A public forum was held on UCLA’s proposal to demolish the Faculty Center and replace it with a hotel/conference center. Most – not all – of the public comments and questions opposed the project or raised issues with it. Comments were made by neighborhood residents, local hotel operators, faculty and emeriti, and students.

The forum began with comments in support of the project by EVC Scott Waugh. Chancellor Block joined the forum about half way through and indicated he had had airplane trouble that caused his late arrival. The chancellor in brief comments echoed the remarks of EVC Waugh.

Below are audios of the forum, divided into six parts. (The audios are actually videos with a still picture from the forum for technical reasons.) Speakers identified themselves before making remarks. In a few cases, comments or questions were called from the audience without use of the official microphone and may not be audible.

There were repeated references to the high room costs that seemed to be the basis of the project’s revenue forecasts. These high prices did not seem realistic either to the hotel operators or to faculty experienced in attending or hosting academic conferences. There were also questions raised about the Luskin gift, specifically whether it was dedicated precisely to the project as described or whether there was flexibility. See last night’s post on that issue. http://uclafacultyassociation.blogspot.com/2011/04/faculty-center-issue-fungibility-and.html Other concerns raised involved traffic, adverse effect on local business and tax revenue, priority in light of the state/UC budget crisis (whether the money might be better spent on other purposes), and the value of the existing Faculty Center structure to faculty.

As expected, administration spokespersons indicated that there would be a “pause” while the project was re-studied. A precise time frame for the pause was not specified in response to a question. However, it was said at one point that it could be 30 days or 300 days – whatever was needed. Yours truly would opine that given what has occurred to date, if the pause lasted only 30 days – or any short period – the external damage to UCLA would be severe. Internally, there would also be severe harm, given the CPB’s negative review of the project, the negative reviews by other Academic Senate committees, and negative votes by members of the Faculty Center (which includes administrators among its members) and various academic departments.

Below are the audios:

Part 1

Part 2

Part 3

Part 4

Part 5

Part 6 (end)

Yours truly will be posting the audio from the public forum of earlier this evening on the hotel/conference center that was proposed to replace the Faculty Center. That posting won’t happen until tomorrow. (The audio needs to be converted to video and then divided into segments that meet certain technical limits.) However, one issue that came up this evening was the flexibility of use of the Luskin gift. Did the Luskins exclusively want a hotel/conference center along the lines originally proposed? That question was not precisely answered. There were general comments about donors having particular visions.

On March 18, a ceremony honoring the Luskins and their gift in front of the School of Public Affairs, unveiling the new sign on the building renaming the School the Luskin School of Public Affairs. Among the speakers was LA Mayor Antonio Villaraigosa. In the course of his remarks, he referred to the gift as being to Public Affairs and to “the Faculty Center.” No one seemed pained by the latter characterization. No one corrected it. Just a slip of the tongue? A misunderstaning? The Mayor referred to having a conversation with the Luskins prior to the event.

A video of the full remarks of Mayor Villaraigosa are below:

The excerpt from the video above concerning the purpose of the gift is below:

There will be a public forum at the Faculty Club tonight (7-9 PM) on the proposed UCLA hotel/conference center project which – as a prior blog entry indicated – has now be postponed for re-study. Undoubtedly, the announcement of the postponement will take some of the edge off what might have been a very contentious meeting.

Yours truly suspects there will requests for clarification of what the postponement means in terms of the time frame involved, about what the process of the re-review will entail – who and how, and about other issues.

Will it go as nicely as this? We will know tonight.
[youtube http://www.youtube.com/watch?v=3aVbJhg23Ao]

As readers of this blog will know, a public forum on the proposed hotel/conference center to replace the current Faculty Center structure is scheduled for April 6 (7 pm, Faculty Center). This forum was shaping up to be an unpleasant confrontation. However, it appears that the train has been halted before unfortunate consequences ensued.

The Council on Planning and Budget’s (CPB’s) negative evaluation of the project described in an earlier post – combined with other communications from faculty and senate committees – seems now to have led to a re-evaluation by the administration. After the CPB report was received by the senate, senate chair Ann Karagozian indicated in a letter of April 1 to the chancellor that the CPB’s position was now the senate’s official position:

“As you know, per Senate bylaws, CPB “specifically reviews and formally articulates a Senate view regarding the campus budget and each major campus space-use and building project at each project’s proposal, planning, and building stages” (http://www.senate.ucla.edu/FormsDocs/bylaws/ch4-4-3.htm#b65_3). As such, CPB’s opinion in the attached document constitutes the Senate’s official view on this proposed project at this time.” Her full letter is at http://www.senate.ucla.edu/documents/04-01-11KaragoziantoAdministration_re.CPBEvaluationRCCwithReport.pdf

In response to the CPB evaluation and the Karagozian letter, Vice Chancellor for Finance, Budget, and Capital Programs Steve Olsen wrote a lengthy letter commenting on the CPB’s evaluation. You can read his comments at http://www.senate.ucla.edu/documents/04-04-11OlsentoKaragozian_re.CPBAnalysisofResidentialConferenceCenterProject.pdf. VC Olsen indicates that a review of the entire project will be undertaken in light of the criticisms received. In addition, the Olsen letter contains the following pledge at the end of the second paragraph:

“While this review is being conducted we will put on hold our current work in bringing forward for environmental review and Regental approval the proposed 282-bed project on the Faculty Center site.”

Undoubtedly, there will be questions from the floor at the April 6th meeting aimed at clarifying the time frame for the review, the consultation process that it will incorporate, and other related matters.

UPDATE: The LA Business Journal carries a brief story about this matter on its blog http://www.labusinessjournal.com/news/2011/apr/04/ucla-conference-center-hold/

UPDATE: UCLA Today carries the story at http://today.ucla.edu/portal/ut/campus-to-reexamine-financial-200160.aspx

The Council on Planning and Budget (CPB) of the Academic Senate yesterday sent the letter below to the chair of the Academic Senate. I have reproduced the text below. Yours truly broke the letter down into more paragraphs than the original for readability on this blog and marked some sections with bold printing for emphasis.

In simple terms, the CPB thinks the hotel/conference center project is likely to fail and doesn’t think failure is a good option for UCLA.

Here is the CPB letter:

Professor Ann Karagozian
Chair, UCLA Academic Senate

Re: Residential Conference Center Proposal

Dear Professor Karagozian,

On The Residential Conference Center Proposal:

The Council on Planning and Budget was asked by Senate leadership to provide an independent assessment of the Residential Conference Center and Faculty Club financial feasibility plan. We have confined our analysis to the proposal’s financial aspects, in the context of the CPB’s charge: to advise the Senate and the campus administration on budgetary matters as they relate to the academic goals of the University. We have relied primarily on the (redacted) PKF Market Analysis, the only systematic and data-based source we have for assessing potential demand.

For statements of Chancellor’s Office policy we rely primarily on the Demand Narrative and presentations to CPB from Vice Chancellors Morabito and Olsen. Most of this is now posted on the Academic Senate website. We also had access to two documents that are not posted: a summary of the unredacted PKF Market Analysis prepared by the CPB Chair and detailed financial information from the Faculty Center Board on operations through December 2010. We also looked up some current rate information for local hotels and university conference centers, but we lacked the time and resources for any systematic study.

We note the existence of several recent university press releases as well as the opposition from campus and community to which these releases are apparently responding. Important issues are being raised, but we felt it would be most helpful to all for CPB to focus on the finances as we see them. Some CPB members felt that it was not within our present mission to assess the Faculty Center Association’s current finances, and confined their scrutiny to the RCC data. Others felt that both had to be considered together; their views are represented at the end of this statement.

The Council on Planning and Budget does not support the UCLA Residential Conference Center and Faculty Club proposal as described in the eponymous February 28, 2011 draft document. Our analysis of the data leads to the conclusion that demand from the UCLA academic community is and will remain far too low to support a facility of this size and at these high price levels, even taking into account the generous gifts for construction and operating subsidy.

PKF employs three methodologies to project demand. One, the Fair Share and Market Penetration Approach, is inappropriate to the task at hand because it is based on the total Westside market for group and individual hotel accommodations. But, as the Demand Narrative and other recent statements of university policy emphasize, the UCLA facility will not be and cannot be open to the general public. Of the other two methodologies, the more empirically-grounded Build-Up Approach projects demand from campus-linked groups and individual travelers combined at half or less the level needed to cover expenses and also service the interest –only construction loan over the first ten years.

PKF states clearly that the Anderson Graduate School of Management would be the largest user, consistent with their experience that executive continuing education is the prime customer for university hotel/conference centers. Other significant demand could come from three other professional schools. No other potential users are specifically mentioned, and PKF states that they did encounter “price sensitivity” in their survey and focus groups.

The other relevant methodology, the less empirical Population Multiplier Approach, does project more substantial demand, but it does so without regard to price, assuming that there will be sufficient effective demand at the very top of the market for the UCLA facility. For that matter, it is not clear to us that price requirements were explicit in the survey methodology of the Build-Up approach; we are certain that price is not factored into the Population Multiplier Approach because it is just a simple multiplication of the size of the UCLA community times a factor derived from occupancy data at other university conference centers. But university hotel/conference centers typically charge rates far lower than those envisioned in the PKF Analysis and the UCLA Financial Feasibility Presentation… rates that are, in fact, similar to what several local hotels charge to UCLA and its visitors today.

The price levels that PKF estimates the UCLA facility could charge are based on corporate-style conference centers, not university facilities. While this might be a reasonable way to project prices that the high-end executive education market could bear, it makes no sense for a general use university conference center.

The failure to consider price levels in estimations of demand from campus-linked trade is one serious problem. Equally serious in our view is that the projections are of total campus-linked business, and seem to assume that all of this business will go to the new UCLA facility. Neither methodology takes into account the continuing competition of several hundred nearby commercial hotel rooms and campus guesthouse rooms priced at far lower levels. Most campus departments and visitors are accustomed to paying hotel rates half to two-thirds the $270 rate projected as necessary for the UCLA facility.

The up-market W Hotel on Hilgard currently advertises rooms at $200…and most departments opt for lower rates, e.g. the circa $150/night university rate at the Angeleno and several other hotels closer to campus. To compete in this market the UCLA RCC would have to employ flexible pricing for its rooms. Interestingly, this is just what PKF’s explicit model for UCLA — the ATT Executive Education and Conference Center at UTA — does: we have seen prices quoted as low as $97 on the internet. Another recently built facility, the Hyatt Place at UC Davis, currently advertises rooms at $140, well below their prices this time last year. Both market aggressively beyond their university communities, which of course would not be an option for the UCLA facility. We have not investigated conference space competition for the RCC, though we doubt that other facilities on and off campus charge anywhere near the $200+ per capita non-residential rate that is planned for the UCLA facility.

Most CPB members agree that even if the project did meet its narrow financial goals by attracting sufficient high-end trade from the four professional schools, it would still not be serving the needs of most campus academic units, and therefore not serve the general academic goals for the project as set out by the Chancellor’s Office. But there is no need to invoke these higher principles; the amount of demand for conference facilities charging $400 package rates and hotel rooms going for $270 nightly is well below what even our more affluent professional schools can provide. Indeed, PKF’s maximum estimate of this sort of business is about 24,000 room nights (PKF, p. V-6), one-third what is required to support this project.

As we see it, the Chancellor’s Office faces a dilemma with respect to these current plans: only a small portion of campus academic units and their visitors could pay the high-end prices; the majority of campus academic units would be shut out, or have very limited access made possible through the recently-announced subsidy. But that subsidy would provide less than two percent the revenue this project will require…clearly not enough to impact overall finances significantly. If the general rates were reduced to competitive levels, without a commensurate decrease in costs, then revenue would be insufficient to cover even the interest -only construction loan after operating expenses.

CPB is also concerned about the implications of the financing model proposed. We understand that no state funds are being used and that debt financing is one important financial resource available to UCLA. Most of us accept that the initial ten-year interest- only note is a perfectly acceptable way of doing business. And some of us are not even terribly bothered by the possibility that the project might not generate sufficient revenue to service the loan; UCLA could cover the loss somehow. However, given the present and almost certain medium/long-run future financial straits facing UCLA we advise against embarking on a project that carries such risk. Granting that UCLA could cover the losses, the opportunity costs of diverting resources for this purpose would negatively affect the academic enterprise; and of course it would look terrible to the campus and the broader community. Furthermore, UCLA’s debt capacity is a shared campus resource that is used with caution in the best of times. Three-quarters of the campus’ current long-term debt is in the form of hospital revenue bonds. The bonded indebtedness for the RCC/FC project would add 14 percent to UCLA’s total long-term debt, and over fifty percent to the general campus long-term debt (we are relying on figures from the 2009/10 UCLA Financial Report, pp. 38-41). Even if the revenue should prove sufficient to meet the project goals, choosing to use UCLA’s long-term debt capacity for this project would mean that some other worthy project is not funded.

As mentioned above, half the membership of CPB feels that it is not within our mission to include analysis of the Faculty Center’s finances in this assessment of the RCC proposal. But the other half, who feel differently, have concluded that the Faculty Center’s best hope for future stability is, in fact, incorporation into a conference center project, but one that is smaller and less pricey. They come to this conclusion based on the rising gap between the Faculty Center’s expenses and income from operations in the past two years, as well as the substantial deferred maintenance costs that must be met in the next few years.

In FY 2010 the FCA had a net operating loss of over $300,000, and this year it is on track to lose over $500,000 (both figures exclude investment gains/losses and the projection for FY 2011 allows for a substantial increase in income hoped for in the last months of the fiscal year). These deficits are driven primarily by increasing salary and benefit costs, which will only continue to increase as benefit costs continue to rise. Deferred maintenance was estimated to be 1.3 million dollars two years ago (Building Assessment Report, 2009). The FCA’s reserves of about $900,000 cannot last long under these circumstances. These CPB members also recognize the value, if not the necessity, of an affordable and widely accessible central residential conference center on campus, especially if the campus were to lose the current Faculty Center.
In summary, CPB’s conclusion is that the RCC/FC project as proposed is not financially viable. Half of the Council on Planning and Budget believe that incorporating the faculty club into a residential conference center scaled down in size, and at customer price levels appropriate to what most UCLA academic units can afford, could serve the academic goals of the University and may well be the best option for the faculty club’s future viability. The others on the committee, however, believe that whatever financial challenges the Faculty Center may face are best dealt with directly and in ways that maintain this valuable academic asset in its current form. They argue that this era of budgetary austerity is not the time, and the Faculty Center site is not the place, for undertaking what many in and outside the campus community already perceive to be a luxury project for the university.

Respectfully,
David Lopez
Chair, UCLA Council on Planning and Budget

==================

The powers-that-be can take advantage of the CPB critique – and others that have been made as this project became known – and they can reconsider. Or they can continue to drive forward with predictable consequences:

Yours truly was given a letter sent yesterday to the chancellor concerning the Faculty Center affair. The text is below since direct reproduction of the letter (as you can see at right) is difficult to do legibly on this blog:

Dear Chancellor Block:

Due to the unusual amount of discussion regarding building the proposed residential conference center on the site of the Faculty Center, the faculty within the Department of Physics and Astronomy encouraged a departmental faculty vote to ascertain if there was strong feeling within our department concerning this issue. A ballot was sent out asking whether to urge the UCLA Administration to reconsider the location of the proposed residential conference center, with the results of the ballot being 39 in favor of requesting the administration to reconsider the issue, with a lone dissenting vote against.

Based on this notably strong vote, the faculty in the Department of Physics and Astronomy are recommending in an advisory capacity that the UCLA Administration reopen the discussion of where to construct the proposed residential conference center. To explain the near consensus behind the vote, I can state that there is concern both about the loss of the present faculty center, and about the wisdom of the currently chosen location. Considering that a number of alternative suggested locations have been put forward that are closer to the Wilshire corridor, with access to restaurants and the upcoming Westside subway link, the current choice seems optimized only to negatively impact the neighborhood. Further, the faculty has expressed doubts about the appropriateness of undertaking such an ostentatious project that has minimal positive educational impact during a time of intense funding pressure on the University.

Sincerely,

James Rosenzeig, Professor and Chair, Physics and Astronomy Department

(A cc: of the letter was sent to former Interim Chancellor Norm Abrams and Academic Senate Chair Ann Karagozian.)

Prof. Dora Costa of Economics has sent yours truly an interesting list of FAQs (Frequently Asked Questions) about the proposed hotel/conference center slated to replace the Faculty Center. They are reproduced below.

Actually, they are not just FAQs. They are FAQsTHNGAAIASYWHSPAATPFOA6 = Frequently Asked Questions That Have No Good Answers Although I Am Sure You Will Hear Some Purported Answers At The Public Forum On April 6th.

Why is a luxury hotel a UCLA priority?

The whole UC system is facing budget shortfalls. Faculty and staff positions have been cut, employee benefits have been cut, class sizes have increased, and tuition has been rising. It is becoming harder to hire and to retain faculty and to attract the best students. Although a luxury hotel might appear to be useful, it is far removed from our core academic and teaching mission. If we cannot retain a first class faculty and students a four-star hotel is of little consequence. The quality of a university depends on its faculty. You can provide shiny new buildings but it is the people in them who are important.

When resources are scarce, we need to focus them on what we do best: research and teaching. We should be investing in people and in the libraries, laboratories, and classrooms needed to discover new galaxies, cure cancer, solve social problems, and train future generations. USC recently received a large gift. It chose to focus its new endowment gift on improving its College of Arts and Sciences. UCLA is allocating money to a new hotel.

Will the hotel make money for UCLA?

The most likely scenario is that the hotel loses money. There is no risk analysis providing worst-case, intermediate-case, and best-case scenarios in either the financial feasibility power point or in the consultant’s report. The demand analysis is deeply flawed. For example, it ignores that people won’t buy if the price is too high. The PFK (consultant) report assumes that the hotel will become the hotel of choice for any visitors to UCLA. But why pay $250 a night when you can put a visitor at the Guest House ($143 a night), Tiverton House, or at a local hotel for a lot less? Why pick UCLA as a conference site when you can find a cheaper site in another part of the country?

What is demand at the hotel rates?

The PFK report assumes a 70% occupancy rate. This is not conservative. They surveyed other university hotels and conference centers and found occupancy rates that ranged from a low of 45 to 50 percent to a high of 80 to 85 percent and that average daily room rates ranged from a low of $100 to $110 to high of $160 to $170. The proposed RCC would therefore by in the high range of occupancy and in a completely different price tier. There is no evidence in the report of demand at such a rate.

The PKF report assumes that the hotel will be used by non-UCLA customers. But UCLA cannot have these customers without incurring tax penalties and the administration plans to use the hotel only for broadly-defined UCLA affiliates who currently stay at local hotels. Of course, this adds to the financial risk. PKF asked local hotels about UCLA code share rooms from comparable hotels. These were only 7,795 in 2008. This suggests there is not much demand for high priced venues.

How did PKF estimate demand?

PKF presents three different estimates of demand. Based on a survey of department CAOs, PKF comes up 23,946 rooms (presumably spread over cheaper options such as the Guest House and Tiverton) and they add another 6700 for 24 nights of sold out events such as big basket ball games. This yields 30, 646 rooms. They estimate total demand could be 32,000 to 36,000 rooms – an occupancy rate of 35%. But to get a 70% occupancy rate we would need to sell 72,051 room nights.

PKF estimates that we could get up to 70,000 rooms if all West LA hotels divided up the entire hotel market, both academic and non-academic, between themselves. Unfortunately this assumes that we accommodate visitors with little relationship to UCLA. UCLA is developing a policy restricting use of a proposed residential conference center exclusively to university-related businesses serving the campus mission of teaching, research and public service. The PKF estimate of 70,000 is thus over-stated.

Finally, PKF looks at other university hotels and conference centers, finds that on average they accommodate 2 room nights per faculty and students combined. They come up with about 75,000 room nights. This ignores that rates are cheaper at other university hotels and conference centers and that there may be less competition in those markets. This approach compares apples to oranges.

Will the $10 million gift to subsidize hotel rooms increase demand?

The effects will be small. A 3% return yields $300,000. Divide that up over the 24,000 rooms used based on a survey of departments and you get a subsidy of only $13 per night.

How will the hotel be financed?

The financial feasibility power point presentation gives one spreadsheet for the hotel and one spreadsheet for parking. It is estimated that $103 million in bonds needs to be raised to build the hotel. For parking, the plan is to raise $12.4 million in bonds and to borrow $4.5 million from Housing and Hospitality reserves to compensate Parking Services for space in Lot A lost to construction.

What is the financial risk?

You can get a sense of the financial risk by tweaking the spreadsheet on page 23 in the financial feasibility PowerPoint. Suppose that in year 4 when occupancy rates are supposed to be 70% revenues are 2% lower, expenses are 2% higher, and cost over-runs in building are 7%. The hotel loses $1.3 million. In the worst case scenario assume cost-over runs comparable to what Ronald Reagan UCLA Hospital experienced (39%). The extra debt service from cost over-runs alone would be $3.3 million.

How will any financial losses be absorbed?

The hotel will be backed by Hospitality and Services bonds. Revenues for Hospitality and Services come from parking, student and faculty housing, and ventures such as the Guest House. Subsidies for electricity, maintenance and Campus Police might come from the General Fund. Additional gift funds might be used to reduce room costs.

Can UCLA operate a four star hotel?

UCLA says yes. The PKF report assumes that there will be corporate operator. A flag operator has access to a global reservation system and a rewards program. A flag operator also has a brand name.

What is the model for the proposed hotel?

The PKF report states that the model is the commercially operated University of Texas, Austin facility. This facility faces onto a commercial area and is within walking distance of a lot of places a visitor would want to go. An analogous UCLA hotel would be located at the extreme south end of our campus or in Westwood. As stated in the PKF report, the location of the proposed hotel on the UCLA campus presents some competitive disadvantages.

Will the hotel affect parking?

It will become harder to find a spot in Lot 2. The PKF report states that the typical parking space requirement for conference centers falls in the range of 1.0 to 1.3 spaces per guest room. Given the loss of the Murphy Hall parking lot, this suggests that we need 680 parking spaces not the proposed 248.

Has the process been transparent?

No. The financial feasibility PowerPoint and the PKF report were made available only after a petition with 75 signatories was submitted to the Academic Senate. The Faculty Center membership was informed via email of the proposed demolition of its building in August 2010. The 2008 letter from the Faculty Center (available on the Academic Senate web page) indicates support for a conference center, not a hotel. Enthusiasm for a conference center does not indicate enthusiasm for a luxury hotel. Conference center needs and hotel accommodations are separate and can be met in many ways. Further study is needed. There are conference facilities throughout north and south campus. UCLA is building a new facility for summer conferences in the northwest of campus which will include a restaurant seating 750, a ballroom, and “sleeping rooms” for guests. Before building more facilities, it would be useful to determine how the existing facilities are used, if they make a profit, and if not, why not. We also need to consider whether a new facility would meet any video-conferencing needs.

Why is UCLA so eager to build a hotel?

It is easy for a leader to point to new buildings as his legacy. We need to move to a new mind-set in which leaders can proudly say, “In tough budget times, I recruited and retained excellent faculty and students.”

[youtube http://www.youtube.com/watch?v=ZFrDhpzigug]

If you are wondering, UBTI = Unrelated Business Taxable Income.

In the case of UCLA entities – which are normally tax exempt – getting into commercial business renders the activity taxable. The IRS ruling below would seem not only to challenge solicitation or acceptance of such business at the proposed hotel/conference center slated to replace the Faculty Center, it seems also to challenge the kinds of activity going on – or proposed to go on – elsewhere on campus. That would include the “other” hotel/conference center going up in the Northwest area that this blog reported on earlier. See:

http://uclafacultyassociation.blogspot.com/2011/03/did-you-know-about-other-conference.html

The IRS ruling reproduced below applies to an educational organization that seems quite similar to UCLA in function (although it is not UCLA). Thus, the UCLA Faculty Center replacement hotel/conference center will have to tightly adhere to the IRS ruling. And one wonders about other activities that are part of the larger housing/hospitality entity. Will those activities now generate the kinds of income that may have been planned? Just asking.

========

PLR 201106019 Rental to Public Constitutes UBTI

Dear * * *:

We have reconsidered the ruling we issued to you on March 28, 2006, PLR 200625035, concerning whether income you derive from a variety of activities is “unrelated business taxable income” within the meaning of section 512(a)(1) of the Internal Revenue Code.

After reviewing the ruling letter, we have determined that Ruling 1 is incorrect in broadly concluding that revenue from a variety of sources would not constitute unrelated business taxable income to you under section 512 of the Code. Further, a review of information you provided in response to subsequent requests for information discloses that PLR 200625035 is based on facts that do not sufficiently or adequately describe the operations for which the rulings were requested. Accordingly, pursuant to our authority in section 13.04 of Rev. Proc. 2010-4, 2010-1 I.R.B. 122, 150, this ruling revokes in part and modifies in part PLR 200625035. In addition, your request for retroactive relief under section 7805(b) of the Code has been granted. You may rely on the March 28, 2006 ruling letter for taxable periods ending before the date of this letter.

In PLR 200625035 we ruled as follows:

1. Revenue generated from providing living quarters in buildings that you own to your students and faculty; and temporary living quarters to family members of your students and faculty; potential students; family members of potential students; guests who are speakers at your institution; and guests of other non-affiliated non-profit organizations (A-F, above) in your immediate geographic area who are also speakers or musical performers at your institution does not constitute unrelated business taxable income under section 512 of the Code.

2. Revenue generated from the renting of rooms to the general public constitutes unrelated business taxable income under section 512(a)(1) of the Code.

After reconsideration of your original request and consideration of all additional information submitted, we rule as follows:

1. Revenue generated from providing living quarters in buildings that you own to your students does not constitute unrelated business taxable income under section 512(a)(1) of the Code.

2. Revenue generated from the renting of rooms to persons other than your students constitutes unrelated taxable income under section 512(a)(1) of the Code.

FACTS

You are exempt under section 501(a) of the Code as an organization described in section 501(c)(3) and are classified as an organization that is not a private foundation because you are an educational organization described in sections 509(a)(1) and 170(b)(1)(A)(ii). You are an independent, multi-denominational seminary whose mission includes educating leaders for ministry in churches and related organizations, extending the work of social justice, and academic teaching and research.

In furtherance of your educational purposes, you arrange for your students and faculty to participate in various programs with educational and religious institutions located near your campus. In this regard, you have several academic partnership agreements with A and offer dual degrees, a Ph.D. program and a Masters Program in Divinity and Social Work. Some of your senior faculty hold joint appointments in A’s Department of Religion. Participating students may cross-enroll at either campus without any institutional tuition transfer. You maintain a large religious/theological research collection and your library facilities are shared by other religious and secular institutions of higher learning including but not limited to A, B, C, and D. In addition, your students rely on churches and religious organizations in the area for internships as part of their professional training. These include the E and its religious tenant, F.

Your campus is often used for meetings of individuals, groups, or institutions of differing backgrounds but similar purposes. Speakers and musical performers at your institution may also speak and perform at some of the other institutions, and speakers and musical performers at the other institutions may also speak and perform at your institution.

In addition to academic buildings, your campus includes dormitory-style and apartment-style housing for enrolled students and for your full-time faculty. You receive revenue, however, only from providing housing to students.

In one of the buildings on your campus, known as the H, you offer rooms on an overnight basis. One substantial use of the H was to temporarily house students waiting for long-term dormitory assignments to become available. You also offer accommodations, if available, to official visitors (speakers, performers, etc.) These guests are provided lodging in lieu of a lodging per diem allowance. You do not limit the rental of rooms in the H to individuals affiliated with your institution or with any of the other educational institutions located nearby. In fact, the information you submitted indicates that rooms are offered to the general public on a “first come-first served” basis and no one is denied lodging if a room is available.

Access to the H is on the inner corridor of the courtyard of your building complex but is open to the public. Your website indicates it is open 24 hours a day, 365 days per year. Although you do not post signs on the facility itself, you advertise the availability of rooms on your website, which mentions H’s convenient location and amenities including: air-conditioning, private bath, cable television, wireless Internet access, an iron and a hair dryer, a miniature refrigerator, daily housekeeping services, 24-hour access front-desk security and free local telephone service and all incoming calls. Other commercial hotels are located in the area. Accommodations at the H and the rates charged to guests are comparable to other commercial hotels in the area. However, when the lodger is an official visitor who does not pay for his or her own lodging, the revenue entry is charged to the host department. When the H is used to provide temporary housing for your students, the rate is the daily portion of the student housing fee.

LAW

Section 501(c)(3) of the Internal Revenue Code provides exemption from federal income tax for an organization organized and operated exclusively for religious, charitable or educational purposes, if no part of the net earnings of the organization inures to the benefit of any private shareholder or individual.

Section 1.501(c)(3)-1(d)(2) and (3) of the Income Tax Regulations provide that the term “charitable” is used in section 501(c)(3) in its generally accepted legal sense, and includes the advancement of religion and education. Further, the term “educational” as used in section 501(c)(3), which relates both to instruction or training of the individual for the purpose of improving or developing his or her capabilities and instruction of the public on subjects useful to the individual and beneficial to the community, clearly includes an organization, such as a college, which has a regular curriculum, a regular faculty, and a regularly enrolled body of students in attendance at a place where the educational activities are regularly carried on.

Section 511(a)(1) of the Code imposes a tax on the unrelated business taxable income (as defined in section 512) of organizations described in section 501(c)(3).

Section 512(a)(1) of the Code provides that (except for provisions inapplicable here) the term “unrelated business taxable income” means the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter that are directly connected with the carrying on of such trade or business, both computed with the modifications provided in subsection (b).

Section 513(a) of the Code defines the term “unrelated trade or business,” in the case of any organization subject to the tax imposed by section 511, as any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of the purpose or function constituting the basis for its exemption under section 501 of the Code.

Section 513(a)(2) of the Code provides that the term “unrelated trade or business” does not include any trade or business which is carried on in the case of an organization described in section 501(c)(3) primarily for the convenience of its members or employees.

Section 1.513-1(a) of the regulations provides that unless one of the specific exceptions of section 512 or 513 is applicable, gross income of an exempt organization subject to the tax imposed by section 511 is includible in the computation of unrelated business taxable income if (1) it is income from trade or business, (2) such trade or business is regularly carried on by the organization, and (3) the conduct of such trade or business is not substantially related (other than through the production of funds) to the organization’s performance of its exempt functions.

Section 1.513-1(b) of the regulations provides that for purposes of section 513 of the Code, the term “trade or business” has the same meaning as it has in section 162, and generally includes any activity carried on for the production of income from the sale of goods or performance of services. Activities of producing or distributing goods or performing services from which a particular amount of gross income is derived do not lose their identity as a trade or business merely because they are carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of the organization.

Section 1.513-1(c) of the regulations states that in determining whether a trade or business from which a particular amount of gross income derives is “regularly carried on,” regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued. For example, specific business activities of an exempt organization will ordinarily be deemed to be “regularly carried on” if they manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations.

Section 1.513-1(d)(2) of the regulations provides that a trade or business is “related” to exempt purposes only when the conduct of the business activities has a causal relationship to the achievement of its exempt purposes. It is “substantially related” only if the causal relationship is a substantial one. To be substantially related, the production or distribution of the goods or the performance of the services from which the gross income is derived must contribute importantly to the accomplishment of those purposes.

Section 1.513-1(d)(4) of the regulations provides that gross income derived from charges for the performance of exempt functions does not constitute gross income from the conduct of unrelated trade or business.

Section 1.513-1(d)(4)(iii) of the regulations, provides that, with respect to dual use of assets or facilities, an asset or facility necessary to the conduct of exempt functions may also be employed in a commercial endeavor. In such cases, the mere fact of the use of the asset or facility in exempt functions does not, by itself, make the income from the commercial endeavor gross income from related trade or business. The test, instead, is whether the activities productive of the income in question contribute importantly to the accomplishment of exempt purposes.

Section 1.513-1(e)(2) of the regulations specifically states that the term “unrelated trade or business” does not include any trade or business carried on by an organization described in section 501(c)(3) primarily for the convenience of its members, students, patients, officers, or employees.

The Committee Reports accompanying the Revenue Act of 1950 [S Rep. No. 2375, 81st Cong., 2d Sess. 29 (1950)] explained the operation of section 513 in regard to university activities: “In the case of an educational institution, income from dining halls, restaurants, and dormitories operated for the convenience of the students would be considered related income and, therefore, would not be taxable.” Section 1.513-1(e) of the regulations retained this distinction by excluding from the definition of “unrelated trade or business” the ancillary services (those provided primarily for the convenience of students) provided in connection with a residential college community. The example provided is that of a laundry operated by a college for the purpose of laundering dormitory linens and the clothing of students.

Rev. Rul. 58-194, 1958-1 C.B. 240, holds that an organization formed for the purpose of operating a book and supply store and a cafeteria and restaurant on the campus of a State university primarily for the convenience of its student body and faculty is operated exclusively for educational purposes. The organization was controlled by a board of directors composed of the president of the university, three elected faculty members and three elected student members. Membership in the organization was available to university students and employees for a nominal fee. The facility was open to all students at the university to afford them an opportunity to obtain their academic supplies without undue inconvenience. By providing these facilities to the university community in furtherance of its educational program, the organization is, for all intents and purposes, an integral part of the university. It is operated exclusively for educational purposes within the meaning of section 501(c)(3) of the Code.

Rev. Rul. 67-217, 1967-2 C.B. 181, holds that an organization formed to provide housing and food service exclusively for students and faculty of a university that lacks adequate student and faculty housing in accordance with the rules and regulations of the university and offers the university an option to acquire the property at any time upon payment of the outstanding indebtedness qualifies for exemption under section 501(c)(3). The facility is located near the university and is managed by a commercial firm in accordance with the rules and regulations of the university and made available to the student body at rates comparable to those charged by similar facilities. By providing a housing facility under these circumstances, the organization was fulfilling the ‘charitable’ purpose of advancing education by aiding the university in fulfilling its educational purposes.

Rev. Rul. 69-69, 1969-1 C.B. 159, describes an organization created to stimulate and foster public interest in the fine arts by promoting art exhibits, sponsoring cultural events, conducting educational programs, and disseminating information relative to the fine arts. Its activities were parried on in a building that contained offices, galleries, music rooms, a library, a dining hall, and studio apartments where artists lived and worked. The studio apartments were leased only to artists, a few of whom were members of the organization. However, the apartments were not made available to the tenants on the basis of membership in the club or any criteria that would further the exempt purpose of the organization. The organization provided maid and switchboard services for the tenants similar to those provided to the occupants of rooms in hotels. The ruling holds that neither the leasing of the studio apartments nor the operation of the dining hall had a substantial causal relationship to the achievement of the organization’s exempt purposes. Nor were these businesses carried on primarily for the convenience of the members within the meaning of section 513(a)(2) of the Code.

Rev. Rul. 76-336, 1976-2 C.B. 143, holds that an organization formed by community leaders to provide housing for students of a particular college unable to provide adequate student housing is operated exclusively for charitable purposes and qualifies for exemption under section 501(c)(3) of the Code. The organization operated the facility adjacent to the college campus and in an area where other suitable housing was not available. Only students of the college were eligible to apply for housing. The organization and the college consulted and cooperated to ensure that the needs of the college and its students were served by the operation of the facility. By providing a housing facility under these circumstances, the organization was both helping the college to fulfill its educational purposes, and aiding the students to attain an education. Therefore, the activities of the organization are advancing education.

Rev. Rul. 81-19, 1981-1 C.B. 353, concerns an organization formed to assist a university by receiving contributions for the benefit of the university, assisting the university’s academic departments in problems of financial management, and managing the operation of soft drink and food vending services as well as operating laundromat facilities on campus. Rev. Rul. 81-19 holds that these activities are an integral part of the exempt activities of the university, and the organization furthers the educational program of the university by operating facilities for the convenience of the university community. It concludes that the operation of the vending services and laundromat facilities are not unrelated trade or business under section 513 of the Code because these activities are substantially related to the organization’s exempt purpose of furthering the university’s educational program by aiding the university in performing its various administrative functions.

ANALYSIS

Ruling #1: A. Revenue Generated from Providing Student Housing

When Congress enacted the unrelated business income tax in the Revenue Act of 1950, it sought to exclude from the definition of “unrelated trade or business” activities carried on by an organization described in section 501(c)(3) primarily for the convenience of its members, students, patients, officers, or employees. As noted above, the committee reports clarified that this intended for an educational institution’s income from dormitories operated for the convenience of students to be considered related income. Section 1.513-1(e) of the regulations effectuates the congressional intent by articulating that unrelated trade or business does not include the ancillary services provided for the convenience of students in connection with a residential college community. Your provision of campus housing, whether in the dormitories or temporarily in H, and related services to students, like those of the organizations described in the court cases and revenue rulings listed above, contribute importantly to your ‘charitable’ purpose of advancing education. Because this activity is substantially related to the purposes constituting the basis for your exemption under section 501 of the Code, it is not an unrelated trade or business within the meaning of section 513(a). Accordingly, the revenue generated from this activity does not constitute unrelated business taxable income within the meaning of section 512(a)(1).

You initially requested a ruling that revenue generated from providing housing to your faculty did not constitute unrelated business taxable income under section 512(a)(1) of the Code. However, you subsequently clarified that you do not earn revenue from such activity and have not submitted proposals for consideration. Thus, pursuant to section 8.03 of Rev. Proc. 2010-4, 2010-1 I.R.B. 122, 134, we are not ruling on any aspect of your provision of housing to faculty. As noted in the introduction of this letter, this part of PLR 200625035 is revoked.

B. Revenue Generated by use of the H

You have conceded that you operate the H as a “trade or business” and this activity is “regularly carried on” within the meaning of section 513 of the Code. You requested rulings that the income from various categories of guests be excluded from the unrelated business income tax because their use of the facility is “substantially related” to your exempt purposes within the meaning of section 1.513-1(d)(2) of the regulations. In addition, you requested rulings that the income from some categories of guests be excluded from the definition of “unrelated trade or business” because the activity is carried on primarily for the convenience of your members, students or employees within the meaning of section 513(a)(2).

Not all uses you described constitute trade or business. Specifically, guests of other departments, who do not themselves pay for their lodging, but whose costs are charged to the sponsoring department, do not result in income. For those guests, the lodging expense is a cost allocation rather than trade or business income. We do not address this issue herein.

a. Revenue from Students

Your use of the H to temporarily house students until their full-time housing becomes available is a part of your campus housing program. You provide this to students on the same basis as full-time housing. As indicated in Ruling 1A, above, providing temporary housing for enrolled students awaiting their dormitory assignments to become available serves the same purpose as providing the long-term dormitories. Thus, revenue attributable to providing temporary lodging to your students in the H while they wait for their full-time campus housing to become available does not constitute unrelated business income within the meaning of section 512(a)(1). This ruling is affirmed.

b. Revenue from Other Paying Guests

You operate the H similar to a boutique hotel. The accommodations and rates are comparable to commercial hotels in the area. You advertise the H on your website. Rooms are available for rent by the general public. You do not limit the rental of rooms in the H to individuals affiliated with your institution or with any other educational institution located nearby. If there is a vacancy at the H, no one is denied lodging, whether or not they have any relationship to your institution. You have made various assertions for the categories of guests that purport to show that providing hotel accommodations for each is related to your exempt purposes. Although you may have shown some relatedness to you or other institutions in the area, you have not established a substantial and causal relationship between the guests’ stays at the H and your tax-exempt purposes. Further, you provided no explanation how any of the various categories of paying guests came to the H other than through the general reservation system.

Accordingly, all parts of PLR 200625035 that differ from this analysis are also revoked.

Ruling #2

Revenue generated from renting rooms in the H to members of the general public constituted unrelated business taxable income under section 512(a)(1).

You provided no information that establishes your operation of the H is part of your educational program or that providing hotel accommodations to the general public contributes importantly to the accomplishment of your educational and charitable purposes. Providing hotel accommodations for the general public is a trade or business regularly carried on and is not substantially related to your exempt purposes within the meaning of section 1.513-1(d)(2) of the regulations. This part of PLR 200625035 is affirmed.

RULINGS

Ruling #1 Revenue generated from providing housing for your students in your dormitories and the H does not constitute unrelated business taxable income under section 512(a)(1) of the Code.

Ruling #2

Revenue generated from renting rooms in the H to members of the general public constitutes unrelated business taxable income under section 512(a)(1). You have not established a substantial and causal relationship for any of the categories of guests staying at the H and your tax-exempt purposes. You provided no explanation how any of the various categories of paying guests came to the H other than through the general reservation system. Accordingly, these individuals are also treated as members of the general public.

This ruling will be made available for public inspection under section 6110 of the Code after certain deletions of identifying information are made. For details, see enclosed Notice 437, Notice of Intention to Disclose. A copy of this ruling with deletions that we intend to make available for public inspection is attached to Notice 437. If you disagree with our proposed deletions, you should follow the instructions in Notice 437.

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited by others as precedent.

This ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts. This ruling does not address the applicability of any section of the Code or regulations to the facts submitted other than with respect to the sections described. Because it could help resolved questions concerning your federal income tax status, this ruling should be kept in your permanent records.

If you have any questions about this ruling, please contact the person whose name and telephone number are shown in the heading of this letter.

In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we are sending a copy of this letter to your authorized representative.

Sincerely,

Steve Grodnitzky
Manager
Exempt Organizations
Technical Group 1

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