For years, colleges and universities have successfully monetized their non–mission critical real estate assets. In this Q&A, expert Kim Wright, a senior associate at B&D (full bio below), sheds light on why the practice is likely to become increasingly common in the coming years, focusing on the monetization of campus land for commercial development.
What is monetization?
Wright: To put it simply, monetization as we’re talking about it is taking a real estate asset, typically land, and developing it to improve its value. Monetization extends to other campus assets, but for this discussion, I am only focusing on underutilized land. So I am not picturing schools monetizing their student housing portfolios, energy programs, or power plants, but developing their land into multifamily housing, retail, office space, medical office space, industrial uses such as logistics warehouses, etc. This can happen on-campus or off the main campus with land owned by the institution. Typically, B&D recommends that an institution not give up ownership of its land so it maintains control. Monetization does include ground leasing land to developers, but the ground leases need to be longer to drive developer interest.
When done well, monetization strengthens a school’s ability to optimize its real estate assets to achieve its goals. For smaller private institutions that are heavily tuition-dependent, monetization may ensure their survival.
What impact will COVID-19 have here?
Wright: The fallout from the global pandemic is expected to impact enrollment—an area we all already knew would be challenging in the coming years due to declining graduation rates. Suddenly, many families are no longer be able to afford college. And those that can afford it might now be looking closer to home instead of sending students across the country; this leaves schools that draw students from afar working even harder to compete (and perhaps coming up short). Meanwhile international enrollment might be fraught, with fewer students willing and able to travel. To put it simply, the enrollment situation could be dire.
Given that decreasing enrollment and the resulting revenue declines, and in light of the ongoing financial demand for maintenance of on-campus facilities—both due to the virus and to general deferred maintenance—schools will have to look beyond tuition and state funding to maintain their livelihood. For schools facing legislative limitations on how much they can increase revenue through tuition and fees, this will be even truer.
Schools across the country will need to search out and implement creative ways to maintain financial sustainability. Many schools have underutilized real estate. I expect many of them will explore the monetization of campus land.
Beyond just financial reasons, why do schools look to monetize their land or other assets through commercial development? What are some examples?
Wright: The core answer is indeed to generate revenue, although many schools are also focused on placemaking and ensuring that the campus and surrounding area are vibrant and attractive. Right now, we’re working with a number of colleges to monetize their campus real estate for this very reason. One, a private university in the West, has been heavily tuition-dependent. For its own survival, the school is working to be less dependent on tuition. It is looking at commercial development on some land it owns to generate revenue and fund future growth.
Other key potential benefits include boosting recruitment and curriculum enhancement. We’re working with a community college that is exploring the development of on-campus land with some of the primary goals being to develop new learning environments to support academic needs, to create jobs for students, and to generate revenue.
Another benefit is enhancing the surrounding community. In some cases, corridors can be activated and neighborhoods can be created or enriched—both things that increase a school’s attractiveness to potential students. For some schools, this is part of their mission. For others, it’s about doing something good. As an example, we are currently working with a private school in the Northeast to enhance a blighted, nearby neighborhood. The project will directly benefit students, while also supporting neighbors. We’re doing something similar with a private university in the West; this schools is seeking to enhance its larger neighborhood, and may acquire additional land to fulfill the vision.
There are further additional benefits to monetizing campus land. A quick list: the practice can help with affordable housing in the marketplace, boost local retail activity, generate tax revenue for the city, and more.
What are the drawbacks?
Revenue generation is important, but it’s not the only important thing here. Schools must use their entire real estate portfolio the best way they can, which is ultimately about serving students through mission advancement. For example, developments might relate to a school’s curriculum or create jobs that students can apply for after graduating.
Here’s an example. There is a public school in the Northeast that recently worked with a developer to build a senior living community on campus. The arrangement is very smart: The project costs about $320M, and the university expects at least $2M in rental income annually. This money will fund scholarships, enable the university to hire new faculty members, and more. Beyond that very important base revenue generation, the development offers additional benefits to the school. Residents of the facility will be eligible to take courses at the university, and a student performance center will move into the new complex. A lot of very thoughtful interaction was built into the facility—an example of real estate being developed into something that benefits the school beyond just money. But it didn’t have to be that way. The school could have brought, say, an unrelated factory onto campus. Would it have generated revenue? Sure. But would it have generated as much revenue as possible while also directly and indirectly benefiting students and the school community?
A separate but important drawback to monetization is that it is not necessarily an easy path. We’ve seen public agencies take issue with schools getting into real estate, specifically when it comes to offsetting taxes. There have been projects that are not subject to certain taxes due to being on university land, or land owned by the university’s foundation. In a recent case in Texas, it was argued that taxpayers would be forced to make up the lost tax revenue from the university-related project. There are ways to mitigate these types of challenges, but a school must really want to pursue this path, and must know how to—or must partner with organizations that can advise them—otherwise they risk spending a lot of time and resources only to see no progress.
Any misconceptions about monetization?
Wright: One we encounter a lot is that in order to engage in monetizing assets, schools must own those assets. That doesn’t have to be the case, as land, for example, can be owned or purchased by the university foundation. Indeed foundations are playing larger roles in a university’s ability to obtain land and build on existing properties.
This is a very literal misconception, but it’s also representative of the idea that monetization is a bit more complex—in a good way—than might appear at first. No two projects are alike, and there’s no one way to do it. But that means schools have a lot of flexibility and a lot of opportunity—both things that will be key as school work to ensure financial sustainability in the post-COVID era.
KIM WRIGHT is a Senior Associate with Brailsford & Dunlavey. She is one of North America’s leading experts on student housing feasibility, public-private partnerships, and general real estate, including multi-family, workforce, and mixed-use housing developments. Ms. Wright has more than 15 years of advising experience in the U.S. and international markets for educational institutions, not-for-profit foundations and private developers on issues related to feasibility, program development, financial modeling, and other aspects of planning and operations.
Ms. Wright has a Masters of Public Management, University of Maryland, and a B.A. in Political Science and Urban Policy from Canisius College. As part of her undergraduate studies, Ms. Wright spent two years studying at the University of North London in the England. She is a member of Community College Business Officers, Association of College and University Housing Officers International, and National Association of College and University Business Officers.