• Confessions of a Community College Dean

    In which a veteran of cultural studies seminars in the 1990s moves into academic administration and finds himself a married suburban father of two. Foucault, plus lawn care.

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Addenda to "Unlocking the Value of College Real Estate"

Don't forget property taxes...

July 28, 2020
 
 

 

If you haven’t seen the piece by Grace Winters and Elizabeth Levin in IHE on Monday about ways that colleges can monetize their real estate, it’s well worth the read.  Winters and Levin point out that physical locations are, among other things, economic assets, and those assets can be used to offset economic pressures on campuses.

 

It’s a good and thoughtful article.  I’ll just add a couple of considerations.

 

Winters and Levin mention that one way for a campus to gain a quick infusion of money without losing space is to sell a space that it owns, then rent it back.  That way, the college gets a quick payment for the value of the space, but still has access to it for its own purposes.

 

That’s true, as far as it goes.  But assuming the college is a nonprofit, its space is likely exempt from local property taxes.  If it sells a building to a local developer and then rents it back, the property becomes taxable again.  That’s a new cost.  (This is why localities are often excited for moves like these; putting something back on the tax rolls is a political freebie.  Here in New Jersey, local politicians chase “ratables” with gusto.)  Presumably, the developer also wants to charge enough to make the arrangement worthwhile, so some level of profit also has to be added to the equation.  Over time, you’re likely to pay more for the same space, with the difference split between property tax and landlord profit.

 

There are times when that’s an okay trade.  If a college is facing a short-term cash crunch but its long-term prospects are good, a move like that can make sense.  Alternately, if it wants to slowly phase out of a given location, a move like that can work; with each renewal of the lease, it can negotiate for a smaller share of the building.  (Of course, it could also continue to own the building and take on tenants, accomplishing essentially the same thing.)  But if it intends to maintain a presence over the long term, it’s likely to pay more by selling and renting back than by just owning.

 

Worse, for many public colleges, it’s much easier to come by money for capital budgets than for operating budgets.  Capital budgets cover long-term fixed assets, like buildings.  Operating budgets cover salaries, utilities, and short-term costs.  If a college sells a building and rents it back, it converts a capital asset into an operating liability.  Rent comes from the operating budget, where it competes with personnel.  Most of the time, the operating budget is far more dire than the capital budget.

 

That’s even more true when donors and/or naming rights are involved.  If naming rights to a building have already been granted in recognition of financial support, selling the building may involve some difficult conversations with the donor or the donor’s estate.  It can be done -- it has been done -- but it can be trickier than just selling a building.

 

Political considerations also play a role.  If a college has a main campus in town A, with smaller branch locations in towns B and C, and it decides to sell its location in C, it may antagonize local political leaders who represent town C.  That’s not inevitable, but it’s not trivial, either.  No college, especially one with “community” in its name, wants to be accused of turning its back on a community.  It may be possible to blunt that critique by renting a smaller space in town C, thereby maintaining a presence, but that also reduces the payoff from the move.

 

None of these points is meant to imply that selling properties is necessarily a bad idea.  Sometimes it’s an excellent idea.  But it’s often less straightforward than it looks.

 

Kudos to Winters and Levin for an accessible piece on a timely topic.  With colleges both cash-strapped and more online than in the past, we’re likely to see more attempts to monetize buildings and land than in the recent past.  It’s the right topic for the time.






 

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