State Legislature. (3) Subject to State appropriation. Combined total for FY2016/17 matches state request; projected thereafter to target $0 Ending Fund Balance (4) Compound annual growth rate

ATTACHMENT 2 F–5.2/201-15 Page 1 of 1 1/8/15 Stress Case Comparison

Base Case

Fiscal Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 FY18-26 Total Funds Available for Deferred Renewal and Facility Modernization Needs (1) 20.2 33.3 41.6 42.6 34.0 35.0 44.6 36.6 37.9 39.2 40.5 41.9 43.3 44.8 46.3 375.2 Subtotal Expenses 24.4 38.8 48.6 49.5 41.0 42.9 52.6 44.6 45.8 47.1 48.5 49.8 51.3 52.8 54.3

Ending Fund Balance 16.6 22.4 17.7 7.8 8.6 8.4 ------

Debt Service Coverage (Total Revenues/Total DS) 6.9 8.1 6.3 5.7 6.0 5.4 5.6 5.6 5.8 5.9 6.1 6.3 6.5 6.6 6.8

4 Years of Flat Building Fees (Stress Test)

Fiscal Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Funds Available for Deferred Renewal and Facility Modernization Needs (1) 20.2 33.3 41.6 42.6 34.0 35.0 34.8 30.7 31.8 32.9 34.0 35.2 36.4 37.6 38.9 312.2 Subtotal Expenses 24.4 38.8 48.6 49.5 41.0 42.9 42.7 38.7 39.7 40.8 41.9 43.1 44.3 45.5 46.8

Ending Fund Balance 16.6 22.4 17.7 7.8 6.9 3.2 ------

Debt Service Coverage (Total Revenues/Total DS) 6.9 8.1 6.3 5.7 5.8 4.9 5.0 4.9 5.0 5.1 5.3 5.4 5.6 5.7 5.9

Higher Construction Inflation (Stress Test)

Fiscal Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Funds Available for Deferred Renewal and Facility Modernization Needs (1) 20.2 33.3 41.6 42.6 34.0 35.0 44.1 36.4 37.6 38.9 40.3 41.7 43.1 44.6 46.1 372.7 Subtotal Expenses 24.4 38.8 48.6 49.5 41.0 43.2 52.3 44.6 45.8 47.1 48.5 49.8 51.3 52.8 54.3

Ending Fund Balance 16.6 22.4 17.7 7.8 8.6 8.2 ------

Debt Service Coverage (Total Revenues/Total DS) 6.9 8.1 6.3 5.7 6.0 5.2 5.4 5.4 5.6 5.8 5.9 6.1 6.3 6.4 6.6

Combined (Stress Test)

Fiscal Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Funds Available for Deferred Renewal and Facility Modernization Needs (1) 20.2 33.3 41.6 42.6 34.0 35.0 34.3 30.5 31.5 32.6 33.8 34.9 36.1 37.4 38.6 309.7 Subtotal Expenses 24.4 38.8 48.6 49.5 41.0 43.2 42.4 38.7 39.7 40.8 41.9 43.1 44.3 45.5 46.8

Ending Fund Balance 16.6 22.4 17.7 7.8 6.9 3.0 ------

Debt Service Coverage (Total Revenues/Total DS) 6.9 8.1 6.3 5.7 5.8 4.8 4.8 4.7 4.9 5.0 5.1 5.3 5.4 5.6 5.7 (1) Subject to State appropriation. Combined total for FY2016/17 matches state request; projected thereafter to target $0 Ending Fund Balance

ATTACHMENT 3 F–5.3/201-15 Page 1 of 1 1/8/15

N

Attachment 4 F–5.4/201-15 Page 1 of 1 1/8/15