Partners With Purpose
Public-private initiatives allow institutions and their communities to share the rewards of enriched educational and economic opportunities—if deals are structured appropriately.
By Patrick Gibbs and Eileen Kennedy Byrne
The University of New Orleans, Louisiana, provides an example of the spectrum of partnership possibilities. UNO, the urban research campus of the Louisiana State University System, is complemented by a family of affiliated foundations that support the system’s academic and service missions through conventional activities such as fundraising and endowment management as well as the somewhat less conventional formation of public-private partnerships. For more than a decade, UNO Foundations has served as an essential link between academia, governmental agencies, philanthropists, and private industry in collaborative efforts to develop cultural centers, support and expand existing regional manufacturing capabilities, and lure new technology-based industry to Louisiana. UNO Foundations also facilitates a host of university-related projects ranging from an art museum and research park to battleship design facilities and a state-of-the-art film studio. The foundations are actively engaged in the financing, design, construction, ownership, and operation of these facilities.
What allows such multidimensional joint efforts to get off the ground and gain momentum? Careful attention. Scrutinizing the details of a public-private deal—even as you focus on common goals—will go a long way toward developing partnerships that last.
Dozens of Deals
Of the many public-private partnerships UNO Foundations helped structure and facilitate, two in particular demonstrate the unique, yet wide-ranging, benefits for all parties involved years after project implementation.
1. Saving the Big Screen
In 1996, UNO and the UNO Foundation—the oldest of the group of affiliated foundations—approached the Louisiana Lieutenant Governor’s office with a plan to prevent a film studio from closing in Elmwood Industrial Park, a dynamic and flourishing business corridor west of downtown New Orleans. The university and the foundation offered to operate the studio as an educational tool for the UNO Film Arts program and as an economic development catalyst for growing the film industry in the region and the state.
The deal. Through a cooperative endeavor agreement, the state provided an annual appropriation of $200,000 that flows through the university to the foundation. The foundation borrowed $2 million to purchase the studio by pledging the revenue stream from the cooperative endeavor agreement. In return, the foundation agreed to manage the studio and make the facilities available to the university and commercial film production companies to support the anticipated industry growth in Louisiana. The Robert E. Nims Center for the Entertainment Arts—expanded and enhanced with more than $6 million in private philanthropy and state, local, and federal economic development grants—is now a fully digital, cinema film production facility. It houses one 20,000-square-foot and two 10,000-square-foot sound stages, a motion capture studio, a visual and special effect and 3D animation studio, production offices, and post-production and editing suites.
The beneficiaries. UNO students pursuing degrees in film and video production now have coveted opportunities to work alongside industry professionals on major motion pictures, motion capture animations, and digital editing projects. They also graduate with a working knowledge of cutting-edge technologies and current film production techniques. This working studio draws students to the university’s undergraduate and master’s-level film arts programs and encourages UNO graduates and other local professionals to build careers in Louisiana.
The deliverables. An overriding goal of the center was to establish a thriving high-tech industry that would provide good jobs in Louisiana. Since opening, the Nims Center sound stage facilities and production offices have been leased to 27 productions with budgets for feature films, commercials, and music videos totaling more than $700 million.
2. Studying Shipbuilding Science and Technology
The UNO/Northrop Grumman Maritime Technology Center opened in April 1998 with the help of a $40 million cooperative endeavor agreement between the Louisiana Department of Economic Development, Avondale Industries (which later merged with Northrop Grumman), and UNO. The center is an off-site component of the UNO Research and Technology Park, situated on 4.5 acres adjacent to the headquarters of Northrop Grumman Ship Systems (NGSS) and a few miles upriver from downtown New Orleans. The four-story, 200,000-square-foot center employs 400 Northrop Grumman engineering and design employees and functions as a research and teaching laboratory for UNO’s School of Naval Architecture and Marine Engineering (NAME).
The deal. The cooperative endeavor agreement obligated the state to include in its annual budget request sufficient funds to provide the $40 million plus interest to the foundation over a 12-year period. Using the promise of state appropriations as pledged revenue, the UNO Research and Technology Foundation (another UNO-affiliated foundation) borrowed the funds to build and equip the facilities. To expedite the project, financing was initially obtained via a syndicate of bank loans and a capital equipment lease underwritten with Avondale’s guarantee. The project was later permanently financed with tax-exempt bonds secured by AAA bond insurance.
A complex series of transactions brought the collaboration to life. First, Avondale Industries purchased vacant land adjacent to its existing shipyard and donated the land to UNO. The university leased the land to the foundation, which contracted for the construction of the facilities and acquisition of the design software and hardware. The entire facility, equipment, and software were then leased back to Avondale (now NGSS) for use in designing ships for the Navy. In turn, Avondale granted UNO exclusive use of 10 percent of the facilities to serve as a teaching laboratory. At the end of the 40-year lease term, the facilities will be donated to UNO.
The beneficiaries. The creation of the center is an integral part of the Navy contract awarded to a consortium led by Avondale, which includes Bath Iron Works, Hughes Aircraft, and Intergraph Corporation. Avondale’s association with UNO’s NAME program was a prime factor in awarding it the first $641 million contract for the design and construction of an LPD-17 ship, the U.S. Navy’s newest and most technically advanced class of amphibious assault ships. The Navy has plans to build 12 of these warships, ultimately worth $8 billion to consortium members. The center likewise provides UNO’s NAME students unprecedented access to $25 million in real-world information systems and 3D modeling facilities. The collaboration also affords faculty the opportunity to train graduate students and shipbuilding industry professionals in a dedicated 20,000-square-foot laboratory within the center. Other Louisiana shipbuilders benefit from this advanced computer facility by learning how to improve their own design and manufacturing efficiency.
The deliverables. The facility operates on a self-supporting basis and provides an annual lease payment to the UNO Research and Technology Foundation. The collaboration allows NGSS to retain its workforce of 6,000 employees in Louisiana. In addition to the research lab, UNO received two chairs endowed by Avondale (NGSS) in further support of UNO’s NAME programs.
Six Steps to Structure Your Deal
Whether student housing, a bookstore operation, or a complex university–state–industry partnership, public-private initiatives provide opportunities and pose complex challenges. The arrangements are often intricate, and they must balance the cultural values and management philosophies of bottom-line-oriented corporations with the more collegial, deliberative operating styles and service delivery methods found in higher education institutions.
Likewise, all cooperative arrangements involve risk and control trade-offs. Deciding to what level institutional prerogatives or controls can be altered, shared, or transferred between or among the parties in return for invaluable academic training opportunities, access to technology, and other rewards is often a difficult process for colleges and universities. Advance planning and a clear definition of the institution’s objectives and limitations are crucial to developing and maintaining effective partnerships.
No doubt, every private partner knows in advance the extent to which it will compromise to meet its specific goals, objectives, and priorities. If college and university leaders also carefully determine institutional priorities and expectations across departmental and divisional lines, negotiating a transaction will be dramatically simplified.
What follows is a framework for evaluating and planning partnership transactions. These steps have broad application across the spectrum of privatization arrangements.
1. Define specific goals and objectives for the project. Determine what real value the transaction has for strengthening the academic programs at your institution. Considerations may include:
- access to additional or alternate facilities, such as applied research laboratory space and real-world training facilities for students;
- access to technology and equipment, including state-of-the-art software;
- ability to attract and retain faculty;
- ability to increase, retain, or diversify enrollments;
- opportunities for student internships and scholarships;
- opportunities for research contracts or consulting arrangements;
- technology transfer and licensing opportunities; and
- financial rewards, such as lease income, tuition payments, auxiliary revenues, gifts, and grants.
2. Weigh risks and returns. Determine the level of risk your institution is willing to accept, including the minimum return you require and your maximum acceptable loss.
- Evaluate and determine the means to measure direct financial and indirect or nonfinancial returns.
- Consider the political and public relations risks inherent in the transaction and any financial risks.
- Determine whether a breakeven project is acceptable, if other benefits to the institution can offset net income considerations.
- Ensure that all institutional leaders involved in the transaction understand and agree to these parameters.
3. Determine which decision-making prerogatives your institution is willing to share or cede to the private partner. For planning and development stages, decision factors may include:
- control of property or facilities;
- compliance with institution design standards;
- selection of materials, designers, contractors, and subcontractors;
- substitution of materials;
- institutional access to contractors and subcontractors in the event of default;
- change order approval; and
- construction oversight and acceptance of project at completion.
For the operating phase of a project or activity, decision factors may include:
- sharing facilities and equipment, exclusive rights of use, and control over scheduling;
- pricing—that is, setting fee and rate schedules and rate increases;
- programmatic decisions within the facilities or projects;
- approval of or input concerning employees of the private partner—including hiring, firing, and disciplinary matters;
- net revenue sharing and maintenance of operating reserves;
- regular and long-term maintenance schedules and funding;
- project user disciplinary decisions, such as collections, evictions, or filing of lawsuits; and
- use of the institution’s name and logo in promotions.
4. Ensure that documents reflect your understanding of all aspects of the transaction. Additional hours or days spent negotiating and clearly defining transaction parameters will prevent needless headache, expense, and conflict across the life of the project. In general:
- Do not sign standardized, pre-printed documents.
- Read all transaction documents carefully.
- Clearly spell out events of default and remedies to cure.
- Make certain that penalty provisions are reasonable and acceptable within the operating philosophy of the institution.
- Know the rights of third parties—for example, bond insurers or mortgage holders—and how exercising these rights will affect your ability to operate in the event of assignment or sale of property or foreclosure.
- Ensure that all language is clear for the benefit of your successors. If a contract provision is difficult to understand, rewrite it.
- Bring in experienced professionals when you need expertise or additional assistance. This is particularly important in the negotiating and contracting stages.
5. Be flexible, and communicate frequently. While you must enter any agreement in a spirit of trust, consider at the outset at what point your institution will step in to save a troubled project.
- Understand the needs, objectives, and constraints of your private and public partners.
- Be prepared to compromise and adjust expectations and operations.
- Plan for downsides and potential problems in the relationships.
- Know which party or parties are contractually obligated to bear the losses—and in what proportions—if the project does not meet financial or programmatic goals.
6. Develop an exit strategy. Components of a sound strategy may include:
- buyout options, including right of first refusal to purchase;
- buyout financial terms; and
- residual rights, such as the private partner’s unamortized capital investment if the option to extend the agreement for additional periods is not exercised.
Well-planned projects and clearly articulated partnerships are productive and profitable for all involved—institutions, private developers, investors, and operators. The right combination of institutional knowledge and private-sector expertise allows for myriad partnership opportunities that can generate significant educational and long-term economic value for institutions and the communities they serve.
PATRICK GIBBS is president and chief executive officer and EILEEN KENNEDY BYRNE is vice president and chief financial officer, UNO Foundations, New Orleans. They also serve as principals for GKB Consulting, New Orleans.
- IRS Grants Relief from New 1098-T Reporting Mandate
- New Overtime Rule Expected Mid-May
- 1042-S Questions Remain as Scrutiny Intensifies
- 2016 CAO and CBO Collaborations
August 1-2, 2016
- 2016 Planning and Budgeting Forum
September 19-20, 2016
- 2016 Managerial Analysis and Decision Support
November 17-18, 2016
- WEBCAST: The Clery Act: Strategic Planning to Mitigate Institutional Risk
Thursday, May 26, 2016 1:00PM ET
- ON-DEMAND: Title IX: Key Issues Surrounding Institutional Compliance
- ON-DEMAND: Containing Cost and Risk with Renewables – the Power Purchase Agreement Story
- ON-DEMAND: NACUBO Live! Higher Education Accounting Forum
- ON-DEMAND: Are Hedge Funds and Private Equity Right for You? An Analysis of Alternative Investments
- ON-DEMAND: Responsibility Center Management: Two Different Perspectives