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Real Estate


Author(s): Jeffrey Lipton - University of Colorado

This chapter is current as of September 21, 2015

Introduction


During the last half century, enormous expansion and growth have occurred in higher education. This expansion has resulted in a corresponding increased need for land and building space to support increasing enrollments and research activities. As the need to increase physical facilities has occurred, there has also been a need to acquire additional land and, in many cases, to acquire or develop buildings to support the growth demands.

The acquisition and ongoing management of new parcels of land and facilities have required many institutions to become more sophisticated in their basic real estate capabilities and to integrate their real estate functions into the facilities management and capital planning activities of their institutions. The acquisition of buildings and land should be considered as part of the overall facility development strategy of an institution. In addition, once a building or parcel of land is acquired, the facilities management organization will often be required to provide ongoing service and care of the new assets as they become part of the overall inventory of the institution’s physical plant.

The facilities management organization needs to work closely with the institution’s real estate office to help ensure that potential acquisitions are consistent with the institution’s long-term facility master plan. During the acquisition process, the facilities management organization needs to be involved to help provide a condition assessment of a potential real estate asset and the estimated cost of bringing that new asset to a maintainable level of service under the institution’s facility standards and code requirements.

An involvement in real estate management has become nearly universal for all colleges and universities. From time to time, almost every institution will need to conduct at least straightforward real estate transactions such as property acquisitions and sales, leases, or the negotiation of right-of-way easements or license agreements. Regardless of the mission of an institution’s real estate office, the real estate function needs to be highly integrated into the organization of the institution and aligned with the institution’s facilities management planning and maintenance organizations.

College and university real estate functions are organized and operated in a variety of ways. Many institutions have highly sophisticated and entrepreneurial real estate offices that are considered as important profit centers and produce considerable revenue to support other institutional needs. Other schools view real estate as a necessary support function but only in support of the institutional need to occasionally purchase a real estate asset or to lease space off-campus to support temporary shortages in their owned facilities.

In addition, institutions are turning to much more complex real estate activities as a means to provide a more creative financing tool for the development of needed facilities, realize income from idle or underutilized institutional property, perform an endowment investment activity, or achieve other institutional objectives. 

This chapter reviews the basic strategies and issues related to managing institutional real estate, including consideration of real property acquisitions, leasing, and property management responsibilities. It also discusses how it is essential to consider real estate as part of the larger capital development strategy of an institution. Guidelines for developing a real estate function at an institution are provided as well as some of the essentials for the acquisition and disposal of property through purchase, sale, and exchange; development of agreements such as leases, easements, rights-of-way, and licenses; property appraisals and environmental assessments; and property management responsibilities. Additional information includes a description of the internal staff or external resources needed to carry out these activities and an overview of several of the innovative approaches for real estate investment and development activities currently being conducted by colleges and universities.

 

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Real Estate Administration


The following are general guidelines for the administration of real estate activities at a college or university.

Organization

Organizational placement of real estate management responsibility varies widely among higher education institutions. Frequently, it will be found in the financial, business, or facilities management organization. More important than its location in an organization is the need for effective communication with, and access to, senior management as well as the authority to conduct all of the real estate activities of the institution. Organizational placement must also ensure that real estate activities are fully integrated with an institution's strategic vision and overall facility and capital planning activities.

Because of the number of potential constituents and internal customers served in the higher education environment, practical and clear internal policies and procedures related to real estate acquisition and leasing are recommended. These policies and procedures should be clearly communicated within the institution so that all stakeholders understand the process and requirements for conducting institutional real estate transactions.

Staffing

Successful management of real estate activities requires the involvement of experienced real estate professionals, either as institutional staff or through contracts with external consultants, including licensed real estate brokers, attorneys, and other consultants. Institutions with significant real estate holdings and a substantial volume of real estate activity will benefit from having a dedicated and well-trained specialized internal real estate staff. Institutions that have a relatively minor amount of real estate activity might rely more on external consultants. Many institutions depend on a combination of resources, perhaps employing an internal staff for routine real estate administration and specialized consultants for unusual, complex, or major transactions.

In seeking qualified real estate staff, institutions should not necessarily limit their search to people licensed as real estate sales agents or brokers, although a background in real estate transactions is helpful. A strong real estate background — complemented with advanced courses in real estate and meaningful experience in business law, facilities management, and finance — is highly desirable.

Real Estate Brokers

Many institutions use professional real estate brokers in various roles to supplement the capabilities of their in-house staffs.  Brokers can be helpful because these professionals are more familiar with, and active in, local real estate markets. They are more aware of current real estate listings, vacancies, market values, and opportunities simply because that is what they do all of the time. Most institutions need to enter the local real estate markets occasionally to meet their real estate needs. However, they are not generally engaged on a full-time basis and therefore do not have all of the market intelligence and relationships needed to be an effective participant.
 
Brokers can help institutions by being a tenant's or purchaser’s representative or agent in searching for property that meets an unmet institutional need either in local markets or in markets geographically distant from the institution. When acting as a buyer’s or tenant’s broker, the broker's loyalty is to the institution, and the brokerage fee is normally paid by the seller or landlord. Brokers are generally commission driven because their incomes are derived from completing transactions. Thus, generally they are very aggressive and work hard to complete leasing and property sales.
 
Professional brokers who typically deal in commercial and institutional real estate can also provide a range of other ancillary services, including space analysis, property management, financing support, design, and construction services. What can be provided depends on the scale and depth of the broker’s organization.
 
One caution in using an outside real estate broker is that an institution can lose control of the activities and behavior of the broker. Because brokers are independent contractors of the institution, there is only limited control. It is important that an institution is careful in selecting a broker and that the broker understands the limits and scope of the activities. Brokers must also understand that they must represent the institution in a manner that is consistent with the institution’s desired local image and reputation.
 
The process for selecting a broker should be consistent with the procurement rules of the institution and often requires issuance of a competitive solicitation.     
 

Record Keeping and Data Management

As in any institutional administrative function, accurate records concerning active contracts, leases, property holdings, and facilities data form the basis for standard activities, including managing accounts receivable, paying vendors, and tracking key activities. In addition, record keeping and data management provide the basis for conducting assessments of real estate investment values and replacement costs, evaluating maintenance needs and scheduling repairs, and monitoring deferred maintenance and facilities condition.

Standardized real estate software packages and web-based systems offer basic tools for maintaining real estate data. A number of customized property management programs, including many that can be networked to support campus-wide distribution of essential data, are also available.

Currently, there is a strong trend for institutions to acquire computerized maintenance management information systems, which now contain real estate components to help manage real estate information. These information systems can be integrated with other institutional facility and financial information systems. More advanced systems also allow land and building data to be shared electronically with the institutional Geographic Information System (GIS) and computer-aided design (CAD) system. These systems can support tracking of data related to property topography; building footprints; utility and infrastructure systems; landscape, pathway, and road systems; and room-specific inventories. Activities such as long-term and short-term capital planning, budget management, and associated analyses (lease build-out costs, space utilization, preventive maintenance schedules, etc.) can be managed more successfully when data for the institution's total inventory of real property and facilities is comprehensively organized in an electronic format.

Property Management

Property management is the operation, control, and oversight of real estate assets. As institutions develop, purchase, or lease properties, there needs to be close attention to managing those assets. This conclusion is true whether the property is privately owned and leased to the institution or whether the institution is the landlord and is leasing its property to tenants.
 
Often, the easiest part of facilities management is acquiring a building or developing a lease. The hard part begins when an institution needs to manage the asset and maintain it. Often, these assets are integral to the mix of buildings and real estate that support an institution’s mission. Thus, notwithstanding whether they are owned or leased, they need to be operated and maintained in a professional manner.
 
It is important that there is close communication with the actual occupants of the facility. Knowing the tenants’ needs and requirements is a critical first step to providing the property management services required to make them happy and productive. There need to be identified contact information, communication protocols, and trouble reporting. 
 
Like any institutional property, there will be the normal need to report and manage maintenance issues. Many institutions choose to perform these tasks internally. However, leases may require that the landlord perform these functions, so there needs to be a close collaboration between the institutional staff and the property owner in developing and implementing maintenance procedures. The requirements for maintenance and responsibilities should be closely defined in the lease document so that there are no misunderstandings as to who is responsible for what, expectations for performance, and how the expenses will be allocated to the institution.
 
There also needs to be attention to record keeping and costs to manage the requirements of the lease for reimbursement of operating costs and utilities. In some leases, the tenant will be responsible for all expenses (net lease), and in other leases, the landlord will be responsible (gross lease). In some leases, there will be a sharing of expenses and maintenance responsibilities.
 
Regardless of how a lease or property ownership portfolio is developed, an institution will need to expect that there will be responsibilities and workload on the part of the institution in managing these physical financial assets. There is no set model for how a property management function should be organized and staffed. Each situation is unique to the specific institution and the assets being managed. However, there will be a requirement for providing a property management function.  
 
There are opportunities for using private property managers for providing these functions instead of using institutional staff. Using an outside property manager might be particularly beneficial if there are not enough real estate assets to justify building, training, and supporting a separate institutional staff. However, as in any privatization model, there will still need to be some institutional requirement for contract management and oversight of even a private property manager.
 

Risk Management

Real estate administrators are always faced with balancing the potential risks and returns of real estate ventures. Risk is inherent to any major investment where returns occur over a long period of time. The traditional risk exposures related to real estate are legal, facility-related, and financial. Today, a wide variety of other potential risk exposures includes environmental issues, changing regulations related to local land use, and political aspects of town-and-gown relationships.

The risks associated with any individual real estate transaction are often specific to that particular transaction and require collaboration of other institutional staff to identify the risks early and to determine the best way to manage them.

Consistent processes and oversight are important elements to controlling and minimizing the risks related to real estate. This approach can be achieved through establishment of centrally managed controls with clear business decision-making structures. Increased risk exposure can result from inconsistent application of policies. This result can be minimized by standardizing liability and insurance-related language and other typical contractual terms whenever possible. Most important, all standard leasing and purchase contract forms and other contracts need to be evaluated by an institution’s legal counsel, risk management, facilities services, and financial management staffs.

Basic Real Estate Transactions and Issues

Real Estate Contracts

Establishing a solid contract is an essential element of any real estate transaction. All real property activities will normally be codified by contract, and the contract must comply with the relevant state's body of contract law (usually based on common law and existing statutes). Beyond the basic elements of a valid contract, each real estate contract may include any number of additional elements to establish the unique aspects of the specific transaction. The use of standard contract forms for each basic category of transaction is recommended.

Permanent Transactions
Real estate transactions can be divided generally into permanent and nonpermanent transactions. Permanent property transactions typically are long-term, such as property acquisitions, sales, exchanges, ground leases, or granting of rights-of-way or easements. These types of transactions can be legally complex as they involve a variety of considerations, including the determination of value, restrictions imposed by local land use regulations, application of restrictive covenants or conditions on use, and analysis of title and tax records. Due diligence before entering any real estate contract is critical. A formal contract is recommended to ensure a complete understanding of each party's obligations and responsibilities.
 
Often, a nonbinding letter-of-intent (LOI) is negotiated before the development of a formal contract. The LOI defines the general terms and conditions of a transaction and provides the basis for the drafting of a subsequent agreement. The elements contained in an LOI should be tailored to the specific transaction but often contain the following provisions:
 
Definition of who is the buyer and who is the seller
Property interest to be conveyed
Agreed-upon price
Earnest money deposits (if any)
Due diligence period and the due diligence information to be provided by the seller
Deadlines to draft an agreement and closing date
Definition of brokerage fees (if any) and responsibility for payment
Responsibilities for providing clean title
Responsibilities for payment of closing costs
 

Appraisals

An appraisal by a professional appraiser is the preferred means of objectively determining the fair market value of a property. An appraisal is a professional appraiser's opinion of value. The preparation of an appraisal involves research into appropriate market areas; assembly and analysis of information pertinent to a property; and the knowledge, experience, and professional judgment of the appraiser. Appraisals may be required for the acquisition, lease, or sale of any type of property, including housing, office buildings, and raw land. Public institutions are often required, by their governing boards or by state policy or statute, to obtain appraisals before purchasing or selling a property.
 
All states require appraisers to be state-licensed or certified to provide appraisals to federally regulated lenders, and many states require appraisers to be licensed or certified to provide appraisals for other parties as well. Appraisers are highly regulated by each state and generally comply with uniform standards and practices as well as codes of professional ethics.
 
Commercial appraisals typically use a three-method approach to valuation: a replacement cost analysis, an evaluation of comparable sales, and an income analysis. The three valuation approaches are then reconciled to provide a single opinion of value for the property. The opinion of value is usually based on the highest and best potential use of a property.
 
Appraisals can be somewhat expensive and can take a few weeks to complete. A more informal method of getting a sense of value is to request a broker’s opinion of value through a professional and licensed real estate broker. Although the broker’s opinion of value will be less precise than one provided by an appraiser, such opinions can provide an initial estimate of value and can often be provided free and quickly. However, a broker’s opinion of value cannot usually be used by lenders in the underwriting process to provide financing if that is required.
 

Environmental Risks

The purchase or sale of real property is also likely to require an evaluation of environmental conditions and potential contamination, depending on the location of the land and the age of improvements. The discovery of latent environmental issues associated with a property can often become a source of expensive remediation and potential litigation. It is essential to perform the necessary due diligence to fully understand the historic use of a property and the existence of any environmental liabilities before acquisition.

It is recommended that for all property acquisitions, a Phase I environmental site assessment (ESA) should be completed. A Phase I site assessment is largely based on American Society for Testing and Materials (ASTM) Standard E1527-13, which provides the definition and requirements for an environmental assessment as well as who is qualified to perform these assessments.

The Phase I study is generally considered the first step in the process of environmental due diligence. According to the Environmental Protection Agency (EPA), a Phase I study is an initial environmental investigation that is limited to a historical records search to determine ownership of a site and to identify the kinds of chemical processes that were carried out at or near the site. An ESA includes a site visit but does not necessarily include any physical sampling. If such an assessment identifies no significant concerns, Phase II and Phase III audits are not necessary.

If concerns are identified through the Phase I environmental assessment, a Phase II environmental assessment should be conducted. A Phase II assessment is an investigation that includes tests performed at the site to confirm the location and identity of environmental hazards. The assessment includes preparation of a report that includes recommendations for cleanup alternatives.

A complete assessment typically includes identification of potential soil contamination, groundwater and surface water quality, indoor air quality, and other issues related to hazardous substances. For building structures, it is important to identify indoor air quality issues (including mold and radon), storage of hazardous materials and petroleum-based products, potential asbestos and lead-based paint contamination, mold issues, and the condition of any underground storage tanks.

It is essential to identify these environmental issues before acquiring a real estate asset so that the management and potential costs associated with those risks can be appropriately handled in the purchase negotiations and contract preparation.

Other Due Diligence

Many other due diligence tasks are required for both a seller and a purchaser of real property. Planning for any real property transaction should also include careful consideration of the compliance requirements of local, state, and federal laws and regulations. The Americans with Disabilities Act (ADA) is an example of a significant federal law that stipulates minimum conditions of facility accessibility that must be addressed. Local and state fire and life safety codes have long been a critical requirement in evaluating the physical condition of a property. Other basic requirements for proper due diligence include conducting a thorough building condition assessment; obtaining recorded property records; knowing the current obligations to existing tenants (if any); and conducting surveys, title insurance, and legal and closing services.

Property Exchanges

In some situations, property (rather than cash or financing) is exchanged or credited as a charitable donation, allowing the buyer or seller a desired tax benefit. Gift properties, structured to serve both the donor and the institution receiving the donation, take various forms. Institutions should always consider potential long-term cost factors that accompany gift properties, including condition, location, land use limitations, development potential, and ongoing management and maintenance obligations. An institution’s development staff or related fund-raising foundations might be able to assist with the initial evaluation and handling of real property gifts. An institution should also consider whether a potential gift of real estate plays a role in its long-term facilities master plan and is consistent with its other institutional goals and vision.

Ground Leases

A form of lease that often has a high degree of permanence is a ground lease, which is of extended duration and is frequently structured to allow the construction of improvements by the lessee on an institution’s land. In higher education, ground leases are often used to allow an institution to generate a revenue stream from a piece of property that is not needed for institutional use for a long period of time. An institution may lease ground to a private developer that can develop the ground in a manner that generates revenue for the developer and for the institution in the form of ground lease rent payments.

Ground leases are typically long term because the developer will need to have the use of the land for a sufficient period of time to amortize the cost of development over the useful life of the constructed asset. Ground leases can typically encumber a piece of property for between 40 and 99 years. Institutions have used ground leases to support the development of research parks, fraternity and sorority houses, faculty-staff-student housing, and mixed-use commercial development where the building rents are shared with the institution.

Because ground leases often grant privileges that simulate ownership, they require careful structuring to protect the long-term interests of the institution and consider the institution’s long-term land requirements to serve its own development needs.

Easements and Rights-of-Way

Easements, or deeded rights-of-way, involve the long-term or permanent conveyance between parties of certain rights, privileges, and interests in property. Easements either granted or acquired by higher education institutions typically accommodate public utilities; telecommunications cabling; conservation; ingress and egress rights; roadway, bikeway, and pedestrian trail connections; landscaping; signage; fencing; and street lighting, among other uses. Consistent use of a standard easement form is recommended. Easements are often granted at no cost or with nominal consideration if the purpose of the easement is in part to serve the institution. If an easement is provided to serve noninstitutional interests, a true valuation of the easement (appraisal) should be determined, and the institution should be compensated for that value.

Whenever underground utilities or communication cables are involved, it is essential that accurate records of improvement locations be maintained and that a system is established for location verification before any excavation. It is important to ensure that utilities installed under easements granted by the institution will not interfere with planned future construction. However, it is often difficult to foresee every eventuality that might require future relocation of a buried utility. To protect the institution against a potential future cost, easements granted by the institution should specifically provide that any future relocation that might be required to accommodate the needs of the institution will be carried out at the expense of the grantee.

All easements should be properly surveyed and recorded with the County Clerk and Recorder’s Office. Easements should also be recorded in the institution’s CAD system or GIS.

Nonpermanent Transactions

Transactions of a more limited or short-term nature include leases and license agreements. Building leases either generate income or result in an expense to the institution. Many public institutions are highly regulated with regard to leasing activities, particularly to ensure that they receive best value for leased space or market rent for space leased to others. Up-front negotiated options and costs associated with leasing may include items such as tenant finish requirements, custom build-out design and construction, installation of communications cabling, insurance coverage, rental rate, term, renewal options, and escalation rates, among other issues that need to be resolved before entering into a lease agreement. Standard lease forms should be developed and applied consistently for each type of transaction.

Income Leases

Income leases generate revenue from renting an institution’s excess or underutilized land or buildings to others. These leases often provide facilities to support diverse purposes such as public service activities; colocation of collaborative nonprofit, government, and private research entities; and access to desirable retail and support services. Leasing remote land holdings for grazing or other uses can be a good way to obtain basic caretaking of properties. When negotiating income leases, it is important to fully evaluate maintenance and operating costs and to allow for inflation and replacement and renewal requirements over time when setting rental rates.

Expense Leases

Expense leases are typically developed to acquire temporary, unique, or additional space or property required to support institutional programs. When institutional facilities and property are not available or suitable and capital funds to construct new space are scarce, leasing space might be a viable, cost-effective alternative. Adequate lead time is essential to the development of a satisfactory and cost-effective lease. How much time is needed will depend on the amount and type of space required, availability of space in the local market, extent of tenant finish requirements, and flexibility of timing for relocation and move-in.

Knowledge of the local market in which an institution requires leased space or land is essential for identifying opportunities and negotiating a competitive lease. Many institutions rely on experienced real estate brokers or consultants to assist them in this process, with excellent results.

For long-term leasing needs, especially where extensive tenant improvements are required, an effective process is a competitive negotiation procedure. The institution issues some form of a request for proposals or other competitive solicitation, which establishes the location, nature of the space requirements, and procedure for evaluating the quality and cost of competing proposals.

For less specialized leasing needs, advertising both online and in the print media to solicit the local market (using with each approach a comprehensive response form) is a means to identify options and compare terms available in an identified area. Storage space, which is often required for temporary uses and is subject to high turnover, can be successfully solicited under a single contract to a self-storage vendor or local warehouse facility, thereby controlling costs and maximizing flexibility.

It should be recognized that the acquisition of leased space in the local market will generally not provide the same functionality and quality as one based on typical institutional specifications. Commercially available space will typically be designed and constructed to a different standard with a lower building component lifecycle and higher operating costs.

Expense Lease Financial Issues

Development of an expense lease budget is an important part of the lease negotiation and development process. Costs for space planning; design and build-out; installation of equipment, telephones, and data communications; and relocation are up-front expenses but may be amortized over time as part of the annual rent.

An annual budget will thus consist of base rent; pass-through costs such as utilities, maintenance, and custodial services; other operating costs, such as telephone, security, and parking; and rental rate escalators applied at agreed-upon intervals. Use of a systematic procurement process (as discussed previously) can help ensure that competitive lease costs are achieved. When standard office space is needed, proposed lease rates can be evaluated against prevailing local market rates for comparable Class A, B, or C office space.

The renegotiation of favorable terms for building lease renewals is best achieved well in advance of termination notice periods. Current market conditions for the local area should be carefully assessed as a preliminary to renegotiation. An early extension of a lease term can often be an effective tool in negotiating a favorable future rental rate during the extension period.

Expense leases typically come in two forms: gross leases and net leases. In a gross lease, the stated rent includes the operating expenses of the building. In a net lease (also known as triple net), the stated rental rate generally excludes insurance, utilities, operating expenses, and real estate taxes for the building. The institution is then responsible for the payment of these costs, either directly to the service provider or to the landlord as additional rent.

License Agreements

License agreements, taking the form of memorandums of understanding or facility use agreements, provide a less complex means to grant permission for a party to enter property for a specified purpose and under limited conditions. This type of agreement allows shared use of a facility or property with a nonowner without needing to relinquish control, as occurs under a formal lease. For example, licenses often include antenna site agreements, agreements with other institutions for the shared use of classrooms, and agreements with other property owners for the shared use of parking. The use of a license agreement instead of a formal lease helps remove the limitations and restrictions placed on an institution under state laws, including issues related to rights of procession, eviction, termination, and damages. These agreements can also be more flexible in their basic terms and conditions because they can be terminated more easily if needed.

License agreements are used extensively by institutions for rooftop leasing, particularly for the placement of commercial and emergency telecommunications antennas. Institutions often have the tallest buildings in cities and towns, which lend themselves well for these line-of-sight uses. Depending on an institution’s location, competition from other sites, and service population, antenna license agreements can often provide a substantial source of additional income. Institutions that have the potential to license their rooftop spaces for antenna sites should consider this use in the context of a larger institutional rooftop management plan. A rooftop management plan should help define the institution’s internal rooftop needs, spectrum requirements, and administrative processes and procedures for developing antenna licenses. This approach will help the institution serve its own needs first and will help ensure maximum value in licensing its rooftop space for commercial and emergency response uses.

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Real Estate Investment and Development


Alternative Approaches to Real Property

Colleges and universities are currently experiencing some of the most difficult financial challenges they have encountered in many decades. An important outcome of these challenges has been the need for institutions to develop new and innovative ways to take best advantage of existing institutional real estate or to secure and develop additional land and building space.

Even in times of financial constraint, property acquisition can support many important institutional objectives, including protecting campus boundaries, accommodating future growth, satisfying space needs, or supporting new programs and research. Often, the long-term success of the institution depends on its ability to find ways to acquire properties, even during fiscally challenging times.

The traditional approach to acquiring real property can be described as a fairly straightforward process of identifying the requirements for property and then obtaining the necessary capital funds to fulfill the requirement. For public institutions, funds typically are secured through a legislative capital appropriations process. Private institutions often use gift funds or existing cash.

Increasingly, both public and private institutions are financing the acquisition of real estate assets through certificate-of-lease participation, revenue bonds, or other forms of mortgages. The servicing of the debt and additional operating costs associated with the new properties are funded through incremental increases in operating funds or through other sources of revenue resulting from the acquisition. For example, depending on the project, new sources of revenue might include rents generated by the acquired property, increased indirect cost recoveries generated from having the new space for sponsored research grants, additional housing rents generated from new dormitory beds built on the property, or new spectator revenues resulting from stadium or arena expansions.

A growing number of institutions are taking innovative approaches to real property acquisition and development. Under these approaches, real assets are viewed as a component of the institution's capital development strategy in addition to serving the more usual institutional goals of developing new facilities, renovating existing buildings and spaces, and using campus land to achieve density and in-fill objectives.

The more innovative measures that colleges and universities are using to meet their long-term real estate goals include agreements with local governments that support cooperative planning of compatible campus and community development, acquisition of facilities through third-party development and financing, and formation of affiliated foundations for real property development or investment purposes. The latter have proved particularly useful to public institutions, especially those that are constrained in their ability to be quiet, effective, and flexible in the open real estate market.

Institutional Issues

Several relatively common issues among colleges and universities motivate them to consider the acquisition and development of real property in a professional, comprehensive, and programmatic way.

Many institutions are located on facility-limited or landlocked campuses. For such institutions, new program and research needs or expanding student populations can create pressure for the expansion of campus boundaries. Conversely, incompatible development of land adjacent to the campus can jeopardize existing activities, institutional image, and the institution's ability to expand.

Institutions are justifiably concerned about surrounding land uses. The character of developing or deteriorating surroundings can affect an institution's success in attracting faculty and students and carrying out its programs. The safety of faculty, staff, and students is an important concern. Institutions thus need to actively consider and often participate in the preservation and revitalization of their surrounding neighborhoods.

For many institutions, land holdings represent significant nonearning assets. Some institutions might own more real property than required to accommodate their long-term needs. Idle or underutilized property consumes resources and carries significant opportunity costs. Although few institutions ever sell real estate assets to generate revenue, there are significant opportunities to develop additional revenue through interim uses, such as by leasing land and buildings or by permitting development of properties for noninstitutional or nonaffiliated purposes.

Many institutions are currently branching out to serve new markets through satellite campuses in owned or leased facilities located at some distance from their core campuses. The land and facility needs of these satellite campuses can often best be satisfied through nontraditional methods such as third-party development of purpose-built facilities, which are then held by the institution under long-term leases and possibly purchased at the end of the lease term. This approach also presents the possibility of locating multiple institutions on one satellite campus.

All institutions will experience public scrutiny and interest in their real estate transactions because all land and building acquisitions will have potential impacts on the community, creating a town-and-gown relationship. Public and private institutions might confront different concerns and use different processes in their real estate activities. For example, private institutions are typically subject to the same zoning rules and regulations and municipal approvals as any other private developer. Public institutions are often exempt from many zoning and municipal planning constraints, yet they must still be sensitive to community concerns.

Transactional challenges are also different for private versus public institutions. Private institutions generally enjoy greater flexibility in entering into real estate contracts. They also have fewer requirements for public disclosure in advance of conducting a transaction. This situation gives private institutions a significant advantage in the speed and cost of conducting real estate transactions.

Public institutions usually must work within the constraints of public procurement regulations, public disclosure, and public approvals by governing boards and state agencies, which all can be cumbersome and time-consuming. The timing, location, and availability of real estate are significant cost factors. To mitigate some of these limitations, a number of institutions have formed innovative real estate nonprofit corporations or other separate real estate foundations. These affiliated organizations can be more nimble and creative in negotiating, financing, and closing real estate transactions.

External Issues

Colleges and universities can have profound influences on communities, commonly extending far beyond the boundaries of the campus. Most often, the influences are positive, such as the economic impact of institutional expenditures, cultural benefits, presence of a well-paid faculty and staff in the community, and promotion of overall economic stability. However, the large number of student renters in a community; presence of fraternity and sorority houses; and impact of traffic, student parking, or incompatible institutional activities on adjacent neighborhoods are some challenging influences.

Acquisition and development of real property assets by a college or university can readily generate major community impacts. Institutions should therefore work closely and proactively with their communities to recognize potential conflicts early in the planning process and ensure that they are satisfactorily resolved. This approach serves not only the needs of the community but also the institution's own self-interest in preserving and strengthening its off-campus surroundings.

For private institutions, which are subject to the same regulations and approval procedures as most other property developers, a basic level of community interaction cannot be avoided. Public institutions, although typically exempt from many or all of these local controls, will find it no less important to work closely with the appropriate local government agencies throughout the process of planning for property acquisition or development.

Institutions that have been most successful at establishing strong, effective cooperative planning relationships with local communities have achieved this result by creating a permanent ongoing framework for regular communication. Active collaboration and cooperation with the community has many benefits, including enhancing and preserving property value.

Research Parks as Development Vehicles

During the past 30 years, many institutions have expanded development of research parks as a way both to use excess property productively and to enhance the academic and research missions of the institution. Such parks can advance collaborative research among institutions, businesses, and governmental research organizations; provide quality research employment opportunities for faculty, students, and graduates; enable technology transfer (i.e., applying research to create commercial products); and improve the overall local economy and long-term financial well-being of the institution. Each institution's goals in developing a research park are different, and their definitions for success are as unique as their parks.

A research park can be a not-for-profit or for-profit entity owned wholly or partially by a university or a university-related entity. Alternatively, a park can be owned by a nonuniversity entity but have a contractual or other formal relationship with a university. For example, a park can be privately developed in a joint or cooperative venture with a university. Often, research parks are established on university-owned land as an interim land use, and the land is leased for development for a long period of time, after which the land and any remaining buildings revert to the institution.

Successful parks are typically guided by a master plan that includes a statement of goals and a physical and environmental plan, backed by necessary covenants and often approved by local officials. Other elements necessary to create a feasible blueprint for development include targeted marketing plans emphasizing institutional research strengths and detailed financial plans. Although research parks are real estate developments, they often have longer development time frames than typical profit-motivated real estate projects because of their broader objectives, such as strengthening the research capabilities of the institution or signaling the institution's willingness to conduct research collaboratively with the private sector. In addition, research parks require substantial initial investment.

The Affiliated Foundation as an Organizational Option

Associated foundations of all sorts have become common in higher education. Typically, they exist to support and further the mission of the parent institution. Often, this nonprofit foundation mechanism has been established to help attract private philanthropic support to public institutions constrained by the legal restrictions of their positions as state agencies. For some time, private institutions have shown successful track records in optimizing real estate holdings through foundation vehicles. Increasingly, specialized foundations are being developed to meet real estate as well as other institutional needs.

Real estate foundations are specialized foundation vehicles established to fill a variety of roles for the long-term benefit of the affiliated institution. Free from many restrictions encountered by for-profit corporations and by public institutions, their fundamental goal is to achieve flexibility by putting entrepreneurship, efficiencies, and philanthropic resources to work in real property acquisition, financing, management, and development.

Real estate foundations have specialized roles. Often, they are established to provide a means to manage or dispose of property gifts, or their principal role might be the long-term stewardship of the institution's real estate interests, with a focus on generating profits that can be reinvested in real estate assets or returned to the parent institution. Foundations also support institutions in helping satisfy their future expansion needs by being opportunistic and making strategic purchases of property without the burden of following state agency rules and approval processes.

Third-Party Development

Third-party development (also known as privatized development) is increasingly being used by universities and colleges to support capital development efforts, especially to support important nonacademic expansion for support facilities, including student housing, hotel and conference centers, and mixed-use retail developments. Often, the institution leases land to a private third party, and the third party finances, develops, and manages the facilities on behalf of the institution. The third-party owner can be structured as a foundation or some other form of charitable nonprofit organization. However, it can also be a for-profit developer that receives the benefits of tax incentives and deductions resulting from the development.

Privatized development is often financed through revenue bonds that are serviced by revenue derived from the project. The bonds can be either tax-exempt if issued through a tax-exempt nonprofit organization (such as an institution’s development foundation) or taxable, depending on the third party’s tax status.

The primary advantage to third-party development is often faster and cheaper delivery of a project because a private developer can often avoid strictly adhering to an institution’s design requirements, approval processes, and internal delays, which all can result in higher development costs. However, institutions must balance those advantages against the loss of control over management of the facilities, which is usually handled by the third party instead of directly by the institution. This is an important trade-off because if there are problems with the ongoing management of a facility, the customers or the public will not normally distinguish between the private third party and the institution.

Another potential advantage of third-party development is keeping the debt associated with the development “off balance sheet” for the sponsoring institution (i.e., segregating the debt from the institution's financial statements and credit rating). However, this practice has become increasingly difficult, and when it is done, it usually requires a loss of control over the project that is generally considered unacceptable by the institution. This conclusion is especially true if the institution leases property for siting the development. It is therefore important to check with the institution’s financial advisers and bond rating agencies to see whether a project can be structured off balance sheet.

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Summary


Real estate management will play an increasingly important role in higher education as institutions continue to feel pressure to expand both enrollment and research beyond what is practicable with existing land and facilities. For many institutions, real estate functions have become an integral part of their capital development strategy. Acquiring new land and buildings is also an important component of planning for a sustainable future and establishing a legacy. As a result, many colleges and universities have become highly entrepreneurial and creative in acquiring, developing, and managing real estate assets.

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Bibliography


Several professional and peer organizations can provide valuable training and assistance in developing real estate management staff, projects, and programs, including the following:

  • Association of University Real Estate Officials (AUREO), an organization of higher education real estate officials, meets annually each fall, hosted by a member institution, and has an active Internet bulletin board. Membership information is available at http://www.aureo.org/.
  • Institute of Real Estate Management (IREM), headquartered in Chicago, confers designations for real estate/asset managers; accredits residential managers; sets standards for real estate management companies; advocates legislative positions on behalf of the industry; provides extensive training; and produces various trade publications, including the bimonthly Journal of Property Management. Information can be obtained at http://www.irem.org/.
  • Urban Land Institute (ULI), headquartered in Washington, DC, is a nonprofit education and research organization that provides training and symposia, offers numerous publications, and sponsors expert panel evaluations for institutions and municipalities. ULI’s homepage is at http://www.uli.org.
  • Association of University Research Parks (AURP), headquartered in Tucson, Arizona, is an association of real estate practitioners who specialize in university-related research park development, both nationally and internationally. AURP has a wealth of information available to its members on establishing and managing research parks. Its primary membership consists of planned and operating research parks around the world. More information can be found at http://www.aurp.net/.
  • Association of College and University Housing Officers–International (ACUHO-I) is the principal association for university and college professionals developing exceptional residential experiences at colleges, universities, and other postsecondary institutions around the world. ACUHO-I provides innovative and value-driven programs, services, research, and development as well as networking opportunities that help support and evolve the collegiate housing industry. More information can be found at http://www.acuho-i.org/.
  • National Association of College and University Business Officers (NACUBO) advances the economic viability and business practices of higher education institutions in fulfillment of their academic missions. NACUBO is the thought leader and authoritative resource for business and financial management of higher education. More information can be found at http://www.nacubo.org.
  • Building Owners and Managers Association (BOMA) International represents the owners and managers of all commercial property types, including nearly 10 billion square feet of U.S. office space. BOMA International is a primary source of information on building management and operations, development, leasing, building operating costs, energy consumption patterns, local and national building codes, legislation, occupancy statistics, technological developments, and other industry trends. More information can be found at http://www.boma.org/Pages/default.aspx.
  • Appraisal Institute is a global association of real estate appraisers. Its mission is to advance professionalism and ethics, global standards, methodologies, and practices through the professional development of property economics worldwide. More information can be found at http://www.appraisalinstitute.org/.
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