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Business Officer Magazine

On a Shorter Lease

To implement a space management strategy with an eye toward reducing the overall amount space in its portfolio, Rutgers University put two key practices in place: responsibility center management and systematic review of all property leases.

By Apryl Motley

As a result of its 2013 merger with the University of Medicine and Dentistry of New Jersey (UMDNJ), Rutgers University "ended with more space of varying quality," according to Mike Gower, executive vice president for finance and administration and university treasurer.

One example is a dining facility on one of the university's campuses. While it is still being used, the facility is more or less obsolete in terms of capacity and style. Another example is a steam plant that needs to be replaced and relocated because it's obsolete in terms of equipment and efficiency. "We have a lot of old facilities that need to be upgraded or replaced," Gower acknowledges.

During the merger with UMDNJ, the university went through a full master planning effort to examine how its various campuses would evolve over the next five to 30 years. This effort included a full assessment of deferred maintenance and the overall quality of the university's facilities.

"Part of the merger meant integrating various space management systems into one system so that we would have an accurate accounting of space," Gower explains. "We are now confident in our system for identifying space."            

"Between now and the end of the year, we'll do a full occupancy inventory to ensure assignments in the system are up to date and accurate," he continues. "Then the next phase is making sure this space belongs to X department and so on and so forth at a room level."

All of this lays the groundwork for the development of a comprehensive financial plan that takes into account what space the university has now and will need in the future.  

Assigning Responsibility

One key aspect of the university's fiscal strategy was the transition to responsibility center management (RCM) beginning in FY14, with this budget model fully in place for FY16.

"With the prior budget model, the university would hold back a certain percentage of revenue to pay for facilities, but under RCM, facilities are basically costed out and rented to occupants, which makes costs real," Gower explains

"If one unit or responsibility center gives up space, [that space] potentially will be reassigned and charged to someone else," he says, "or we will eliminate the old space by tearing down buildings or selling them."

Rutgers has 29 million square feet of space dispersed across 1,011 buildings. According to Gower, the intent is for the number of buildings to start to go down, because from a management standpoint, maintaining space at current levels is problematic.   "We know that we would be better off compressing the number of buildings that we have from an efficiency standpoint," he said. "Some buildings perhaps can be repurposed, but others may be taken down."  

Justifying Leases

In some cases, the need for specialized or upgraded space may have resulted in departments leasing space off campus. "Why are we leasing more space?" Gower asks. "That's the primary question, and nine times out of ten, there's a legitimate reason."

For instance, in the case of the continuing education department, space was leased because sufficient parking wasn't available on campus. In another instance, the New Brunswick Dental School was opening a dental clinic and needed unique space for its operations.

Gower characterized the university's Office of Real Estate Planning as the "sole facilitator of leased space." Once a year, this office prepares a report for the chief business officers at each of Rutgers' four major units, so they are aware of how much they are spending per unit for leased space.

As far as new leases go, departments have to make a strong case for why they need the leased space. "When departments request leases, they have to put forward a corresponding business plan that makes the case for obtaining cost savings or incremental net revenue that we couldn't get without leasing that space," Gower says. "The chancellor for each campus must approve the business plan and justification before I will sign the lease."

And he doesn't sign them lightly. "There are times when I send leases back to the units and say, 'We have this space available on campus.' The real estate office helps me with that." The basic equation Gower uses to make these determinations is as follows: "This unit is currently leasing X thousand square feet of space for X dollars. How much could we save if the unit used space on campus?" From his standpoint, as leases come up for renewal, "it will be beneficial for the university to move people from leased space to home space."

APRYL MOTLEY, Columbia, Md., covers higher education business issues for Business Officer.

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