ROLE #1

The Opportunity Sponsor

Role Summary

Are there development projects you’d like to undertake on your campus, like new housing or other facilities? Are there assets you control that you’d like to monetize to create new revenue streams? Do you have property in a nearby neighborhood that you’d like to see redeveloped? If so, you’re an Opportunity Sponsor – an institution that has your own project that you’d like to bring to market.

Summary of Benefits

If you came to this Roadmap with ideas in hand for projects you’d like to execute, this role is for you – and what better benefit could you have than seeing your concept become investable? The reward for being an Opportunity Sponsor is seeing a real estate project come out of the ground,  no matter whether that project is on your campus or in your community.

Financial & Resource Commitment

FINANCIAL COMMITMENT

RESOURCE COMMITMENT

Being an Opportunity Sponsor is a “hands on” experience. It will take time, energy, and predevelopment capital to get a deal “teed up” for potential investment. That desn’t mean you’ve got to undertake the whole lift by yourself – as you read, you’ll see that you can partner with experts and development firms to guide you along the way. But, the more experts you bring on (lowering your time / resource commitment), the more your long-term financial commitment will increase.

Functional Scope / Workflow

The Development Cycle – How a Deal Comes Together.

Being an Opportunity Sponsor means you’ll walk with the project through the entire development cycle, so this Role description helps you understand the process from start to finish. 

There are six rough “phases” to the development cycle, each with its own partners and considerations for you as Opportunity Sponsor. 

Depending on the type of project you’re sponsoring, your institution may be responsible for all, some, or none of the steps above. For example, if you’re building student housing, you’ll be much more engaged across all phases than if you are trying to facilitate a commercial development on nearby property you own. However, you’ll need to identify partners who can execute across all phases if you aren’t doing them yourself – so read on to see what each phase entails and how you can best position your institution to master it.

PHASE 1

Opportunity Identification

Being a sponsor starts with what’s possible to develop on land you could control (or redevelop, if you’ve got an existing facility that needs a serious upgrade).

This infographic shows you some of the most common types of higher ed-oriented real estate deals, arranged on two axes – amount of return produced (X-axis), and likelihood that the deal occurs on or off campus (Y-axis). These are the two driving variables that will dictate whether a public private partnership deal makes sense – and, if it does, what kind of legal structure you’ll need to have in place to start pursuing the deal. 

In general, projects that can produce their own cash flow make for better public private partnership investment targets. Projects towards the right side of the chart have a stronger potential to make their own money, meaning that investors will underwrite them based on the strength of the project and its ability to generate a promised return. Projects towards the left side of the chart have little to no potential to make their own money, meaning investors will underwrite them based on the strength of who is ultimately paying the lease (a higher ed institution, a local nonprofit, etc.). 

The top right quadrant consists of cash-flowing on-campus projects that – in the context of a public-private partnership – can generate cash through operations to repay investors. In these deals, the institution typically ground-leases land to a private developer, who builds the building – and can then either lease it back to the institution (in which case, the institution is on the hook for the lease, and investors will underwrite the institution) or lease directly to an end user (e.g., student residents, commercial tenants in lab space, etc.) – in which case the project is on the hook for the lease, and investors will underwrite the project.

Similarly, the bottom right quadrant are deals that will produce cash flow (or at least have the potential to do so), but may happen off-campus or on land your institution does not control. In these cases, where the institution does own land, P3s are still possible – but where the institution does not, consider being a Local Anchor or a Capacity Builder if you want to make the deal happen. 

Each of the deals on the left side of the diagram involve uses that do not – in and of themselves – generate a substantial revenue stream to repay an investor. That means, for each of these deals, you’ll either need to (a) add a revenue generating component or (b) have an anchor institution stand behind the deal as an “anchor tenant” signing a multi-year lease for the facility. For example – an investor could build a workforce training center, then lease it to a two-year college for a 10-year term. After 10 years, the college has the ability to buy the building back from the investor or renew the lease. Local Anchors are especially needed on the bottom left quadrant of the chart – and if you like deals on the top left, you can be an Opportunity Sponsor and structure them as public-private partnerships.

PHASE 2

Predevelopment

In order to move on to the financing step, every deal needs to have a comprehensive package put together that includes the following information: 

● Demand Estimation

Every project type will have an end user – housing has residents, lab space has researchers, incubators/co-working spaces have company tenants, etc. Your job here is validating that there are enough potential end users to justify the total size of the development you are contemplating. For example:

  • If you want to build wet lab space – how many square feet are in the market right now? What is their condition? How densely are they occupied? What is the new pipeline of potential researchers and new companies that would pay rent to occupy the space, from your institution and others? How will that pipeline change over the next 10 years? How much space would each take, on average?
  • If you want to build commercial space – how much competing commercial space is there of the kind you are contemplating (grocery, retail, office, etc.) within a 5-minute walk or drive? 15-minute? 30-minute? How occupied is that space, and with what quality of tenants? How much space do those tenants typically need and at what price point? Where will new tenants come from, and how will that change over the next 10 years?
  • If you want to build residential space – what’s your target market (undergrad students, grad students, local workforce, general public, etc.)? How has that population changed over the last 10 years and how do you anticipate it changing over the next 10? What price points can your target demographic afford? What size units do they typically want to see?

We’ve linked some sample demand studies in the Resources section so you can see the typical depth you’ll need to move on to the Financing stage. 

You have two options for creating these demand estimates: bringing in someone from your business school / economics / statistics / real estate department to do it themselves, or contracting with a third party demand study provider. If you have the ability to do a “back-of-the-envelope” analysis in house, that may help you build your initial team and validate that this project is worth pursuing without paying the $5,000-20,000 it could take to run a comprehensive demand assessment.

Before you hire out, always make sure you discuss who you’re hiring and what their scope needs to be with your development team. Some capital providers are highly particular about the credentials of third party demand experts, and the contents of those studies, and the last thing you want to do is (a) hire the wrong group, (b) get the wrong information, or (c) act too soon such that you’ll have to pay to get it updated before you can close financing.

● Architecture and Design

You’ll need a preliminary set of renderings and a design concept for any facility you want to see get built. As with demand studies, you’ll likely have folks that can do this in-house if you have a design school, at least to create the “first pass” at your vision for the project that could be used to share your initial vision with an outside development team.  Be careful, though – every outside developer has their own design and architectural firms (or in-house teams of their own), and a big part of your analysis for who to pick as your development partner is how good they are at design. The more you “box them in,” the less potential you create to maximize their value.

● Site Testing & Evaluation

Every site has its own set of issues. For developed sites, there will always be concerns about prior contamination (by anything from fuel runoff to asbestos), which are typically addressed with an environmental report (commonly referred to as a “Phase 1”). Other sites will have concerns with wetlands, waterways, drainage, topography, or other physical characteristics that need to be examined by an engineer to determine how they’ll need to be addressed in the development plan. This work is almost always performed by outside experts, but again – be careful who you pick and what you ask them to do, and make sure it aligns with what your anticipated sources of financing will need.

● Engineering and Construction Budgeting

Once you have your design in place and have ironed out site challenges, you can create a more detailed engineering estimate for how much it will cost to actually build the building you want. This is an iterative process – you can make justified assumptions about costs until you get more detailed site information or architectural estimates. As with site testing, this work is almost always performed by third parties – typically general contracting firms (who may, if you have a good relationship with them, give you a “ballpark” estimate without needing to formally engage – it never hurts to ask!). And, as with everything above, beware trying to select your contracting partners before you have a master developer for the project (if you want one) – while capital providers aren’t as particular about general contractors and engineers, most developers are, and pre-selecting them will drastically limit the number of developers who would be willing to work with you on putting the deal together.

● Pro Forma Development

As you continue to get the inputs identified above – e.g., cost estimates for your ideal building design, demand estimates for how many square feet could be occupied at a given rental price, etc. – you can begin building a financial model for the development. These models can be simple single-tab Google Sheets or massive multi-tab variable Excel models, but in the end, they just need to show that (1) your debt can be comfortably repaid and (2) your equity investors (if you have them) will make the return they expect. For more on what banks and investors expect, see Financing step below. This is a highly iterative process – you may want to create a “straw man” pro forma to prove that the project you are contemplating is investable before you undertake any of the other steps above. Be sure to highlight all your assumptions (e.g., estimated rents, construction costs, site work, etc.), then validate those assumptions with real data as you move through the predevelopment steps outlined above. 

The keys to developing a good pro forma (which typically needs to be taken out over a 5- to 10-year investment horizon) include:

  • “Sources and Uses” – through the iterative process above, you’ve (hopefully) identified the total cost of the development (“Uses”), but you’ll need an equal amount of capital (“Sources”) to match your need. That will come from debt, equity, and incentives – and we’ve got just the calculator you’ll need to see how all of that could fit into your capital stack. 
  • Solid, realistic estimate of potential rents  (which GroundUp can help you estimate, at least on a first pass)
  • Expense estimation (which GroundUp can help you estimate, at least on a first pass)
  • “Cost of Capital” – each capital source will come with a “cost” (debt = interest rate, equity = expected investor rate of return, incentives = potentially free), which you’ll need to estimate, then show the project can handle. 
  • Exit Strategy – make sure that equity investors have a chance to “get out” of the investment by selling their interest in the deal to (a) your institution or (b) a third party within a given period of time (see “Phase 6 – Exit” below), and that this strategy is modeled appropriately in the pro forma. 

The best “back of the envelope” pro forma calculator that accounts for all of the pro forma elements above can be found at GroundUp.

● Team Development

If trying to do everything above sounds overwhelming, don’t worry – most institutions approach the Opportunity Sponsor role by finding a qualified third party who can handle all the steps above on behalf of the institution. The reason we’ve explained these steps above is not to suggest you should do them yourselves – rather, it’s to highlight for you how much needs to be done before you can contemplate a development, and allow you take some of those initial “could this idea ever work” steps yourselves, without needing to spend tens of thousands on a development consultant only to get a “no.” 

Institutions typically identify their master development partner through some kind of an informational packet on the opportunity, highlighting your anticipated uses for the site. This can take the form of a 2-3 page project summary, with satellite view images and some basic bullet points, or a much more comprehensive Request for Information or Qualifications that could run 10+ pages. In either case – make sure to include all of the “pre-work” you could do in-house in the packet to give your potential development partners a flavor for why you think this deal could work.

Remember that part of your plan needs to include management – how will this facility be operated over the next decade or more? Who will be responsible for leasing? Operations? Maintenance? Even though those items don’t come into play until Phase 5, you’ll have to have rock solid answers to those questions now if you want a chance at getting financing.

Hopefully, through your landscape mapping process above, you were able to identify a number of potential development partners locally for your property – the question now becomes (a) which partners you need (based on what you’ve already done), (b) what you need those partners to do, and (c) how wide a net you want to cast in finding them. 

As you’re answering these questions, remember that the private sources of financing you’re looking to attract for this opportunity want to see a team with a rich depth of experience (usually 10+ years executing within that vertical or asset class) across all phases of a development discussed above.

Note that these are not presented in any particular order – sometimes the vision and renderings come first, followed by the team and pro forma, which gets validated by demand studies and construction budgeting. Other times the demand validation comes first, which allows you to build a pro forma and attract a development team, who helps with architecture and engineering.  Much of the sequencing will be about your institution’s capacity to produce these predevelopment materials yourselves – then filling gaps with external team members.

PHASE 3

Structuring + Financing

Once you’ve assembled your deal, it’s time to put the deal structure and capital stack together. For many of you, that will mean handing the baton off to your development team partners and letting them work through the details of where the debt, equity, and additional incentives will come from that are needed to do the deal. 

However, some of you may want to assist with the process of putting that capital stack together – or even do it yourself. There is so much detail around what is possible here that we created a whole separate role – that of the Capital Aggregator – to give you better insight. Jump ahead to that section if you want to learn more. 

Regardless, your choice of legal structure for your deal will impact the capital you are able to attract. There are a variety of methods you can use to structure your development deal, grouped loosely by legal ownership structure below. Note that this discussion pairs well with our Guidebook section on structuring and negotiating P3s – please review both, particularly if the project you’re sponsoring might be undertaken as a P3. 

● Continued Ownership + Fee Development (not P3)

If you want to retain complete control of the asset and the development, hire a developer and a team on a “fee development” basis. Under this model, your institution will own 100% of the equity of the project, and would contract with a development team / other professionals to make the deal happen. If you choose to contract a developer for a fee using this method, they can be responsible for as much (or as little) of capital stack assembly as you’d like them to be.

  • Because your institution retains 100% of the equity on a deal like this, it will be an on-balance sheet transaction (as opposed to a typical P3, which is off-balance sheet) and will impact your financials. 
  • You will not be able to raise any third party equity through this model (or offer any up for your development team) because you chose not to relinquish any control of the deal. (If you want to raise equity but retain partial ownership, see ground lease / conveyance sections below).
● Ground Lease (P3)

Ground leases are the most common way for an institution to retain some control over its property while creating the opportunity a public-private partnership / private equity investment. Terms of the lease vary based on what state law allows (particularly for public institutions), and what the institution / development team are comfortable with (developers like longer leases of 40-50+ years, institutions typically like shorter). These leases are typically given to a special-purpose vehicle (a new legal entity, like an LLC, set up to “own” the project) in which the developer is the general partner/sponsor and private equity investors (which could include alumni) or even the institution itself as partial owners. In some cases, a ground lease actually runs to a related party – like a real estate-focused foundation controlled by the university, if the university wants some separation from the deal but wants to control it. For more on structuring these ground-lease P3s, see our guidebook on Public-Private Partnerships. 

● Conveyance with Clawback / Repurchase Option (P3)

Ground leases can sometimes be awkward vehicles for development; state law can make granting them a challenge, and banks always prefer to take a mortgage on a fee simple interest in property – not the leasehold interest conveyed by a ground lease. To provide your development team with greater flexibility to build whatever capital stack they want, consider a conveyance to the same special purpose vehicle your development team set up to execute on the project. You can structure that conveyance as –

  • An interest swap, in which you convey the property to the development entity for no charge in exchange for a percentage equity ownership in that entity; or 
  • A sale with a repurchase option, which gives your institution a “cash pop” and allows you to “claw back” the property for predetermined amount(s) if certain milestone(s) are not met (e.g., development or lease-up has not progressed before certain dates, certain key tenants are not acquired, etc.). 

For more on structuring these milestones, see our guidebook on P3s

● Straight Sale (not P3)

Some institutions simply do not want the ongoing association with a property occasioned by any of the methods described above. In this case, structure your Step 3 execution as a request for proposals on what private developers would do with the site under your control, and convey the property to the one you believe has the best chance of executing on your vision. All capital raising methods are available for a private sale.

PHASE 4

Construction

This is likely the step where you’ll be the least directly engaged in execution of day-to-day responsibilities – other than as a progress monitor and active participant in helping to solve issues as they arise. For on-campus projects, you’ll need to ensure close coordination between facilities / property management, the development team and their contractors, and make sure you have a detailed plan for how to address every interaction between their team and your institution (e.g., campus access permissions, parking disruptions, job site security, etc.). For off-campus projects, the key is finding a development team and general contractor that can execute in a way that keeps the community happy. In both cases – your goal is doing whatever you can to help the project come in on time and under budget.

PHASE 5

Lease-Up, Stabilization, and Management

If you’ve gotten this far, it means you did an excellent job of identifying a long-term property management strategy during predevelopment and you are ready to start executing. The type of project you’ve undertaken will dictate the management strategy you’ll need to execute:

  • For on-campus projects (especially those involving students), you’ll have a choice between university management and private management. You’ll then codify that choice in your legal documentation (which will include a management agreement with the development team), along with whatever long-term rights, responsibilities and obligations you’ll have with respect to the property.
  • For off-campus projects, you’ll typically use a third party management service – normally selected by the development team. In any structure besides a clean property sale, make sure that your legal documentation allows for some recourse if facility management is not up to your standards (and make sure you have a clear definition for what those standards are on the front end).

PHASE 6

Exit

In any of the P3 structures discussed above (e.g., ground lease / conveyance), the key will be creating an exit mechanism that can get investors (and/or your development partner) out of the deal. 

  • Ground Leases typically come with a “termination payment” for which the institution is responsible. Those termination payments occur at pre-determined intervals (e.g., $1,000,000 if terminated at Year 10, $750,000 at Year 15, etc.) and (typically) at pre-determined amounts (or amounts determined by a formula pegged to the cash flow coming out of the development itself). The amounts are sized based on how much cash flow the development team and their investors will lose once the deal is terminated – so, sometimes the easiest way to determine this amount is to simply take the present value of anticipated future cash flows for the remainder of the ground lease term as the exit payment. 
  • For conveyances, someone needs to “buy out” the developers / investors / other members of the special purpose vehicle that owns the development. For total off-campus projects, that can be a third party – anyone from a real estate investment trust or a pension fund to a community land trust. For on-campus projects, the institution itself is the typical buyer, with the purchase price set in the same manner that the ground lease termination payment gets established (e.g., a present value of an assumed amount of future cash flows that other investors/developer are giving up). 

We encourage you to be proactive in identifying who will ultimately own the development and when any transfers might take place. The sooner the anticipated transfer, the more proactive you’ll need to be about identifying a buyer and framing out a potential purchase price – and we encourage you to review our guidebook on community-oriented wealth building strategies to determine whether that vehicle could be right for your deal.

Related Case Studies

Arizona State

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Stillman College

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As soon as it became clear that Stillman would be located in a Opportunity Zone, the school’s president seized the opportunity to enlist the support of potential private equity partners, the City of Tuscaloosa, and consultants to develop investment projects for the school’s vacant and unused property holdings.

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University of Virginia’s College at Wise

Wise, VA

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UVA-Wise is the lead partner for an Opportunity Appalachia program in the State. They are a leader in Southwest Virginia in community and economic development, with tremendous connections to community leaders across the region and to state government. They have a strong track record in downtown development and rural entrepreneurship efforts in +20 communities.

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University of Pennsylvania

Philadelphia, PA

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Between 1996 and 2003, the University of Pennsylvania tripled the dollar amount of goods and services purchased from West Philadelphia businesses through their Economic Inclusion Initiative. They continue to focus on local purchasing and aim to award 20 percent of all construction contracts to minority or women-owned businesses.

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University of Iowa

Iowa City, IA

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“Hannon Armstrong joins ENGIE and Meridiam in the “Hawkeye Energy Collaborative,” which was awarded a $1 billion 50-year utility management concession contract in December 2019 and reached financial close on March 10, 2020. Hawkeye Energy Collaborative will support the University of Iowa’s energy, water, and sustainability goals for two campuses spanning 1,700 acres in Iowa City, Iowa. Under the agreement, ENGIE will operate, maintain, optimize, and improve the on-campus utility systems for the University.

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University of Indianapolis

Indianapolis, IN

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The University of Indianapolis joined city and community leaders to celebrate construction of the University Lofts apartments, an off-campus student housing development in partnership with Indianapolis-headquartered Strategic Capital Partners.

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University of Chicago (Child Care)

Chicago, IL

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The University of Chicago and IFF, a CDFI with a history of lending to the child care sector, have worked together on multiple initiatives to create more childcare and education opportunities for Chicago’s communities.

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Tulane

New Orleans, LA

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The Warwick Hotel has been abandoned since Hurricane Katrina. The 154 room hotel, with its 1950s-era modernist architecture, opened in 1952. Tulane University signed a lease on Warwick and the structure will be completely renovated using opportunity zone money from the New Orleans Redevelopment Fund.

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The Russell Center

Atlanta, GA

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The Herman J. Russell Center for Innovation and Entrepreneurship is a 50,000 SF campus in one of Atlanta’s fast growing downtown neighborhoods that is focused on black entrepreneurship.

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Rutgers University – Newark

Newark, NJ

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The Center for Urban Entrepreneurship & Economic Development (CUEED) at RU-N is one of the first centers of its kind to integrate scholarly works with private capital, government, and non-profit sectors to develop citywide resources and bring renewed economic growth and vitality through urban entrepreneurship.

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California State University, Dominguez Hills

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The university is working with energy storage firm Stem, Inc. to implement the company’s software-driven energy storage service to drive down energy costs across the university. “CSU Dominguez Hills is another example of a higher education leader who seeks Stem’s automated energy savings while also contributing to more intelligent grid solutions,” said John Carrington, CEO of Stem. “California’s universities and colleges want energy storage to help them control their energy choices, play a strong role in their community, and help transition the state to even higher amounts of renewable energy.”

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Rowan University

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As Rowan began to increase its capital spending locally, the city of Glassboro saw a unique opportunity to leverage the Rowan investments by developing a plan for the transformation of the downtown area leading to the university. This plan ultimately became the $476 million, mixed-use development of Rowan Boulevard. In the city of Glassboro more than 30 percent of school-aged children qualified for the free lunch program and 20 percent of families earn under the poverty line.

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Ohio State

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Working through Campus Partners, a nonprofit community development corporation, Ohio State invested $28 million of its endowment funds into the “South Campus Gateway” complex.

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Missouri State University

Springfield, MO

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Using a $1.25M grant from the Economic Development Administration and matching local OZ funds, the University plans to expand its efactory business incubator in Springfield, MO. According to Missouri State, this investment is expected to create “360 jobs and spur $27 million in private investment.”

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Lehigh University

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Opportunity Zone equity was paired with Historic Tax Credits to support the transformation of an underutilized 125-year-old building on Lehigh University’s campus into 30 apartments and new retail space in South Bethlehem. Reinventing this space is part of Lehigh’s strategy to demonstrate their commitment to community, revitalize South Bethlehem, and continue campus expansion as the university grows.

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LaSalle University

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In 2004, La Salle University’s Office of Community and Economic Development worked with leadership and community members to craft a realistic plan to improve the quality of life for residents around the campus. The University’s findings led them to The Reinvestment Fund (TRF), a Philadelphia-based CDFI and leader in the financing of neighborhood revitalization, affordable housing, community facilities, supermarkets, and commercial real estate.

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Howard University

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Howard University teamed up with the Washington, D.C. government, Fannie Mae, and corporate partners to transform 45 abandoned, university-owned properties in a neglected neighborhood into more than 300 housing units and $65 million in commercial development. The Howard University LeDroit Park Initiative had three themes: 1) celebrate the history of the area; 2) redefine the community; and 3) enhance the quality of life and safety.

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Clemson University

Clemson, SC

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Clemson University has deployed a distributed energy storage system in an effort to reduce energy costs and to provide engineering students an opportunity to practice measuring and tracking energy savings. “Our distributed energy storage system is a natural extension of our core businesses in the buildings and battery markets and partnering with Clemson University allows us to help deliver the kind of smart and integrated energy management that will keep students and faculty comfortable while driving down utility costs,” said John Schaaf, vice president of distributed energy storage at Johnson Controls, in a prepared statement.

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Western Colorado University

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Western Colorado University’s ICELab is a “community organization with a keen interest in mountain town sustainability and economic diversity in rural Western Colorado.” The lab provides startups and growing businesses affordable coworking/office space as well as an Incubator Program.

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