What does it take for a private developer to build a project in concert with Duke University, North Carolina State, or University of North Carolina-Chapel Hill? A strong balance sheet and a track record with similar development will help. Also important: understanding the unique strictures universities operate under, and appreciating the deal structure some of the partnerships must take.
At a ULI Roundtable event on Wednesday, March 4, representatives from Duke, N.C. State, and UNC joined with their recent private development partners to talk about how three projects involving the universities are structured. The panel, titled “P3s with Universities: Three Approaches,” was moderated by Beth Rudiger Stout, Business Development Director, Lend Lease.
The event featured three case studies:
- Scott Selig, Duke’s Associate Vice President of Capital Assets and Real Estate, and Jessica Brock, Managing Director at Longfellow Real Estate Partners, discussed the Durham. ID Project;
- Michael Harwood, Associate Vice Chancellor at the NC State Centennial Campus Development Office, and Ben Brunt, a Principal in the Noble Investment Group, discussed the new hotel and conference center on N.C. State’s Centennial Campus; and
- Gordon Merklein, Executive Director of Real Estate Development at UNC, and Jeff Furman, Director of Raleigh Operations at Northwood Ravin, discussed the redevelopment of University Square.
How the Deals Began
In the case of both N.C. State and UNC, the projects began with the universities. The schools made determinations on where they wanted to encourage development, and then made formal requests for proposals seeking partners.
“We do everything by RFP or RFQ,” N.C. State’s Harwood said.
Duke takes a different tack in identifying real estate development partners. “I don’t pick them as much as let them come to me,” said Selig, who oversees Duke’s off-campus real estate portfolio.
For instance, the Durham.ID project began with the private sector, not Duke. Longfellow Real Estate Partners, working with private landowners, put together plans for redevelopment of 15 acres in downtown Durham into a multiuse “innovation district” which, when built out, will have 1.7 million square feet of office, lab and retail. Under the current plan, the Durham.ID project will ultimately have 1 million square feet of offices and labs for research and commercial uses. Duke is involved as an anchor tenant for the project, but is not directly funding the project or contributing any school-owned property to the project.
Duke’s involvement as a tenant makes it a crucial partner, said Brock of Longfellow Real Estate Partners. “You can have the best ideas in the world, you can have the land, and you can have the money,” she said, “but if you don’t have the tenant, you don’t have the development.”
The Potential of Partnership
With public funds for new building limited, university administrators are looking for opportunities to work with private developers to further their mission. At UNC, the University Square redevelopment sprang from a goal to redevelop Franklin Street, located just at the edge of campus.
UNC led the redevelopment through a private foundation, Chapel Hill Foundation Real Estate Holdings, which purchased the 12-acre University Square property on Franklin Street in 2009. The foundation partnered with Cousins Properties, an Atlanta-based REIT, in rezoning approximately six acres of the property for mixed-use development. (The remainder of the property is Granville Towers, a 1,300-person student housing complex. It will remain as is.) Northwood Ravin has been brought in as a development partner as well.
UNC’s Merklien said that the school foundation’s involvement was “a catalyst for new development.” The foundation obtained the property and was involved in lining up the necessary zoning entitlements for redevelopment. Its partners, Cousins and Northwood Ravin, will be responsible for financing and building the new development. As currently planned, the new mixed-use development on the site would have 159,000 square feet of office space, 42,000 square feet of retail, and 246 apartments.
Structuring the Deal
At both UNC and NC State, the development groups that are financing and building the projects are operating in a bit of an unusual structure. In both cases, the schools’ private foundations will retain ownership of the property being redeveloped. The development teams will build and operate their projects on ground leases. Those involved said the schools are not providing financing or other guarantees to the projects.
Getting comfortable with that arrangement can take work and negotiation. For instance, as part of the discussions on the new 164-room hotel and conference center on NC State’s Centennial Campus, Noble Investment Group wanted to make sure that NC State understood and appreciated Noble’s real estate investment platform. “There was a lot of discussion and a lot of meetings,” said Noble’s Brunt.
For the development team building the new NC State hotel, the terms and structure of the ground lease they are building on were an important concern. One point of negotiation was the lease’s limitations on the development team’s ability to transfer the ground lease to a buyer down the road, as well as the qualifications that NC State would require potential buyers to meet.