The Land Lessor's Tale

By WILLIAM DEVINE
3/15/2002

ne prospective client recently asked what lessons our campus planning practice has revealed to us about transactions involving an academic institution and a developer.   Timely question.   As the cost of offering a first rate education escalates, so does a school's need to generate a better return on assets, such as excess campus land.

Many schools with excess land arrange long-term ground leases with developers.   If you see a ground lease on your horizon, here are some signposts that can help you negotiate the stretch of road that lies ahead.

•  Favor dollars over dining halls.   Some deals call for the prospective tenant to pay rent, while others call for rent plus some payment in kind, i.e., the prospective tenant will build a lab, a classroom, or an athletic administration building.   Payment in kind often appears to be a prince, but turns out to be a frog.   The problem is one of vision.   When you think "classroom," for example, you may see an educational nerve center where technological innovation, global connectivity, and the quest for truth intersect.   When the prospective tenant thinks "classroom," by contrast, he may see a Quonset hut with an electrical outlet and a pair of folding tables.  

Working with this person to draw up architectural plans and a development agreement that set forth the classroom's specific features may resemble a march across an English moor during a sleet storm.   Same for resolving uncertainties over materials or design that arise during construction.   Why?   You have educational excellence in mind, whereas the tenant, concerned about how to deliver the classroom at the lowest cost possible, is thinking, "Quonset hut."  

To save time, reduce frustration, and maximize your income from the transaction, have your tenant pay rent in dollars.   Everyone agrees on what they look like.

•  Make simple deals.   A complex negotiation eats up your time and your resources.   It encompasses more terms than a simple negotiation, so it gives parties more grounds for discord, and is thus less likely to conclude in a deal.   Even when a complex negotiation concludes in a deal, smooth relations between the parties are rare, because the deal's many terms remain fertile ground for discord.  

Sometimes complexity in a negotiation is a sign that one party is not satisfied enough with the deal to complete it, or is unclear on what it hopes to gain from the deal.   Complex deals made by dissatisfied people who are unsure about what they want rarely result in pay raises and promotions.  

If you see clouds of complexity gathering above your negotiation, take a moment to examine the school's motivations and the developer's.   Maybe now is not the time to summon all the king's horses and all the king's men to put this deal together.   Maybe you're spending time and money trying to make a deal that would be better left unmade.

•  Marry for more than money.   Can you see good intangible reasons for making a deal with the developer sitting across the table from you-e.g., a connection to the school, a sterling reputation, or a track record of thoughtful dealings with public institutions?   Such clues help point you toward people who will act in a straightforward manner when your deal gives rise to differences of opinion or unforeseen problems.  

How can you make sure that your faith in your prospective lessee is based on reality and not on wishful thinking?   Date more than one suitor.                                           

•  Hang onto your land.   This move seems obvious, but when short-term thinking prevails, a school can find itself selling off excess land.   Don't make this mistake.   After education, the best investment on Earth is earth.