How to Unlock Development Value From Institutional Sites

In dense urban districts and other settings where land values are high and prime development sites are increasingly difficult to find, many real estate leaders see the latent potential of property owned by nonprofit institutions such as universities, hospitals or religious organizations.

Institutional leaders, too, often recognize the value of utilizing their landholdings for private development that can generate much-needed revenue. But while a successful deal holds real benefit for both parties, the process of working with an institution is rarely simple and brings a unique set of considerations that development teams should recognize.

Here are several of the most important factors that contribute to success.

Be prepared to deal with an institution’s advisers and selection process

Development decisions don’t happen informally, and sophisticated institutions will usually have a competitive selection process run by an experienced real estate adviser, often in concert with a master planning consultant. Developers should be prepared to deal with all of these advisers and may need to carry out some speculative design work and financial calculations to demonstrate their ability to successfully realize a complex project.

To be considered favorably for these projects, it also helps to be known by these advisory groups. The chances of being on an invited list are greater for developers who have marketed themselves to, and built relationships with, institutions and advisers.

Developers should be comfortable undertaking a leasehold project

Real estate advisers working with large nonprofit institutions will often recommend their clients pursue a leasehold arrangement, in which a separate tax lot is established on a given property, clearing the way for a privately managed development. The leasehold model is very common in the U.K. market and elsewhere internationally, but it’s relatively rare in the U.S., where straightforward sales or sale-leaseback transactions are prevalent.

For developers used to working on sale-based deals in the private sector, it may come as a surprise that many institutions cannot or will not take this route. A university or hospital, for example, may sit on government-owned land that can’t be sold, or excess development rights may only be available when the institution’s entire property is considered.

Or as is often the case, the nonprofit may simply prefer to retain ultimate ownership over the land—and a developer’s ability and willingness to carry out the project under a leasehold arrangement will be a fundamental deciding factor in the review of any proposal or the pre-proposal vetting of potential candidates.

Nonprofits may need the money, but they also prioritize other values

While financial considerations are a catalyzing force for nonprofits looking to develop their land holdings, any development team familiar with institutional and nonprofit partnerships knows that these groups bring a multifaceted set of criteria and goals to any large-scale decision.

Recognizing and understanding what many institutional leaders describe as a three-pronged set of considerations (money, mission, design) is instrumental to the success of a development scheme; even if the criteria are not explicitly articulated in a proposal, it’s likely that board members and nonprofits leaders will evaluate potential developers on their ability to address these concerns.

Money

There is no question that institutions undertake private development partnerships for financial reasons. Leaders and board members want and need value, either from a one-time sale payment that can help resolve an immediate need, or from the perpetual aspect of lease payments that happen every year and can become an important ongoing part of the nonprofit’s budget.

Mission

As mission-driven organizations, nonprofits such as universities, hospitals, or a religious diocese will also look for any development plan to be consistent with their institutional values. Awareness of and receptiveness to the way these values influence decision-making will help developers find success.

A religious organization considering a deal for residential development may, for instance, favor proposals that prioritize rental housing (and its greater potential for an affordable component) over proposals that foreground condominiums.

Design

It’s also important to recognize that many nonprofit leaders are interested in high-quality design that is consistent and compatible with the character—and prestige—of their institution. Leaders will want to know what the design is or might be, and they will have an opinion on it.

From the earliest possible stages of discussion with institutional leaders, developers will do best if they can indicate an architect or set of architects they might approach to carry out the design.

Experience has shown that their decisions are influenced by the involvement of architects who can clearly articulate a vision. In one instance, the steering committee of a major diocese took significant interest in the materiality of the buildings that would go up on this campus.

The winning development group and its architects were able to describe a range of design and development approaches to the committee, and then offer a clear recommendation.

Patience is key

Universities and other nonprofits with significant land holdings such as hospital systems or religious organizations will usually need to carry out their own internal master-planning processes. An essential step for aligning physical resources with long-term goals, this phase will shape development but rarely happens quickly. Even if a planned future project has a designated developer, that developer will need to allow time for the planning process and its related stages to unfold.

Rezoning and entitlement issues are common, such as for the changes in use, density, or mass that make a private commercial or residential development fit onto a proposed site. Developers may be partners in that process, or they may need to wait until entitlements are completed to make a final financial proposal. Some institutions will prefer to complete the zoning before going to market. If the development group is a partner in the rezoning and entitlements, they will need to be in it for the long haul. Going through a discretionary approval process can take years, and many promising building ventures have fallen through because the developer lost patience.

It’s hard to overstate the value of patience and commitment when launching into a development venture with an institutional landowner. At the end of the day, any leader on the institutional side will need to know the answer to one fundamental question: Is this developer a true partner we can trust to follow through and successfully get a project built?

With a broad assurance of the developer’s awareness and understanding of the above considerations, institutional real estate leaders can feel confident in saying, “Yes.”

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Donald Clinton, AIA, MRAIC, LEED AP, is a partner at the architecture and urban design firm Cooper Robertson in New York. He leads the firm’s collaborations with medical and research institutions, has represented private and institutional clients before planning commissions, has led complex projects through their planning and entitlement phases, and has spearheaded planning for mixed-use development and multifamily residential projects across North America.