A Deep Dive into the Property Trust Model for Universities and Colleges: A Path Forward for Institutions to Transform Real Estate

The SHURE Initiative interviewed Gary Morrison, Interim Executive Director of the UFV Properties Trust in Vancouver (British Columbia, Canada) about the adoption of the property trust model as an effective vehicle for academic institutions to own and manage their land and real estate. UFV is a public university in Canada that enrolls approximately 15,000 students. Satellite campuses are in Abbotsford, Chilliwack, Mission, and Hope, and Chandigarh, India.

SHURE: A delight to have Gary Morrison, who is the interim executive director at the UFV Properties Trust in Vancouver, BC in Western Canada, joining us today. Good day, Gary.

GM: Good to be here.

SHURE: How would you describe your experience in the business world in Canada? There’s a perception that there’s more regulation; the notion of Canada not being a Wild West atmosphere in the U. S. in terms of competition and capitalism. And, you have worked in multiple countries.

GM: While I’m originally from the UK and did part of my MBA in Hong Kong and China back in 1992, I’ve spent my career working in the US and Canada. I’m very happy to work and live in Canada. It’s a good place to do business. Now that can differ, and I’m sure a lot of people in the real estate industry know that differs municipality by municipality.

I’m working right now in Chilliwack and in Abbotsford. Both of those are great places to do business. I’ve also worked in some of the municipalities in Metro Vancouver where it is a bit more difficult to get things done.

SHURE: Let’s talk about master planning and the growth of real estate. We are finding some universities are very progressive with their real estate decision making and others have little to no sophistication. It’s really a question of unlocking the value of real estate, which is not necessarily the core mission of the university. It’s an opportunity to leverage and optimize land and attract external investment. Do you think that the post-secondary world is becoming more aware of the value of real estate and moving in this progressive direction?

GM: Universities and colleges in Canada are re-evaluating their real estate holdings for a few reasons. One is the financial stress and the lack of funding experienced by most post-secondaries. These are difficult times for all government agencies, and universities and colleges are not immune to that. Many of them have surplus lands and they’re receiving calls regularly from developers who want to build something. But as you mentioned, a lot of them are not sure how to engage with the development community. However, the financial stress is reaching the point where it is forcing a lot of universities and colleges to start thinking seriously about, well, how can we monetize and capture the value of the surplus lands to help support our broader academic mission. And as you start asking those questions, you realize, firstly, setting up a special-purpose legal entity, separate from the university, is how other universities have achieved that goal while shielding the university from the risks of real estate development. The property trust model is one example, especially when it structures transactions using land leases to developers, so the university always owns the land. And then secondly, once you get a bit deeper into it, you start to see the community building dimension of using a property trust. Developing the surplus land on the periphery of campus can enhance the educational experience for students if done right.  It can broaden the housing options for students, for staff, for faculty. So now there is not just a financial reason to do it, but instead it becomes an opportunity to enhance campus life. It’s a realization that there’s a big value-add opportunity here to enhance the educational experience, animate campus life, and make the campus more interesting without giving up ownership of the land.

So, now we have something the board will want to talk about. Now, it’s more than just a financial transaction. Now, it’s about enhancing the core mission of the university. And, of course in the background we are in the middle of a housing crisis in Canada. These are very difficult times for people, particularly in some of the major urban centers. So, when you add the pressure that students, that faculty, and that staff are feeling in terms of trying to find accommodation, we can also use the property trust to broaden housing options for everyone. So, you can see how a business case now starts to formulate around that, starting with the financial pressure, then moving on to these other important factors that resonate at the board level for a lot of universities.

SHURE: In terms of semantics, let’s talk about the real estate operating entity. Many universities and colleges have a property trust now as their official operating entity of the real estate. Some have real estate assets in some other structure or organization. Is the property trust model effectively catching fire globally so that universities can become more sophisticated with their real estate?

GM: So, let me put a dividing line between universities, colleges, and post-secondary institutions. One dividing line you could apply: Is it a public sector institution? Is it a publicly governed, government owned institution, as is the case for practically all post secondaries in Canada? There are more privately owned post secondaries in the U.S., and they already have a for-profit arm for development. They have a different regulatory framework.

In Canada, public sector agencies may have real estate that they know is valuable, but they’re constrained in their mandate because they do not want to take development risk and cannot do for profit development.

Historically, the University of British Columbia was the first to manage the risks of development while protecting the rights of the university. Bob Lee and Al Poettcker at UBC can take credit for this. They implemented this idea that the university could create a property trust and that property trust could oversee in a very focused, managed way the development activity of the university.

Then, the Simon Fraser University team under Gordon Harris refined the model and added a great focus on environmentally sustainable development. So, now we have a great proof-of-concept and decades of successful development demonstrating the property trust model can work. Today we have a new generation of post-secondary institutions under financial pressure wanting to do something that’s more than just money. They want to utilize their surplus lands to enhance the educational experience and build great communities on the periphery of campus. When setting up the business model they have a choice: Either look at the tried and tested property trust model that we know works or try to reinvent the wheel using some kind of public-private partnership. For me, it is  an easy decision.

Now, the bad news is that the property trust structure itself is complicated. It requires specialist legal and accounting advisors.

GM: What do you think the discount is on prepaid land leases these days compared to fee simple real estate? What would you think when the appraised value of the land comes in, if it’s on a 99-year prepaid lease, versus just buying that land outright?

SHURE: That’s a good question. I’m going to randomly guess maybe 25%.

GM: Not even close. The discount achieved by the property trust for using a prepaid land lease can be as little as two percent in British Columbia.

As a result of the successful history of development at UBC and SFU the property trust 99-year prepaid land lease structure is now understood by lenders, developers and the broader marketplace of homeowners.  This allows the property trust to capture the full value of the land and capture the land lift as a result of rezoning and subdivision.

SHURE: When a property trust is established, what entity is linked to the university? Who are the staff? What is the oversight?

GM: That’s an important question. And, the answer is the property trust is independent. It has its own separate board composed of mostly independent directors. The university has some influence on that because it owns the land and can appoint directors, but most of the directors must be independent.

The university will typically be one of the beneficiaries of the property trust. The other beneficiaries will be other entities and there needs to be more than one. So again, all these technical details have been reviewed. Lawyers have opined on it and there is now growing comfort on the mechanics of this situation and the mechanics of the independence of the board.

SHURE: Are you finding that when the university moves to the property trust structure the doors are more open? Is there more opportunity and more innovation in terms of what the university can do with its real estate? For example, UBC now has doctors’ offices, supermarkets, and retail stores.

GM: The mix of developments is driven by a few factors. Firstly, you must start with the mission of the university as landlord of the property and with the goals that were established when that property trust was founded.

I’m very proud of what UFV is doing in terms of making building community a core part of that mission. We are being very deliberate in how to create pedestrian friendly, bike friendly environments, integrating community gardens, common space, car sharing and bike sharing into the plan.  We want to design and facilitate real estate around the campus to create intentional community elements and animate the campus, and ultimately enhance the educational experience.

Let me give you another example. Is the goal of the property trust to generate quick near-term cash flow?  In which case building condos will be the right answer. Or, does the property trust have a mandate to generate long-term recurring cash flows for its beneficiaries?  For example, by building rental buildings or office space that’s rented out.  Cash flow timing goals drive development plans. Thirdly, we must consider the risk appetite of the property trust. Office and retail real estate is a bit more risky than residential rental and condos, so risk tolerance also influences the mix of developments pursued.

SHURE: If I’m in the shoes of a university property trust executive, or a president or a vice chancellor at a university, this all sounds quite interesting. My immediate reaction might be well, why don’t we try to acquire more land and open it up to for market-rate condos and rental projects. UBC has done this with Polygon Homes, for example, where there’s a 99-year ground lease structure and the housing is available to the public.

GM: I characterize that as an implementation question. Do we enter partnership early or later in the phasing process? I would generally lean toward partnership and land acquisitions later. The goal of phase one is to get the property trust structure set up, bring in a seasoned board, and perform the rezoning and subdivision work yourself to fully capture the land lift benefits yourself from such work. Phase two would be to complete a few projects on easier sites to stabilize your cash flow situation and clearly define infrastructure costs on the rest of the sites. Then phase three considers partnering to manage risks on technically challenging sites or to access the financial depth of a partner for a large-scale project. The property trust will have already captured the value of the “low hanging fruit” in the early phases and will be tapping the expertise of an outside developer for more technically challenging sites or projects with a risk profile beyond the comfort zone of the property trust.

SHURE: When we talk about building a non-faculty, non-staff, non-student housing product on campus, such as what Polygon has done with UBC, do you find that the market rate product tends to be for rent product or for sale or combination of both? What are you seeing? Is it mostly for rent or for sale? Or will it just vary depending on the campus?

GM: It’s both. It starts with condominium product for sale, and then we’ll see townhomes. We’ll see other rental projects coming online. I think UBC has had the luxury of being able to design complete communities and the same with SFU. They’ve done an amazing job creating focal points of retail and then building places where people want to live. I live near UBC. I love it.

SHURE: What’s next for the property trust trend, globally?

GM: I think we’re going to see more of the same. The financial pressures on agencies are forcing them to explore innovative options. We will have many more post-secondary institutions take a long, hard look at what they’re going to do with the surplus land, and confront the same questions: What are they doing with those surplus assets? And is there an opportunity to get innovative here? And as always make sure that innovation leads to an enhancement of the educational experience and supports the broader mission.

SHURE: How might the property trust model change or innovate due to the re-adjustment post-pandemic, and in terms of on-campus real estate utilization?

GM: I think over the last three years, one of the key things we’ve learned is how dangerous social isolation can be. And that’s whether on campus, off campus, working from home, zooming into meetings all day long, zooming into class all day long. It has been a disaster. We’ve realized, collectively and on a global basis, the importance of social interaction and community building.

There’s been a realization among many people that social connectivity, bringing people together, having an animated campus and bringing campus back to life is essential. Real estate can play a role in that.