The looming demographic crisis in higher education is poised to create operating challenges for colleges and universities across the United States. Known in the higher-education industry as “the enrollment cliff,” institutions will begin to see marked enrollment declines in the mid-to-late 2020s due to falling birth rates following the 2008 recession.[1] The COVID-19 pandemic has accelerated this trend, with enrollment down 8% between 2019 and 2022.[2]

Many colleges and universities will not weather the upcoming decline. While western states may see an enrollment increase, the Northeast and Midwest will experience declines upwards of 15% by the end of the decade.[3] Institutions with tight operating budgets that are dependent on tuition income rather than returns on endowment investments, can expect their campus operations to be stressed to the point of closure. For context, since 2020, a combined 27 public and private nonprofit schools of higher education have closed (or announced closure). Over the same time frame, 17 institutions have merged with other universities.[4]

For small to mid-size colleges and universities at risk of closure, their real estate portfolio is often their most valuable asset, although it is important to point out that colleges located in rural areas are more susceptible to post-closure valuation issues on these assets. While the value of an institution’s real estate on the open market can often determine its future prospects, factors such as deferred maintenance liabilities—asbestos abatement, lead paint, HVAC upgrades, etc. — can negatively impact the value of that real estate to the point of negatively impacting optionality.

This article explores two college closures in the Oakland, California hills: Mills College and Holy Names University, to illustrate how very different closure outcomes can occur, even within the same city.

Mergers and Acquisitions

One ideal outcome of a closure announcement is a merger with a larger, more financially stable, institution. Such was the case with Mills College in Oakland, California. Founded as a women’s college in 1852, Mills began to experience financial distress in the mid-2010s. By 2021, the college announced a restructuring of its operations as a research institute, rather than a university, in order to reduce costs.[5]

Following the announcement, other universities, including Boston-based Northeastern, began to reach out to Mills about acquiring the campus and merging operations into an umbrella organization. In June 2022, Northeastern announced that Mills would be renamed Mills College at Northeastern University, folding the college into Northeastern’s global centers, allowing students and faculty to remain on campus.

Though the acquisition required Northeastern to take on Mills’ significant liabilities, it also gained a formidable number of assets, including a 135-acre campus in Oakland (with undeveloped land) as well as an extensive art collection.[6] While debt can be a deterrent to any acquisition, a real estate portfolio that represents an endowment growth opportunity for the acquiring institution can be an enticing M&A driver.

The Northeastern-Mills merger can be considered an optimal closure scenario because it resulted in a streamlined handover process that effectively preserved both enrollment and on-campus employment. In this case, the value of the real estate represented a net boon for Northeastern. However, what happens when deferred maintenance becomes a liability?

Holy Names University: A Case Study in Deferred Maintenance

In another part of the Oakland Hills, Holy Names University, a Catholic university founded in 1868, experienced a mix of declining enrollment and increased operational costs accelerated by the COVID-19 pandemic. At first, the institution pursued a teach-out relationship with the nearby Dominican University of California to allow students to continue their  studies uninterrupted.[7]

However, as financial difficulties continued to compound, the university announced its closure in December 2022 following a default on the debt it had taken on for its campus property.

Municipal leaders were quick to act. The Oakland city council implored Preston Hollow Community Capital, Holy Names’ lender, to work with the university, stressing that Holy Names was a vital source of employment for the nearby community and provided a college path for Oakland students. The lender replied that it was pursuing a foreclosure auction as it was not interested in holding on to the real estate in its portfolio.[8]

In the interim, a merger did not occur. This was most likely due to the $50 million in debt and $150 million in deferred maintenance on campus—a significant liability for any acquiring institution, thus showcasing that while real estate may be a college’s most valuable asset, it can also preclude the possibility of M&A.

As the foreclosure process continued, the city reiterated its position by issuing a letter emphasizing that the campus property was not zoned for residential development and that such a change would not occur unless the council would rezone; an unlikely outcome considering its previous position.[9] No other educational institution, however, was willing to take on $150 million of maintenance liabilities on a 58.6-acre campus. This can truly be a bind for any institution—squeezed by the municipality on one side, and an aging campus on the other.

Instead, the campus was sold to BH Properties, a Los Angeles-based investment firm, for an undisclosed sum. The investment firm has since put the campus up for rent, stressing that any potential lessee should be an educational endeavor, though not necessarily another college or university.[10]

Real Estate Determines the Future

The Mills and Holy Names closures represent two potential outcomes for real estate value when winding down operations at a college or university, both within the same city.

Real estate constitutes a substantial and often pivotal asset for educational institutions, making it an essential component of their financial portfolio. It is essential to recognize that when a college is forced into a transformative change such as a merger, or a teach-out and wind down, reality sometimes does not align with the initially appraised value of its real estate holdings.

In the case of Mills, the asset value was a boon to the college, ultimately paving the way for a merger with the larger Northeastern University. For Holy Names, deferred maintenance was a critical issue that significantly impacted the value of the academic institution’s land holdings, and municipal recalcitrance meant that the university could not simply liquidate the property for the value of the land to have the area redeveloped.

Ultimately, the fate of an institution of higher learning post-closure is inextricably linked to the condition of its real estate and the decisions made regarding its upkeep. These factors play a pivotal role in shaping the institution’s outcome, it’s ultimate legacy and determining whether its campus can be merged, sold, or otherwise monetized.

A proactive approach to maintaining value and a long-term view regarding the importance of its most valuable asset can be of significant future benefit to institutions that are living on the edge or are close to it.  Neglecting these crucial considerations can result in the loss of value, limited options, and a more challenging “end-of-life” path. The significance of these choices cannot be overstated, as they hold the power to shape the destiny of academic institutions long after their doors have closed.