The Higher Education Institution Business Opportunity An Escarpment advisors report

The Higher Education Institution (HEI) industry is in the midst of fundamental disruption.

“In 15 Years From Now Half of US Universities May Be in Bankruptcy.” Source: Clayton Christiansen, Harvard Business School

The Old Higher Education Institution Business Model...

Undergraduates + MBA + MeD + JD = Growth

Traditional Students

...has fundamentally changed

In Chicago...

graduate enrollment has already dropped by over 20%. (Source:IPEDS)

The number Illinois high school graduates has declined by 13,000 students per year (Source:WICHE)

Private, Non Profit HEI's Located In Urban Areas Are At Significant Risk

Suffolk University, Boston -3,672 Students

Roosevelt University, Chicago -716 students

Touro College, New York City -3475 students

Howard University, Washington, DC -2256 students

...private, non profit HEI's located in the Top 5 Urban Markets lost 63,000 Students between 2009-14 (Source: IPEDS)

Many Urban HEI's Bet on the Status Quo and Lost

  • they have already reduced admission requirements (Source: Standard and Poor's)
  • they have already discounted tuition (Source: Moody's)
  • ...and they invested heavily into new buildings for traditional students (Source: Bain & Company)

But Growth Opportunities Haven't Disappeared, They've Shifted...

Older, with families, and working full time,

...To Non-Traditional Older Students Balancing Work and Family

Non-Tradtional Students depend upon hybrid, online based course delivery that reduce the need for academic related facilities

by shifting either a portion or all of course instruction from being facility based to online.

Most non-traditional students do not use residential, athletic, and student service facilities.

Many private non profit HEI’s have resisted pursuing this new growth market

  • they believe that the traditional student market will return
  • they invested substantial sums in traditional student infrastructure
  • they lack the senior leadership resolve to reposition their institution

Today, HEI’s own more than $250 billion worth of real estate assets

HEI’s have been the leading issuers of tax exempt debt.

Roosevelt University $226m in Tax Exempt Debt
Suffolk University $353m in Tax Exempt Debt
Howard University $293m in Tax Exempt Debt

As scheduled tax exempt debt repayment escalates, many urban HEI’s are having increasing difficulty meeting their debt service coverage and liquidity covenants.

Bond Rating Agencies HEI outlook has been increasingly negative

"Smaller, regional institutions will continue to struggle to differentiate their brands, which will require additional investment and resources that could weaken their credit profiles in 2016." (Source: S&P's 2016 Higher Education Outlook)

HEI’s lag behind other real estate intensive industries in finding ways to turn a portion of these assets into cash (Source: Bain & Co)

REIT's like American Campus Communities focus exclusively on student housing assets

These trends have driven the growth of investment and operational vehicles such as student housing Real Estate Investment Trusts (REITs) which allow HEI’s to convert assets to cash.

The Opportunity

...to assist at risk private, non-profit higher education institutions (HEI’s) in managing their underperforming academic facilities.

by creating a investment and operational vehicle that:

  • raises capital
  • identifies underperforming Higher Educational Institution (HEI) facilities, negotiates and acquires selected facilities
  • converts these to alternative uses
  • manages converted facilities

To accomplish this a HEI acquisition target profile must be developed

Due to incomplete information on HEIs financial status, expert resources (such as Merritt Research Services ) must be identified and contracted with. This information will be used to define what desirable facilities are, identify HEI’s with desirable facilities, and to initiate board level contact with these institutions.

Then, technical support related to tax exempt debt redemption and HEI facility acquisition must be added.

This requires the identification of legal experts with significant experience in the redemption of tax exempt debt and expertise in structuring investment and operational vehicles that acquire facilities .

This presents significant opportunities for organizations interested pushing the envelope of industry innovation.

Realizing this opportunity requires

  • the ability to move promptly
  • extensive experience in value-added real estate investments, new development, and property leasing and management,
  • tax exempt financing expertise
  • a thorough understanding of higher education trends

A Case Study: Episcopal Seminaries

In 2003, there were 11 masters and doctorate granting Episcopal seminaries. By 2015, overall enrollment declined by almost 40% and the student gender and age composition has shifted from young males, who were full-time, residential students to women over the age of 40 who are increasingly online students

General Theological Seminary, New York City

Since 2007, to reduce its $40 million debt, Manhattan based General Theological Seminary seminary has sold its 180 10th Street and 422 and 455 West 20th Street facilities.

Three other seminaries have either merged or sold facilities

Created By
Christopher Multhauf
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