The following is a three-part exposé of how the University of California, Berkeley came to the idea of creating a special department to manage all its real estate holdings and how it took it all down. The first part of this story was published on Monday, October 21, and the final part will be published on Friday, October 25.
By Meghan Hall
Recognizing Berkeley’s financial plight, and the role that real estate played in it, former Chancellor Bob Birgeneau and Vice Chancellor of Finance and Administration (VCFA) John Wilton determined in early 2013 that a restructuring of Berkeley’s lines of financial reporting, combined with the creation of a real-estate specific division would be necessary in order to reorganize the university’s vast real estate portfolio.
Prior to early 2014, consultant reports noted that UC Berkeley’s current operating model meant that certain parts of real estate — facilities services, custodial, asset management, space and capital resources — reported to the VCFA, while others, such as additional custodial and trade services, new projects and project design, fell under the jurisdiction of student affairs.
“Birgeneau wanted to professionalize finance and administration,” said Wilton, who served as Vice Chancellor for Financial Services between 2012 and 2017. “What had occurred to me was that real estate did not report to the VC of Admin and Finance; it reported to the chancellor…The weird thing at Berkeley was that student affairs helped to design and run student accommodation, but student affairs just didn’t know how to run real estate.”
Wilton continued, “The problem is the governance of the space. You do not have professionals running jobs that have professionals in them.”
Prior to Birgeneau’s and Wilton’s decision to restructure, Wilton noted on several occasions that there was no strategic, long-term financial plan at either UC Berkeley itself or at the greater University of California system level, putting undue pressure on Cal and its systems as it struggled to find new sources of revenue while facing debt and increasing operational and capital costs. Wilton believed that while some costs could be saved through cuts to staff and programs, the university needed to find additional sources of revenue in order to close its financing gap. One of these large sources of revenue, Birgeneau and Wilton posited, was through Cal’s extensive real estate portfolio.
Birgeneau retired in the spring of 2013, but Nicholas Dirks, who took over as Chancellor, agreed to continue to build upon the groundwork laid by Birgeneau.
“It has become increasingly vital to consider alternative financial approaches to ensure that Berkeley can continue to offer the modern facilities required of a world class teaching and research university as State financing of capital projects has been diminished,” wrote Dirks in August of 2013, announcing the restructuring. “…My own experience in the area of capital projects and operations and maintenance leads me to believe that Berkeley would benefit from some degree of consolidation of functions and greater clarity around line responsibilities.”
Dirks did not return The Registry’s request for updated comment.
And so, at the suggestion of Wilton, Berkeley alumnus Bob Lalanne was brought on board as Cal’s first Vice Chancellor of Real Estate. Lalanne, who had decades of private sector development experience and had served on Berkeley’s Board of Trustees, took over responsibility for figuring out how the university’s real estate portfolio could be leveraged in a positive way, and how the university was to address its growth.
Lalanne formally started in his role as the Vice Chancellor of Real Estate (VCRE) in 2014, and the real estate responsibilities that had been those of Student Affairs, and in addition some that had belonged to the VCFA, were combined under the office of the VCRE. Lalanne’s department would now be in charge of everything pertaining to real estate: all capital projects — which encompassed design and construction — management, facilities services and custodial.
“Berkeley is running a construction management company with the vast majority of people who have never run construction,” stated one source to The Registry. “There is no real understanding of how to put projects together that are efficient for contracting.” Lalanne’s job was to change that and professionalize the staff and place an organizational structure to run this group efficiently.
Lalanne’s first capital project came in the form of Jacobs Hall. At the time of Lalanne’s arrival, Cal had received an $18 million endowment from Paul Jacobs, executive chairman of Qualcomm, and the building was expected to open by fall of 2015. When the university’s proposed plans totaled $24 million, exceeding the endowment, and the proposed solution was to pull a floor off of the building thereby eliminating a quarter of its footprint, Lalanne pulled the project and terminated the university’s agreement with the general contractor.
The decision, according to sources, shocked Berkeley faculty. However, after rebidding the project and pursuing a public-private partnership — a common strategy used at universities around the country, but one, noted sources, not often used at Cal — Jacobs Hall opened on time and under budget in August 2015. The finished product was well received and served as the basis for what was deemed “The New Berkeley Way”: the goal of completing Cal’s lengthy list of capital projects at private sector costs, while still conforming to California State public bidding requirements.
The New Berkeley Way was applied to numerous other campus projects: renovations to Barrows Hall that originally came in at $1.1 million were reduced to $680,000. The Stiles Residential Building, which would come to house 750 students, came in at $130,000 per bed, a significant savings versus the Martinez Commons, built by Student Services in 2012, which was built at $190,000 per bed using campus debt. And, perhaps most significantly, was the Berkeley Way project, a new, mid-rise building for the School of Public Health, Psychology and Education. The 230,000 square foot academic building was procured for $128 million, as opposed to the $150 million campus leadership had agreed to spend.
The VCRE also pursued revenue generation through the Albany Village Project, which began construction in December 2015; the center, anchored by Belmont Senior Living and Sprouts, generates $1 million of new, annual ground rent for the university. Stiles Hall now generates about $2 million annually in ground rent. Repurposing California Memorial Stadium through the use of non-athletic spaces for university programming generated an additional $500,000 in rent. Reports stated that if the university integrated retail services into all campus-owned property, the university could also harness an additional $2 million per year.
With these successes, the VCRE seemed to be operating as intended — until in 2016, it all fell apart.
