Office of the
Executive Vice President
721 Franklin Building
3451 5Valnut Street
Philadelphia, PA 19104-6293
October 8, 1997
Trammell Crow Corporate
695 E. Main Street
Stamford, CT 06901
Attn: Mr. William F. Concannon
President and Chief Executive Officer
Re: Proposed Infrastructure Management Agreement between The Trustees of the University of Pennsylvania ("University"), and Trammell Crow Higher Education Services ("TCHES")
As you know, Penn's facilities - whether they be classrooms, residences, labs, offices, or off-campus real estate - and their management, are integral components of our mission of teaching, research, and service in an attractive and safe urban setting. It is critical, therefore, that we exercise our fiduciary responsibility to continuously improve service quality and efficient use of University resources in this area. The University of Pennsylvania has a long and proud history of developing and managing facilities to support a world-class academic environment. At the same time, the institution recognizes that many of the best practices found in private-sector facilities and real estate management settings - management information systems, employee career development and reward systems as well as others - offer great potential for improved services, greater cost efficiency and better informed decisions on the part of the many constituencies who utilize University facilities and impact their development. In this spirit, we have discussed how the University and Trammell Crow could create a strategic relationship that would allow us to forge a new service delivery model characterized by client friendliness, cost efficiency, generous sharing of information, accountability, and long-term investment.
In a very significant respect, this relationship has already begun. In August 1996, the University entered into an agreement with Trammel Crow Corporate Services, Inc. (TCCS) for the management of selected real estate assets owned by our subsidiary, University City Associates. Based upon the positive results achieved under this agreement - by improving the quality of the services rendered, lowering the costs of such services, and providing a more rewarding work environment - and upon TCCS's excellent reputation as the country's premier provider of infrastructure management services, we have discussed a substantial expansion of our strategic relationship in the infrastructure management area. Such an expansion contemplates the formation by TCCS of a wholly owned subsidiary, Trammell Crow Higher Education Services (TCHES) which will be engaged exclusively in the provision of infrastructure management services to institutions of higher learning, with Penn as its first major client. You have proposed a contract between the University and TCHES for a wide range of infrastructure management services, and we have responded with specific ideas and models for the relationship. We now believe it is appropriate to negotiate a detailed contract for these services. Accordingly, we intend to work with you during the next several weeks to negotiate a definitive agreement including the following key terms:
Scope - TCHES will be the exclusive provider of certain infrastructure management services to the University with respect to designated campus and off-campus properties and grounds. The parties believe that these properties will encompass at least ten million square feet.
Infrastructure Management Services - The services provided by TCHES will include those customarily known as facilities management services (e.g., the management of operations, maintenance, utilities, facilities planning and design, small renovation work, groundskeeping, owner representation for construction, and accounting and financial reporting). The services will also include real estate portfolio and transaction management, such as property acquisitions and dispositions. TCHES will have an opportunity to bid for the provision of additional services to the University such as construction management, general contracting and consulting services.
Term - The Service Agreement will extend for ten years and will commence by the end of this calendar year with a transition period to allow the parties to smoothly proceed with the new arrangement for the rendering of services with minimal disruption to the University community.
TCHES Employees and Existing Collective Bargaining Agreements. - TCCS will commit to interview all affected University staff for positions at TCHES and a significant majority will be offered employment opportunities with competitive compensation and benefit programs. The management services to be provided by TCHES will include oversight in areas of the University where collective bargaining agreements are in force, and collective bargaining unit employees will remain in their current positions to perform such work. The University will honor its obligations under existing collective bargaining agreements and its obligations to labor organizations under the National Labor Relations Act, and TCHES will render its services in a manner consistent with these obligations.
Fees - The University expects to pay TCHES net fees for facilities management services of at least $5.25 million per year in accordance with terms to be set forth in the definitive agreement, including terms regarding guaranteed savings. In addition, TCHES will receive from the University variable fees based upon a schedule to be negotiated by the parties for real estate portfolio and transaction management services and the additional services referred to above.
Performance Based Contract: Up Front and Additional Payment - The University and TCCS are committed to negotiate a performance based contract which will provide appropriate credits, incentives, measurements and guarantees to ensure that improvements to service are actually delivered pursuant to this new arrangement. In addition, TCHES will make an up-front payment to the University of $26 million and, subject to certain conditions to be negotiated, an additional payment of $6 million.
TCHES Advisory Committee - To ensure that TCHES will provide the highest level of infrastructure management services in the context of institutions of higher education, the University will participate on an advisory committee or similar body to be established by TCHES which will meet regularly with respect to the design and implementation of TCHES's services.
TCCS Regional Office - As part of this agreement, TCCS will make a public commitment to West Philadelphia by establishing its regional office in University City. At this time, TCCS plans to bring 30 new jobs to the City of Philadelphia in this endeavor.
This letter does not constitute a legally binding agreement and the parties intend to be bound only pursuant to the definitive agreement which will be negotiated to their mutual satisfaction and will be subject to approval by their respective Boards. TCHES and the University will negotiate in good faith, on the basis of the expressions of intent contained in this letter, with the view to arriving at a definitive agreement in the next month. To that end, prior to November 5, 1997 the University and TCHES will not negotiate with any other party, nor seek, encourage or entertain any third party proposal, with respect to any business arrangement of the nature contemplated by this letter and covering any significant portion of the campus or off-campus properties of the University.
Bill, I look forward to working with you to arrive at a definitive agreement. Please execute a copy of this letter on behalf of TCCS to indicate your agreement with this letter.
John A. Fry
Executive Vice President
TRAMMELL CROW CORPORATE SERVICES, INC.
William F. Concannon
President and CEO