Capitalize on Campus
University properties hold opportunities for redevelopment.
campus properties often languish in colleges' real estate portfolios
with their revenue potential unrealized. To capitalize on these
opportunities, commercial real estate professionals can create joint
ventures with educational institutions. The key is to identify the best
prospects for redevelopment and structure proposals that meet the needs
of colleges and universities.
any property that lies within the environment of a large college or
university has potential value because a student body always demands
good housing. When developed in the right way, student-housing
buildings become highly coveted places to live that benefit from
word-of-mouth advertising and a waiting list of prospective tenants.
Companies that capitalize on the redevelopment potential and are
identified with good student housing have a ready audience for future
Many factors work in favor of developers, brokers, and others who are
interested in pursuing the student-housing property niche. First, many
universities lack the resources to redevelop properties into a
significant income source. Second, most universities face increasing
enrollment numbers every year and a subsequent increased need for
housing. Not only are college admissions more competitive than ever,
it's also a challenge to obtain university housing. At some large
universities, only freshman are guaranteed on-campus housing. This
creates a huge demand for student housing on- and off-campus for older
colleges are wary of owning properties that have not been maintained
properly by previous owners. Deteriorated college-owned buildings
reflect poorly on a school's image, among both town residents and
case study highlights the potential commercial real estate
professionals can find when working with universities and colleges. The
University of Pennsylvania owned Pine Arms, a 74-year-old mid-rise
apartment building in University City in West Philadelphia, where the
university's campus is located. Once an architectural gem and asset to
the community, the building had suffered years of neglect. University
of Pennsylvania purchased the property to protect it from further
deterioration, knowing that this building could help fulfill the need
for university housing in the future.
Apartments of Philadelphia realized the opportunity and took the
initiative. A student-housing pioneer, the company's private holdings
now total more than 220 properties and include mid-rise buildings,
brownstones, townhouses, and garden-style apartments. By partnering
with the university rather than simply negotiating a long-term ground
lease, Campus Apartments created more value for both partners.
The Joint Venture
A university-commissioned study indicated Pine Arms should be torn down
and replaced immediately - an expensive proposition. Campus Apartments
approached the university with a redevelopment plan that would cost 33
percent less than what the original study had proposed.
company proposed a joint equity venture in which it would develop,
manage, and assume all debt risk for Pine Arms. The university, as a
limited partner, would share in the positive cash flow. In exchange,
Campus Apartments would receive a percentage of the rental revenue of
the redeveloped building.
university to such a partnership requires a well-crafted joint venture
proposal. Universities often lack the budget - and expertise - for
redevelopment. Developers can provide a valuable service by taking the
project off the school's hands - at minimal risk and cost.
Apartments tailored a financing strategy that suited the school.
Ideally, colleges or universities are looking for plans that do not
take any dollars out of their budgets and do not require them to assume
any liability. However, they also need to retain rights to properties
in the event that they may one day need them for campus expansion.
addition, as not-for-profit institutions, certain financial issues
affect their balance sheets and credits. They need to be extremely
cautious and they make decisions much more slowly than private-sector
companies. That was the case with the University of Pennsylvania.
Structuring the Proposal
The Pine Arms proposal outlined a plan to transform the property into
attractive, luxury apartments - and save the university money and
liability at the same time. Campus Apartments found the most important
component in structuring the joint venture was the understanding that
the school wanted to maintain certain controls. University of
Pennsylvania requested control over the sale, refinancing, and the
property's change of use.
Apartments took all the risks, including a construction completion
guarantee, a personal guarantee of the construction loan, permits,
construction pricing, and finally, rental and lease-up risk.
assuming lease-up risk for Pine Arms, Campus Apartments removed the
final hurdle from the university's perspective. Because of the
company's experience and reputation in developing and managing real
estate in University City, the school was very receptive to the
partnership. However, the Pine Arms deal still took 18 months to
negotiate and the project itself took 2.5 years.
The Financing Details
To finance the redevelopment, Campus Apartments obtained a two-year,
interest-only construction loan based at a rate of prime plus zero,
with the loan amount equaling 80 percent of the construction cost.
permanent financing went smoothly. Once the project was completed, upon
achieving a 90 percent occupancy rate for 90 days, Campus Apartments
placed a 10-year loan with a 30-year amortization non-recourse with
Fannie Mae, at a rate of 5.78 percent.
structuring the financial details in the proposal, developers need to
make it clear to the university exactly how cash will be obtained for
the project. But they also should look at every angle to streamline
costs to make the joint venture proposal more attractive financially.
and developers can investigate other ways to create financing, too. For
example, older buildings may qualify for historic tax credits. However,
joint ventures with not-for-profit partners, such as most universities
and colleges, cannot sell historic tax credits. Therefore, creating
different entities to accomplish their sale may work. For instance, a
university can be structured as a limited partner, or the developer can
transfer the stake in historic tax credits to for-profit university
Façade easement is another
type of tax credit that developers can utilize. Many nonprofit
preservation organizations want to ensure that building exteriors are
preserved. The rights to the easement can be sold to a nonprofit in
exchange for the developer's assurance that any replacements or
upgrades will be done in a historically accurate manner. In return, the
developer and university receive the benefit of further tax deductions.
From Eyesores to Profit Centers
In the end, University of Pennsylvania gained a fully occupied luxury
apartment building, and Campus Apartments had a new long-term revenue
within the historic natureof the building, Campus Apartments preserved
its original French doors and crown molding, leaden antique glass, and
original hand-turned woodwork. In addition, the apartments now sport
the latest technology including high-speed Internet, high-definition
television, and voice over Internet provider telephony.
came in ahead of schedule and on budget, which delighted University of
Pennsylvania officials. Even more important, the building preserved an
important community landmark, improving the neighborhood.
University of Pennsylvania was so happy with the Pine Arms
redevelopment that it marked the beginning of a series of projects and
partnerships. Campus Apartments also was awarded the management
contract for 78 university-owned scattered-site properties. The success
of these projects has been financially rewarding for Campus Apartments,
resulting in additional student-housing projects with other
universities and investors.