When a school district has a piece of property it isn’t using, the school board members must ask themselves two basic questions: Will they need the property anytime soon and would the property be worth something if it were to be repurposed to a commercial or residential use?
If the property will be needed soon, the board should sit tight and hold on to the property. But if there’s no use for the property in the near future, the board has a decision to make.
“The first priority should be to monetize that site,” says DCG Strategies CEO, Landis Graden.
Letting a building sit empty drags down a neighborhood and piles up maintenance costs to no good end. Selling or leasing a property turns an unused property into a productive asset, generating revenue that can be put toward teaching and learning.
Whether leasing is preferable to selling is context dependent, and school districts should carefully analyze their situation to determine if leasing is the right choice.
The Benefits of Leasing
Leasing allows a school district to generate income from a property while still maintaining ownership and control over it. This comes with several benefits:
- Defined time-frames. Typically, school districts don’t want to be in the landlord business. However, if there is a property that a district is confident it won’t need for the next 10 years but might need in the next 20, leasing it would make more sense than selling it.
- Captured rising value. If the property is in a desirable location that will continue to appreciate in value, it might be wise to maintain ownership and watch the economic value of the property rise. That is how San Francisco’s school district collects $2.5 million annually from the Nordstrom in the Westfield San Francisco Centre shopping mall.
- Better returns. If a property can be converted to multi-tenant housing, a district could generate significant income from a land lease agreement with an apartment developer, earning much better returns over time than from selling.
- Control over use. A lease becomes especially attractive if the district has needs the property can meet. Through the lease, the district has control over what the property is used for. So if the district lacks affordable housing or convenient childcare options for its teachers, bringing in workforce housing or a preschool would raise revenue and fix a problem. However, converting a school property into an apartment complex is an expensive endeavor. A developer won’t be willing to take on that cost without a long-term lease that guarantees enough time to recoup that investment and make a profit.
The most important decision a board must make is how long of a lease it can sign — how long it can go without using a property.
Risks of Leasing
The main risk a school board takes in leasing a property is not being able to get it back when it needs it. This can be mitigated, however, in how a lease is structured.
Leases can be short-, medium- or long-term. If a district is only certain it won’t need a property for the next five years, it should look for a short-term lease with a single tenant, such as a preschool. Note, that taking less risk comes with less reward. Districts earn the biggest lease payments by putting a property toward its highest economic value — potentially an apartment complex or shopping mall — which require long-term leases.
As with any real estate transaction, school districts can cut a bad deal if they don’t do their homework.
To protect themselves, school boards should hire a real estate broker who understands their needs, knows the market and is able to negotiate market-rate rents. Also, school districts operate under unique rules in the real estate market, so hiring a real estate broker that is familiar with the education code is especially beneficial.
DCG Strategies specializes in representing school districts that are buying, selling, leasing and redeveloping property. Understanding the needs of school districts, we spend as much time leading up to a deal as needed for the board to be confident in its decision to move forward or not.
A successful lease arrangement can provide both a needed service and generate needed revenue, benefiting a school district for years to come. The real estate experts at DCG Strategies can advise and assist school leaders in exploring, developing and implementing these options. Whether you’re looking for more information or are already exploring your options and need a second opinion, DCG is here to help. Contact us to learn more.