Ramping up liquidity by rethinking real estate
Colleges and universities can bolster liquidity and slash costs by taking advantage of strategies that are common in commercial real estate but underused in higher education.
Nearly every higher ed institution owns or leases real estate in one form or another, from off-campus housing for visiting professors, to satellite facilities out in the burbs. Yale University is among the top commercial landlords in New Haven, Connecticut, for example. In a 2018 analysis by news outlet The Real Deal, the ten biggest private universities in New York owned a combined total of more than 45 million square feet of assets—about 550 buildings in all.
Now that the fallout from Covid-19 is forcing colleges and universities to rethink their business models, they should use real estate to support those strategies. Savings on leased and owned properties could be used to buy technology or ramp up safety.
Below are three approaches to optimizing real estate that are employed in commercial real estate and turnaround management.
1. Renegotiating leases.
Executives in the hard-hit retail sector are increasing the frequency and intensity of “portfolio reviews”—efforts to systematically cull underperforming stores and look for ways to lower occupancy costs. Higher education could benefit by scrutinizing real estate in the same way. With respect to any space leased by the university, this could involve lowering rental payments by aggressively engaging with landlords in renegotiations, or subleasing spaces the university no longer needs. For example, the university could respond to the rising need for affordable housing by subleasing an off-campus student housing development that, due to declining enrollment, is no longer needed.
2. Doing sale-leasebacks of owned properties.
In commercial real estate, operators routinely use sale-leaseback transactions to catalyze broader business strategies. The basic idea is to raise cash by selling a property and then leasing it back, thus retaining the ability to keep on using it. These deals are particularly doable for buildings in big cities, where private equity firms and other real estate investors are forever on the lookout for long-term acquisition opportunities.
3. Selling non-core real estate assets.
For just about any business today, it’s a good idea to sit down and put real estate assets into one of two baskets: “core” or “non-core.” Even before the COVID-19 era, declining university enrollments, plummeting funding from states and other adverse trends may already have shifted certain assets into the non-core category. Moving forward, it is likely that other buildings will cease to be mission-critical, making them good candidates for sale.
Assets such as well-kept houses located close to campus may have appreciated nicely over time. In other cases, COVID-19 may have triggered major questions about the market value of particular properties. (After all, the original appraisal was derived from the pre-pandemic assumption that it would be part of a fully functional college town—not the “new normal” of social-distancing and capacity restrictions.)
Savings on leased and owned properties could be used to buy technology or ramp up safety.
A structured sale could be beneficial here. Under today’s conditions, it’s more likely for a school to need to raise cash under a tight timeframe as part of an ongoing financial plan. Structured sales provide certainty around when real estate transactions will occur, because bidders agree to the sale terms (including due diligence items like rent rolls, environmental reports, preliminary title commitments and management agreements) upfront as opposed to post-contract, which could lead to haggling that delays or even scuttles the deal. Especially at a time like today, structured sales can boost bidders’ confidence—and lead to a better sale price.
These accelerated transactions generally result in all-cash offers within 60 to 75 days. They give sellers control over the process and timing and yield real-time data about what properties are actually worth, even in a disrupted marketplace.
Liquidity is critical in higher education today. The goal should be to position for the future, not merely survive. Taking a strategic approach to real estate is one way to get there.
Jeff Hubbard is a senior managing director at A&G Real Estate Partners. He has 28 years of experience in real estate across sectors, including education, retail, office, residential and hospitality, and can be reached at email@example.com.