The Strategic Orphan: Why the "Three-Legged Stool" is Broken (And How to Fix It)
In private higher education, we comfort ourselves with the "Three-Legged Stool" metaphor. We are taught that financial stability comes from balancing three legs: Tuition, Fundraising, and Auxiliary Revenue.
But metaphors can mask reality. The truth is, successful private institutions don't "balance" these legs; they typically survive by dominating one of three specific financial archetypes.
The crisis facing many mid-sized private universities today—specifically those that grew by bolting professional schools onto liberal arts cores—is not just about inflation or demographics. It is that they have become structurally homeless. They are operating under a financial logic that no longer exists in the market.
Here is why the old models are breaking, and why the solution lies in a radical redefinition of what we call an "Endowment."
Part I: The Three Models of Viability
To understand the crisis, we have to look at the math behind the three winning strategies in private higher education.
Model 1: The Endowment Fortress
This is the model most Board members visualize when they think of "Liberal Arts Stability." Institutions like Williams, Pomona, and Swarthmore live here. They generate 35–50% of their operating revenue directly from endowment returns. They are essentially hedge funds with a college attached.
The Math: To make this work, you need roughly $800,000 to $1 million in endowment per undergraduate student.
The Reality Gap: Most mid-sized private universities operate with an endowment between $50k–$80k per student. At a standard 5% draw, that generates only a few thousand dollars per student annually—missing the $15,000+ subsidy required to play this game. We cannot budget like Williams when we are capitalized like a startup.
Model 2: The Graduate Cross-Subsidy (The "Hybrid")
This is the model that built many mid-sized universities over the last 30 years. The strategy was explicit: Maintain a high-touch undergraduate core, but fund it by running high-margin professional graduate programs (Business, Law).
The Math: Historically, these programs operated at 40–50+% contribution margins, utilizing undergraduate infrastructure without bearing the full overhead load. This surplus cash subsidized the undergraduate liberal arts mission.
The Reality Gap: The market has ruthlessly corrected this arbitrage. With significant declines in regional graduate enrollment, the subsidy has evaporated. The "Cash Cow" is no longer funding undergraduate program deficits.
Model 3: The Premium Brand
These are the institutions without the massive endowments of Model 1, but with the raw brand power to command full price—think NYU or Boston University.
The Math: This model is defined by Pricing Power. These schools keep discount rates ruthlessly low (often <30%) and capture $40,000+ in net tuition per student.
The Reality Gap: You cannot pivot to this model overnight. If your undergraduate discount rate has climbed toward 65–70%, the market is signaling that you lack the price elasticity to simply "charge more."
The Diagnosis: Structurally Homeless
Many institutions are currently stuck in a "Middle Market" trap:
Too small to act like a Research University (Model 3).
Too poor to act like an Elite Liberal Arts College (Model 1).
Too exposed to the collapse of the specific model they were built for (Model 2).
We cannot wait for graduate enrollment to return to 1990s levels, nor can we cut our way to prosperity. We need a new way to view our resources.
Part II: The Solution – The "Asset-Backed" Endowment
The solution is not to invent a "Fourth Model." It is to democratize Model 1.
We tend to define our "Endowment" narrowly: a portfolio of financial assets (stocks and bonds) managed by an investment committee. But for many institutions, the most valuable assets are trapped on the statement of financial position (balance sheet) as "Property, Plant, and Equipment."
True financial sustainability comes from converting these static assets—land, buildings, infrastructure, and capacity—into perpetual, endowment-like income streams.
1. Stop Selling, Start Leasing (The Ground Lease)
The temptation for cash-strapped universities is to sell land for a one-time cash infusion. This is a mistake. It trades a permanent asset for a temporary "sugar high."
The strategic move is the Long-Term Ground Lease. By retaining ownership of the land and leasing it to developers (for housing, retail, or medical use) for 50–99 years, the university creates an annuity.
The Endowment Equivalent: If you structure a ground lease that pays the university $100,000 annually in rent, you have effectively created a $2 million endowment gift (at a 5% draw).
The Example: Sweet Briar College utilizes its campus for agricultural leasing (vineyards) and a "green" cemetery. These aren't distractions; they are asset monetization strategies that align with their rural liberal arts identity.
2. The University-Based Retirement Community (UBRC)
Demographics are destiny. As the "college-age" cliff approaches, the "retiree" wave is peaking.
The Strategy: Institutions like Berry College and Arizona State lease campus-edge land to senior living developers. The university receives upfront capital and perpetual ground rent.
The Mission Win: Residents become lifelong learners who audit classes, mentor students, and attend arts events. It monetizes the intellectual environment of the campus, turning a cost center (empty land) into a vibrant, revenue-generating village.
3. Infrastructure Concessions
If you don't have hundreds of acres, you still have assets. Mid-sized universities sit on "utility" assets—parking garages, energy plants, wifi networks—that are operationally heavy and revenue-light.
The Strategy: Partner with specialized firms to modernize and operate these assets in exchange for a revenue share. The University of Toledo’s parking concession generated significant upfront endowment capital while offloading maintenance risk.
The Mindset Shift: Instead of paying to fix a parking deck roof, the university receives an annual distribution from its operation.
Conclusion: The Total Return Mindset
The "Solution" for the structurally homeless university is to stop viewing the endowment as a separate bank account.
We must shift our thinking from Managing Facilities (a cost center) to Managing a Portfolio (a revenue generator). Every asset on campus—whether it is a parking lot, a roof suitable for solar, or a plot of land—should be evaluated not just for its utility, but for its yield.
The goal is not to become a real estate developer. The goal is to build a fortress of reliable, non-tuition income streams that allows the institution to weather enrollment volatility without compromising its academic soul. We might not have the billion-dollar portfolio of Williams College, but if we are smart about our physical assets, we can build the mathematical equivalent.
