As all of our schools are confronting some version of this, I pass this along that was shared with me. This twitter chain details how another student housing entity called Corvias is putting pressure on the Board of Regents of the University System of Georgia to have student housing be full. It points out the ‘blame the students” approach for any COVID-19 spikes that happen when in fact it is the structural setup of not having dormitory suites being single occupancy even if it a two, three, or four person suite. The company makes clear that it is not taking the risk for reduced student occupancy of housing as in exchange for the 40 year lease they have incurred hundreds of millions of dollars of debt to refurbish and construct various student housing on all these campuses. So the company attempts to put the onus on the University System of Georgia for any shortfalls that would happen from reduced student occupancy (like turning a four person suite into single occupancy) wanting the system to make the company whole. 

It is clearly looked at by Corvias as a breach of contract if the Board of Regents does the things required to protect students. What is interesting is how Corvias “reinterprets” the CDC guidance to say that the high student occupancy is ok. Which of course is a reinterpretation driven by their desperate leveraged need for the cash flow. This is exactly how I predicted things would go in the article below. 

We should not have the Wall Street profit and cash flow vision dictate the public safety of students, faculty, and staff. I am appalled.

I did not know about this when I wrote this article, but on July 6, 2020 Harvard and MIT have sued the Federal Government to have the ICE guidance declared unlawful and to return to the earlier guidance in the pandemic. As they say, lead, follow, or get out of the way.

“America is a business, now (f’ing) pay me” – Brad Pitt, final line, Killing Them Softly

According to the Chronicle of Higher Education, based on their tracking of about 1090 colleges and universities, the reopening strategies for the fall at colleges and universities fall into 5 categories: “In-person” or “hybrid” for 84 percent, “online” for 9 percent, “unclear” for 5 percent, and “waiting” for 2 percent.

While there is a concern raised about safety in a pandemic for students and to a lesser extent for faculty and staff if the reopening is in-person or even hybrid, there is only anecdotal understanding outside of the Executive Suite of the financial pressures that may come to bear on the Administrations attempting to discern what to do in a pandemic.

This note attempts to address that in a systematic fashion.

Private Equity

American Campus Communities (NYSE sticker: ACC) is a Real Estate Investment Trust that is quoted on the New York Stock Exchange and whose board appears to be made up of significant players in the private equity business.

Their motto “Where Students Love Living” is explained by the fact that they are the nation’s largest developer, owner and manager of high-quality student housing as noted on their website:

“All across the country, American Campus Communities (ACC) gives students the resources and environment they need to succeed academically and personally — at every price point. We are the nation’s largest developer, owner and manager of high-quality student housing, but our commitment extends far beyond bricks and leases. We work with universities and developers and owners to deliver an exceptional student experience, on campus and off.”

Obviously, like with all companies but particularly with those in higher education, the closing down and going remote of colleges and universities due to the COVID-19 pandemic was a serious event. A material event that one would expect American Campus Communities to reflect in its SEC filings as it did in their Form 10-Q filed on May 1, 2020.

As to COVID-19, American Campus Communities pledged in its COVID-19 statement by Bill Bayless, American Campus Communities CEO as of March 31, 2020, that:

“Our pledge is that every American Campus Communities resident will continue to have a home during this crisis regardless of their ability to pay rent on a timely basis. We will act in good faith – working with every student and family suffering financial hardship on a case-by-case basis to ensure our residents continue to have a home and complete their online instruction in an academically-oriented environment. At this difficult time, there will be no late fees, no online payment fees and no financial related evictions. Also, there will be no negative impacts to the credit reports of those suffering financial hardships related to the COVID-19 pandemic.”

Conscious of the difficulties for students and families, one sees a company having its business model upended and attempting to protect its business, particularly as the stock market is watching them.

But beyond the pledge, American Campus Communities like every business knows that cash is king and so cash flow has to be protected.

This Is Just Business

One means of protecting cash flow was through the CARES Act funding for businesses. American Campus Communities got a piece of that action according to their SEC10-Q filing of May 1, 2020.

But that is a short-term measure.

One has to think more systematically about the business model. The sophisticated player in a student housing model would do what is normal for business which is to use other people’s money to leverage one’s position.

So after identifying a potential project, the financing of the design, construction, and operation of the site has to be carefully parsed.

So for the construction of one of the properties which essentially all seem to have a public university as the primary university served per the SEC 10-k listing (pages 20-24) one can imagine the issuance of some bonds by the company or maybe an entity that can emit tax-exempt state or local bonds. Stocks and bonds are really just marketing instruments that are shaped in a certain way to attract a certain market of investors. Shape the stock or shape the bond and you have said who you want to buy them – a private placement, offered to the public, whatever.

Those bonds then in turn are used to finance the design and construction. There are fees related to setting up these financial structures that sophisticated investment bankers and their lawyers know more about then I will ever understand but it is just business and they are making their money.

After construction, there is a question as to whether to own the facility or merely have an operating/management relationship. Depending on the structuring of the deal there will be a more thick or thin revenue stream commensurate with the operating risk taken.

Depending on the financing mechanism and the length of the debt obligations, the revenue stream from the facility has to be protected from other uses. That revenue stream has to be dedicated to the specific property project so that the spreadsheet cash flows for repayment of debt and interest, fees, operating/management fees, etc, and all the rest are taken care of.

If a university has its own property on which it can earn housing revenue it might be tempted to put students in that housing outside of the project housing and generate more revenue for itself. So, that kind of discrimination has to be clearly foreseen to not be possible, or else the financial structure of the deal falls apart. It has to be clear that if it is part of the deal, such university arbitrage of housing is a no-no.

This is just business.

The Academic Year and Reopening

In a business that gets funds for 9-10 months a year with a low ebb in the summer months, the protection of cash in the March to May period would have been essential and also the planning for the next year when rents start up again in August or September would be a key concern.

In a pandemic with its inherent uncertainties and some level – even if inept – of federal, state, and local governmental intervention on safety creates great uncertainty as is noted in the American Campus Communities Form 10-Q of May 1, 2020.

But, business is full of risks and the role of the good manager is to know how to both manage those risks.

At the universities where American Campus Communities have properties, the reopening strategies this fall are for 94.7 percent in-person or hybrid (including mixed in-person and hybrid at different campuses), 2.6 percent are online, and unclear for 2.6 percent. These numbers for in-person and hybrid are significantly higher than the totals across 1090 colleges and universities tracked by the Chronicle of Higher Education as of July 6, 2020 (84 percent).

Put another way, and this is very important, because the university is the primary unit served by the project, whether or not the university is part of the deal, American Campus Communities has an interest in making sure (“betting the farm” in more colloquial terms) that the 90 odd campuses where they are operating or are near will be open so that the revenue streams can flow. Thus, one can better understand the COVID-19 pledge which has implicit in it that students will be residents.

Now it could be possible to have provisions in the bond instruments or management contract that really make sure that the deal works for the cash flow from the project to return solely to the project, but it could also have in it provisions on occupancy, etc. And so if occupancy were to fall below a certain threshold, payments have to be made to cover the debt and interest and other expenses. It is inevitable.

“Everybody Say, Corona Don’t Play”

With COVID-19 one can note that the emptying of dorms without the commensurate suspending of the rental lease payments for students in March at a time when 40 million people became suddenly unemployed placed great stress on all the students and their families. But, also on the business model. To keep the rental payments flowing for April and May until the usual downtime happens becomes crucial and one would act accordingly to preserve that revenue stream required by the bond indenture or other financing mechanism.

Here the governmental response becomes crucial. For if the federal, state, or local government were to pass a governmental order that shut down the universities until further notice that could be seen as a contractual excuse of impossibility by governmental order that would excuse all concerned from their contractual obligations. That would include the students in the leases for the properties also so funds would dry up, the bonds would not be paid, and the business model would die. But, that governmental order would provide an excuse for non-performance and would not amount to a breach – unless the deal was set up to allocate that risk.

So, if one can make sure that the federal, state, and local level response is short of the impossibility for governmental order justification for non-performance, then one still has a window to operate and survive. And it does seem that governments at the federal, state and local levels in varying ways have made sure that they do not give that impossibility by government order justification for non-performance.

A further way to protect the revenue stream is to get students back into the dorms. In the presence of COVID-19, the approach is to end all classes by Thanksgiving at many schools and start the academic year earlier. Of course, starting the year earlier cuts down the summer downtime window usually foreseen and helps to lock students in for the year a bit earlier so the revenue streams are in place.

This is just business.

For those universities hesitant about a full reopening, a hybrid model has to be tolerable to deal with the real concerns about a university operating in a pandemic whose first wave is not over. And even in an in-person setting, the idea of students, faculty, and staff getting sick and dying is bad for business. So some type of arrangements has to be made for those persons in those groups who suffer higher risk from COVID-19.

But, it is absolutely imperative, for the student housing based business model to work, that schools do not go back to fully online or too much online.

The Irreplaceable Revenue Streams (at Least to Universities)

From the University perspective, it has several different more or less significant revenue streams and several different more or less significant cost streams that it has to address. If they are a big sports school, there are revenue streams tied to whatever media deals have been developed by them individually or in the context of the NCAA or other entities. No games then probably no payment.

And the revenue streams are not just for broadcasting. The entire local community and maybe even online sales may be geared to the games and rivalries that generate sales for many entities other than the university in a kind of microcosm of interrelated profitability across a region. There are also the tax revenue implications for the communities that have sales tax etc for the business derived from the universities’ activities. All those entities whether state or local can play a role of influencing and guiding the university management in deciding how to confront the COVID-19 pandemic.

It is worth noting that nearly all the universities on the list of American Campus Communities are public universities tied to various states, the political pressures in a Presidential election year would also be another influencer on the decisionmaking of the university.

Finally, let us speak of the international students that may form a significant part of the residence of the project or the revenue of the University and its environs. To really dissuade the move to full online, let us make sure that the federal government sends out a notice:

Temporary exemptions for the fall 2020 semester include:

1. Nonimmigrant F-1 and M-1 students attending schools operating entirely online may not take a full online course load and remain in the United States. The U.S. Department of State will not issue visas to students enrolled in schools and/or programs that are fully online for the fall semester nor will U.S. Customs and Border Protection permit these students to enter the United States. Active students currently in the United States enrolled in such programs must depart the country or take other measures, such as transferring to a school with in-person instruction to remain in lawful status. If not, they may face immigration consequences including, but not limited to, the initiation of removal proceedings.
2. Nonimmigrant F-1 students attending schools operating under normal in-person classes are bound by existing federal regulations. Eligible F students may take a maximum of one class or three credit hours online.
3. Nonimmigrant F-1 students attending schools adopting a hybrid model—that is, a mixture of online and in person classes—will be allowed to take more than one class or three credit hours online. These schools must certify to SEVP, through the Form I-20, “Certificate of Eligibility for Nonimmigrant Student Status,” certifying that the program is not entirely online, that the student is not taking an entirely online course load this semester, and that the student is taking the minimum number of online classes required to make normal progress in their degree program. The above exemptions do not apply to F-1 students in English language training programs or M-1 students pursing vocational degrees, who are not permitted to enroll in any online courses.

So if one wants to keep that non-immigrant student revenue, a school is to open for in-person, and even if it does hybrid it is what I would call minimal hybrid. And given that classes cannot be structured separately for international students and American students, one can see that the hybrid model will actually be a defacto in-person model for schools that are dependent on international student revenues.

Enter Safety

Of course, the student-athletes who come down sick or die are a risk, but that might be the cost of doing business from the point of view of all these other interests. And, of course, if faculty and staff come down sick or die because they were in the in-person aspect of a full in-person or hybrid model, then it is their fault for not having gauged their personal risk in the decisions they made to be in that classroom. And, of course, if some international student comes down sick or dies, that is sad, but we just bundle them off to their home country and they are sight unseen.

One could expect lawsuits to flow from this, and therefore the usefulness of COVID-19 limiting liability legislation at the state or federal level seems to be a way to cut off those risks from students, faculty, or staff. Thus, we see the efforts to have states and/or Congress pass COVID-19 limitation of liability protections. Moreover, the workers’ compensation system varies from state to state so the downside risk there may not be so bad and in the event the proving that the sickness occurred in the facility or on the campus is exceedingly hard to do.

I entitled this section enter safety, but note there is no safety discussed in this section.

Enter Risk by Race

The most recent data is saying that infections and deaths from COVID-19 are disproportionately occurring among Black and Brown people. And the average age of infected persons is descending. So we can expect that among the Black and Brown students, staff, and faculty, there will be a higher propensity to get sick and die – as will be the case for the people in their personal communities.

Unfortunately, the above information on race is not understood as what it details which is the point of relative vulnerability. One would think with the death rate for older persons that we have seen, that people would understand that vulnerabilities for various reasons are in operation and that Black and Brown people from on average lower-income communities are more likely to have those vulnerabilities.

But, Corona does not care about race. It goes where the opportunities are. And so from the spikes, we see those who are not people of color who think that they and their families will avoid the risk are INSANE. But, we can see by the manner in which people are operating in a number of states that they are seriously underestimating the risk they face when they are in places spending significant time like an in-person class that makes social distancing and masking irrelevant. Plexiglass might protect from the big droplets, but it is of no effect on aerosol droplets that are smaller and stay in the air.

And thinking of the international students who are caught in a horrible bind. If they are present for in-person classes, they are running the above risks. But, if they are online, ICE is saying they will be kicked out of the country. The consequences can be dramatic as they or their parents might have loans from foreign banks that they undertook in order to allow them or their child to do the program. All that money would be lost if they are required to go overseas.

Universities need to make sure that they care for these international students in meaningful ways such as getting ICE to rescind its notice to assure more flexibility in the safety approach. I feel for the primarily Indian and Chinese students being put in this terrible bind. While many do not think much about international students, I do as I lived abroad for many years. Americans should remember that they and their children who go abroad and study are international students too. So the international law concept of reciprocity would seem important to learn or remember.

In Summary

Students, faculty, and staff safety is only one of many parameters being evaluated in the reopening strategies universities are taking. This note suggests that, notwithstanding whatever is said, these other pressures that students, faculty, and staff are not going to really be aware of or only vaguely aware of place a significant pressure on the university to undercount the evaluation of the student, faculty and staff risk in order to meet contractual or bond indenture obligations, maintain revenue streams for themselves and the communities that are around them, as well as entities like American Campus Communities which is quoted on Wall Street. One thing I learned in my Corporate Finance class in Business School back in the day – Jamie Dimon the head of JP Morgan was in my class and sat in the top row at the far left – is that cash is king and the only thing Wall Street is interested in is profits and cash flow. Everything else is secondary.

Now, if you are a really strong school like Harvard with a huge endowment, you can go completely online. You manage your own huge money. Harvard announced that it would invite only 40% of its undergraduates to live on campus this fall. The Cambridge business community is not happy, but Harvard can impose that choice.

All 1,650 first-year students will have the option to reside on the Cambridge grounds when the term begins on September 2. But students will not attend live classes. Instead, they will isolate in their single dormitory bedrooms and take all of their courses online.

Turning two, three, and four-bedroom suites with a common bathroom into single occupancy may be something that Harvard was able to do for its Freshman class. Or alternatively, it did not need to retrofit but just spread these students across the entire campus just enough. Balancing the cost of retrofitting with the cost of running x number of dorms I am sure has been on a spreadsheet. The point is that the COVID-19 risk is very minimized because all the classes are online. So students not on campus do not need to be in Cambridge and can continue their coursework remotely. But, what about the international students at Harvard? Are they going to lose their visas and have to leave the United States because Harvard is online? Or will Harvard use its influence to get a waiver for them? Alternatively, Harvard can use its worldwide reach maybe to have satellite campuses outside the United States for these students. But, again, will those courses be considered sufficient for purposes of the degree requirements?

This is the world we live in in the United States today in academia. And it is a world that extends to the K-12 arena too for international students in high school are affected by the ICE rules. In addition, all of those public, private, and charter schools that have been funded in some means may have also this dilemma of revenue streams. Depends on how strong the balance sheet is.

It is a Darwinian survival of the fittest space that cries out for leadership that puts the safety of all Americans and our visitors first rather than just trying to cobble together business as usual into a COVID-19 suit.

In any event, as was said by Dr. Sanjay Gupta, with the increase in cases and the positivity index in places like Arizona where 28 percent of those tested were found to be positive for COVID-19, very very soon it will be none of these persons and entities who will be making the decisions.

For I fear that the time of COVID-19 making the decisions for us is now.

For more on COVID-19, see our special coverage.

Benjamin G. Davis is a Professor of Law at the University of Toledo College of Law.

Suggested citation: Benjamin G. Davis, The Business of Reopening Colleges and Universities in a Pandemic, JURIST – Academic Commentary, July 7, 2020, https://www.jurist.org/commentary/2020/07/benjamin-davis-reopening-pandemic-colleges-business/.

This article was prepared for publication by Tim Zubizarreta, JURIST’s Managing Editor. Please direct any questions or comments to him at commentary@jurist.org