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Abstract: Real Estate

The tremendous growth in higher education has created a need for more land and buildings. The acquisition of real estate must be integrated with university master planning, and include input from the facilities department regarding property condition and maintenance requirements. Institutions view property acquisitions as a profit center or a necessary support function; either way, financial implications must be reviewed carefully in advance.

Real Estate Administration

Organization. Real estate management responsibility can be given to the financial, business, or facilities management group. Wherever the responsibility lies, the group must have direct access to institutional decision makers. Guidelines and policies for real estate acquisition and management must be clearly defined so that all stakeholders can be involved in the process.

Staffing. Effective real estate management requires the involvement of licensed real estate brokers, attorneys, and other consultants. Some will be internal staff members with a background in real estate, business law, facilities management, and finance; some will be external consultants.

Real  Estate  Brokers.   Many  institutions  augment internal staff efforts with professional real estate brokers who are more familiar with  the  local  market.  Brokers can act as the institutional representative in real estate transactions and can provide space analysis, property management, financing support,  design,  and construction services. Institutions must closely monitor broker activities to ensure that their actions are consistent with the public image and policies of the institution.

Record Keeping and Data Management. Institutions must track property holdings, leasing details, and facilities data to effectively integrate real estate administration with capital planning and budget management. Space utilization metrics, build-out details, preventive maintenance scheduling, and expected repair specifics are also crucial considerations. Various off-the-shelf and customized real estate software packages are available to help manage real estate assets.   More complex software allows the use of Geographic Information System (GIS) and Computer- Aided Design (CAD), providing details about property topography, building footprint, room utilization, utility and infrastructure, landscape, and road systems. The precise data management protocol varies with institution needs.

Property Management. Property management encompasses operation, control, and oversight of leased or purchased real estate holdings. Evaluation of tenant needs, maintenance obligations, and record keeping requirements is an integral part of property management. Good communications with facility occupants and a well-defined procedure for reporting problems help maintain good relations. Clearly outlining the maintenance agreement between the institution and the landlord is best done in the original lease document. Institutions need to track expenses, whether for landlord reimbursement or simply to have an accurate record of the overall cost of owning or leasing property. Institutions often hire an outside property manager to fulfill these obligations, but institutional oversight is imperative.

Risk  Management.  Potential  risks  intrinsic  to  real estate ventures (e.g., traditional  legal,  facility-related, and financial risks and environmental, regulatory, and political risks) must be identified and managed. Each transaction is unique, and so are the associated risks. Establishing a cohesive risk management policy includes standardizing contractual terms (especially those related to liability and insurance) and ensuring involvement by institution legal, risk management, facilities, and financial management teams.

Basic Real Estate Transactions and Issues. (1) Real estate contracts codify all property activities, especially financial and maintenance specifics. (2) Permanent transactions generally are long term (e.g., purchases, sales, right-of-way easements). A detailed nonbinding letter of intent is often negotiated before a formal contract is signed. (3) Appraisals are typically conducted by a certified professional to evaluate replacement cost, comparable sale statistics, and income analysis. (4) Environmental risks must be assessed before any property purchase and typically include a Phase I environmental site assessment. If any concerns are identified, a Phase II assessment is normally conducted to assess soil, water, air, hazardous materials, mold, asbestos, and lead-based paint conditions. (5) Other due diligence includes assessing compliance with regulatory guidelines (e.g., ADA, fire codes), determining building condition, securing appropriate property records, identifying obligations to current tenants, conducting surveys, obtaining title insurance, and factoring in legal and closing costs. (6) Property exchanges (gifting property to an institution) are frequently preferable to donors for tax reasons. The institution needs to evaluate whether the potential gift is consistent with the institutional master plan and to review associated long-term costs related to (e.g., condition, location, land use limitations, development potential, ongoing management and maintenance obligations). (7) Ground leases are typically used when an institution wants to generate a rrevenue stream from a piece of property that the institution does not need for a long-term period. These leases require careful review to ensure that long-term institution vision and needs are protected. (8) Easements and rights-of-way typically accommodate utilities, telecommunications cabling, conservation, ingress and egress rights, vehicle and pedestrian roadways or pathways, landscaping, signage, fencing, and street lighting. A clear contract specifies that the university is not responsible for any associated costs and notes the requirement to provide records with specific improvement details. Easements must be surveyed and recorded with the county clerk and recorder’s office and with the institution’s property management software (preferably CAD or GIS).

Nonpermanent Transactions. Short-term or limited transactions include building leases and license agreements. Standard leases can ensure compliance with public regulations and protect the institution from unexpected cost risk. (1) Income leases create a stream of revenue for the institution. (2) Expense leases allow the institution to temporarily acquire needed facilities. (3) Expense lease budgeting enables the institution to manage and amortize financial issues related to an expense lease (e.g., space planning, design  and  build- out, equipment installation, relocation). A gross lease includes all building operating expenses; a net  lease leaves the responsibility for insurance, utilities, operating expenses, and real estate taxes with the institution. (4) License agreements (less regulated than leasing) grant permission for a party to access or  use  a  specific property under limited conditions (e.g., shared classrooms, antenna site agreements, shared parking).

Real Estate Investment and Development Alternative Approaches to Real Property. Universities confront serious financial challenges and must find new ways to take advantage of existing institutional real estate or to augment current holdings. Institutions are increasingly financing property acquisitions through mortgages, review bonds, and certificate-of-lease participation. Expenses associated with the cost and maintenance of the property are usually covered by income from rents, grants, or stadiums and arenas. A growing number of institutions are exploring alternative and innovative ways to fund real estate acquisitions (e.g., foundations, third-party development and financing, agreements with local governments) that support cooperative campus and community development planning.

Institutional Issues. The need for additional space is a common institutional challenge. For landlocked campuses, the suitability of adjacent land is an issue. Neighborhood safety and local resident attention to

property maintenance are vitally important to the campus. Some institutions have a large number of underutilized real estate assets; leasing them could help cover the cost of ownership. Some institutions are opening satellite campuses developed by a third party. All institutions must keep abreast of local regulations and foster positive community relations. Private institutions enjoy greater flexibility, but public institutions can mitigate limitations through more innovative negotiating, financing, and closing arrangements.

External Issues. Universities have a profound effect on the local community. They have a positive economic impact, bringing cultural offerings and well-educated faculty and staff into the community, but student renters, fraternities and sororities, and traffic create issues. Institutions with a strong focus on community involvement and collaboration reap rewards through community quality-of-life improvements and the ensuing rise in value of institutional property holdings.

Research  Parks  as  Development Vehicles.  Over  the past 30 years, institutions have increasingly used research parks, which productively use excess property to foster collaboration among academic and research missions, other institutions, businesses, and governmental research organizations. A research park can be for profit or nonprofit and can be owned by a university or a third party. Successful parks establish a master plan (e.g., targeted marketing strategy; detailed financial forecasts; physical, environmental, and regulatory considerations).

Affiliated Foundation as an Organizational  Option. Affiliate foundations are free from regulatory restrictions and the need for institutional approval; they are often used by institutions as a vehicle for managing property gifts or maximizing profit from real estate assets through opportunistic and strategic property purchases.

Third-Party Development. Third-party development (privatized development) typically involves third-party finance, development, and management of facilities on behalf of the university. Project finance often comes through revenue bonds, which are serviced by project-generated funds. The advantages of this arrangement to the institution are quicker and less expensive project delivery and off-balance-sheet financing, but the loss of project control creates risk for the institution.