F–6 STANDING COMMITTEES Finance and Asset Management Committee

F–6/210-20 10/8/20

Advisory Committee on Real Estate (ACRE) Update and Review of Real Estate Strategy INFORMATION This item is for information only. BACKGROUND The Advisory Committee on Real Estate’s (ACRE) most recent quarterly meeting was held on September 1, 2020, which addressed several topics, including the Metropolitan Tract. This item is intended to be a report of that meeting and a discussion about the broad strategies that guide the UW’s management of its real estate holdings. The attached Annual Report on Lease Obligations for Fiscal Year (FY) 2020 containing data on the University’s financial commitment as a tenant was reviewed by ACRE at the September meeting. It provides summary level information about the UW’s leasing activities, which are included at a higher level in the University’s annual financial statements. Beginning in FY 2022, all leases will be shown on the UW’s balance sheet under new GASB guidance. The report also helps inform evolving real estate strategies and potential transactions for ACRE consideration. The attached presentation outlines the current thinking around these strategies. Attachments:

1. Annual Report on Lease Obligations FY20 | July 2019 – June 2020 2. Connecting Real Estate Strategy to Long Term Capital Plan

ANNUAL REPORT ON LEASE OBLIGATIONS FY20 | July 2019 – June 2020

UW REAL ESTATE | UW FACILITIES

1This report is on real property lease obligations only. It does not include embedded right to use agreements, which may be included in future financial statements per GASB 2Includes South Lake Union (“SLU”) leases 3U-District Station Building (UDSB) not included in future rent and estimated operating expenses

- w/ SLU $61M, w/o SLU: $12M

LEASES UW AS TENANT 1

PORTFOLIO METRICS2

Annual Lease Obligation

$102M Total Lease Obligation

$2B Leased SF 2.5M SF Properties 173 Active Leases 259 Contracted

Services 18

HIGHLIGHTS

19 new leases, 75 lease renewals, 17 TI projects = 123 total FY20. 42 terminations. Generated revenue or savings of $18M through subleasing, downsizing and backfill. Examples: 5th & Bell lease termination, Liberty Mutual

sublease for UW Med IT, 4545 Roosevelt subleases. Renegotiated Benjamin Hall DBOM contract from fixed fee to actual costs for operating expenses for estimated $12.5M savings over 15 years. Assumed management of NW Hospital lease portfolio since integration with UWMC January 2020 adding $40M to total lease obligation. Negotiated average cost for office space at $30/RSF compared to market average $35-$55/SF. Completed $8M Tenant Improvement project at SLU 3.2 on budget. Obtained, at record speed, new Lab Med leases to meet COVID demands. Strategized on future lease renewals due to COVID impacts, including planned terminations, reduced space and blend/extend.

ANNUAL LEASE OBLIGATION (IN MILLIONS)3, 4, 5

ANNUAL LEASE OBLIGATION BY USE

Use RSF Cost / RSF6

Office 1,099K $30 Lab 631K $52 Clinic 323K $32 Classroom 191K $21 Storage/Warehouse 111K $14 Residential 38K $16 Retail 7K $24 Other 64K - Grand Total 2.5M $27

ANNUAL LEASE OBLIGATION BY PAYER

44.6%

25.6%

13.1%7.7% 4.5% 2.6% 1.5% 0.3% 0.1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

71 7196 81 80 77 70 69 65 64

16 17

1919 22 21

19 19 18 18

0

50

100

150

FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025

Rent Obligation Estimated Operating Expenses

$61M$16M

$5M$4M

$2M

$2M$1M$1M

$1M

$8M

SCHOOL OF MEDICINE

HOSPITALS & CLINICS

SEATTLE CENTRAL ADMINISTRATION

HEALTH SCIENCES ADMIN

COMOTION / GIX

BOTHELL CENTRAL ADMINISTRATION

CONTINUUM COLLEGE

EXTERNAL AFFAIRS

UW TECHNOLOGY

SCHOOL/COLLEGES < $1M

INCLUDES SLU

- $16M

- $5M

- $4M

- $2M

- $2M

- $1M

- $1M

- $1M

- $8M

$12M

$16M

$6M

$2M$8M

$2M

$4M

$1M$1M

$1M

EXCLUDES SLU

4Operating expenses for gross leases are included in annual rent 5Decrease in total lease obligation over time does not account for potential future lease renewals 6Cost/RSF is an average for full service leases

ATTACHMENT 1F-6.1/210-20 10/8/20

Page 1 of 1

UNIVERSITY OF WASHINGTON

Connecting Real Estate Strategy toLong Term Capital Plan

Board of Regents

ATTACHMENT 2 F-6.2/210-20 | 10/8/20 Page 1 of 9

Long-Term Capital Strategy: The ChallengeFrom March 2020 Regent Meeting

• Preserving and enhancing UW’s physical infrastructure

– one of the most beautiful campuses

• Building on UW’s reputation as dynamic institution delivering impact

– one of most innovative universities

• Maintaining a strong and sustainable clinical enterprise

– one of the top rated academic medical systems

F-6.2/210-20 | 10/8/20 Page 2 of 9

Long-Term Capital StrategyFrom March 2020 Regent Meeting

Focus Capital Spending on Renewal and Clinical Investments

− Make capital investments in existing facilities to preserve asset functionality and reduce costly deterioration

o ~$240M / yr funded by state, donors, & debt (50% of total CapEx)

− Increase access to debt financing for the clinical enterprise

o ~$125M / yr funded by clinical equity & debt (25% of total CapEx)

Limit Growth in Square Footage

− Reduce campus SF growth rate to 0.5% per year (current rate is 3%)

o ~$75M / yr funded primarily by donors

− Leverage partnerships to pursue strategic goals and increase impact

o ~ Partnerships bring resources and/or space with minimal capital investment

F-6.2/210-20 | 10/8/20 Page 3 of 9

Corresponding Real Estate Strategy

Preserve debt capacity for renewal & clinical investments

− All real estate transactions should have limited impact on debt capacity

− e.g. Husky Hall, UDSB

Consolidate leases & reduce square footage

− Evaluate all leases nearing end of term for consolidation opportunities

− Reduce square footage – less SF per person

− Capitalize on emerging post-COVID trends in office space

− e.g. Roosevelt Commons, UW Medicine Call Center, Social Work

Leverage partnerships to expand access to capital and maximize impact

− Seek out other agencies & companies with common goals

− Partner with developers to increase (mission-supporting) utility of land we own

− e.g. W27 (NOAA), UDSB (Sound Transit), Husky Village (developer)

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Example: University District Station Building

Preserve debt capacity

– Leverage private capital

– Capitalize on land value (air rights)

– Minimize operating costs

Consolidate leases

– Vacate market leases

– Consolidate administrative functions

– Reduce space through flexible design and economies of scale

o ~320,000 SF of eligible leased office space

o 164,000 SF available in UDSB

Leverage partnerships

– Maximize impact with larger building

– Add to U District life

– Create new entry to UW campus

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Future ACRE TopicsDevelopment opportunities

West Campus: Expanding UW’s Impact

Site W27 (Clean Energy + NOAA)

Filer Property (affordable housing)

University District Station Building

Others…

UW Bothell: Serving Students

Husky Village (student housing)

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Discussion/Questions

Capital Investment:

− How should we best leverage partnership projects and capital investment by other parties?

− Are we willing to spend more or forego long term gain on some transactions such as development projects in order to preserve debt capacity for campus renewal & clinical investments?

Space Reduction:

− Should we look for opportunities to reduce both leased space off campus and increase efficiency of use for owned space on campus to reduce our growth rate?

o Units do not pay rent for owned space, but M&O + Renewal costs for on-campus space are comparable to rent for leased space.

Risks (associated with Partnerships):

− Have we identified all the potential risks?

− What is our threshold for tolerance of these new types of risk?

− What mitigation strategies should we have in place?

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Appendix

F-6.2/210-20 | 10/8/20 Page 8 of 9

Limiting UW’s Square Footage GrowthFrom March 2020 Regent Meeting

Excludes: UW Medicine, Parking and Field SitesF-6.2/210-20 | 10/8/20 Page 9 of 9