August 8, 2008

Colleges Explore Alternative Revenue Streams

This is the third part of a multipart series on the business of college.

At Lasell College in the Boston suburb of Auburndale, there is a retirement community that essentially constitutes a campus within a campus. But the community of 230 who live there and take courses is more than just an experiment in seniors engaging in lifelong learning. For Lasell, the retirees are a source of alternative revenue that will help protect the college's bottom line from fiscal and demographic trends that are making the college business more challenging.

Increasingly, colleges and universities, especially publicly funded state schools and those with small endowments [, 10/22/07], are turning to alternative revenue streams -- including grants, private donations, patents, real estate, and money-making graduate courses -- to make ends meet. Administrators at these schools say it is the only way they can compete with wealthy private schools, such as Harvard, that have brand names and hefty endowments [, 11/29/2007].

The Revenue Gap Even though tuition is high across the board, administrators say they spend more to educate undergraduates than they can charge students. "The cost of higher education is increasing so rapidly. There's no end I can see," said Neil Theobald, vice-president and chief financial officer of Indiana University in Bloomington and Indianapolis, where tuition makes up only about a third of the school's revenues and state support is declining.

Additionally, the so-called echo boom generation -- children of the baby boomers -- is finishing university, and the coming generation is smaller. Therefore, there will be fewer potential college students. "We must protect ourselves for that day when the competition [for tuition dollars] is going to get rougher," said Lasell College President Michael Alexander.

So where's the new money coming from? For many colleges, providing additional forms of education is an obvious way to create a new revenue stream. Many schools are developing graduate program -- in areas such as management, health care, and education -- because they are in demand and can be profitable. A case in point: New England College in Henniker, N.H., which added a masters in management with a health care specialization and an MFA program in poetry, which combines online work with two 10-day on-campus sessions. "We're not a wealthy institution. We don't have a large endowment," said Michele Perkins, New England College's president. "We are what you'd call tuition dependent." In 2003, the first year that New England College offered a graduate program, it generated $1 million in revenue. In the 2008-2009 academic year, the graduate programs are projected to bring in $5 million.

Real Estate Forays Some universities are creating revenue streams of an entirely different sort by going beyond education and becoming real estate developers and landlords. Many universities already do this to some extent by owning student dormitories and apartments. But some schools are finding that their property is valuable and in demand for uses beyond student housing and classroom buildings. For example, Emmanuel College, a Catholic liberal arts school in Boston, leased an acre of land in the Fenway neighborhood to pharmaceutical company Merck (MRK), which built a 12-story, 300,000 square-foot private research facility that opened in 2004. The 75-year ground lease for a research facility brought in $50 million, said Jack Maguire, who as chairman and founder of higher education consultancy firm Maguire Associates brokered the deal with the college.

Similarly, the California State University system is pursuing real estate partnerships, said Richard West, the system's executive vice-chancellor and chief financial officer. One example: It allowed the professional soccer teamLos Angeles Galaxy [, 7/13/07] to build a 27,000-seat stadium at the system's Dominguez Hills campus. The school shares revenues from rent, parking, and the box office. West said alternative revenue sources -- which includes extended university courses and degrees, philanthropic gifts, contracts and grants, exclusive provider agreements, and land lease agreements -- represents at most 10% of the system's budget. While they help, "they don't make it any easier to lose state funding," he said.

Lasell College, meanwhile, didn't take on a partner to become a senior community developer. Lasell Village, with 188 apartments and 16 buildings, was built and is owned and operated by the college. Residents are required to take 450 credit hours per year, and their tuition is built into rental fees. The school takes in management fees, a lease payment every year, and maintenance fees. Lasell College President Alexander said that $1 million to $2 million goes straight to the bottom line.

Revenues From Royalties Offering financial support to research, startups, and inventions [, 10/16/07] is another way that educators can create a revenue stream while remaining true to their original goals of education and innovation. CFO Theobald said that while Indiana University supplements its tuition revenue through its hospital, dormitories, and a growing endowment, it's also pinning its hopes on returns from research that can generate valuable patents and royalties. There's precedent for that. In the mid-1950s, Crest toothpaste was patented by three Indiana University researchers. Royalites from Crest paid for a dental research institute on campus.

Not every plan to boost revenues has worked out. For instance, a plan at Indiana to construct and lease an 800-bed dorm with a private partner foundered, Theobald said. And school administrators admit to some worries about blurring the line between being educators and businesspeople as they pursue alternative sources of income. "I don't think it's a cost-free alternative," said Theobald. "We're changing the nature of public education as we do this."

Still, administrators say universities have no choice but to continue to pursue alternative revenue streams. Some say that attracting more international students, especially with the weaker dollar, and providing study abroad opportunities will be other ways to bring in more cash. Meanwhile, the other programs -- from real estate to research -- will likely continue to expand. "Don't let anyone kid you," said Lasell's Alexander. "You have to be thinking about ways to make money. It costs more than tuition to educate people."