Creating Schools Without Capital.

A school district leases retrofitted facilities to house new academic programs

Adversity creates opportunity. Amid increasing student enrollments, calls for more personalized education and higher student achievement and political and economic realities that put a strain on education finances, some school organizations are finding new cost-effective ways to provide unique school facilities--and to do so without capital funding.

A shortage of capital and education facilities appropriate for some unique programs prompted the Edmonton Public School District in Edmonton, Alberta, to explore creative solutions to answer space and finance challenges but also for "outside the box" facility planning.

During the summer of 1994, I received several calls from private and charter school operators requesting appointments to see a vacant office building I was marketing for lease. Each school official who toured it was interested in leasing the building, which had been converted to classroom space, and each had great ideas for using the space. None had funding.

One call came from the office of Gary Reynolds. He was directing facility requirements for Continuing Education Services at Edmonton Public Schools. Reynolds saw the 15,000-square-foot building as a potential home for part of the English as a Second Language program for adults, which at that time was housed in a cramped central facility.

While Reynolds had access to operating funds, he did not have any capital funds. I structured a transaction whereby the landlord would provide all the funding for the school and its improvements and the school system would lease the building, after renovations, for a sum that fit its operating budget.

While the landlord and tenant could not find a common ground and the plans to house the ESL program in the building fell apart, this experience established a solid, trusting relationship between me and my real estate firm and the Edmonton district, setting the stage for future projects.

That landlord in time saw the light. He eventually leased the building to the school district to house the Woodside Home alternative high school program on terms very like those we had explored earlier.

The superintendent and the board of trustees felt comfortable giving Reynolds latitude to explore alternatives to traditional buildings and supported me and Colliers International as a valued resource in that process.

This relationship paid dividends over the next several years. We have completed seven assignments for Edmonton Public Schools, including Centre High at the Boardwalk, the Continuing Education Centre on 9th and the Amiskwaciy Academy.

Centre High

In 1996, administrators at Edmonton Public Schools were interested in establishing a new high school to serve Edmonton public school students who were not able to finish their schooling in the usual three years. This included students who were struggling academically, students who excelled but needed a course or two to graduate and students who had drifted in and out of the system.

These students would be required to attend this new school for their 4th and/or 5th year of high school. There would be no sports, no social clubs, no extracurricular activities--just academic course work under focused guidance of teachers and administrators.

Although many details of the project were tentative, Reynolds, then director of continuing education services, asked us to explore the possibility of leasing premises. He was uncertain how many students would be enrolled. It might be more than 500 in the first year or perhaps less.

This project faced administrative, political and financial obstacles as well. Officials were under pressure to accommodate the program in existing surplus school district space, timing was uncertain and there was a possibility of no funding at all for leasing or buying a building. Therefore, we needed to plan discreetly.

We developed a two-stage planning process. First, we reviewed all existing obsolete and surplus facilities in the district's inventory and all potential private-sector facilities, considering size parameters (25,000 to 75,000 square feet in one, two or three sites), location and transportation.

Public transit, major transportation arteries and parking needed to be considered, as students would come from all over Edmonton, a metropolitan area with a population of nearly 1 million. We were looking for a location that would be an appropriate environment for learning. Industrial and commercial areas were considered possibilities if the neighborhood was a suitable environment for learning and if neighboring businesses were supportive.

As I toured sites during the vetting process and learned more from my client, it became easier to eliminate inappropriate sites. For example, checking out proximity to bars, nightclubs and shopping malls became as important as investigating zoning, ambient noise and ease of access and egress.

We reviewed student statistics to determine where most of the target students lived, as we preferred to secure a single facility that was centrally located. Nonetheless, we surveyed the entire market and considered every viable location.

Several potential sites fit our criteria. Most were located in the central downtown area among high-rise office buildings, high-end shopping stores and municipal services.

Our second step involved site review, negotiation and planning. The district gave us the go-ahead to at least negotiate for a site with the understanding the program still might be housed in an existing school, nullifying any deal we might tentatively strike.

The planning team grew to include newly hired Principal Susan Burghardt-MacNeill, Eric Lumley, an architect and the school facilities manager, and staff from the school system's monitoring and planning department, who helped us predict enrollment and the needed facility size.

We all agreed that the environment in which students learn is itself one of the instructional tools. This important consensus contributed to our energy and enthusiasm for finding just the right facility. While difficult to define with a specification, we agreed that the fit and feel of the place had to excite us or it would never excite the students.

A Discreet Search

Until we knew the school was a go and that existing school district facilities were not going to be used, it was important that we conduct the site search and negotiation discreetly. Therefore, we went to market "on behalf of an undisclosed tenant."

Our facilities search produced 57 potential sites. After touring those that met our criteria, Reynolds and I narrowed the field to six ranked sites and began the negotiating process.

To our disappointment, the landlords of our first two sites, upon learning our particular plans for the facility, declined to negotiate, believing the daily presence of hundreds of teen-agers in and around their downtown office and shopping complexes was a recipe for trouble.

Our third choice turned out to be our best. An old warehouse had been converted to an office building, connected to an adjacent office building and then renovated to create a retail market and office development. That concept had failed; the property had recently been sold because of insolvency. The new owners had just lost a large tenant so our space requirement could be accommodated. They were willing to hear our proposal.

Acting on Reynolds' authority during lease negotiations, I worked with the landlord and the landlord's leasing agent. Negotiations were completed in about four weeks. In the end, we successfully negotiated for the landlord to fund all major base building items (e.g., bringing electrical, HVAC, stairs, washrooms and life safety systems up to public high school standard), signage and all tenant construction improvements; share the cost of requested mechanical upgrades; finance a loan to cover mechanical upgrades and cost overruns; and sign a long-term lease (15 years plus 20 years of options) at well below market rates.

Now that we had a facility, we could begin the design phase, which included several planning workshops involving school district staff and several teachers who had been hired. We also elicited student input regarding the design and were able to develop a functional and exciting plan for using the space. The building owners' interior designer and space planner, working for both the landlord and tenant, directed the design process, permit approvals, tendering and construction.

The final result was Centre High. Opened in September 1997, this 73,000 square-foot school served a peak enrollment of 2,200 full-time and part-time students in 1999-2000.

While the school initially was funded solely with operating allocations on a courses-completed basis, it soon had sufficient funding to operate. The school district's share of mechanical upgrades were funded by a loan from the landlord that was repaid early and was more than offset when the provincial government recognized Edmonton Public Schools with a $750,000 innovation grant for its creativity in establishing Centre High without a capital funds allocation.

The school's physical environment, coupled with its location in the heart of the commercial district, is key to its success. Partnerships with corporate sponsors, corporate financial aid and mentoring programs have helped prepare students for the world of work and/or post-secondary schooling.

Continuing Education

After the Centre High project was completed, I followed up with Reynolds, director of continuing education at the time, about the English as a Second Language project that had been shelved earlier. The need for a facility was still alive but only if it could be done economically. As before, no capital funding was in sight.

Because all of the continuing education programs, including ESL, were offered in regular public schools, classes could be held only during the evening and on weekends. We talked about creating a central shared facility to provide all the continuing education programs with a home of their own so students could take classes during the day as well as on evenings and weekends. A 30,000 to 35,000-square-foot space seemed to be in order.

I remembered a facility I had toured nearly a year earlier. Capital Centre is a 200-suite apartment project that stretches for nearly a block. It sits above a two-story commercial component of main-floor retail and second-floor office space. The gutted 36,000-square-foot second floor had been vacant for eight years. The building recently had changed hands and the new owner was keen to find a tenant for this obsolete space.

We negotiated a 10-year lease with 20 years of options that included a 100 percent landlord-funded base building and tenant improvement budget and a loan to the tenant for any cost overruns. The designers and contractors who built Centre High delivered a superb facility on time and on budget.

This facility opened in September 1998 and was expanded by 11,000 square feet in fall 2000. It will serve more than 12,000 participants by the end of the 2000-2001 school year. In January, the site was renamed Metro Community College and serves as the flagship location for continuing education.

Amiskwaciy Academy

In summer 1999, the school district began exploring the merits of establishing a high school to improve achievement and completion rates for the 5,000 self-identified aboriginal students in K-12. The model was the Frederick Douglass Academy in New York City's Harlem.

Traditional learning methods hadn't met the needs of these students, as evidenced by the fact only about 25 percent of aboriginal students in Edmonton Public Schools graduated. The lack of a high school diploma makes it difficult for these young people to find jobs and limits their opportunities for further training.

Colliers International won the request for proposals to represent the Edmonton Public Schools and was mandated to find an appropriate site and negotiate a lease for the school.

Acting on our recommendation, the school system hired an interior designer/space planner at this stage rather than after the facility was selected. She ran design planning workshops with the school program planners to determine size and function requirements and raced ahead with design concepts appropriate to aboriginal culture. We then could measure the fit of potential sites against the design criteria. This process saved several months and helped us identify the best facility more easily than would have been possible otherwise.

In March 2000 we completed conditional negotiations on the two preferred sites, but long-term funding was not yet secured and it was clear that neither facility could be ready in time for the start of the next school year. So in May the school system instructed us to negotiate a smaller (30,500 square feet) temporary location to meet a September 2000 opening.

The district made available interim operational funding for this temporary location, and we found a good fit: a downtown building that had previously been used as a telecom training facility and which required minimal renovation. We negotiated a five-year lease with multiple renewal options and a right to sub-lease.

This facility was renovated over the summer in time for the opening of Amiskwaciy Academy last September. Three hundred students enrolled in Amiskwaciy.

In June 2000, the Alberta government announced pilot program funding of $12 million for Amiskwaciy Academy to help establish the school in a permanent facility.

We have since concluded negotiations for an outstanding permanent facility (86,443 square feet). The building, a former airport terminal building, sits on a site large enough to allow construction of a fieldhouse or gymnasium. The building is situated in a commercial neighborhood in an area that is ripe for building partnerships that will lead to employment opportunities and work experience for the students.

The permanent facility will open in September after $4 million of renovations by the landlord. The design of the renovations--interior, landscape and building envelope--strongly reflect images and atmosphere that will give students a sense of pride and ownership in their school. More than 800 students are expected to enroll in the academy, which will offer more than basic academics for aboriginal students. The school will incorporate an aboriginal perspective into each program and daily school life. Students also will be able to study Cree and other native languages and native studies.

Creative Collaboration

What began with a phone call six years ago has blossomed into a solid partnership between our real estate firm and the Edmonton Public Schools. Together, we are finding new ways to use resources to meet the educational needs of students.

New programs need not compete with or displace other important offerings because of a lack of capital funding. The Edmonton Public Schools have discovered leasing can generally be a cheaper solution to a facility need, regardless of the state of the local real estate market. Leasing allows a school district to be nimble in bringing new ideas to life.

Mark Kolke is a commercial real estate agent specializing in education facilities with Colliers International, 3700 Bankers Hall East, 855 2nd St. S.W., Calgary, Alberta, Canada T2P 4J8.

Why Landlords Love School Tenants

Why do landlords and developers compete to build schools for a system that is short of capital funds and is willing to pay only the lowest possible rent?

First, a school district, however funded, is a good credit risk. While most landlords agree to some degree of underwriting and credit investigation, it is likely that a school district is a highly credit-worthy organization: It pays bills on time, lives up to its commitments and won't leave town in the middle of the night.

Second, most commercial real estate transactions for office or mixeduse space are for facilities in the range of 3,000 to 10,000 square feet. Landlords often have trouble finding tenants for larger blocks of space (30,000 to 40,000 square feet and larger). When a landlord who has an older facility with a large volume of vacancy finds a single tenant with a good credit reputation and a viable use, the landlord is willing to risk investing money to retrofit the building.

But it is more than a matter of filling a large vacant space with a credible tenant who pays an economic rent. Rather, the greatest value of such a tenancy is the improved value of the real estate project based on the strength of the tenant. This enhances the landlord's ability to finance the project to a higher level and at lower rates and improves the facility's resale value.

A large vacant facility might sit unfilled for a long time. Landlords compete aggressively for the opportunity to sign up a school tenancy. In fact, landlords we have considered in this process have come back to us later asking for an opportunity to be alerted early on next time as they see a strong opportunity worth pursuing again.

While this dynamic works well in communities that have high vacancy rates and low rental rates, one can generally find large, older buildings with substantial vacancy in any market. These are the facilities worth considering for a school conversion.

Also be aware that even with extensive research, you might overlook some potential facilities. We were amazed by the number of proposals we received from landlords of buildings we had no idea were available and sites we would not have identified as available on our own.

Mark Kolke

Selecting a Real Estate Consultant

What should you look for when selecting a real estate services firm to represent your school district?

The short answer is confidence. School officials should be confident in the abilities of the real estate representatives, confident in their demonstrated direct experience with education facilities and working with educators as clients, and confident in terms of experience handling sensitive confidential negotiations. The real estate services firm also should have patience and an appreciation for the economic and political realities of a public school system.

While a firm's reputation is important, focus more on the skills and reputation of the individuals handling the assignment and on the processes he or she will employ, as it is these people who will represent your school district in the marketplace. The professionalism with which they work will reflect directly on your organization and the project at hand.

Because the potential financial exposure to a school district in the event of a transaction gone wrong is significant, the skills and ethical standards of everyone involved in a project are important.

Mark Kolke