Learning to Thrive: The University as Developer

Learning to Thrive: The University as Developer

Reasons to consider real estate development now—and how to get started
 

A USA TODAY HEADLINE states, “Tuition Hikes Will Ease.” The article opens, “The price tag for college tuition is continuing to climb this year, but experts are predicting less sticker shock than in the past two years.”

The American Council on Education’s nonprofit subsidiary Solutions for Our Future (www.solutionsforourfuture.org) claims that in the last decade college tuition has increased by an average of 76 percent at public four-year schools and 62 percent at private ones. Median income during the same period has risen 5 percent. The biggest cause for tuition increases at public institutions has been variables in state appropriations. During recessionary years earlier in the decade, state spending at best increased by minimal rates. With current headlines screaming recession, where will the money come from?

Real estate development is not to be undertaken by stodgy authorities.

As funding for higher education decreases, the number of students seeking admission will increase. Not all higher ed institutions have the endowments of a Harvard or Stanford. So the real question is: What can IHEs do to ensure their fiscal sustainability for the future?

There are more than 100 U.S. land grant universities and many other IHEs that have received endowments of land or have purchased land whose value has exploded. Some urban campuses are engaging in development activities to clean up the blighted boundaries of their campuses, hoping to create a safer, more pleasant environment with which to lure the best and brightest faculty and students. Other IHEs are beginning to investigate how best to fully realize the potential of their land to accommodate long-term growth. Enlightened higher ed leaders are focusing on promoting the economic health of their institutions, their academic populations, their surrounding communities, and the environment.

The university as real estate developer is an exciting and challenging opportunity not to be undertaken by stodgy authorities, but relished by forward-looking leaders able to combine the interests of the institution with the needs of the community. With careful planning and creative vision, institutions can generate significant revenues to serve their academic needs, fulfill their land grant missions, and develop partnerships within their communities that benefit all.

Why become a real estate developer in the midst of a housing recession? Real estate markets are historically cyclical. It’s in the doldrums now, but the market will return to health. Planning and entitlements for real estate projects take time, often years, to complete. By preparing and positioning projects for development now, landowners will be in a position to capitalize on the value when the market returns.

Is the risk inherent in real estate appropriate for an academic institution? Value in real estate can be harvested at many points along the evolution of the property, from raw land to built product. An institution could sell surplus raw land. This, however, is typically the lowest value that might be achieved. It also leaves the use and quality of the development to the new owner, who may decide to use the land in a way that reflects poorly on the university. Value is added by creating an initial vision for the property through a master planning process, providing the university’s development partner and its stakeholders with a clear understanding of the institution’s desires and standards, which must be met in the development.

Some IHEs choose to sell the land once they have articulated their vision and the guidelines needed to ensure its implementation. Obtaining entitlements and approvals from a variety of state and local entities adds further value without committing funds to building roads, utilities, or buildings, and other institutions harvest value at this point in the process.

Still others choose to construct roads and utilities as the “master developer” of the property, leaving the construction and sale of homes and other buildings to private sector developers. As value is added, risk increases. By gaining a clearer understanding of the development process and weighing the potential risk against the gain, IHE leaders are maximizing the value of their real estate assets.

Universities have certainly at times assumed an active role as developer, rather than simply selling or leasing land assets to other entities. Projects that reflect a synergistic, collaborative effort between the university and designer achieve an exceptional level of sophistication and quality. Wise planners create flexibility for market adaptation, multiple phasing opportunities, centralized support services, and shared resources to maximize the sustainable financial model.

Gathering information on the complex issues of landownership, development partnerships, management structures, endowments, and academic mission requirements relating to development is a first step. Academic resources can be called on to inform the planning process in the areas of transportation, health, energy, and the environment to outline a vision for the prospective development.

A land-planning firm can help create cost-benefit models and a metrics system by which all aspects of sustainability can be defined and measured to ensure that best practices are used in every area of development. When the best possible decision is realized, the potential project can be presented for stakeholders’ approval.

Developing real estate within an academic framework is an opportunity and a challenge. The opportunity is to create quality projects reflecting best practices in environmental sustainability and fiscal responsibility, as well as a heightened sense of community and beauty. Quality is critical; the project reflects upon the reputation of the institution, whether it is directly connected to the project or engages in development through an independent entity. The same values and standards taught in classrooms must be realized in the development, both to maintain the institution’s brand and to satisfy the many constituencies.

As campus planners strive for sustainability, they must also meet this standard in their development activities. The process of decision making in a scholastic setting is typically all-inclusive, involving all stakeholders in a transparent effort to meet and exceed some heady goals, with real sensitivity to academic values.

The same values and standards taught in classrooms must be realized in the development.

While this holistic method can lead to innovative ideas, the time for communication can be extensive and the decision-making authority can be vague. Decades of a collaborative model must give way to a reorganization that allows the university to move quickly in the marketplace. The relationship between the institution, the development arm, and all the other contributors must be clearly defined.

The development arm must have the expertise to execute these complex real estate projects with a full understanding of the institution’s values. Central to this understanding is the creation of master plan documents, pattern books (which guide the design of architecture, landscape, and engineering improvements), and community governance structures that clearly define the IHE’s intent and ensure the quality of the built product.

Occasionally the academic mission is in conflict with project profitability. Is it more important to create research opportunities related to the property itself, or obtain the maximum returns, which could then be funneled into other research efforts within the university?

One strategy is to funnel a portion of profits back into research related to the project itself in the form of an R&D budget intended to improve the product offering. The ability to provide cost-benefit models for the variety of available options is key to helping an academic institution in decision-making.

There are tax strategies to consider for how the development structure should be handled. These complex issues are best determined by legal experts, who should be part of the process from the outset. For example, does the real estate exist within the IHE’s decision-making purview, or in a separate but wholly owned subsidiary? There are advantages to the real estate development entity as a for-profit endeavor, thus ensuring the vigor of the marketplace in its operations and avoiding the sense that it is competing with other developers on an uneven playing field. Also, how does the land flow from the IHE to the development entity? How do profits flow back to the university? Each institution’s tax situation will be different. Informed tax advice is needed.

Universities are asserting themselves in their own neighborhoods like never before, engaging in the design process and consulting with their communities to create opportunities that cross the boundaries of their campus. Institutional leaders who take the lead in the development of underutilized land holdings can discover a very significant way to contribute to the funding of their schools and complement their academic reputations.

Most often, the attention to detail and the multilevel participation from the university’s best minds in collaboration with visionary designers produce projects of exceptional quality.

The university as developer is a new concept to many colleges and universities as well as their leaders, but it is one that should be pursued not only in the interest of fiscal sustainability but, more importantly, in the interest of building their legacies.

Kurt Culbertson is CEO of Design Workshop (www.designworkshop.com), an international firm that practices landscape architecture, land planning, and urban design for education and other industries.


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