Lessons in Landlording

Lessons in Landlording

Managing an institution's real estate assets requires careful planning and thoughtful problem solving-all while keeping the school's mission in mind.







 

In some ways, the typical landlord-tenant relationship applies. A suitable tenant is found. A lease is worked out. Rent gets paid (hopefully on time). And the landlord gets an earful when the drain clogs, the roof leaks, or the heating or air-conditioning system busts.


But in other ways, the rules are different when the landlord is a college or university.


For one, institutional needs prevail over profits. When Cornell University administrators decided the retail space on the ground level of an off-campus dorm would better serve as a student lounge, the long-time retail tenant's lease was not renewed. (The university wound up finding a spot for that tenant across the street, reports Director of Real Estate John Majeroni.)


The motivation behind a mixed-use development project near campus wasn't "to have retail space as an investment. Our investment was in building a neighborhood around our university." -Ellen Hamilton, University of Illinois at Chicago

In addition, a university landlord may be more contractually flexible. Say a student renter is graduating early and needs to break the lease. "We don't like to be strict for the sake of being strict. We understand that the students are the reason that all of us are here," says Jessica Saavedra, the real estate administrative coordinator at Washington State University. "We have to weigh decisions based on business and image."


When a college or university is leasing its real estate-residential or commercial-learning how other institutions are handling the situation can help. Institutions and their real estate managers are taking the following key approaches in their roles as landlords.









 

The reasoning behind an institution becoming a landlord generally drives decisions that real estate managers make.


At the University of Idaho, Real Estate Officer Gerard Billington explains, "Our core mission is not to do commercial leasing. It's education, outreach, research." That's why most of UI's office and research space tenants are connected to the university's work in some way. "We're not really trying to get into the real estate business," Billington says. "On the other hand, it is a business that can produce income, so we engage in the activity."


Though, some land across from campus is an income producer that's not connected to university activities. Acquired in the 1920s for farming, it gained commercial value when a highway was constructed. Now UI has a ground lease deal with a regional mall. "It was a great place to have cows, but we've got a lot of great places to have cows," he says.


East Hill Plaza Shopping Center in Ithaca, N.Y., was actually purchased by Cornell back in 1984. "It was run down, and the owner was not investing in it," says Majeroni, who oversees 600-plus properties in 25 states. With the shopping center's close proximity to the university, "we didn't want it to end up being an eyesore." Now the 110,000-square-foot center features restaurants, a Best Western hotel, a bank, and other services, as well as university office space.


Cornell has also done its part to strengthen downtown Ithaca. Through a public-private partnership, the $32 million, nine-story Seneca Place building features retail space, a Hilton Garden Inn, and office space.


Also involved in leasing as part of an effort to revitalize a neighborhood is the University of Illinois at Chicago. The South Campus project, located in a formerly dilapidated area a few blocks from the main campus, includes about 750 apartment units and 750 dorm-style units, all with ground-floor retail space.


The development allows the institution, which had been largely for commuters, to "create a 24-hour living, learning environment, where our students would be happy to stay, exchange ideas over a cup of coffee or a smoothie," says Ellen Hamilton, director of real estate and auxiliary enterprise support. The project wasn't created "because we thought it would be a good idea to have retail space as an investment. Our investment was in building a neighborhood around our university," adds Hamilton, also the current president of the Association of University Real Estate Officers.


Washington State University, too, had living and learning in mind when officials there began the College Hill Revitalization Project a few years ago. A popular area for students living off campus, College Hill "has a lot of problems with absentee landlords," says Saavedra. "A lot of houses turn into party houses."


So, WSU is "buying properties in a central area of the neighborhood to try to have a positive presence," she explains. Right now, there are seven academically themed houses for rent to student groups, plus a house rented temporarily to visiting and relocating staff and faculty.


Sometimes officials consciously decide to leave properties underutilized. "We've got some properties where the best use would be to tear them down for mass development. We preserve that opportunity for 20 years from now," says Cliff Joyner, assistant vice chancellor for real estate operations at Vanderbilt University in Nashville.


Properties in a "hold" pattern include parking lots "that we probably lose a little money on," Joyner says. "I could do a 40-year ground lease to a developer who wants a hotel, but then that would be an obstacle to the university's institutional needs. You have to resist the temptation to fully leverage your portfolio because then you create obstacles for yourself."









 

Joyner sees getting the right tenants as crucial to success in real estate; once tenants are found, he says, "You've won half the battle because a lot of the other stuff takes care of itself."


His department-which leases out office space, medical clinic space, apartments and multi-family houses, and retail properties-can be choosey about who gets in. "We have a waiting list of tenants at pretty much any given time," he says. The majority of office tenants are internal, generally departments needing temporary or long-term space off campus.


For external space near campus, real estate managers tend to ensure a tenant would complement the neighborhood. The University of Illinois at Chicago, which contracts with a real estate broker to fill 125,000 square feet of retail space at South Campus, turned down a large beverage/liquor establishment seeking 15,000 square feet, for example. "It's not always easy when you're trying to fill up space," Hamilton says. "You don't want to get a reputation as a development that has a lot of empty storefronts for a long time."


Some of the institution's name-brand tenants-such as Quizno's, Cold Stone Creamery, and Footlocker-are helping to fill remaining space. "There's a lot of street credibility from having national retailers," notes Hamilton. Still, the university aims to help small businesses grow and thrive in the new neighborhood.


Cornell, which has a variety of property types, is like Vanderbilt in that finding tenants is rarely a problem. Vacancies get advertised in print and on television, Majeroni says.


On the residential side, universities tend to like student renters. "Typically it's when we've gone away from the student market that we've had our problems," shares Bill Cromwell, director of real estate asset management for the University of Virginia Foundation.


As for maintenance, you can't beat the predictability of school vacation vacancies. WSU officials learned to plan for short-term vacancies the hard way: One cold winter during break, the pipes burst, flooding one of their houses. Now, Saavedra says, "When students are gone for break, we have to have our maintenance custodian check on houses weekly, and we have to winterize properties."



With student tenants accustomed to annual move-ins and move-outs, there's generally no need for negotiation on lease lengths. Commercial leases seem to run at least three to five years, with longer lengths depending on the university's needs and comfort level.


At Vanderbilt, Joyner says he avoids granting external tenant requests for long-term leases because he likes "to have the flexibility to accommodate internal tenants." As a safeguard, he now puts right-to-relocate clauses in lease agreements.


But Hamilton, who knows that the South Campus retail space will remain, happily agrees to leases of 10 years or more. These agreements tend to be with tenants who "are bullish about their ability to succeed," she says.


Institutional real estate managers don't necessarily agree on whether it's best to maintain standard leases or to negotiate separately with each tenant. While Majeroni says Cornell's leases tend to be "very straightforward," at Virginia Commonwealth University in Richmond, it's unlikely that two leases are alike, notes Nancy Buchanan, director of real estate and insurance. And for UI, the lease terms may well be more flexible "when there's a programmatic component to the real estate deal," Billington says.


In any case, it helps when a school's real estate team has industry experience. Hamilton, who spent 20 years in commercial development, in part as a developer of retail shopping centers, knows national retailers may try to make statements like "This is the way we have always done business" when negotiating. She'll find out what the retailer has agreed to elsewhere. "You always want to know what they're willing to do so that you can push the envelope," she says.


Likewise, it's good to know what sorts of problems less experienced tenants may unwittingly cause. With mom and pops, Buchanan has found that tenants will, say, penetrate a roof for a restaurant's exhaust system, without realizing the roof warranty requires that the installation company be on-site if the roof is cut.









 

The expectation of getting rent money in full, on time is another thing it doesn't hurt to spell out for tenants. "People will ask if they can pay their rent when they get their financial aid. [On-campus] housing is lenient about that, but we have to say no," Saavedra says.


VCU's retail tenants, Buchanan notes, "know what our philosophy is in terms of locking the doors" when the rent isn't paid.


In Chicago, Hamilton is well aware that the South Campus tenants have signed on before construction is complete. In the beginning particularly, she expected some businesses to have financial difficulties. She heard questions like, "Why can't construction go faster?" and "When will more people live in the area?"


Sidewalks were completed as soon as possible to help increase foot traffic. Getting food vendors in early also helped, since people will walk to them. The adaptive reuse part of the project, which involved renovating eight historical buildings nearby and now features details like life-sized bronze street art, adds to bustling sidewalks.


Of course, there's more to having tenants than collecting rent. WSU's maintenance department was performing routine repairs on its themed student houses at first. Since the additional workload was straining staff, Saavedra's department funded its own custodian.


As for extending the life of real estate assets, nothing beats thinking ahead. Vanderbilt's 10-year plan for each of its properties helps eliminate surprises, Joyner says. Each building is evaluated as a long- or short-term holding and decisions are made accordingly. From systems maintenance and replacement to new carpeting and paint, everything gets put on a schedule. Ordering materials and equipment in advance also helps. For example, one building has several air-conditioning units nearing the end of their lives. Joyner's department had five new ones ordered and now has them in storage.


Sometimes maintaining tenant relationships requires coming up with innovative solutions. At UI, for example, Billington got involved with the nearby mall leasing UI land when mall management wanted to alter the landscaping for greater street visibility. He considered the university's obligation to a group of community members concerned about the scenic value of existing landscaping. "We ended up having to position ourselves in the middle," Billington explains. Another new landscaping plan provided greater visibility while also shielding some of the structure from passers-by.



In navigating tenant challenges, having a property management firm on hand is useful. These firms act as a buffer between owner and tenant, says John Murray of S.B. Ashley Management Corp., which has managed properties for Cornell for the past 18 years.


Murray's firm coordinates the showing of commercial and residential units, drafts lease agreements, arranges for rent payment, handles repairs and maintenance, and oversees move-out inspections. "We found we could do it cheaper through them and get better service," says Majeroni. Another benefit is not having to compete with on-campus services. "If the university grounds [staff] is doing the lawns and they've got to do the campus lawns and our lawns, we'll always come in last," he explains.


In addition, Majeroni points out that while the university is used to maintaining buildings on a 100-year life cycle, that's not the ideal rental property approach. "The standards of the university are too high," he says.


Finally, a property management firm helps in maintaining businesslike tenant relationships, Majeroni says. "If they're talking to university people and they don't like something, the next thing you know the dean's calling [about it]."


Property management firms abound in many markets. Some university real estate managers mention preferring smaller firms where they can have direct contact with the owner. With larger firms, finding out who exactly would get the account is important.


After all, plenty of contact will follow. Majeroni and a subset of his department meets with Murray and his manager weekly. "Communication, either good or bad, is key in the business to keep each other up-to-date," Murray says.


That goes for communication with tenants, too. Cornell surveys its commercial tenants every two years on the customer service they're getting.


Cromwell at U.Va. says his system works this way: If a tenant e-mails a building's on-site property manager, a response should be sent within an hour. If it's not, the e-mail is sent automatically to the manager. After a certain amount of time without a response there, the e-mail will hit Cromwell's in-box. "We've never had that happen," he notes.



Abrupt break-ups cast university landlords in a not-so-flattering light. That's why real estate managers advise being upfront and honest if the end is near.


"You have to resist the temptation to fully leverage your portfolio because then you create obstacles for yourself." -Cliff Joyner, Vanderbilt University Real Estate

When Vanderbilt opts not to renew an external tenant lease, Joyner says, "We always try to help them find other space."


He can think of two instances when tenants wound up better off for it. An Indian restaurant and a Japanese steakhouse were struggling with having too much room for their needs and were, as a result, having difficulty paying rent. The university needed their space, so Joyner suggested finding them more suitable locations. One moved next door, another a block away. Both businesses now seem to be doing well, he reports.


Whether it's not renewing a lease or peeling off another sticky landlording situation, talking it out can help. "I take advantage of as many outside information sources as I can. There's a whole bunch of experts around a university-professors, experienced administrators," notes UI's Billington. He has also discovered the power of running ideas by others who are in his position elsewhere. "For the most part, it's a phone call," he explains. Think about it: A few minutes of encouragement and wisdom from someone who's been there, done that can ease many a landlord headache.


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