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Real Estate

Jeffrey Lipton

Real Estate Copyright APPA 2020

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Real Estate

Introduction

During the last half century, enormous expansion and growth haveoccurred in higher education. This expansion has resulted in acorresponding increased need for land and building space to supportincreasing enrollments and research activities. As the need toincrease physical facilities has occurred, there has also been a need toacquire additional land and, in many cases, to acquire or developbuildings to support the growth demands.

The acquisition and ongoing management of new parcels of land andfacilities have required many institutions to become moresophisticated in their basic real estate capabilities and to integratetheir real estate functions into the facilities management and capitalplanning activities of their institutions. The acquisition of buildings andland should be considered as part of the overall facility developmentstrategy of an institution. In addition, once a building or parcel of landis acquired, the facilities management organization will often berequired to provide ongoing service and care of the new assets asthey become part of the overall inventory of the institution’s physicalplant.

The facilities management organization needs to work closely with theinstitution’s real estate office to help ensure that potential acquisitionsare consistent with the institution’s long-term facility masterplan. During the acquisition process, the facilities managementorganization needs to be involved to help provide a conditionassessment of a potential real estate asset and the estimated cost ofbringing that new asset to a maintainable level of service under theinstitution’s facility standards and code requirements.

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


College and university real estate functions are organized andoperated in a variety of ways. Many institutions have highlysophisticated and entrepreneurial real estate offices that areconsidered as important profit centers and produce considerablerevenue to support other institutional needs. Other schools view realestate as a necessary support function but only in support of theinstitutional need to occasionally purchase a real estate asset or tolease space off-campus to support temporary shortages in theirowned facilities.

In addition, institutions are turning to much more complex real estateactivities as a means to provide a more creative financing tool for thedevelopment of needed facilities, realize income from idle orunderutilized institutional property, perform an endowmentinvestment activity, or achieve other institutional objectives.

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

Real Estate Administration

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

Organization

Organizational placement of real estate management responsibilityvaries widely among higher education institutions. Frequently, it willbe found in the financial, business, or facilities management


organization. More important than its location in an organization is theneed for effective communication with, and access to, seniormanagement as well as the authority to conduct all of the real estateactivities of the institution. Organizational placement must also ensurethat real estate activities are fully integrated with an institution'sstrategic vision and overall facility and capital planning activities.

Because of the number of potential constituents and internalcustomers served in the higher education environment, practical andclear internal policies and procedures related to real estate acquisitionand leasing are recommended. These policies and procedures shouldbe clearly communicated within the institution so that all stakeholdersunderstand the process and requirements for conducting institutionalreal estate transactions.

Staffing

Successful management of real estate activities requires theinvolvement of experienced real estate professionals, either asinstitutional staff or through contracts with external consultants,including licensed real estate brokers, attorneys, and otherconsultants. Institutions with significant real estate holdings and asubstantial volume of real estate activity will benefit from having adedicated and well-trained specialized internal real estate staff.Institutions that have a relatively minor amount of real estate activitymight rely more on external consultants. Many institutions depend ona combination of resources, perhaps employing an internal staff forroutine real estate administration and specialized consultants forunusual, complex, or major transactions.

In seeking qualified real estate staff, institutions should notnecessarily limit their search to people licensed as real estate salesagents or brokers, although a background in real estate transactionsis helpful. A strong real estate background — complemented withadvanced courses in real estate and meaningful experience inbusiness law, facilities management, and finance — is highlydesirable.

Real Estate Brokers

Many institutions use professional real estate brokers in various rolesto supplement the capabilities of their in-house staffs. Brokers can behelpful because these professionals are more familiar with, and activein, local real estate markets. They are more aware of current realestate listings, vacancies, market values, and opportunities simplybecause that is what they do all of the time. Most institutions need toenter the local real estate markets occasionally to meet their realestate needs. However, they are not generally engaged on a full-time


basis and therefore do not have all of the market intelligence andrelationships needed to be an effective participant. Brokers can help institutions by being a tenant's or purchaser’srepresentative or agent in searching for property that meets anunmet institutional need either in local markets or in marketsgeographically distant from the institution. When acting as a buyer’sor tenant’s broker, the broker's loyalty is to the institution, and thebrokerage fee is normally paid by the seller or landlord. Brokers aregenerally commission driven because their incomes are derived fromcompleting transactions. Thus, generally they are very aggressive andwork hard to complete leasing and property sales. Professional brokers who typically deal in commercial and institutionalreal 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 onthe scale and depth of the broker’s organization. One caution in using an outside real estate broker is that aninstitution can lose control of the activities and behavior of the broker.Because brokers are independent contractors of the institution, thereis only limited control. It is important that an institution is careful inselecting a broker and that the broker understands the limits andscope of the activities. Brokers must also understand that they mustrepresent the institution in a manner that is consistent with theinstitution’s desired local image and reputation. The process for selecting a broker should be consistent with theprocurement rules of the institution and often requires issuance of acompetitive solicitation.

Record Keeping and Data Management

As in any institutional administrative function, accurate recordsconcerning active contracts, leases, property holdings, and facilitiesdata form the basis for standard activities, including managingaccounts receivable, paying vendors, and tracking key activities. Inaddition, record keeping and data management provide the basis forconducting assessments of real estate investment values andreplacement costs, evaluating maintenance needs and schedulingrepairs, and monitoring deferred maintenance and facilities condition.

Standardized real estate software packages and web-based systemsoffer basic tools for maintaining real estate data. A number ofcustomized 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 acquirecomputerized maintenance management information systems, whichnow contain real estate components to help manage real estateinformation. These information systems can be integrated with otherinstitutional facility and financial information systems. More advancedsystems also allow land and building data to be shared electronicallywith the institutional Geographic Information System (GIS) andcomputer-aided design (CAD) system. These systems can supporttracking of data related to property topography; building footprints;utility and infrastructure systems; landscape, pathway, and roadsystems; and room-specific inventories. Activities such as long-termand short-term capital planning, budget management, and associatedanalyses (lease build-out costs, space utilization, preventivemaintenance schedules, etc.) can be managed more successfully whendata for the institution's total inventory of real property and facilitiesis comprehensively organized in an electronic format.

Property Management

Property management is the operation, control, and oversight of realestate assets. As institutions develop, purchase, or lease properties,there needs to be close attention to managing those assets. Thisconclusion is true whether the property is privately owned and leasedto the institution or whether the institution is the landlord and isleasing its property to tenants. Often, the easiest part of facilities management is acquiring a buildingor developing a lease. The hard part begins when an institution needsto manage the asset and maintain it. Often, these assets are integralto the mix of buildings and real estate that support an institution’smission. 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 actualoccupants of the facility. Knowing the tenants’ needs andrequirements is a critical first step to providing the propertymanagement services required to make them happy and productive.There need to be identified contact information, communicationprotocols, and trouble reporting. Like any institutional property, there will be the normal need to reportand manage maintenance issues. Many institutions choose to performthese tasks internally. However, leases may require that the landlordperform these functions, so there needs to be a close collaboration


between the institutional staff and the property owner in developingand implementing maintenance procedures. The requirements formaintenance and responsibilities should be closely defined in the leasedocument so that there are no misunderstandings as to who isresponsible for what, expectations for performance, and how theexpenses will be allocated to the institution. There also needs to be attention to record keeping and costs tomanage the requirements of the lease for reimbursement of operatingcosts and utilities. In some leases, the tenant will be responsible forall expenses (net lease), and in other leases, the landlord will beresponsible (gross lease). In some leases, there will be a sharing ofexpenses and maintenance responsibilities. Regardless of how a lease or property ownership portfolio isdeveloped, an institution will need to expect that there will beresponsibilities and workload on the part of the institution inmanaging these physical financial assets. There is no set model forhow a property management function should be organized andstaffed. Each situation is unique to the specific institution and theassets being managed. However, there will be a requirement forproviding a property management function. There are opportunities for using private property managers forproviding these functions instead of using institutional staff. Using anoutside property manager might be particularly beneficial if there arenot enough real estate assets to justify building, training, andsupporting a separate institutional staff. However, as in anyprivatization model, there will still need to be some institutionalrequirement for contract management and oversight of even a privateproperty manager.

Risk Management

Real estate administrators are always faced with balancing thepotential risks and returns of real estate ventures. Risk is inherent toany 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 potentialrisk exposures includes environmental issues, changing regulationsrelated to local land use, and political aspects of town-and-gownrelationships.

The risks associated with any individual real estate transaction areoften specific to that particular transaction and require collaboration ofother institutional staff to identify the risks early and to determine the


best way to manage them.

Consistent processes and oversight are important elements tocontrolling and minimizing the risks related to real estate. Thisapproach can be achieved through establishment of centrallymanaged controls with clear business decision-making structures.Increased risk exposure can result from inconsistent application ofpolicies. This result can be minimized by standardizing liability andinsurance-related language and other typical contractual termswhenever possible. Most important, all standard leasing and purchasecontract forms and other contracts need to be evaluated by aninstitution’s legal counsel, risk management, facilities services, andfinancial management staffs.

Basic Real Estate Transactions and Issues

Real Estate Contracts

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

Permanent Transactions

Real estate transactions can be divided generally into permanent andnonpermanent transactions. Permanent property transactions typicallyare long-term, such as property acquisitions, sales, exchanges,ground leases, or granting of rights-of-way or easements. These typesof transactions can be legally complex as they involve a variety ofconsiderations, including the determination of value, restrictionsimposed by local land use regulations, application of restrictivecovenants or conditions on use, and analysis of title and tax records.Due diligence before entering any real estate contract is critical. Aformal contract is recommended to ensure a complete understandingof each party's obligations and responsibilities. Often, a nonbinding letter-of-intent (LOI) is negotiated before thedevelopment of a formal contract. The LOI defines the general termsand conditions of a transaction and provides the basis for the draftingof a subsequent agreement. The elements contained in an LOI shouldbe tailored to the specific transaction but often contain the followingprovisions:


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 beprovided 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 ofobjectively determining the fair market value of a property. Anappraisal is a professional appraiser's opinion of value. Thepreparation of an appraisal involves research into appropriate marketareas; assembly and analysis of information pertinent to a property;and the knowledge, experience, and professional judgment of theappraiser. Appraisals may be required for the acquisition, lease, orsale of any type of property, including housing, office buildings, andraw land. Public institutions are often required, by their governingboards or by state policy or statute, to obtain appraisals beforepurchasing or selling a property. All states require appraisers to be state-licensed or certified to provideappraisals to federally regulated lenders, and many states requireappraisers to be licensed or certified to provide appraisals for otherparties as well. Appraisers are highly regulated by each state andgenerally comply with uniform standards and practices as well ascodes of professional ethics. Commercial appraisals typically use a three-method approach tovaluation: a replacement cost analysis, an evaluation of comparablesales, and an income analysis. The three valuation approaches arethen reconciled to provide a single opinion of value for the property.The opinion of value is usually based on the highest and best potentialuse of a property. Appraisals can be somewhat expensive and can take a few weeks tocomplete. A more informal method of getting a sense of value is torequest a broker’s opinion of value through a professional andlicensed real estate broker. Although the broker’s opinion of value willbe less precise than one provided by an appraiser, such opinions can


provide an initial estimate of value and can often be provided free andquickly. However, a broker’s opinion of value cannot usually be usedby lenders in the underwriting process to provide financing if that isrequired.

Environmental Risks

The purchase or sale of real property is also likely to require anevaluation 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 aproperty can often become a source of expensive remediation andpotential litigation. It is essential to perform the necessary duediligence to fully understand the historic use of a property and theexistence of any environmental liabilities before acquisition.

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

The Phase I study is generally considered the first step in the processof environmental due diligence. According to the EnvironmentalProtection Agency (EPA), a Phase I study is an initial environmentalinvestigation that is limited to a historical records search to determineownership of a site and to identify the kinds of chemical processesthat were carried out at or near the site. An ESA includes a site visitbut does not necessarily include any physical sampling. If such anassessment identifies no significant concerns, Phase II and Phase IIIaudits are not necessary.

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

A complete assessment typically includes identification of potential soilcontamination, groundwater and surface water quality, indoor airquality, and other issues related to hazardous substances. For buildingstructures, it is important to identify indoor air quality issues(including mold and radon), storage of hazardous materials andpetroleum-based products, potential asbestos and lead-based paintcontamination, mold issues, and the condition of any underground


storage tanks.

It is essential to identify these environmental issues before acquiring areal estate asset so that the management and potential costsassociated with those risks can be appropriately handled in thepurchase negotiations and contract preparation.

Other Due Diligence

Many other due diligence tasks are required for both a seller and apurchaser of real property. Planning for any real property transactionshould also include careful consideration of the compliancerequirements of local, state, and federal laws and regulations. TheAmericans with Disabilities Act (ADA) is an example of a significantfederal law that stipulates minimum conditions of facility accessibilitythat must be addressed. Local and state fire and life safety codeshave long been a critical requirement in evaluating the physicalcondition of a property. Other basic requirements for proper duediligence include conducting a thorough building conditionassessment; obtaining recorded property records; knowing thecurrent obligations to existing tenants (if any); and conductingsurveys, title insurance, and legal and closing services.

Property Exchanges

In some situations, property (rather than cash or financing) isexchanged or credited as a charitable donation, allowing the buyer orseller a desired tax benefit. Gift properties, structured to serve boththe donor and the institution receiving the donation, take variousforms. Institutions should always consider potential long-term costfactors that accompany gift properties, including condition, location,land use limitations, development potential, and ongoing managementand maintenance obligations. An institution’s development staff orrelated fund-raising foundations might be able to assist with the initialevaluation and handling of real property gifts. An institution shouldalso consider whether a potential gift of real estate plays a role in itslong-term facilities master plan and is consistent with its otherinstitutional goals and vision.

Ground Leases

A form of lease that often has a high degree of permanence is aground lease, which is of extended duration and is frequentlystructured to allow the construction of improvements by the lessee onan institution’s land. In higher education, ground leases are oftenused to allow an institution to generate a revenue stream from a pieceof property that is not needed for institutional use for a long period oftime. An institution may lease ground to a private developer that candevelop the ground in a manner that generates revenue for the


develop the ground in a manner that generates revenue for thedeveloper and for the institution in the form of ground lease rentpayments.

Ground leases are typically long term because the developer will needto have the use of the land for a sufficient period of time to amortizethe cost of development over the useful life of the constructed asset.Ground leases can typically encumber a piece of property for between40 and 99 years. Institutions have used ground leases to support thedevelopment of research parks, fraternity and sorority houses,faculty-staff-student housing, and mixed-use commercialdevelopment 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 ofthe institution and consider the institution’s long-term landrequirements to serve its own development needs.

Easements and Rights-of-Way

Easements, or deeded rights-of-way, involve the long-term orpermanent conveyance between parties of certain rights, privileges,and interests in property. Easements either granted or acquired byhigher 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. Consistentuse of a standard easement form is recommended. Easements areoften granted at no cost or with nominal consideration if the purposeof the easement is in part to serve the institution. If an easement isprovided to serve noninstitutional interests, a true valuation of theeasement (appraisal) should be determined, and the institution shouldbe compensated for that value.

Whenever underground utilities or communication cables are involved,it is essential that accurate records of improvement locations bemaintained and that a system is established for location verificationbefore any excavation. It is important to ensure that utilities installedunder easements granted by the institution will not interfere withplanned future construction. However, it is often difficult to foreseeevery eventuality that might require future relocation of a buriedutility. To protect the institution against a potential future cost,easements granted by the institution should specifically provide thatany future relocation that might be required to accommodate theneeds of the institution will be carried out at the expense of thegrantee.

All easements should be properly surveyed and recorded with the


County Clerk and Recorder’s Office. Easements should also berecorded in the institution’s CAD system or GIS.

Nonpermanent Transactions

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

Income Leases

Income leases generate revenue from renting an institution’s excessor underutilized land or buildings to others. These leases often providefacilities to support diverse purposes such as public service activities;colocation of collaborative nonprofit, government, and privateresearch entities; and access to desirable retail and support services.Leasing remote land holdings for grazing or other uses can be a goodway to obtain basic caretaking of properties. When negotiating incomeleases, it is important to fully evaluate maintenance and operatingcosts and to allow for inflation and replacement and renewalrequirements 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 institutionalprograms. When institutional facilities and property are not availableor suitable and capital funds to construct new space are scarce,leasing space might be a viable, cost-effective alternative. Adequatelead time is essential to the development of a satisfactory andcost-effective lease. How much time is needed will depend on theamount and type of space required, availability of space in the localmarket, extent of tenant finish requirements, and flexibility of timingfor relocation and move-in.

Knowledge of the local market in which an institution requires leasedspace or land is essential for identifying opportunities and negotiatinga competitive lease. Many institutions rely on experienced real estatebrokers or consultants to assist them in this process, with excellent


brokers or consultants to assist them in this process, with excellentresults.

For long-term leasing needs, especially where extensive tenantimprovements are required, an effective process is a competitivenegotiation procedure. The institution issues some form of a requestfor proposals or other competitive solicitation, which establishes thelocation, nature of the space requirements, and procedure forevaluating the quality and cost of competing proposals.

For less specialized leasing needs, advertising both online and in theprint media to solicit the local market (using with each approach acomprehensive response form) is a means to identify options andcompare terms available in an identified area. Storage space, which isoften required for temporary uses and is subject to high turnover, canbe successfully solicited under a single contract to a self-storagevendor or local warehouse facility, thereby controlling costs andmaximizing flexibility.

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

Expense Lease Financial Issues

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

An annual budget will thus consist of base rent; pass-through costssuch as utilities, maintenance, and custodial services; other operatingcosts, such as telephone, security, and parking; and rental rateescalators applied at agreed-upon intervals. Use of a systematicprocurement process (as discussed previously) can help ensure thatcompetitive lease costs are achieved. When standard office space isneeded, proposed lease rates can be evaluated against prevailing localmarket rates for comparable Class A, B, or C office space.

The renegotiation of favorable terms for building lease renewals isbest achieved well in advance of termination notice periods. Currentmarket conditions for the local area should be carefully assessed as apreliminary to renegotiation. An early extension of a lease term canoften be an effective tool in negotiating a favorable future rental rateduring the extension period.


during the extension period.

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

License Agreements

License agreements, taking the form of memorandums ofunderstanding or facility use agreements, provide a less complexmeans to grant permission for a party to enter property for a specifiedpurpose and under limited conditions. This type of agreement allowsshared use of a facility or property with a nonowner without needingto relinquish control, as occurs under a formal lease. For example,licenses often include antenna site agreements, agreements withother institutions for the shared use of classrooms, and agreementswith other property owners for the shared use of parking. The use of alicense agreement instead of a formal lease helps remove thelimitations 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 theirbasic terms and conditions because they can be terminated moreeasily if needed.

License agreements are used extensively by institutions for rooftopleasing, particularly for the placement of commercial and emergencytelecommunications antennas. Institutions often have the tallestbuildings in cities and towns, which lend themselves well for theseline-of-sight uses. Depending on an institution’s location, competitionfrom other sites, and service population, antenna license agreementscan often provide a substantial source of additional income.Institutions that have the potential to license their rooftop spaces forantenna sites should consider this use in the context of a largerinstitutional rooftop management plan. A rooftop management planshould help define the institution’s internal rooftop needs, spectrumrequirements, and administrative processes and procedures fordeveloping antenna licenses. This approach will help the institutionserve its own needs first and will help ensure maximum value inlicensing its rooftop space for commercial and emergency responseuses.

Real Estate Investment and DevelopmentReal Estate Copyright APPA 2020

Real Estate Investment and Development

Alternative Approaches to Real Property

Colleges and universities are currently experiencing some of the mostdifficult financial challenges they have encountered in many decades.An important outcome of these challenges has been the need forinstitutions to develop new and innovative ways to take bestadvantage of existing institutional real estate or to secure and developadditional land and building space.

Even in times of financial constraint, property acquisition can supportmany important institutional objectives, including protecting campusboundaries, accommodating future growth, satisfying space needs, orsupporting new programs and research. Often, the long-term successof the institution depends on its ability to find ways to acquireproperties, even during fiscally challenging times.

The traditional approach to acquiring real property can be describedas a fairly straightforward process of identifying the requirements forproperty and then obtaining the necessary capital funds to fulfill therequirement. For public institutions, funds typically are securedthrough a legislative capital appropriations process. Privateinstitutions often use gift funds or existing cash.

Increasingly, both public and private institutions are financing theacquisition of real estate assets through certificate-of-leaseparticipation, revenue bonds, or other forms of mortgages. Theservicing of the debt and additional operating costs associated withthe new properties are funded through incremental increases inoperating funds or through other sources of revenue resulting fromthe acquisition. For example, depending on the project, new sourcesof revenue might include rents generated by the acquired property,increased indirect cost recoveries generated from having the newspace for sponsored research grants, additional housing rentsgenerated from new dormitory beds built on the property, or newspectator revenues resulting from stadium or arena expansions.

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

The more innovative measures that colleges and universities are usingto meet their long-term real estate goals include agreements with


local governments that support cooperative planning of compatiblecampus and community development, acquisition of facilities throughthird-party development and financing, and formation of affiliatedfoundations 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 universitiesmotivate them to consider the acquisition and development of realproperty in a professional, comprehensive, and programmatic way.

Many institutions are located on facility-limited or landlockedcampuses. For such institutions, new program and research needs orexpanding student populations can create pressure for the expansionof campus boundaries. Conversely, incompatible development of landadjacent to the campus can jeopardize existing activities, institutionalimage, and the institution's ability to expand.

Institutions are justifiably concerned about surrounding land uses.The character of developing or deteriorating surroundings can affectan institution's success in attracting faculty and students and carryingout its programs. The safety of faculty, staff, and students is animportant concern. Institutions thus need to actively consider andoften participate in the preservation and revitalization of theirsurrounding neighborhoods.

For many institutions, land holdings represent significant nonearningassets. Some institutions might own more real property than requiredto accommodate their long-term needs. Idle or underutilized propertyconsumes resources and carries significant opportunity costs.Although few institutions ever sell real estate assets to generaterevenue, there are significant opportunities to develop additionalrevenue through interim uses, such as by leasing land and buildingsor by permitting development of properties for noninstitutional ornonaffiliated purposes.

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


All institutions will experience public scrutiny and interest in their realestate transactions because all land and building acquisitions will havepotential impacts on the community, creating a town-and-gownrelationship. Public and private institutions might confront differentconcerns and use different processes in their real estate activities. Forexample, private institutions are typically subject to the same zoningrules and regulations and municipal approvals as any other privatedeveloper. Public institutions are often exempt from many zoning andmunicipal planning constraints, yet they must still be sensitive tocommunity concerns.

Transactional challenges are also different for private versus publicinstitutions. Private institutions generally enjoy greater flexibility inentering into real estate contracts. They also have fewer requirementsfor public disclosure in advance of conducting a transaction. Thissituation gives private institutions a significant advantage in the speedand cost of conducting real estate transactions.

Public institutions usually must work within the constraints of publicprocurement regulations, public disclosure, and public approvals bygoverning boards and state agencies, which all can be cumbersomeand time-consuming. The timing, location, and availability of realestate are significant cost factors. To mitigate some of theselimitations, a number of institutions have formed innovative realestate nonprofit corporations or other separate real estatefoundations. These affiliated organizations can be more nimble andcreative in negotiating, financing, and closing real estate transactions.

External Issues

Colleges and universities can have profound influences oncommunities, commonly extending far beyond the boundaries of thecampus. Most often, the influences are positive, such as the economicimpact of institutional expenditures, cultural benefits, presence of awell-paid faculty and staff in the community, and promotion of overalleconomic stability. However, the large number of student renters in acommunity; presence of fraternity and sorority houses; and impact oftraffic, student parking, or incompatible institutional activities onadjacent neighborhoods are some challenging influences.

Acquisition and development of real property assets by a college oruniversity can readily generate major community impacts. Institutionsshould therefore work closely and proactively with their communitiesto recognize potential conflicts early in the planning process andensure that they are satisfactorily resolved. This approach serves notonly the needs of the community but also the institution's ownself-interest in preserving and strengthening its off-campus


surroundings.

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

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

Research Parks as Development Vehicles

During the past 30 years, many institutions have expandeddevelopment of research parks as a way both to use excess propertyproductively and to enhance the academic and research missions ofthe institution. Such parks can advance collaborative research amonginstitutions, businesses, and governmental research organizations;provide quality research employment opportunities for faculty,students, and graduates; enable technology transfer (i.e., applyingresearch to create commercial products); and improve the overalllocal 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 ownedwholly or partially by a university or a university-related entity.Alternatively, a park can be owned by a nonuniversity entity but havea contractual or other formal relationship with a university. Forexample, a park can be privately developed in a joint or cooperativeventure with a university. Often, research parks are established onuniversity-owned land as an interim land use, and the land is leasedfor development for a long period of time, after which the land andany remaining buildings revert to the institution.

Successful parks are typically guided by a master plan that includes astatement of goals and a physical and environmental plan, backed bynecessary covenants and often approved by local officials. Otherelements necessary to create a feasible blueprint for developmentinclude targeted marketing plans emphasizing institutional researchstrengths and detailed financial plans. Although research parks arereal estate developments, they often have longer development time


frames than typical profit-motivated real estate projects because oftheir broader objectives, such as strengthening the researchcapabilities of the institution or signaling the institution's willingnessto conduct research collaboratively with the private sector. Inaddition, research parks require substantial initial investment.

The Affiliated Foundation as an Organizational Option

Associated foundations of all sorts have become common in highereducation. Typically, they exist to support and further the mission ofthe parent institution. Often, this nonprofit foundation mechanism hasbeen established to help attract private philanthropic support to publicinstitutions constrained by the legal restrictions of their positions asstate agencies. For some time, private institutions have shownsuccessful track records in optimizing real estate holdings throughfoundation vehicles. Increasingly, specialized foundations are beingdeveloped to meet real estate as well as other institutional needs.

Real estate foundations are specialized foundation vehiclesestablished to fill a variety of roles for the long-term benefit of theaffiliated institution. Free from many restrictions encountered byfor-profit corporations and by public institutions, their fundamentalgoal 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 areestablished to provide a means to manage or dispose of propertygifts, or their principal role might be the long-term stewardship of theinstitution's real estate interests, with a focus on generating profitsthat can be reinvested in real estate assets or returned to the parentinstitution. Foundations also support institutions in helping satisfytheir future expansion needs by being opportunistic and makingstrategic purchases of property without the burden of following stateagency rules and approval processes.

Third-Party DevelopmentThird-party development (also known as privatized development) isincreasingly being used by universities and colleges to support capitaldevelopment efforts, especially to support important nonacademicexpansion for support facilities, including student housing, hotel andconference centers, and mixed-use retail developments. Often, theinstitution leases land to a private third party, and the third partyfinances, develops, and manages the facilities on behalf of theinstitution. The third-party owner can be structured as a foundation orsome other form of charitable nonprofit organization. However, it canalso 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 thatare serviced by revenue derived from the project. The bonds can beeither tax-exempt if issued through a tax-exempt nonprofitorganization (such as an institution’s development foundation) ortaxable, depending on the third party’s tax status.

The primary advantage to third-party development is often faster andcheaper delivery of a project because a private developer can oftenavoid strictly adhering to an institution’s design requirements,approval processes, and internal delays, which all can result in higherdevelopment costs. However, institutions must balance thoseadvantages against the loss of control over management of thefacilities, which is usually handled by the third party instead of directlyby the institution. This is an important trade-off because if there areproblems with the ongoing management of a facility, the customers orthe public will not normally distinguish between the private third partyand the institution.

Another potential advantage of third-party development is keepingthe debt associated with the development “off balance sheet” for thesponsoring institution (i.e., segregating the debt from the institution'sfinancial statements and credit rating). However, this practice hasbecome increasingly difficult, and when it is done, it usually requires aloss of control over the project that is generally consideredunacceptable by the institution. This conclusion is especially true if theinstitution leases property for siting the development. It is thereforeimportant to check with the institution’s financial advisers and bondrating agencies to see whether a project can be structured off balancesheet.

Summary

Real estate management will play an increasingly important role inhigher education as institutions continue to feel pressure to expandboth enrollment and research beyond what is practicable with existingland and facilities. For many institutions, real estate functions havebecome an integral part of their capital development strategy.Acquiring new land and buildings is also an important component ofplanning for a sustainable future and establishing a legacy. As aresult, many colleges and universities have become highlyentrepreneurial and creative in acquiring, developing, and managingreal estate assets.


Bibliography

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

Association of University Real Estate Officials (AUREO), anorganization of higher education real estate officials, meetsannually each fall, hosted by a member institution, and has anactive Internet bulletin board. Membership information isavailable at http://www.aureo.org/.Institute of Real Estate Management (IREM), headquartered inChicago, confers designations for real estate/asset managers;accredits residential managers; sets standards for real estatemanagement companies; advocates legislative positions onbehalf of the industry; provides extensive training; andproduces 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, isa nonprofit education and research organization that providestraining and symposia, offers numerous publications, andsponsors expert panel evaluations for institutions andmunicipalities. ULI’s homepage is at http://www.uli.org.Association of University Research Parks (AURP), headquarteredin Tucson, Arizona, is an association of real estate practitionerswho specialize in university-related research park development,both nationally and internationally. AURP has a wealth ofinformation available to its members on establishing andmanaging research parks. Its primary membership consists ofplanned and operating research parks around the world. Moreinformation can be found at http://www.aurp.net/.Association of College and University HousingOfficers–International (ACUHO-I) is the principal association foruniversity and college professionals developing exceptionalresidential experiences at colleges, universities, and otherpostsecondary institutions around the world. ACUHO-I providesinnovative and value-driven programs, services, research, anddevelopment as well as networking opportunities that helpsupport and evolve the collegiate housing industry. Moreinformation can be found at http://www.acuho-i.org/.National Association of College and University Business Officers(NACUBO) advances the economic viability and businesspractices of higher education institutions in fulfillment of their


http://www.aureo.org/

http://www.irem.org/

http://www.uli.org/

http://www.aurp.net/

http://www.acuho-i.org/?tabid=125

academic missions. NACUBO is the thought leader andauthoritative resource for business and financial management ofhigher education. More information can be found at http://www.nacubo.org.Building Owners and Managers Association (BOMA) Internationalrepresents the owners and managers of all commercial propertytypes, including nearly 10 billion square feet of U.S. officespace. BOMA International is a primary source of information onbuilding management and operations, development, leasing,building operating costs, energy consumption patterns, local andnational building codes, legislation, occupancy statistics,technological developments, and other industry trends. Moreinformation can be found at http://www.boma.org/Pages/default.aspx.Appraisal Institute is a global association of real estateappraisers. Its mission is to advance professionalism and ethics,global standards, methodologies, and practices through theprofessional development of property economics worldwide. Moreinformation can be found at http://www.appraisalinstitute.org/.


http://www.nacubo.org/

http://www.boma.org/Pages/default.aspx

http://www.appraisalinstitute.org

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