Schools and Colleges

Schools and colleges are an asset that Greater Boston has in abundance. As much as the Red Sox, its hospitals, and its high tech industry, academia is part of the image this city projects. Schools and colleges are a source of vitality, ideas, and income. Emerson College and Suffolk University are part of the transformation of the Combat Zone. Johnson & Wales' new campus is integral to the revitalization of downtown Providence. Planners use colleges the same way retail developers use anchors, for their spin-off effects.

Colleges are some of the largest and most powerful institutions in the city. Large and powerful institutions make easy targets for politicians, as Harvard well knows from the reaction to its acquisitions in Allston. Private schools and colleges take more than their share of rhetorical barbs. Like other large institutions, colleges need thick skins. The irony is that, if enough barbs were to hit home and cause a school or college to want to move, it would be the city as much as the college that would stand to lose.

Fortunately for cities, schools seldom move. Private schools and colleges are born from communities. Beyond the initial decision of where to locate, made when a school is young, schools exercise little choice in location. For the most part, schools grow by expansion in place, through absorption of abutting property. Because they lack powers of eminent domain, schools are often obliged to pay top dollar for property to accommodate their growth. To acquire property, colleges at times compete against themselves, in markets that are of their own making. Property adjacent to a college often has one value to the college and a different, substantially lower, value on the general market. It is the lucky neighbor whose property is within the sphere of a university's expansion. Schools grow horizontally by absorption and vertically by new construction. Construction sends a message. It says that the school is prospering. It says, "Enough people want to be here that we need to build this new building." For a new school, construction is also a statement of identity. It announces to the rest of the city, "We are here."

The valuation of a school's real estate differs from the valuation of an office, a lab building, or an apartment. Because schools seldom relocate, they seldom sell. The Sales Comparison Approach therefore is not as useful as it is in the valuation of other property types. Schools are even less frequently rented, so analysis through the Income Capitalization Approach is not useful, as well.

A school is a special use property, for which the standard measure of value is cost. If a school builds a building, it pays by paying a contractor for the real estate. At that point, it is hard to argue that its value is less than its cost. Cost is the best measure of value so long as the community that built the building is solvent and is committed to maintaining the building (or the campus) as its home. Remove those conditions, however, and the building faces the market test. Former school buildings that sell for new uses often do so at prices substantially below the level of construction cost. One relevant question, then, in the valuation of a school is the value of the asset for alternate use. Another is the value of the vacant land.

Whether a school has value at the high or the low end of the range depends not so much on the market but on the health and needs of the school itself. An appraiser engaged in the valuation of a school or college needs to inform the client of the high end of the range and of the conditions that produce value at that level. The appraiser is also obliged to inform the client of the low end and of the conditions that may make it more likely. The choice of a final value estimate is at the high end if the community that built the school is financially healthy and displays its health by spending on the physical plant. The value is toward the low end if the school community is in a process of contraction. For the appraiser to display the full breadth of the range is the best means to provide a complete picture of value.

Eric T. Reenstierna, MAI