Start where you are. Use what you have. Do what you can.
Post outbreak of COVID-19 in March 2020, many higher education institutions are facing financial challenges on account of reduced revenue and high fixed costs towards operations and debts. Higher education institutions generally have sizeable real estate holdings and may hold the solution for the current challenging scenario.
The physical campus is the heart of the institution, but it is also real property, with real value. Administrators may be able to turn to creative real estate ownership structures, common in the commercial real estate world, to create an infusion of cash for the institution.
To begin thinking strategically about your real estate, you must understand that your institution’s buildings and land are assets to be optimized rather than maximized, more so in times of crisis. Optimizing your real estate comes down to answering one question:
Are you utilizing the entire scope of your real estate assets to their highest performance?
The following steps will guide institutions in developing a strategic plan for unlocking real estate value of their portfolio:
Step 1: Catalog and review institution’s real estate portfolio
The first step to develop your strategic plan is to catalog and review your institution’s full real estate portfolio. Higher education institution’s portfolios are often made up of a mashup of various types of real estate -- contiguous parcels forming the core of a campus as well as leases on nearby property or smaller parcels in other locations (sometimes completely off the radar of those making the most difficult financial decisions for the institution).
Step 2: Understand education institution’s needs in short-term and long-term.
At this juncture, it is important to formulate a long-term vision for the Institute and then break it up into immediate, short-term & long-term plans. The real estate requirement for each stage must be planned to optimize the real estate strategy.
Step 3: Evaluate institution’s real estate portfolio based on its business needs.
The second step is to evaluate and prioritize those assets based on value -- monetary, strategic, regulatory, and sentimental. A property may be worth hundreds of millions, but its sale may be restricted due to regulatory constraints and thus may need to be retained. In contrast, a piece of property may be of minimal importance to the character of the institution but significantly attractive to potential developers or third-party users.
In this step, lease audit to be conducted for leased facilities to identify if lease terms are aligned to current market conditions, key terms for exiting/ subletting if required, and other important parameters.
Step 4: Develop strategy
A. Lease Restructuring
Through lease audit one can identify preliminary cost savings by assessing all the leases where the institution is a tenant to determine whether the lease could, by its terms, be terminated or the rent reduced. Some leases explicitly contain provisions that would give a break on rent when the tenant cannot operate. Even if a lease does not contain those provisions, creative arguments might be made that the tenant is entitled to deferral or relief of rent obligations under applicable law. Landlords may even be eager to allow a tenant to terminate or to sublease, especially in markets where rents have risen in the past few years or there is significant nonpayment of rents generally. After reviewing a lease with a lawyer, savvy institutions can reach out to landlords to negotiate creative solutions.
While eliminating or reducing rent obligations on an institution’s books can offer some relief, the way to generate actual income or liquidity from real estate is to dispose of some interest in it. That does not necessarily require a sale. Real property can generate cash from rents, from a mortgage or from a joint venture, all of which allow an institution to maintain some degree of control over the way that property is used or redeveloped. You can structure these arrangements flexibly to allow your institution to take back some use of the property when campuses are full again.
Leasing property to a third party allows the institution to maintain the most control. While seat counts are reduced in the coming semester or semesters, a college or university could offer short-term leases to office tenants or other educational institutions. Many office tenants will likely be searching for additional short-term square footage as employees come back to work but cannot safely work in the same close quarters as before. Working with a broker to market short-term leases could reveal surprising opportunities and allow for the option to take back control of the space once the pandemic impact declines.
B. Property dispositions: Long term leasing & Sale–leaseback
Institutions looking for more substantial cash flow from disposition (but preserving ownership in the long run) may consider a long-term land lease. Land leasing gives a developer a right to own the building constructed upon it for a specified duration (generally, 30-60 years), but the land lessor can often maintain consent rights over the method and the aesthetics of any new construction, limit the way the building is used, and have the right to consent to any sale.
Alternatively, a sale-leaseback would allow the reverse of the ground lease structure: your college or university can continue to occupy the property while monetizing the value of ownership. In a sale-leaseback, the institution sells the property to a third party, resulting in a cash payment to the institution. The institution then leases the property back from the new owner -- and may even have the First Right of Refusal (FROR) option to buy back the property if the new owner ever decides to sell. That can provide a quick infusion of cash with little to no change in the day-to-day use and operation of the property.
Finally, one can explore partnerships with developers who are looking to develop student housing or mixed-use projects on university property. Through various formulations of underlying ownership, a partnership between your college or university and the developer would allow your institution to benefit from the developer’s construction and operational expertise while maintaining some level of ownership and control over the property. Many private companies, such as student housing developers, hospital systems and residential developers, are looking to partner with educational institutions to bolster the credibility of their brand and to find shared efficiencies.
The most effective real estate management strategy is likely a combination of all the above depending on the vision and requirement of the Higher Education Institution (HEI). Shedding rental obligations will free up some operating budget. Short-term leases will provide cash in hand and flexibility for the future. Sales of noncore parcels will provide liquidity and relief of operating expenses. Sale-leasebacks, ground leases and joint ventures will provide cash in the short term and the comfort of additional income in the future, while maintaining institutional control over the look, feel and use of the campus property. All these options afford liquidity without jeopardizing the longevity of the institution.
Step 5: Implementation
The final step is implementation. The HEI needs to be focused on the selected strategy and have market aligned expectations. One can take support for partner selection, tenant search or sale process from a reputed real estate advisory firm. They can assist your in-house staff navigate local real estate markets, lease or acquisition negotiations, and build-outs so you get the best value for your real estate asset.
Colleges and universities have a lot of capital resources tied up in their physical assets. However, many viable real estate strategies can turn your student housing, campus parking, food service, or utility generation into revenue streams for your institution. Although there is a lot to learn about sale-leasebacks, property management companies, and long-term lease negotiations, many colleges and universities are spinning off these operational responsibilities confidently knowing they are generating capital and leveraging knowledgeable, experienced service providers to achieve their goals.
In summary, strategic plan will guide institutions to:
- Maximize the function of your existing facilities,
- Prioritize capital improvements and allocation of capital funds toward real estate,
- Leverage facilities as a source of revenue for reinvestment,
- Promote a positive environment that will attract and retain students on your campus.
The suggested process will help a financially challenged college or university minimize the threat of reaching into an endowment to cover expenses. By looking instead to the campus under its feet, the institution can effectively obtain an infusion of cash without relinquishing its identity and physical presence in the process.
Meraqi provides real estate solution to education institutes for varied purpose. Meraqi provides strategic consulting, research and analysis, acquisition, disposition, financing services and due-diligence services for-profit schools, colleges and universities to secure strategic locations, lower occupancy costs and increase market presence.
We provide solutions to Private K-12 schools, Private Colleges and Universities and ancillary facility: Student Housing.