MAXIMIZE THE VALUE OF THE REAL ESTATE ASSETS OF HIGHER EDUCATION INSTITUTIONS

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MAXIMIZE THE VALUE OF THE REAL ESTATE ASSETS OF
HIGHER EDUCATION INSTITUTIONS

• Carole Wedge, President
• Shepley Bulfinch Richardson and Abbott
• Thomas Kearns, Principal
• Shepley Bulfinch Richardson and Abbott
• Wallace Mlyniec, Former Associate Dean
• Georgetown University Law School
• Jeff Turner, Senior Vice President
• Brailsford Dunlavey
• Robert Dickey, Managing Director
• Jones Lang LaSalle

Georgetown Law
Shepley Bulfinch
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• Valuing Assets
• The Campus
• Fresh Students Every Year
• Understanding Options
• Real Estate
• Funding
• New Models

• Linking Strategy
• Operating and Capital Budgets
• Payback / Lifecycle
• Evaluating Delay
• Escalation
• Recruitment
• Opportunities Missed

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CAPITAL PROJECTS IN CONTEXT
Initiatives that may impact space
needscapital planning and dollars.

• Strategic Plan
• Curriculum Plan
• Growth
• Technology
• Innovation
• Administration Change
• Sustainability Commitments

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QUESTIONS INSTITUTIONS ARE ASKING
How can we accomplish this? (Show me the
) How do we garner support? (Show me the
) How will this make us competitive? (Why
is this important?) How will this improve our
recruitment? (Why is this important?) Can
we afford this? (What are the
operating costs?)
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TRENDS IN HIGHER EDUCATION

• Institution as Economic Engine
• Transformational Student Experience
• Changes in Teaching and Learning
• Changes in Living Environments

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INSTITUTION AS ECONOMIC ENGINE
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INSTITUTION AS ECONOMIC ENGINE
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INSTITUTION AS ECONOMIC ENGINE
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INSTITUTION AS ECONOMIC ENGINE
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INSTITUTION AS ECONOMIC ENGINE
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INSTITUTION AS ECONOMIC ENGINE
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INSTITUTION AS ECONOMIC ENGINE
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INSTITUTION AS ECONOMIC ENGINE
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CHANGING LEARNING STYLES
Problem Traditional classrooms have key
restrictions of limited resource availability and
physical isolation.
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CHANGING LEARNING STYLES
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CHANGING LEARNING STYLES
Class with Remote Guest Speaker Imported into
the classroom via video with the session
including guest captured in streaming format and
shared with faculty and students doing
interdisciplinary work in related fields.
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CHANGING LEARNING STYLES
Goal - Establish a portfolio of flexible and
technologically-enhanced formal and informal
learning spaces in support of socially-enabled
inquiry and discovery.
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CHANGING LEARNING STYLES
Media Creation iPods, iTunes, iPhoto, eBooks,
iLectures, videophones, BluRay disks for
stereoscopic video, Lectopia, Symposia,
Blackboard.
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CHANGING LEARNING STYLES
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GEORGETOWN LAW SCHOOL FOUNDED IN 1875
2006 GULC
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DOWNTOWN D.C.
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GEORGETOWN UNIVERSITY LAW CENTER CAMPUS
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BERNARD McDONOUGH HALL EDWARD DURRELL STONE,
ARCHITECT
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EDWARD BENNETT WILLIAMS LIBRARYHARTMAN COX,
ARCHITECT
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BERNARD AND SARAH GEWIRZ BUILDINGHARTMAN COX,
ARCHITECT
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BERNARD MCDONOUGH HALL EAST WINGHARTMAN COX,
ARCHITECT
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GEORGETOWN UNIVERSITY LAW CENTER CAMPUS
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ERIC HOTUNG INTERNATIONAL LAW BUILDINGSHEPLEY
BULFINCH, ARCHITECT
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GEORGETOWN SPORT AND FITNESS CENTER SHEPLEY
BULFINCH, ARCHITECT
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THE FUTURE
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TRENDS TOWARDS ALTERNATIVE FINANCING

• Limited State Financial Support
• Speed of Delivery Execution
• Increasing Construction Costs
• Allow for greatest expertise
• Community Partnerships

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TRENDS TOWARDS ALTERNATIVE FINANCING
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TRENDS TOWARDS ALTERNATIVE FINANCING

• Less defined campus edges
• Off-campus university bookstores make for strong
  anchors
• College towns potentially incubate new business
• Student population accounts for 20 of the
  market
• Successful college towns consists of high-end
  national (30) as well as local merchants (70)
• Source Ayers Saint Gross

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OBJECTIVES

• Examine financing alternatives for colleges and
  universities
• Review development implementation options
• Achieve a win-win situation by aligning
  stakeholder interests
• Understand issues that pertain to developing
  institution-owned land

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ELEMENTS OF A SUCCESSFUL DEVELOPMENT
Market Demand (Programs)
Development Expertise (Skills)
Capital(Money)
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INSTITUTIONAL VIEW

• Long range and short range decisions
• Budgeting and finance
• University vs. university foundations
• Capital campaigns and private money
• Partnerships, collaborations and consortia
• Tax exempt status and UBITs

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CAMPUS DEVELOPMENT

• Core facilities
• Academic facilities
• Research
• Utilities and infrastructure
• Non-core facilities
• Residential and auxiliaries
• Administrative and support facilities
• Sports and athletics
• Campus retail

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CREDIT SPECTRUM OF FINANCING ALTERNATIVES
HIGH
LOW
CREDIT RATING IMPACTS
Joint Venture or Private Development
General Revenue Bonds
Auxiliary Revenue Bonds
Stand-Alone Revenue Bonds
Project-Based Revenues (Off-Balance Sheet,
Separate 501(c)3)
POTENTIAL IMPACT ON UNIVERSITYS DEBT CAPACITY
LOW
HIGH
COST OF CAPITAL
DEGREE OF UNIVERSITY CONTROL
LOW
HIGH
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DEVELOPMENT ASSESSMENT MATRIX
OPTION 1
OPTION 2
OPTION 3
OPTION 4
OPTION 5
Ground Lease (no participation)
Ground Lease (with participation)
University Development
Sale
JV Development
Risk
Level
Low
Med-Low
Medium
Med-High
High
All cash flows depend on the success of the
project. The risk is shared with the JV partner.
All cash flows depend on the success of the
project. University assumes all risks.
Reasons
All cash flows are certain.
Cash flows are certain, but the viability of the
lessor is a risk.
Cash flows somewhat dependant on the success of
the project.
Results
Timing / Control
No future control.
No control until the lease expiration (30 - 40
year minimum).
Control shared with the JV partner.
University has complete control.
No control until the lease expiration (30 - 40
year minimum).
Return Expectations
Recovery of capital investment plus some growth
factor.
A fixed annual return based on the value of the
underlying land.
Some fixed annual return and some upside
potential based on success of project.
Open to negotiation with JV partner.
University would receive market-based returns
Cost Impacts
None.
Ground lease can be structured to cover debt
carry.
University funds all acquisition and devel. costs
until completion long-term refinance.
Ground lease can be structured to cover debt
carry additional risk.
Possible equity contribution.
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QUALITATIVE ANALYSIS OF DEVELOPMENTALTERNATIVES
University Private Developer Hybrid
Cost of Capital Lowest Highest Premium for commercial uses
Speed of Delivery Slowest Fastest Same as private developer for commercial
University Control Program, Operations, Tenants, etc. Greatest Least Need for control manage the developer
University Risk Delivery, Financing, Lease-up, etc. Greatest Exposure Least Exposure Least exposure for retail, may require subsidy
University Financial Impact Greatest Exposure / Opportunity Least Exposure / Opportunity Blended
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CAPITAL VS. CONTROL
Programmatic and Quality Control
Capital

• Quick return
• Building to commercial standards
• Discipline of market forces

• Patience, long-term view
• Building to 100-year institutional standards
• Flexibility

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OWNERSHIP STRUCTURE REVIEW
University Owned

• Lowest cost of capital
• Highest degree of control
• Retain surplus cash flow

• Uses debt capacity
• Uses University contracting process

Affiliated

• Low cost of capital
• Reasonable degree of control
• Avoid University contracting process

• Level of University involvement can impact
  University credit

3rd Party Developer

• Potential impact on debt capacity
• Fastest process

• Highest cost of capital
• Lowest degree of control

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THE DEVELOPER SPECTRUM
Market Demand (Programs)

• At risk developer
• Fee developer
• Construction manager
• Design / build
• General contractor

Development Expertise (Skills)
Capital (Money)
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STEPS FOR SUCCESS

• Clear objectives within university
• Selection and agreement process
• Public contracting laws
• Board / foundation approval
• Master developer vs. project developer (overall
  planning)
• Developer (fee / at risk) alignment of interests
• Capital (investment partner, joint venture
  partner)
• Private foundation latitude and flexibility

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EVALUATING DEVELOPERS AND SELECTION CRITERIA

• Understanding the concept of the development plan
• Previous experience with similar projects
• Financial stability
• Team qualifications
• References

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DEVELOPMENT DOCUMENTATION

• Feasibility
• Market analysis
• Highest and best use analysis
• RFQ / RFP
• Concept proposals, principles for discussion
• Exclusive negotiating agreements
• Development agreements
• Joint ventures, limited partner and equity
  partner agreements

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UNIVERSITY 101 WHAT DEVELOPERS NEED TO KNOW

• University organization
• Institutional view
• Campus development
• Political context
• State vs. system-wide authority
• Overall organization
• Shared governance
• Decision making
• University foundations

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LESSONS LEARNED

• Do your homework
• Capital versus control determine optimal
  position
• Make the deal a win-win
• Understand alternatives
• Understand third party capital
• Moodys message