Opinions expressed in AGB blogs are those of the authors and not necessarily those of the institutions that employ them or of AGB.
Talk about a need for flexibility. American colleges and universities, after months of contemplating how to respond to the pandemic in real time, are now mulling a future in which Covid-19 may finally be under control.
Assuming the national vaccination campaign goes as planned, most epidemiologists believe the United States could be “back to normal” by as early as fall 2021.
That means today’s colleges and universities face enormous questions about enrollment size, demand for classroom space, budget allocations, and much more in this post-pandemic environment. As you formulate the tactics and strategies needed to address these issues, having greater liquidity can help you act on those plans.
To support those efforts, schools should make sure their portfolios of owned and leased real estate are as efficient as possible. They need to slash costs and bolster liquidity wherever possible, because having more financial firepower gives them a broader array of options.
The benefits of portfolio reviews
Across the world of commercial real estate, companies with leased and owned real estate are engaging in in-depth portfolio reviews. In the case of leased properties, these comprehensive reviews are designed to identify sites where the terms of the lease need to be revisited.
Now is the time to pore over each and every lease and, where appropriate, start dialoging with landlords about how you can lower your occupancy costs. But don’t limit the negotiations to rent alone; given the need for strategic flexibility, take a hard look at factors such as the length of the lease and any restrictions in the document that could reduce your options. For example, you may want maximum flexibility around subleasing that space—an excellent way to bolster liquidity while retaining the potential for future use.
Consider sale-leaseback transactions
In much the same way, selling a property and then leasing it back can enable you to raise money while retaining use. These deals are common in commercial real estate but underused in higher education. Real estate professionals can help you identify likely investors and market the space to them in compelling ways, with detailed data analytics and demographic information.
Sell noncore assets—but control the terms
A big part of the portfolio review involves taking a step back and looking at your real estate through the lens of your new strategic priorities. That exercise will result in the ready definition of various real estate assets as either “core” or “noncore.”
You’ll want to scrutinize the market value of noncore assets with a view toward a potential sale. The list could include many types of assets, including satellite campuses and underutilized buildings and/or properties gifted to the university.
But how you conduct that sale also matters. Typically, educational institutions’ financial plans necessitate raising money on relatively tight timeframes. However, the conventional approach to real estate sales can result in lowball offers and a general lack of control over buyers, timing, and terms.
Moreover, noncore properties quite often require adaptive reuse—for example, the buyer may want to convert a student housing complex into a multifamily housing development. But these types of transactions do not lend themselves to a conventional sale process.
Sealed-bid real estate sales and auctions are often a better fit for colleges and universities seeking to sell excess real estate—proving to be a successful course of action for numerous institutions over the last few years. These sophisticated transactions accelerate the timeline while allowing you to control the terms, find the right buyer, and be more confident that fair market value has been achieved.
A key element here is to give bidders the purchase agreement (with deadline and deposit information) well in advance, along with due diligence items like rent rolls and environmental reports. By achieving all-cash offers within 60 to 75 days, these types of transactions can empower colleges and universities to move the ball forward on their adaptive strategies.
They allow you to completely avoid the typical post-contract haggling over terms that so often delays or even scuttles conventional real estate sales. Giving bidders so much upfront information tends to boost their confidence and lead to a better sale price as well.
Flexibility and liquidity may not be synonyms in Roget’s Thesaurus, but from the standpoint of business strategy, they might as well be. By taking a strategic approach to your real estate, you’ll stand a better chance thriving in the post-Covid 19 landscape. May it be here soon.
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 jhubbard@agrep.com.
References and Resources
- AGB WEBINAR: Bolstering Liquidity by Optimizing Real Estate
- ARTICLE: Real Estate Weekly – New Normal Spurs Schools to Rethink Their Real Estate
- ARTICLE: Journal of Corporate Renewal – Real Estate Could Yield Much-Needed Liquidity for Educational Institutions
With Thanks to AGB Sustaining Member: A&G Real Estate Partners
Jeff Hubbard
Senior Managing Director
A&G Real Estate Partners, Real Estate Sales Group
jhubbard@agrep.com