Using Land Assets for Stress Relief
Colleges and universities face a slate of migraine-inducing financial challenges. Inflationary tuition costs, declining enrollments, competition from for-profit schools and vocational alternatives, under-performing investments and diminishing endowments, and rising liability risks related to public safety and security--these are but a few contributing factors to this dilemma. Because many institutions have land and real estate assets at their disposal, the outlook is not altogether painful. Still, of those that do have these assets, how many have the in-house expertise to address the breadth of issues in the real estate world?
Often owned for decades or longer, these overlooked assets can play a vital role in helping IHEs address many seemingly unrelated broader business challenges.
"Colleges and universities are finally taking a more critical look at their real estate portfolios," explains Howie Gelbtuch, a principal with Greenwich Realty Advisors in New York. "Finding the highest and best uses for real estate is a means to unlock value or tap into capital that can help institutions thrive in an increasingly competitive environment. There is also a growing realization that schools must take a leadership role in their own neighborhoods to ensure an attractive environment for students and faculty."
Gelbtuch is a member of The Counselors of Real Estate (www.cre.org), a nonprofit organization of real estate advisors in the U.S. and abroad. Their Consulting Corps service provides unbiased guidance to IHEs and other nonprofits on how to maximize real property assets.
Institutions provide the CRE Consulting Corps with a brief history and summary information about their real estate problem, as well as their immediate and long-term objectives. The Consulting Corps sends experts to conduct an extensive site visit and delve into the problem, and then the team spends several intensive days crafting solutions and action plans. The group requests only an honorarium and travel reimbursement for its services.
Institutions that ignore real estate issues in their communities or fail to use assets strategically do so at their own peril, says John Fry, president of Franklin and Marshall College (Pa.). "Fundamentally it comes down to two things," says Fry. "If the institution is located in a neighborhood that is thriving, safe, and attractive from a quality-of-life perspective, it's going to be stronger in recruiting the best students and faculty. And beyond the mission of teaching and research, modeling good civic behavior and citizenship is an equally important responsibility."
Before coming to Franklin and Marshall, Fry played a central role with his former employer, the University of Pennsylvania, which has been widely lauded for its joint public-private efforts in community redevelopment known as the West Philadelphia Initiative. Once criticized for ignoring the creeping urban blight in the surrounding neighborhood, Penn changed course to tackle the problem in the mid-1990s. Today, the West Philadelphia Initiative is routinely touted as the definitive model for partnering with the community and taking a vested interest in the neighborhood.
The initiative was an ambitious community redevelopment exercise that ultimately helped reduce crime and resuscitate West Philadelphia. Today, a stroll through the neighborhood reveals a host of thriving developments that contribute to the economic vitality of the area. These include: University Square, a 300,000-square-foot mixed-use project that boasts a luxury hotel, the Penn bookstore, numerous retail amenities, and valuable green space; Hamilton Square, a 75,000-square-foot project featuring a specialty grocer, theater complex, and parking facility; and The Left Bank, a 700,000-square-foot, previously blighted warehouse that the university acquired and converted into apartment units, retail, and offices. Not to be overlooked, the university partnered with the School District of Philadelphia to create the Penn Alexander Community School for students in grades pre-K-8. And finally, it helped provide cash subsidies and other incentives to both faculty and staff to attract residents into the neighborhood. The multi-faceted approach, generally considered a success, recently earned top honors in the prestigious Urban Land Institute's Awards for Excellence competition.
"Penn competes with Harvard, Princeton, Yale, and other Ivy League-level schools," says Fry. "The neighborhood situation was a severe negative. But with our commitment to West Philadelphia we took it out of the negative column and put in the plus column. From a competitive advantage standpoint, it helped us enormously."
In mid-2004, the trustees of Abilene Christian University (Texas) determined that something needed to be done to address the deteriorating neighborhoods to the north, south, and west of campus. The area was uninviting at best. Rental units owned by private citizens were in various stages of disrepair, some actually requiring condemnation. Campus visits were raising qualms among parents and prospective students, and there was a growing concern among ACU administrators that conditions could have an impact on enrollment. Without preemptive action the trustees knew the situation would only worsen.
The school called on a CRE Consulting Corps panel, which spent about a week meeting with university and community officials. The panel created an over-arching plan that identified specific real estate tactics and helped lay the groundwork to address the problems. Among the suggestions was an aggressive acquisition of land as a means to spur gentrification, gain control of any potential development, and create new amenities for students. In addition, the Corps panel urged the university to form a separate real estate entity for liability and cost management purposes, and to pursue partnerships with other public and private local stakeholders.
When Wal-Mart announced plans to build a new store close to the university and several of its properties, questions were raised about the best use of these parcels. Strategies for each parcel--whether to hold or sell, potential uses, and timing of sales or development--were formulated. All of these issues were considered in the context of how the location and future potential uses of these properties could impact both the university's image and its bottom line.
The university expects to formally endorse the recommendations and may announce more detailed plans of a community revitalization program later this year; the plans would coincide with the school's centennial. The land-use strategies should ultimately improve the quality of the neighborhoods, ensure the best uses for ACU-owned properties, and help the university achieve its enrollment benchmarks.
"We were quite satisfied with both the panel and its report," says ACU Executive Vice President Jack Rich. "It will be very helpful as we try to build a consensus on where we should head and how we might accomplish our goals. Now the real work begins."
The real estate issues of educational institutions do not always relate to neighborhood revitalization. Real estate assets are often the largest item on a balance sheet for colleges and universities. Yet if these assets are undeveloped or do not generate income, they can actually siphon precious operating funds away from the institution by virtue of their associated liabilities.
Tougaloo College (Miss.), a small liberal arts school located in a bedroom community near the state capital of Jackson, was faced with an interesting dilemma. Established in 1869 with the acquisition of a 500-acre plantation, the institution is rich in history and land, but poorly endowed. Approximately one-quarter of the college's land is currently used for campus and related activities while the remainder is undeveloped.
Unlike the neighborhoods surrounding Penn and ACU, Tougaloo's problem is not urban blight. The college is located in an affluent community, and the school's land is in the path of accelerating development activity moving toward campus. The proposed widening of County Line Road, the main gateway to the college, as well as strong growth in Hinds and Madison counties, are creating a unique opportunity for the college to strengthen its fiscal position through the strategic use of its land.
The scope of the issues and the potential ramifications--both positive and negative--are enormous, notes Kelle Menogan, vice president of Facilities Management for the school. Tougaloo turned to CRE Consulting Corps for help. "We have one time to do it right," Menogan says. "Plus, we don't have all that expertise here on campus, so they helped guide us through the process and gave us the tools to get started."
After inspecting the land and meeting with city, county, and state economic development officials, a panel from CRE Consulting Corps outlined a broad development strategy to help the college maximize the value of its assets without relinquishing control. The experts identified several areas for prime development but also stressed the importance of a master planning process to consider longer-term ramifications.
Among the immediate recommendations, the Corps urged the college to have a greater say in the County Line expansion to ensure that the project didn't detract from the college.
The university was also advised to be patient and resist the urge to sell parcels outright for what might appear to be attractive profits, but which could prove more valuable later. The CRE panel helped Tougaloo work with the city to get proper zoning controls, to make sure that the infrastructure improvements would be inviting, and to ensure architectural integrity and quality in any projects.
"We're a small institution and I don't have access to an entire staff of architects and developers," says Menogan. "We received this incredible level of expertise for pennies on the dollar--advice this college couldn't otherwise afford. They were, and continue to be, an invaluable resource."
For too many years, colleges and universities have been isolated from their own communities, sometimes coexisting easily but other times acting unilaterally and promoting seclusion. As evidenced by the successful initiatives of the University of Pennsylvania and the new work being undertaken by Abilene Christian University, a commitment to the community and a genuine partnership with the surrounding neighborhood is mandatory, albeit challenging.
And beyond taking a more proactive role in community development, institutions of higher learning should understand that real estate can be a powerful source of income that is often underutilized. For Tougaloo College, the development opportunity at hand offers a rare opportunity to enhance the endowment and create a future equal to its rich history. "For many institutions," says Gelbtuch, "finding the best and highest uses for land, often without ceding control, can be a genuine windfall."
Theddi Wright Chappell is director of advisory services at Pacific Security Capital in Beaverton, Ore. She often consults on higher-education real estate investments.