Leveraging the Land

Seeking new long-term revenue sources without losing sight of their missions, independent schools get entrepreneurial in digging into their real estate. “Land is an asset you can’t get back.”

Jun 1, 2016

From the May/June 2016 Net Assets Magazine.


Article by Leah Thayer

Institutional investors see real estate as an asset to leverage for potential financial gain. To nonprofit independent schools, real estate represents a valuable but expensive asset primarily in support of educational mission. Collectively, their campuses encompass hundreds of thousands of acres, and the schools invest heavily in them to attract families seeking spaces where their children will learn, gain self-reliance and develop strength of character. But can schools do more with their land?

With financial sustainability a mounting concern, growing numbers of independent schools are exploring real estate not just as expenses to manage, but also potentially assets to leverage. The four schools profiled in this article provide a snapshot of possibilities that extend well beyond facility rentals and summer camps. A key to the success of any venture? “It’s got to be a win-win,” says Tim Fish, associate headmaster of McDonogh School. “That’s what independent schools do so well.”

Lightning Strikes, a School Leaps

An idea floated by several generations of trustees at Georgetown Day School is finally having its day and then some, thanks to serendipitous timing and swift action by school leadership. If successful, by 2020 the GDS campus and retail/residential plan will not only unify the school’s two campuses—the long-sought idea—but it will also generate new and sustainable revenue sources for the 70-year-old, highly tuition-dependent school.

The plan took off only in 2014, when GDS had the opportunity to purchase two separately owned commercial properties adjacent to its five-acre high school campus in D.C.’s Tenleytown neighborhood. The school had eyed each property, a supermarket and a car dealership, for years, and the remarkable timing of both listings prompted the GDS board and leadership to take a risk unusual for independent schools, quickly assembling $41 million in bank financing and other sources to purchase the properties.

“This was a once-in-many lifetimes opportunities,” says Rahel Rosner, director of finance and operations at GDS. “Our campuses have had seven homes in 70 years,” and with the lower and middle schools on another campus four miles away, “there has been a real desire for unification.”

Moreover, as a tuition-dependent school with a core commitment to financial aid and socioeconomic diversity, GDS has long “grappled with financial sustainability as an institution,” Rosner says. Tuition has risen sharply despite efforts to rein in costs; for example, 6th-grade tuition grew at a compound annual rate of 4.9 percent over a recent 10-year period. The school has tried to offset declining net tuition through camps and other forms of alternative revenue, but returns have been marginal due to high staffing and operational costs, among other factors.

When the commercial lots became available, the school’s leadership moved fast not only to line up financing but also to quietly embark on extensive due diligence. Rosner and others spoke with audit partners, accountants and attorneys (“a really good” zoning attorney was essential, she says), as well as city officials, traffic engineers and retail consultants.

Community engagement soon became another priority. As soon as the purchases were announced, neighboring residents and businesses began raising questions about everything including traffic flow and parking, water run-off, building heights and the fate of the supermarket. “Over less than 200 days, we had 70 community meetings,” says Rosner. As the school heard (and continues to hear) neighbors’ concerns, it has worked with its architects and other planners to make various modifications.

Discussions and refinements continue to this day as GDS moves closer to finalizing plans and breaking ground. Among other issues to be explored are what to do with the existing lower and middle school campus. “We’re not quite sure at this time,” Rosner says. “But we’ll probably lease if the balance sheet permits. We’re looking at financial sustainability through a multi-year lens.”

Locking up the Land

It wasn’t so much potential revenue as strategic objectives and geographic proximity that impelled Quest Academy to purchase a commercial strip mall in 2011.

Since 1982, Quest Academy has educated gifted children in the suburbs northwest of Chicago. In 1993, seeking a permanent space with room to grow, the school purchased and moved into a 32,000-square-foot space that formerly housed the Palatine Public Library. Many improvements and an addition later, that building today accommodates almost all Quest academic and business functions.

Here’s where Quest’s story takes an unusual turn. Its academic building (far right in image above, and also at right) also was (and is) adjacent to a 35,000-square-foot strip mall-style shopping center (L-shaped building). On the other side of the shopping center are 3.7 acres of mostly undeveloped property. Both parcels were owned by the same individual, who had no relationship with the school.

“It was a goal of the school to expand its real estate footprint and green space in particular,” explains Curtis Maas, vice chair of the Quest board and CEO of a company that provides capital equipment to manufacturing companies. Deborah Chen, the school’s director of finance and operations, underscores this point. “One problem [with the school building] is that it had no green space, just a tiny playground.”

Fulfilling that goal demanded patience. It wasn’t until 2008 or 2009 that the long-term owner of the undeveloped land became interested in selling. Quest formed a separate limited liability company both to create a separation between the school and this investment, and to ensure that the administration and operation of the center would not be a distraction to Quest staff. Finally in 2011, after years of discussion between the school and the property owner, that LLC purchased the shopping center, and the school purchased undeveloped property.

The acquisition served to further strategic initiatives for the school. Purchasing the undeveloped land, at the time something of an eyesore, would provide the school with ample green space to develop into athletic fields and gardens. Today, by walking from the school building along paths around natural prairie plantings, students enjoy the use of a soccer field, basketball court, classroom flower and vegetable gardens, shelter/picnic area and outdoor gathering areas, Chen says.

And purchasing the shopping center allowed Quest to maintain control over the critical space between its academic and outdoor education facilities. While the operational strategies and goals for the retail center are no different than for any other retail plaza, “in reality, the purchase was a defensive maneuver,” says Maas. “We knew we weren’t deploying our equity for the highest return but for the highest benefit to the school.”

The Gifts That Keep Giving

Like the settlement of the American West itself, geography has proven destiny at Albuquerque Academy, thanks in part to the positive impression the then-fledgling school made on a school family in the 1950s. “It’s not a stretch to say that Albuquerque Academy would not exist without the transformational gifts of the Simms family,” says Gary Gordon, the school’s treasurer and a graduate of the school’s class of 1979.

That gift began with Dr. Albert Simms and his wife Barbara, who one summer tried too late to enroll their son in a local public school. They had more luck with a small private school—The Academy for Boys, then operating in the basement of an Episcopal Church—and soon became “enamored with the idea that Albuquerque needed a great independent school,” Gordon says. The two convinced Albert’s uncle, a wealthy landowner also named Albert, and his wife, Ruth, to donate much of their sprawling ranch to support this goal. By 1964, the renamed Albuquerque Academy had received gifts of nearly 12,000 acres of undeveloped land stretching from the Rio Grande River to the crest of the Sandia Mountains on the northern outskirts of Albuquerque.

Supported by the gifts, the Academy has developed into a highly competitive co-ed school with an 8:1 student-teacher ratio, an endowment close to $100 million, $4.2 million in annual financial assistance and, after a series of transactions resulting in much of Albuquerque’s residential development, a remaining campus of 312 acres, about 140 of which the school uses for its core mission. In addition, the school enjoys perpetual access to a 270-acre tract in the mountains used for backpacking and other types of outdoors-based “experiential” learning, along with a 3,000-acre ranch leased to ranchers who tend to fences and cattle.

Why has the school kept so much acreage? “Land, particularly in our part of the world, is fundamental to building wealth,” Gordon says. The ranch acreage is agricultural for tax purposes and has a low carrying cost for the school. While it may one day be sold for development, “our trustees are patient over the long term, as we have the capacity to be.” Further, he says, “we would never rule out the possibility that some of our existing campus might be subject to further development.”

Not every land-related transaction has succeeded for Albuquerque Academy. A master-planned residential community in nearby Rio Rancho developed by the school’s for-profit subsidiary collapsed when the housing bubble burst in 2008. “That definitely made us more cautious,” Gordon notes. He recommends strong governance for land ownership, and a disciplined treatment of land as a capital asset. “What is your internal rate of return on your asset?” he says. “What is a reasonable return? Is it competitive against what else you might do with that capital?”

To reinforce that discipline, Gordon’s position was created for the purpose, in part, of managing the school’s investments, including its land.  Moreover, he reports to the board, not to the head of school. “It’s a bit of a luxury” for a school to have such a position in addition to a fully staffed business office, he notes, but “the school developed this model the right way.”

Border Security, Financial Security

Founded in 1873, McDonogh School sprawls over 823 acres of rolling Maryland countryside. More than three-quarters of the land is used in a manner familiar at many well-appointed boarding schools. There are Georgian-style classroom and dormitory buildings, a multipurpose student center, extensive athletic and performing arts facilities, a power plant, and expansive equestrian facilities that include a 70-stall barn and an indoor arena.

While the campus is impressive, McDonogh’s land usage really stands apart with the Owings Mills Corporate Campus. A 200-acre business park on the north edge of the school’s property (only 100 acres are currently built-out), it features similar architecture and well-manicured landscaping and ponds that wouldn’t look out of place on the school’s grounds. There’s a nice synergy between the school and its corporate partners, which include T. Rowe Price and Baltimore Life Insurance. For instance, the students have visited the park to learn about the businesses and the measures they took to protect the environment during construction. And McDonogh makes meeting space available to its corporate neighbors and invites them to some school events.

McDonogh’s business venture took root in the 1980s, when Baltimore County targeted the region as a major growth area. “The school wanted to be proactive and protect its land against residential development,” says Kacey Macomber, the school’s director of land use and property manager of the business park. A board-level task force worked with a company that had helped Princeton University control commercial development on its land, and plans were laid to create a corporate campus that would mesh with school aesthetics and lock in new revenue.

“The thing McDonogh did well was negotiate a deal that has served the school and its business partners well, without ever compromising any of John McDonogh’s original land,” says Tim Fish, the school’s associate headmaster. Would the school consider selling the land outright? Barring a financial crisis, probably not. “Land is an asset you can’t get back,” says Fish. “I wouldn’t say a land lease agreement is a silver bullet—or we’ll never have to worry about tuition again—but the money certainly hasn’t hurt, and it’s brought revenue that over a 50-year period will help our endowment grow.”

Macomber agrees. “Selling is a quick fix,” she says. “What’s attractive is not so much that we have an office park instead of townhouse developments, but that we’ve protected the land for the good of the school. You really have to think long-term.”

Leah Thayer is NBOA's vice president, communications and editor of Net Assets. 



years is the target ceiling for a school plant's financial "age."

Get Net Assets NOW

Subscribe to NBOA's free twice-monthly newsletter.