With rising maintenance costs and tighter operating budgets, Facilities leaders have growing reason to seek out new mechanisms to fund regular maintenance and capital renewal needs. One strategy Facilities leaders have considered is building endowments.
Building endowments hold significant potential to help solve the deferred maintenance funding challenge in the long run.
These endowments enable an initially small investment to grow into a sizeable pool of money from which resources can be pulled to pay for maintenance and renewal. But despite increased interest, the best way to structure successful endowments has not yet been settled.
This resource is part of the Enhance Your Capital Project Planning Process Roadmap. Access the Roadmap for stepwise guidance with additional tools and research.
Multiple approaches to launching building endowments
A few institutions have successfully established building endowments.
Since 1996, Furman University has required donors to contribute 30% beyond the cost of construction for new buildings. These funds are split between two building-specific endowments: 80% to cover annual operations and maintenance (O&M) and 20% to provide for long-term capital renewal. As a result, Furman now has endowments for a quarter of their campus buildings—but that also means Facilities must manage 30 separate endowment funds.
By contrast, the University of Idaho established one centralized building endowment. In 2007, the university began to fundraise 15% beyond the cost of construction for all general education and auxiliary buildings. Currently, the institution sets aside 5% to cover administrative fees while the other 10% goes into a central endowment. (The University of Idaho keeps the general education and auxiliary funds separate.)
Each institution points to the importance of presenting donors with a single number that incorporates both construction and endowment costs, while also communicating the potential for a higher standard of building care.
Strategies to improve building endowment outputs
In establishing these endowments, Facilities leaders at Furman and the University of Idaho wrestled with a major problem:
How much money do we actually need to establish an effective endowment? On one hand, too big an initial investment can turn off senior leaders. On the other hand, an initial investment too small will not cover all desired building expenses.
EAB’s Facilities Forum set out to help provide guidance on this question. We built an exploratory total cost of ownership model to test various scenarios to determine when maintenance endowments were more successful and when they failed to cover enough costs. (Recognizing the differences between various higher education campuses, our generalized model did not aim to provide specific numbers, but instead investigate possible scenarios.) Our model assumes:
- A newly constructed building has an average expected lifecycle of 40 years.
- The endowment will average a 5% return (a conservative estimate based on long-term trends from NACUBO’s recent survey of higher education endowments).
- The total cost of ownership of a building with a 40-year lifecycle delineates into 10% for initial construction costs, 30% for major capital renewal, and 60% for operation and maintenance. These numbers come from an analysis of building costs conducted by a health care consortium, which some Facilities leaders have used for their own exploratory TCO models.
- Building O&M and capital renewal costs vary over time. For example, we scaled the distribution of total capital renewal costs across the building life to begin fairly high across the first couple years (due to unexpected modifications), remain low while the building is young and in good condition, increase steadily as the building gets older and more expensive to maintain, and then drop as the building is managed to fail towards the end of its life.
Based on this model, EAB uncovered four ideas for improving the output of building endowments:
1. Increase the initial investment in the maintenance endowment
Clearly, asking for more money is the most straightforward and simple solution. A large initial investment not only expands the total amount of money available for the endowment, it also preserves the endowment for longer. Increasing the initial investment in a building endowment from 25% to 50% of the cost of construction more than triples the long-term output for O&M spending, while increasing the covered costs to 46% for a capital renewal focused endowment.
However, institutions that have successfully introduced building endowments point out that the more money you ask the advancement team to fund raise, the less likely you are to get approval. Consequently, simply increasing the initial investment may not be an option for many campuses.
2. Use the endowment to cover only some of the anticipated costs
Barring an impossibly high initial investment, the reality is that no endowment can cover all maintenance and renewal costs. Assuming an initial investment of 25% the cost of construction, full coverage of O&M and renewal costs will drain the endowment pool within the first three years.
Of course, this time frame varies based on other factors, but even an investment of 100% the cost of construction only improves the endowment survival length to 13 years. A building endowment cannot be the only solution for funding O&M and capital renewal; therefore, Facilities leaders should focus the endowment on only a few particular costs, such as long-term building exterior renovations and behind-the-walls infrastructure repairs.
3. Refrain from using the endowment until the second half of the building’s lifecycle
While early year renovations are a fact of life for almost every building, the vast majority of capital renewal takes place in the latter half of a building’s life. Our model shows that waiting to draw down until the 21st year of the building’s lifecycle greatly increases the capacity of the endowment to cover costs. Leaving the money untouched allows the endowment to grow larger at a faster rate because of the compounding nature of the interest. For example, an initial investment of 25% the cost of construction will pay for 48% of the renewal costs of the second half of the building’s lifecycle (and 30% of total 40-year renewal costs).
4. Focus the endowment on capital renewal needs, not recurring maintenance costs
For most institutions, capital renewal funds are not as consistently available as O&M dollars. Renewal needs also tend to be concentrated in the second half of the building’s life. Therefore, leveraging an endowment to cover just renewal needs allows the endowment more time to mature and pay out for a narrower and more predictable set of costs. Assuming an initial investment of 25% the cost of construction, a capital renewal endowment will last the entirety of the 40-year lifecycle of a building and cover 23% of all renewal costs—a significant improvement compared to the 7% of O&M costs the same endowment would be able to cover.
Building endowments hold a great deal of potential to supplement the Facilities budget in the long term. To make the case to campus, Facilities leaders must consider a number of different factors about how to structure the endowment. Implementing all four of these ideas has the potential to increase an endowment’s output by eight-fold when compared to a model endowment tested without them; however, even pursuing one will have a significant impact on the effectiveness of the endowment.