Public-private partnerships aren’t new in higher education. But, in 2012, some especially compelling financial reasons accelerated development of public-private partnerships between public universities and private entities in their communities. Public institutions have never been under more pressure to find alternative sources of revenue to help close the resources gap resulting from lower state appropriations. Trusteeship asked leaders at public institutions in two different cities to describe how public-private partnerships are helping further their goals.
Metropolitan State University of Denver
By Stephen M. Jordan, President
Metropolitan State University of Denver is Denver’s newest hotelier. Our Hospitality Learning Center and adjacent SpringHill Suites® Denver Downtown opened last August on our campus. It’s a major example of what we hope will be the first of many public-private partnerships that will benefit students’ educational opportunities and our community long into the future.
When I was appointed in 2005, the board of trustees made it clear that it wanted to pursue a more entrepreneurial direction. There was a “sweet spot” for MSU Denver between two-year colleges that granted degrees focused primarily on workforce development and four-year research institutions. That sweet spot was where we wanted MSU Denver to be, offering theory and practice for career-oriented students.
Our belief was that:
- MSU Denver students should combine the analytic skills that come from the liberal arts with the work skills that students need to succeed in their lives.
- MSU Denver should turn out students that are workforce-ready and have the intellectual capacity and understanding of a greater context.
- MSU Denver should collaborate with the community to identify essential areas of economic health that we can target with our academic programs.
When the economic downturn hit, such goals took on additional urgency and one more was added: find new sources of funding.
MSU Denver is relatively new, founded in 1965 to provide educational access and affordability to Coloradans in an urban environment. We are Colorado’s most ethnically diverse four-year institution. We share our campus with two other institutions, Community College of Denver and the University of Colorado Denver, in a unique partnership under the umbrella of the Auraria Higher Education Center (AHEC). These differences—already adaptations to traditional models of higher education—helped give us the courage to go further.
Starting in 2005, MSU Denver leadership worked with AHEC, our land-owning entity, to encourage updating the 20-year-old campus master plan. Student growth at all three institutions was being accommodated willy-nilly; sometimes doublewide trailers have had to be used for classrooms and office space. Our representatives on the AHEC board of directors thought we needed to think about land use creatively. A public-private component was included in the RFP that resulted in hiring campus planners and getting the process started.
The campus’s prime location adjacent to a growing downtown created additional pressures; developers were eyeing our land as a possibility for a large retail store. During the two-year master planning process, we made a commitment to not undertake any partnership because, in the words of Maria Garcia Berry, a former MSU Denver trustee who worked on the master plan, “We were not interested in having anyone on campus that doesn’t have an integrated reason for being there.”
Not long after that, the hotel idea was hatched. The board assessed where higher education funding in Colorado was headed and ultimately determined that it would continue to diminish. At a board retreat, trustees decided that we should work toward creating partnerships that would produce revenue streams; support academic programs and student services, including more scholarships; and help connect MSU Denver more closely with the community.
A hotel was a natural fit: our Department of Hospitality, Tourism and Events (HTE) has existed for 35 years and has taken off in the past six years, with student majors more than doubling from 300 to 650. What we didn’t have was a comprehensive, experiential piece that enabled students to put into practice what they learned in the classroom. We wanted the hotel to be profitable—a real-world enterprise in which students understood that a business must make money or it will fail. Most similar hospitality hands-on learning situations are subsidized by their institutions.
Associate Professor Chad M. Gruhl, now the associate chair of the HTE program, began exploring other university-owned hotels—especially at Cornell University and the University of Delaware, both of which shared information generously. Meanwhile, a steering committee was appointed from our board members to guide the process. Each trustee had experience that was useful: structuring financing, forming public-private partnerships, and dealing with government agencies.
We understood that we weren’t hotel people, so we sought advice from a few Denver-based companies that owned and operated hotels throughout America as well as from others familiar with university-owned facilities. Their advice was that the hotel needed a direct connection to the Hospitality Learning Center, and we realized they were right.
Our plan was to create a wholly owned, nonprofit corporation that would own the hotel. Revenues from patrons would pay for the hotel part, and we would mount a capital campaign to pay for the attached learning center. The MSU Denver Foundation would raise $12 million, and the hotel’s net profits would flow to the learning center to support scholarships.
The hotel was expected to operate like a for-profit business, but with labor supplied by our students. MSU Denver would structure an academic program to support the operation of the hotel. There would be no “bright lines” between service and academics. Moreover, the financial structure specified that the management company would receive a flat fee for its services, an unusual arrangement for hotel operations and management.
Under the steering committee’s supervision, Gruhl and the staff wrote a comprehensive RFP for an organization that could bring all the elements together:
- Design and construction
- Management
- A flag, or name brand
- A financial package from the hotel chain
We received 10 bids, including ones from several major hotel chains. The winning bid came from Sage Hospitality, a locally based hotel holding and management company. Sage operates hotels in Pittsburgh, Chicago, Minneapolis, Orlando, and Denver, including some Marriott properties. Marriott’s SpringHill Suites® was the flag they proposed, and Marriott offered the best financial package.
SpringHill Suites® seemed like a good fit. It was a “select” rather than a full-service hotel, which was fine because we didn’t want to spend time and dollars on some of the extras required in a full-service hotel, like high-end decorations, room service, and bellmen. We did, however, decide to add another dimension with a quick-serve restaurant, partnering with the Denver-based Red Robin chain on a Red Robin Burger Works.
Interestingly, Sage Hospitality’s chairman, Walter Isenberg, was one of the people who advised us that we couldn’t achieve an academically prominent program without connecting the hotel and Hospitality Learning Center. He felt so strongly about it that he said Sage would not submit a bid unless the two were together. According to our current board chair, Robert Cohen: “Walter had vision. He knew that partnerships work best when you have institutions and businesses that are in alignment.”
Just as we were about to embark on this huge project, however, the economy tanked. We had to decide whether to continue. The upside was that by proceeding we would be able to take advantage of lower interest rates and construction costs. The downside was that MSU Denver might find itself with an empty hotel, a continuing recession, and an inability to service our debt and meet other financial obligations.
It was a tough decision, but Denver’s economy hadn’t suffered as badly in the recession as some cities’ economies had. Denver still enjoyed a good convention business. And our location on the edge of downtown, in close proximity to the football stadium and ballpark and across the street from the arena where the Denver Nuggets and Colorado Avalanche play seemed to promise healthy business. We forged ahead, issuing bonds for the project in 2009.
It was the right decision. Since the hotel opened this past August, our average occupancy has been about 75 percent, with more than a dozen sell-out nights. Our room rate is $150 per night, $25 more than we originally thought we could get. Our goal is that 80 percent of the positions in the hotel will be filled by our students. After graduating from the HTE program with experience at SpringHill Suites® Denver Downtown, they will be ready to take management positions in other hotels.
Last spring, the board approved the university’s 2012–17 strategic plan, and among the many concepts that it considered and ultimately adopted were more innovative public-private partnerships and cross-functional collaborations that enabled programs to break out of rigid silos to resemble more real-world endeavors. An excellent example of what we envisioned as such a partnership with cross-functional collaboration was already in progress: The Franchise Ownership Program. Denver is one of America’s major hubs for franchising, yet it has no university-level training ground for franchise-owning entrepreneurs.
The original plan was to develop a franchising training program that would include a financing component so that someone completing the program would have access to funding and be matched with a franchise partner already vetted as a solid concept with a successful track record. According to Mick Jackowski, the director of our Center for Innovation, which houses the franchise program, the minute the word got out that we were developing a franchise program, “People started coming out of the woodwork.” Franchisors had been hurt by the recession, unable to recruit new franchisees because banks weren’t making the loans necessary to start up businesses.
The first financing model was a strict debt fund set up as a C-corporation that could accept both donations and private investors through the MSU Denver Foundation. Private investors would know upfront that their return would not be as high as in a regular venture fund. Our goal was to raise $2 million, but that got kicked up to $25 million when a publicly owned company in Denver approached us about bringing institutional investors together and then managing the fund for a fee. It plans to ramp up the fund over time to $100 million.
To participate, franchising companies must show they have at least 50 thriving locations and that a franchise applicant has the potential to generate enough revenue to pay him- or herself a living wage. Program applicants—MSU Denver graduating seniors, alumni, and some community members—have to show they are a good credit risk and agree to make a 10 percent down payment, which is still less than if they tried to get an SBA loan.
The program is a good opportunity for students to get into a business for relatively low cost, while investors cut their risk by investing in well-established franchises that will be owned and run by people who have been specifically trained in the ins and outs of their business by MSU Denver. We anticipate this will be a particularly good opportunity for military veterans who have discipline and experience following an established program.
We expect our first class of applicants in either January or March. We think that if this program achieves its anticipated success, we will be able to expand it nationally and even internationally, turning it into a moneymaker that will give us more freedom from public funding.
MSU Denver has also begun a Vendor Relationships Program through which vendors sign a long-term lease agreement at market rate and the campus’s students and employees provide a built-in clientele. In return, MSU Denver receives a percentage of gross sales that we funnel into our scholarship endowment as well as a cash gift from each business to endow a scholarship. As far as we know, we are the only university that has tried this concept.
We are constantly out in our community seeking opportunities that could spawn more public-private partnerships. One in its nascence is to build a program that takes advantage of Colorado’s position as the second-largest aviation and aerospace cluster in America. Companies with bases here include Ball Aerospace, Lockheed Martin, United Launch Alliance, and Jeppesen.
This academic year, we hope to bring together in a single facility all the departments involved in teaching our students for this industry cluster: our nationally recognized aviation and aerospace program, physics, industrial design, and engineering. They will then work with Colorado’s aviation and aerospace businesses to plan, design, and build a facility and determine the proper academic programming for it—with a goal to have it all up and running within three years.
MSU Denver is just starting to discover new and innovative ways of involving community resources in building academic programs. It comes from a deep understanding of what our institution is about and who our students are. Board member Ellen Robinson articulates it very well: “We want a much tighter response to the demands of the Denver metro market because we see ourselves educating the future workers and leaders right in our backyard. Our students come from here, and they stay here. We need to involve those we serve.”
City University of New York
By Charles A. Shorter, Trustee, and Iris Weinshall, Vice Chancellor for Facility Planning, Construction, and Management
In the fall of 2011, The City University of New York (CUNY) opened a gleaming $110-million building in the East Harlem neighborhood of Manhattan—a new home for The Lois V. and Samuel J. Silberman School of Social Work at Hunter College and CUNY School of Public Health at Hunter College. Successfully implementing a major capital project in these times of constricted state budgets would be reason enough for a university to celebrate. But what made it most unusual—and perhaps even possible—was how it came to be. The new building, a satellite of Hunter College, was the result of a partnership between CUNY, the state, and three private entities—two philanthropic foundations and a major commercial developer.
Under normal circumstances, the project would have followed a typical process: CUNY would have needed to find a property, negotiate a price, bid out the construction, and pay for it all with a capital allocation from the State of New York. But these are not normal times, and this project was anything but routine. It was the product of an arrangement that was intricate and imaginative—and instructive for CUNY, as well as perhaps other colleges and universities trying to make their way in times of diminished resources.
It comes at a time when the world of public higher education is wrestling with the new norm: a long trend of sharp cuts in state funding that have led to diminished operating resources and deteriorating or inadequate facilities—and at a time of increasing enrollments. That new norm requires new approaches—and unconventional ones.
One that we have taken at CUNY is to recognize the value of our institution’s real estate as a portfolio of assets. The opportunistic, rational use of land and buildings, whether owned or leased, is yielding new revenues and facilities. Under the leadership of Chancellor Matthew Goldstein, CUNY has become more entrepreneurial, judiciously treating its real estate as a portfolio of assets for investment and maximizing its value by actively seeking relationships and partnerships with the private sector. It’s an approach adopted by CUNY in the last few years that numerous private universities embraced long ago, but public institutions have largely shied away from.
CUNY, the largest urban public university in the country, has 24 campuses and 292 buildings. Nearly one-third of these buildings are individual properties on city streets, apart from a campus. These are valuable assets in a city where real estate is king and no new land is being developed. The key first steps for any institution, naturally, are to know what it has and then to develop a comprehensive strategic plan for turning assets into new revenue. So it was for CUNY.
To evaluate the university’s holdings and identify properties that offered the most promising opportunities, CUNY’s Office of Facilities Planning, Construction, and Management hired an independent construction firm with expertise in public-private partnerships. The firm identified five major university properties with leveraging opportunities totaling $390 million in potential revenues. The university is pursuing a number of recommendations to tap the equity value of its holdings, ranging from selling and leasing some properties to redeveloping others in partnerships with private developers.
The creation of the new home for two of CUNY’s most prominent professional schools started with a building in which CUNY was only a tenant—but a tenant with leverage. In 2007, the New York City Community Trust, which owned the building that housed the Hunter College School of Social Work, informed CUNY that it planned to put the property on the market. The 10-story building, on East 79th Street, a residential street of Manhattan’s Upper East Side, had once been the townhouse residence of prominent philanthropists Lois and Samuel Silberman. Their family foundation had donated the building to the Community Trust in 1969, and a few years later CUNY was given a 99-year, rent-free lease to house its social work school.
Three decades later, the Silberman Fund became a major player in a remarkable—and remarkably successful—public-private partnership that emerged after months of meetings and negotiations between CUNY, state officials, the private trusts, and one of the city’s leading apartment developers.
Because CUNY was only one-third of the way through its 99-year lease, the Community Trust stipulated that the university would receive approximately two-thirds of the proceeds of the sale to help relocate the social work school. But the university took it a step further, asking the trust to help find a new home for the School of Social Work that could also house CUNY’s new School of Public Health. The trust agreed, bringing in a real-estate firm to scout potential properties.
In the end, the New York City Trust agreed to sell the Silberman property to a private developer, The Brodsky Organization, for $48 million. New York State officials, impressed by CUNY’s move to leverage a long-term lease into $30 million in new capital funds, agreed to appropriate the additional $95 million needed to buy land and construct a new building. That turned out to be a property in East Harlem that was ideal but for one thing: It was larger and costlier than needed. At a university with 24 campuses, however, there is never a shortage of needs. The CUNY Graduate Center had been in search of dormitory space for 15 years, so 100 units of graduate housing were added to the project.
The final piece of the puzzle was the construction. CUNY negotiated a stipulation to the deal between the trust and the developer to acquire the former Silberman building on East 79th Street at the negotiated price (a good deal in the market), and Brodsky had to construct the new building for CUNY and accept no management fee. Brodsky agreed, and put up the building in record time for New York City—14 months from groundbreaking—and about $20 million under budget.
The New York Times called the project “a multiparty real-estate deal of byzantine complexity.” But that may have been because it was considered so unusual for a public university system to go outside the standard operating procedure of depending on the state as the sole source of funds for new facilities. This project proved that a public university can be as aggressive, successful, and entrepreneurial with its assets as some private institutions are.
Many colleges and universities have long had internal real-estate departments to maximize the value and revenue potential of their assets—Princeton University, Stanford University, the University of Pennsylvania, George Washington University, and CUNY’s neighbor, New York University, to name a few. In one notable example, Stanford several years ago leased land at the edge of its campus to a high-end shopping mall developer. The Stanford Shopping Center has been a reliable source of revenue for the university ever since.
CUNY is also looking intensely at a public-private partnership to create a home in Manhattan for a new community college that is opening this year in temporary quarters. One of CUNY’s six senior colleges, John Jay College of Criminal Justice, recently opened a new building on its campus on the West Side of Manhattan, near Lincoln Center and the Time Warner Center. That left vacant a building, once a shoe factory, on a large site in a prime location.
Building a new facility for a community college on its own would cost CUNY roughly $400 million. But it would cost far less for the university to make use of something it already owns by partnering with a private developer to raze the existing building and construct a new, larger one that they could share. The property covers half of a city block, allowing for the development of up to 800,000 square feet of space. CUNY would retain the lower half of a new building for its community college, while the developer would own roughly the top half and develop it as a mix of residential units and commercial space. Such a partnership would allow CUNY to finance a portion of the new college’s facility with proceeds from the sale, without relying on the state for the full appropriation. The project is expected to draw significant interest from commercial developers.
Although CUNY believes that public-private partnerships are a viable and even necessary option given current realities, that hasn’t come without some lessons learned. In 2007, the university engaged in a partnership with a leading developer in Brooklyn for a new building at one of the colleges, New York City College of Technology. The building was to be split between academic space for the college and commercial space for the developer, which would pay CUNY $48 million. But the deal fell apart over the kinds of things that often make deals fall apart: complications about the developer’s choice of a famous architect who wasn’t a good fit for CUNY’s purposes and a crash in the real-estate market during the course of negotiations that made the original plan less appealing to the developer.
The take-home lessons: Identify your goals upfront, set them out clearly, and know your potential partners and whether they’re a good match for what you want to accomplish for your institution. Those lessons helped make for a successful venture the next time out for CUNY: the beautiful building in East Harlem that now bustles with students of social work and public health. This is not to say that using real estate to generate revenues or meet facility needs is easy, nor is it a panacea for the fiscal woes confronting many institutions. Our experience, however, is demonstrating that it is a viable option, one that is helping CUNY achieve its mission as a great urban university.
Some Lessons, Cautions, and How-To’s
- Know what you have: Analyze your real-estate holdings, with a particular focus on location, to ascertain potential value.
- Look to the private sector to get the lay of the land. Meet with developers in your area—they’re always on the lookout for a deal—to give you a sense of value and come up with varying development approaches.
- Make certain to identify the institution’s specific goals and objectives—short and long term. These must drive any specific transaction the college or university contemplates.
- Make certain to have in place a fully developed, yet flexible, strategic real-estate development plan. Such a plan will provide a comprehensive road map for everyone involved and help ensure revenue generation and facility development that align with the institution’s needs. That should be, for instance, a predictable, steady flow of new income from a well-executed lease agreement or other real-estate transaction.
- Carefully plan the total approach for a real-estate transaction from start to finish. Anticipate the problems likely to be encountered in the development, including shifts in the real-estate market.
- Have your internal (and external) resources in place before undertaking any discussion or negotiation with the private sector.
- Exercise due diligence: Know who you’re dealing with in any public-private partnership. Besides their reputation and track record, understand your development partner’s goals and needs.
- Employ full transparency internally and externally. In other words, keep the community’s interests in mind and fully informed.
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