Large organizations, including educational institutions, often own real estate critical to routine operations. Additionally, owning real estate provides the opportunity to expand mission-based services, grow programmatic impact, and possibly generate revenue. As these institutions look to unlock the potential of underutilized real estate, they often seek to minimize their financial risk and high demand for staff resources. In our practice, Denham Wolf has seen a growing interest in engaging third-party developers to bring in additional expertise and resources. Navigating this process requires careful planning and rigorous implementation.
The phrase Public Private Partnership (“PPP”) was initially coined to describe a public entity leveraging the resources and expertise of a private entity to amplify the positive impacts of a capital project. These days, PPP commonly refers to any nonprofit that partners with a private developer to facilitate the development of property. Essentially, the use of a developer’s money to leverage a nonprofit’s assets.
Today we see many universities and colleges finding themselves in a competition to have the newest and best-in-class facilities. For institutions to remain attractive to top-tier talent, their buildings must embrace innovation and technological advances. Further, many wish to represent their commitment to sustainability by developing “state of the art” buildings that minimize their carbon footprint and highlight sustainable practices. Larger institutions often lead by example, especially when implementing sustainability in new on-site projects.
Institutions often leverage their real estate to impact their communities in numerous ways. For example, in addition to being revenue-generating, retail storefronts present the opportunity to create a distinctive campus atmosphere and culture. Organizations with underutilized properties on- and off-campus are encouraged to explore opportunities to use these sites to expand programs, generate income, serve the broader community, or a combination of all three. To access the full potential of their properties yet mitigate the impact on the institution’s balance sheet, some choose to enter into a relationship with a developer – often to preserve some control over the asset, a long-term ground lease. Untapped resources that have been “warehoused” until the resources are available can accelerate their path towards utilization.
Many universities and colleges have staff experienced in developing traditional physical spaces and effectively utilizing fundraising, both from philanthropy and debt. Internal teams, however, may be over-extended and strained when it comes to projects outside of the routine. In certain instances, the institution may lack the internal expertise necessary to carry out highly specialized buildings, including life science and cutting-edge medical facilities.
An arms-length transaction with a third-party developer, when structured appropriately, can jumpstart the activation of an underutilized asset while preserving the nonprofit’s debt-service capacity, staff resources, and critical financial ratios for existing debt obligations. Depending on the institution’s priorities, the transaction can also generate additional revenue for the institution.
For example, in our work with Columbia University, we have explored the possibility of bringing in a developer to maximize the use of all available development rights while delivering a critical programmatic need to the university. The additional development may accommodate housing or commercial uses, whatever the market deems preferable, which will generate income to allow the developer to pay Columbia ground rent on a long-term lease. Columbia would retain the right to expand into or eventually acquire the expanded development for its purposes in the future.
To realize the full benefit of working with a developer and ensure a rigorous and fair process, developer selection must be transparent to the institution and result in an unbiased “market” transaction. The institution must be clear about its expectations for the project, and we strongly recommend a thorough planning process to build consensus, including economics, timing, preferred uses, and more. It is helpful to establish non-negotiables (i.e., we must generate at least $X or we will not pursue the project, we must select a local developer), because the project will create momentum that can otherwise cause you to lose track of your key priorities. The request for proposal (RFP) is also the opportunity to express specific preferences, such as a requirement for Minority and Women-Owned Business Enterprises (MWBE) participation levels or union labor.
We recommend curating a list of appropriate developers, based on experience, capacity, and reputation, to receive a customized RFP. The RFP should present adequate information about the proposed development to facilitate the respondents’ responses and establish clear expectations for submission requirements. It is helpful to include in the RFP a request for a live financial model detailing their underwriting and preliminary design ideas, renderings, and their proposed development schedule. Also, be sure to include opportunities for clarifying questions, interviews, and proposal revisions.
Once you have identified the select group of developers and explored their interest in the proposed project, you can distribute your RFP and commence the dynamic and balanced competitive process. The RFP process should be well documented, from establishing project criteria through creating the list of selected developers to finalizing the selection. In addition to providing a clear rationale for the institution’s decision, it also creates the foundation for preparing the term sheet and, ultimately, the contract codifying the terms of the transaction.