Part 1 – The Wheelhouse Issue*

Stories of post-secondary institutions deploying innovative independent, accountable, business structures, most often business trusts, to make the most of their institutional assets pop up now and again (see this University Affairs piece and, more recently, this Globe and Mail piece). There’s a good reason – they are a good way for an institution to unlock the value of its endowment (for example its real estate) to help it achieve various goals, from building a community around campus, to facilitating innovative research partnerships and entrepreneurship, to assisting recruit and retain faculty and staff and meeting sustainability goals. The funds generated from such business activities provide a fresh source of capital that can be used for academic priorities, from building student housing and academic facilities, to modernizing infrastructure, to strategic recruitment, to the development of innovative programming.

Currently, there are eight such business structures (that we’re aware of) deployed by institutions in Canada, and we know that others are “percolating”.

While they do make good sense in certain circumstances, they are not without their challenges. Because they are outside of the normal experience and expertise of most public post-secondary administrators and boards, there is an added need to fully understand these structures, their implications, benefits and drawbacks, and when they are the right choice (which is often, but not always).

This is the first in a series of articles that will discuss the “why” and the “how” of public post-secondary institutions engaging in business activities through independent, accountable, business structures.

In this article, we’ll begin by discussing one of the important “why” questions:

The institution already conducts various business activities, why doesn’t the institution just engage in these business activities itself?

Put another way, running diverse revenue generating activities including real estate development is in our wheelhouse*, why outsource it?

The short answer is: the (big) legal and practical differences between a related business and an unrelated business. Put differently, most for-profit business activities are curve-balls, so the ball may only look like it’s in your wheelhouse.*

The longer answer is that public post-secondary institutions are, by their very nature and by their constating legislation, charters, letters patent, or constitutions, focused on delivering education, and many are, of course, also focused on research.  Those are their core activities.

Most public institutions are also registered charities for the advancement of education. As registered charities, institutions are exempt from all manner of income tax and may give charitable tax receipts for donations they receive. The quid pro quo is that they devote their assets and resources to those charitable objects and related activities.

In order to provide services and convenience to their faculty, staff and students, many institutions also provide ancillary services, either on a cost-recovery or on a revenue-generating basis. Examples include student housing, parking, food services, and bookstores. Other activities make use of the excess capacity of assets; this includes renting out athletics facilities to the public, providing access to medical imaging equipment to health authorities, and operating hotel or hostel operations from student residences in the summer months.

Some of those are business activities, surely, but to extent they are businesses (i.e. revenue generating) they may properly be considered related businesses, as in related to and subordinate to the charitable purpose of advancing education.  Such business activities ought not endanger an institution’s charitable registration.

However, there are business activities that are not directly related with the advancement of education, such as developing residential real estate for sale, or long term lease, to the general public, and developing commercial premises (retail, office, industrial) for lease to businesses serving the general public or doing work that has no connection to the institution.  If the institution itself undertook this activity (as the developer and/or the landlord), putting institutional resources at risk in search of profits, such an activity would very likely be considered a business that is unrelated to the institution’s charitable objects. This is true even though the profits from such activities would flow back to the institution to be used for further educational activities. The reason is that the Canada Revenue Agency looks at the connection between the business activity itself and the educational purpose—e.g. is the real estate development project itself advancing education? What use is made of the profits in the hands of the institution is, for this limited but very important legal purpose, irrelevant.

There is a grey area, of course, for endeavors such as faculty and staff housing, and developing commercial property with the express purpose of facilitating institution-owed or affiliated research enterprises. While this area may be grey, the consequences of getting it wrong (endangering one’s charitable registration) are high, so each institution needs to conduct its own due diligence, get good legal advice, and weigh the benefits and risks before proceeding one way or the other.

Finally, on a very practical level, entrusting an unrelated business activity to a separate entity allows the institution to stack that entity with industry professionals and specialists who have the knowledge, experience, and business connections, to maximize the chances of the endeavour’s ultimate success.  That allows the institution’s administration and Board to stay focused on the core mandate of the institution, which will hopefully soon include considering how best to spend the proceeds of the business to advance the institution’s mission.

So, if an institution does has an opportunity and appetite to realize the benefits of unrelated business activities, what are the options? Stay tuned for the next set of articles, which will explore some of the options available.

* “wheelhouse” is slang used in baseball for the zone in which the batter is mostly likely to hit the ball… it started as the name of the place in any boat most likely to contain the wheel.  It has, of course, moved into common usage as something that is well within your area of expertise.