Doing More with Less: Using Real Estate Assets To Fulfill the
- By Allan E. Wampler, Mark H. Smith
- April 1st, 2005
In today’s highly competitive funding environment, real estate assets should be maximized to improve an institution’s financial outlook.
The governing boards and administrators at institutions of higher learning are exploring more imaginative ways to meet increasing financial pressures. Raising tuition and fees has become commonplace at most colleges and universities, but effective use of an institution’s real estate assets may play a part in closing the revenue gap while simultaneously reaping other returns that further the institution’s mission.
Administrators and trustees at most institutions are faced with a wide range of issues directly related to higher education. In today’s highly competitive funding environment, however, boards are continually asked to also make decisions about real estate assets. To help maximize operating revenue, administrators and trustees must repeatedly examine whether to renovate, acquire or dispose of real property in satisfying the interests of myriad of constituencies within the academic and general communities. The board must also decide whether to lead, or to delegate, the formulation and implementation of plans for treating the institution’s real estate assets appropriately.
Many, if not most, colleges and universities own real estate, and some of them have substantial amounts. Much of this real estate may be under-utilized, or not used at all. Institutions of higher learning are primarily in the business of education; so dealing with issues related to real estate holdings has often taken a back seat at trustee meetings, or has been delegated to an institution’s business or finance department. Pressures to make institutional real estate produce as much return as possible offer new opportunities for boards and administrators to have lasting and positive effects on the institutions they govern.
Colleges and universities serve many constituencies: students, the community, alumni, research interests, governments and donors, among others. An institution’s leadership must continually define and revise its objectives as they relate to various constituencies. Many of these goals are financial, given the need to maintain solvency, but many more are less tangible, or qualitative, in nature.
Real estate at any institution should, first and foremost, be evaluated based on its contribution to both the quantitative and qualitative goals of the college or university. If real estate projects are to be successful, they must simultaneously deliver economic, social and environmentalreturn benefits to the institution and, where appropriate, to the larger community.
A New Way of Thinking
Traditionally, colleges and universities have facilitated education, research and student life with little regard for the return value of their real estate assets. Through the past two decades, however, institutions have experienced change on the financial front because grant funding has decreased as a percentage of institutions’ budgets, leading capital to often come with a cost (i.e., interest payments on loans or bonds). Therefore, aggressive private fundraising has become essential rather than optional.
Thus, the need to view real estate assets from a stronger business perspective represents a paradigm shift for many educational entities. An institution’s leaders, including those with extensive real estate backgrounds, must change the perspective from which they view their institutions’ use of real estate assets. The process should begin with a clearly defined and understood set of return goals relative to the development of real estate assets in general and on a project-specific basis.
Adopting a Sensible Strategy
A clear definition of quantitative and qualitative return goals is essential to the success of any real estate project. In the private sector, those metrics are usually financial, with profit motivation as the key driver of development activity. In higher education, as with many public and quasi-public entities, those goals include many less tangible factors that are often more important than profit, including:
expanding enrollment and student opportunities,
increasing technology transfer activities,
establishing public goodwill,
broadening fundraising activities,
improving the quality of life on campus and in the community, and
catalyzing economic development.
The importance of qualitative measures does not necessarily diminish the importance of the more easily defined quantitative goals. At the very least, institutions are likely to seek a break-even scenario when addressing real estate activities. Therefore, financial issues remain the most important component of most real estate transactions, even among non-profit entities.
Other definable quantitative measures, such as student enrollment and donor contributions, are unique to the education sector. While these goals are clearly defined by numbers, they must be given weighted measure, along with the less tangible qualitative objectives, to evaluate the feasibility of a given project. The establishment of return goals should be a collaborative effort of all stakeholders, which may include trustees, administrators, faculty, students, staff, alumni, local residents, and elected and appointed public officials.
After the return goals are set, a thorough analysis of market conditions relevant to the real estate project at hand should be conducted. While some market studies offer a generic analysis of the market, others measure market conditions and projections against a proposed use or action, such as the sale or lease of real estate. In most cases, a market study will forecast how a community’s or region’s population and employment climate will affect real estate (e.g., office, industrial, retail and residential) supply and demand over a specific period of time. It will also provide a detailed feasibility analysis of the proposed project.
In the case of a potential sale or acquisition, an appraisal is usually done to determine a defendable market value against which to measure a financial analysis. If the proposed project is a potential development — either by the institution or through joint development with a private-sector party — financial projections are measured against market projections. This step might include capital budgeting scenarios that measure net present values against one another to determine a logical course of action. Regardless of methodology, the goal of any given study is to determine the highest and best use of the real estate in optimizing the return goals.
Input from all relevant constituencies at the outset of the process is a key factor in the successful formulation and execution of a real estate strategy. While important to all public and quasi-public entities, inclusion is most important to educational institutions because of the nature and diversity of their constituencies. Stakeholders involved in the establishment of return goals must continually remain informed to adequately measure a project’s success against its objectives. Outlets through which to successfully involve administration, faculty, students, staff, alumni, local residents and public officials include a project task force, regular workshops and update meetings, surveys and focus groups.
The extent to which board members are involved in creating and managing a real estate strategy will vary from one institution to another. Staff and administration will often implement the plan in conjunction with outside consultants and real estate professionals.
Upon completion of market and feasibility analyses, and after a process that has adequately addressed the concerns of all stakeholders, preparation of a preliminary plan for board consideration should occur. This proposal should reflect the input of each constituency, and board members’ evaluation of the plan should result in a consensus on real estate objectives, strategies and tactics, as well as on a timetable and budget for implementing the plan.
The Development Selection Process
Making real estate assets (e.g., vacant land, unused or under-utilized structures) productive can be accomplished in a number of ways. The institution could sell or lease the property to derive income or it could be developed, either for institutional use, private use or both, under a joint development arrangement. Joint development through public/private partnerships has become an attractive way for public institutions, in particular, to fulfill a number of missions such as economic development, utilization of assets and privatization of public land.
A real estate project that involves the development of a new product (e.g., office, retail, residential, hospitality) will ultimately require the services of a qualified real estate developer. The selection process to determine the most qualified developer is one that must accommodate financial and non-financial variables alike. Primary considerations include the potential developer’s experience with similar projects and ability to implement the institution’s strategy on time and on budget.
Many developer selection activities result in the creation of a Request for Proposal (RFP) process that screens and evaluates real estate development experience and responsiveness to the development concepts in institutions’ preliminary plans. Many institutions are required (or choose) to use an RFP process before awarding a development contract.
An institution should initiate an RFP process to ensure the proper optimization of return goals. Key questions in the RFP should ascertain the developer’s relevant experience, ability to complete the proposed project on time and on budget, financial stability and intentions relative to the project. An RFP process often includes a written response, followed by initial screenings and presentations by selected finalists to the board, and, in some instances, to the stakeholders.
Upon selection of a developer, the board members and administrators have a right to expect certain things from their new partner. First and foremost, the developer must view the board asassociates rather than as an oversight group that makes life difficult. The developer should also be fully accessible to the board of trustees and should provide timely job progress and budget reports through regular appearances at trustee or committee meetings until project completion. The board should also expect the developer to assume responsibility for cost overruns if original project specifications remain unchanged.
Likewise, the real estate developer will expect accessibility to the board, as well as treatment as a partner in a joint venture rather than as a mere vendor. The board, while expecting the developer to absorb cost overruns when the project scope remains unchanged, should be prepared to absorb overruns if it changes project specifications after the project has begun. A developer will also expect timely answers to relevant questions, as well as ongoing feedback and prompt payment of invoices. While the board may delegate many of those responsibilities to staff, trustees remain ultimately accountable.
Building a Strong Future
By properly managing real estate assets, a college or university can maximize the return of these assets to further the mission of higher education. Needed revenue may result as one of the quantitative return goals. If carefully managed, however, the returns can include qualitative rewards, such as improved services and amenities to students and faculty, better community relations, economic development, job creation, tax base expansion and quality-of-life enhancements.
In today’s value-added, results-oriented competitive environment for a higher education experience that yields both a sheepskin and a résumé, returns from a well-conceived and properly executed real estate program can cultivate opportunities for student internships and professor-led technology transfer to the private sector, as well as institutional research.
In considering real estate priorities for institution-driven projects and joint ventures with the private sector alike, stakeholders must consider a comprehensive group of quantitative and qualitative returns that are supported by market realities. Identifying the optimal plan that is realistic and maximizes return is the responsibility of the institutional real estate owner.
This process will allow the private developer to shape its proposal to meet the goals that are in the best interests of the college or university and its constituencies. Choosing the correct vehicle to attract qualified developers or end-users must be fashioned to the unique circumstances at hand. Understanding the development process, and entering into a positive relationship with a qualified developer, will result in a successful long-term opportunity that complements the mission of the institution and creates a long-term legacy for board members and administrators.
Allan E. Wampler is president and Mark H. Smith is vice president of Synergy Real Estate Corporation www.synergyre.com, a real estate and economic development advisory firm that works with clients nationally in helping colleges and universities to maximize the use of their real estate assets.