Creating a multi-use building for a research center: a management and operations case study and critique.

Introduction

The University of California, San Diego (UCSD) enjoyed heady times in 2001. In May the National Cancer Institute (NCI) awarded the Moores Cancer Center its sixth Cancer Center Support Grant (CCSG) for five years of continued support at a substantial increase in funding. In July, for the first time in its 23-year history, the center was granted status as an NCI-designated comprehensive cancer center. The construction of a major building assigned to the cancer center was in the final stages of planning and approval. This study summarizes a series of decisions and events that had an impact on that building over the next four years.

The 2000 CCSG application included the University's commitment to construct a large, multi-use building consolidating the cancer center's research, patient care and outreach activities. The center at that time was dispersed over 20 locations on the UCSD campus and in neighboring leased facilities. Its ambulatory patient care was conducted at two sites 20 miles apart. The building promise was long in coming and its delay threatened the survival of the center. Plans called for a building of 270,000 sq. ft., with the first floor housing a state-of-the-art ambulatory oncology center and the upper floors containing wet and dry labs. A large conference center and administration suite were also part of the plan. The design featured a striking exterior of glass and limestone, with stainless steel tiles chemically treated to reflect sunlight in different hues throughout the day. It would be one of the largest buildings on the UCSD campus, exceeding the size of the university hospital and buildings in Health Sciences. The plans had been granted concept approval in 1999, and the estimated cost was $100 million.

Financing the Building

The building commitment was made with the understanding that the entire cost of the research space would be underwritten with private funding (the clinical space was to be financed with $20 million from Medical Center reserves). While this was a development goal of unprecedented scale at UCSD, the Cancer Center Board and leadership accepted the challenge and proceeded to raise $50 million, including a naming gift from benefactors Rebecca and John Moores. But by fall 2001, potential sources had become scarce, and $30 million stood between further delay and groundbreaking. Debt financing was, reluctantly, the only option. The timetable was critical, as the building was considered essential to future NCI CCSG support.

To finance new construction, the University of California may advance funds to a campus to be repaid through indirect cost reimbursement on competing federal grants. This form of construction support, known as Garamendi financing (named for former State Sen. John Garamendi, who introduced the legislation to create the debt instruments), has its benefits and drawbacks (University of California, San Diego, 2002). While it allows urgent construction to proceed, repayment is subtracted from the indirect cost reimbursement available to the entire UCSD campus, including Health Sciences. Thus, the budgets of all divisions and departments are calculated on the balance of funds after debt reduction payments. In employing debt financing, the cancer center was charged with computing myriad models to determine if the building could sustain an estimated annual repayment cost of approximately $3 million.

Form and Function of the Building

The building was conceived with the primary goal of shortening the time and distance between discovery and clinical application of advances in cancer prevention and treatment. Much thought went into creative venues for small- and large-group meetings to facilitate collaboration and research sharing. A 110-seat auditorium with pre-function space, a cafe, 15 conference rooms, 12 terraces and multiple outdoor seating areas for the comfort of patients and staff were among the design features. Because of its spacious design, usable space shrunk from 270,000 gross sq ft to approximately 150,000 assignable sq ft. The first floor, containing about 34,000 sq ft, would be dedicated to patient care. Cancer prevention and control would be conducted in about 23,000 total sq ft of dry labs and examination rooms distributed on floors two and three. Clinical trials offices would be allocated about 5,000 sq ft, and administration, approximately 8,000. A 13,000 sq ft vivarium occupied most of the basement. A five-story, 62,779 sq ft laboratory wing contained approximately 15,000 sq ft on each of its 4 upper floors; the clinic would occupy the first floor. Public use areas of approximately 7,000 sq ft completed the assignable space.

Modeling the Debt Service

Foremost in building financial models was determining where and how much debt was needed and what savings in construction could be achieved. One option was to build shell space in designated lab areas, perhaps as large as whole floors. Another option was to shell the conference center pending a naming gift. Yet another option was to limit additional parking spaces. The engineers and architects cautioned that renovating shell space at a later date was far more costly than building it out in the initial construction. This advice would be weighed carefully against the workable debt ceiling. Ultimately, it was decided to complete the building during construction because of the incremental costs of deferred renovation.

Financial modeling began in earnest in October 2001, and continued through April 2002, in anticipation of a request for debt approval at the UC Regents meeting that May. A senior member of the business office used Microsoft Excel to build spreadsheet programs employing complex macros and links to facilitate modeling. The macros included formulas for percent of overhead toward debt multiplied by the term of the mortgage times the principal, the annual prorated increase in grant dollars, and the calculation for escalating start-up costs. The models included multiple metrics, such as amount and length of the financing, percentage of revenues to be allocated to debt service, time to and amount of optimal sponsored funding, and other avenues of revenue, including the lease of one to two lab floors to non-cancer center tenants. The limits of financing applied alternative scenarios of 10 to 30 years and amounts from $33 million to $47 million. The higher debt ceiling was to cover the funding gap of sequential payment and testamentary contributions as well as the build-out of the entire building. The percentage of revenue applied to debt ranged from 80% to 90%, in accord with Garamendi-type financing. Ramp-up grant revenue projections generally followed a schedule of 25% annual increments leading to capacity funding in four years. Included in the grant revenue projections was the backfilling of occupied space vacated by investigators transferring to the new building.

The final model would forecast a debt of $44.3 million to be repaid over 10 years from the projected building completion in 2005, with a four-year ramp-up of recruitments, starting with 25% to 100% of projected revenue from applicable grants beginning July 2002. Indirect cost revenue to debt service would be at the 80% level. Rent revenue from two lab floors was proposed, but this decision was later modified to limit cancer center space to three, not two lab floors, and thus leasing to only one, for a period not to exceed five years. Thus, while the potential occupancy by cancer investigators was temporarily limited, the requirement to meet debt service obligations was reduced. With start-up package obligations for 17 new lab recruitments estimated at $12 million, or $3 million per year for the first four years, it was projected that expenses would exceed revenues until year five of occupancy. The proposal was approved by the UC Regents at their May 15, 2002 meeting. The building project was officially launched.

Planning for Cultural and Organizational Change

Along with new opportunities, the building presented the cancer center with many challenges. Significant among these were consolidating the separate cultures of the medical center and the medical school under one roof; territorial disputes arising from adjoining, partitionless labs of up to 12 investigators on a research floor; the new proximity and threat to productivity of contiguous administration and faculty offices, and the ongoing financial needs of a considerably larger and more costly enterprise.

In July 2002 the cancer center director unexpectedly announced his plans to retire, effective December 31, 2002. Ground-breaking took place on November 8, 2002, with anticipated construction completion in 25 months. An interim cancer center director would monitor the building construction until November 2003, when the current director, Dennis A. Carson, MD, assumed the post. Shortly thereafter a staff management group was formed to plot the logistics of the transition. This committee, the Managers' Workgroup, had many functions, including: 1) Human Resources; 2) Facilities Coordination and Management; 3) Operating Policies; and 4) Financial Planning and Management.