Working with Universities
Are There Higher Opportunities in Higher Education?
Some brokers consider working with universities to be as rigorous as a final exam-testing a broker's mettle through delays for one more signature or another approval process. But Jerry Ward, CCIM, of RE/MAX Commercial Brokers in Louisville, Kentucky, says his firm wasn't put off by the demands of university protocol. In fact, when RE/MAX became the exclusive agent of the University of Louisville two and a half years ago, the firm decided to teach the university how to move things along. "We set up a training session with all the university departments that we dealt with, including the legal department," Ward says. "We showed them how to streamline procedures, so contracts and closing statements can get approved ahead of time. We also had a half-day seminar with the university's support staff, showing them how to set up things and introducing the Transact database that we use. They liked that, because they like knowing the time frame of when things are happening." The result? "Things move much more quickly," Ward says.
Not all schools prefer to enter into exclusive-agent agreements, but whatever the setup, universities and colleges represent a major market for brokers. Although the university provides about 5 percent of his company's business, "we are really a full-service operation for them," Ward says. The association began when the university issued a proposal to outsource its real estate department. "We were chosen after a detailed selection and interview process," Ward says, "which included a visit to our office by the university's staff to analyze our resources and support staff."
Since that time, Ward has assisted the university in the areas of consulting, sale and auction of donated property, lease transaction analysis, property management, coordination of out-of-state real estate transactions, representation of the university in the purchase of real estate, and comprehensive site analysis. Because of the breadth of the services, Ward says, "it demands all the skills learned in the CCIM program." His firm has handled everything from the auction of a donated fraternity house, to the evaluation of a tract of land in eastern Kentucky with mineral rights, to the acquisition of property adjoining the campus with a bowling alley and a radio station. Those structures were demolished, because what the university really needed was parking space, not another recreational activity.
In small towns, mid-size cities, and big cities, America's 3,638 colleges and universities offer opportunities for brokers like Ward to provide commercial real estate and investment services. Some schools look to outsource most of their operation to one firm; others work with a variety of brokers on various projects. The size and needs of the institution determine the amount and type of services required; however, in many cases they can be substantial. For example, during the last couple of years, the University of Tennessee bought or sold more than $7 million of property. And the university is just one of about 71 institutions of higher education located in the state, 44 of which are public and receive operating money from the state coffers.
In terms of budgets, building funds, and development plans, higher education is big business, both for private and public institutions. And because public universities spend considerable amounts of taxpayer money, state governments are understandably concerned with its wise use. For example, this year the state of Tennessee appropriated approximately $400 million for the University of Tennessee, about one-third of the university's annual budget.
The five-campus land-grant university is similar to other large, multicampus systems found in almost every state, and its real estate activities are typical for institutions of similar size. It owns approximately 22,700 acres of campus, research, and trust property in Tennessee and gift properties and mineral interests in other states.
Almost every institution of higher education, from small community colleges to large teaching and research universities, has real estate needs that commercial brokers looking for new markets can readily serve. Finding out about the needs of colleges and universities in a particular geographical area may be as simple as picking up the phone and talking to the institution's office of real estate. Or it may require networking with university development officers and trustees. Either way, once the door is open, it may lead to services that build in number and profit over the years.
What Are the Opportunities?
Regardless of their size, universities and colleges use all types of space. Many institutions have requirements for residential, warehouse, parking, office, classroom, and laboratory and research space. Furthermore, many are also involved in retail space, investment properties, REITS, and large-tract land banks as investments in their portfolios.
Recent Trends. Since 1980, there has been tremendous growth in the development and leasing of research parks connected with large research universities. From fewer than 20 before 1980, now more than 150 university-related research parks are located in North America with about 1,700 buildings containing more than 118 million square feet.
According to the Association of University Related Research Parks in Tempe, Arizona, research parks are land and buildings designed specifically for public and private research-and-development facilities, high-tech and science-based companies, and support services. Park tenants can include corporate research-and-development centers, faculty-developed businesses, university or government research centers, and private companies that usually choose the location to be close to the university for research or other synergistic reasons. Small-business incubators aimed at start-up technology firms are often a popular component of research park space.
In addition to often providing space that is wired for the newest technology or can be built out to include wet labs and other research facilities, research parks also offer companies access to a pool of highly trained employees, such as graduate students from the university's science and technology departments. Some research parks also offer tenants access to university facilities, from state-of-the-art sports/fitness complexes to one-of-a-kind electron microscopes.
In another growing development, large urban universities that find themselves landlocked with no space to expand may be ripe candidates for adaptive reuse of buildings in urban cores. In an innovative example, DePaul University in Chicago purchased and renovated the former Goldblatt's department store in the heart of the State Street retail district. Because the 584,289-square foot, 11-story building was too much space for the university alone, DePaul leased space to the city and retail establishments.
The $65 million redevelopment of the landmark property netted DePaul 321 individual offices, 30 classrooms, conference rooms, and space for a library and administrative offices for the school's Loop campus. To consolidate city department offices in one location, the city of Chicago leased 222,378 square feet of office space on four floors. DePaul leased the concourse and first floor to musically oriented retail tenants in a mall called the Chicago Music Mart.
Although these two examples represent the more dramatic development efforts in which large universities engage, they indicate a growing trend among educational institutions toward active development of properties that provide sources of revenue as well as traditional academic facilities.
Higher educational institutions generally divide property into three major categories: institution-owned property, leased property, and gift or donated property.
Institutional Property. Campus or institutional property supports the institution's research and other academic pursuits and is owned in fee by the university. This is generally campus property built around a student union or a central administrative building. Acquisitions of this type are budget-driven and are usually identified in the campus master plan or land acquisition plan.
Growth areas within institutional property are the development of off-campus neighborhood medical facilities for the support of large teaching hospitals and off-site or perimeter parking developments. One of the newest areas is distance-learning classrooms, which are located in remote areas and receive real-time classes broadcast by satellite or digital feeds. The University of Tennessee currently has 13 distance-learning facilities located across the state in university-owned and private leased space.
Leased Space. A second division of real property is institutional leased space. In addition to leasing space for distance-learning classrooms and parking facilities, universities may receive research grants and consulting contracts that require office space off the main campus and close to the contracting company.
When public institutions seek office space, a request is issued soliciting proposals to lease a certain amount of space. These proposals are received and evaluated, and leases are finalized. Brokers interested in working with universities should be on an institution's vendor list for real estate services so they will be aware of the institution's needs and receive notices of requests for proposals.
Brokers representing the lessors must keep the process moving forward toward finalized lease negotiations. The approval process and time frame required to obtain the necessary signatures can be several weeks, especially when dealing with public institutions or large-dollar leases that require special review and approval by the university's board of trustees.
Gift Properties. Gift property management and disposition offers the most opportunity to brokers. (See "Case Study in Gift Property and Estate Planning," page 21.) Most of these properties are donated through the efforts of university development and alumni affairs offices.
This area can require creativity. Whether through outright gifts or the establishment of trusts, universities acquire all types of property from cemetery plots to large, undeveloped tracts of land. The property may be improved, income-producing, or vacant speculative property.
Once an institution receives title to a property, the first step is generating an asset management and disposition plan (AMDP). This plan must be in concert with the institution's goals and the desire of the donor. Consulting with a broker active in the marketplace, the institution's office of real estate management reviews the appraisal amount, the AMDP, and the goals of the donor and university to decide how to proceed with the management of the property. Some courses of action may be to sell immediately, hold until the market rebounds, hold and make minor improvements, or hold and make major contributions to deferred maintenance, updating, and marketing efforts.
Any decision made may involve the expertise of the broker. In Ward's work for the University of Louisville, he coordinated the evaluation, acquisition, and sale of a 10-story office building in the central business district of Huntington, West Virginia. "The office building was donated by an alumnus of the university's school of law," he says. "We established a management team for the operation of the building during the university's interim period of ownership."
The University of Louisville gets a number of property bequests, Ward says, "especially out-of-state bequests from older alumni who have retired and moved elsewhere. We evaluate the property in a two-day period and recommend whether or not the gift should be accepted. Sometimes people donate property to get rid of it; if there's too much deferred maintenance or an environmental problem, we'll recommend that the university not accept it."
Many times, universities receive property under trust agreements naming the university as trustee and beneficiary. As trustee, the university must be careful how it spends money on trust property. The institution cannotspe nd its own money to improve or enhance the trust property-this may be construed as self-dealing and violate the trust, thus disallowing the charitable deduction. In addition, the university must be sure that its activities are not considered unrelated business income and thus subject to the unrelated-business income tax.
The Bureaucratic Process
Like many large businesses, most universities do not make the quick decisions that may be common in other real estate transactions. With state institutions, many large real estate expenditure decisions may have to go to the state legislature for approval or ratification. Also, leases that meet certain term or annual rental thresholds may require the approval of other state government officials.
With respect to gift properties, the University of Tennessee may, by state statute, acquire and dispose of gift property without any further review by state officials. This permits the university to finalize transactions much quicker. However, all universities operate under their own bylaws and procedures, which usually address such requirements as minimum exposure time to the market, type and number of appraisals, and minimum sales prices.
Another important consideration, especially when dealing with public institutions, is the possibility of conveying property by quitclaim deed. This deed conveys only the university's rights or interests in real property as they may appear without stating the nature of these rights and with no warranties of ownership. This may concern a potential buyer, but with proper title search and due diligence, the buyer should be satisfied as to the quality of the title.
Regardless of how an institution makes buy or sell decisions, brokers must take into consideration the approval process and determine if the necessary approvals are in place. Many times, title attorneys may require copies of bylaws, resolutions, and seller affidavits representing that the university has full power and authority to sell a piece of property.
Taking the First Step
Although many universities have well-staffed real estate departments, most are not active marketing specialists. Institutions often place the marketing responsibility with brokers. The institution's real estate offices do not have the time or resources to respond to every inquiry or request that they receive to visit properties across the state or nation. For the University of Louisville, Ward uses both the CCIM network and other RE/MAX offices to investigate and coordinate out-of-state transactions.
Interested brokers should contact the person or office responsible for real estate acquisition, management, and disposition at any local university, college, or campus in the geographical area. In addition, for large, multicampus universities, brokers should also contact the office of real estate management for those related institutions.
Real estate activities in higher education are ongoing and growing. Although budget constraints may have slowed the acquisition of campus properties, development and alumni activities are increasing. The charitable remainder unitrust is a major philanthropic, estate-planning vehicle still available. This allows contribution of appreciated assets with significant tax benefits. If a gift of real estate is used to fund the trust, then an AMDP must be put in place. The implementation of the AMDP offers brokers the opportunity to do more business and provide a valuable service.