As good as gold: Opportunities for institutions to extract land value through strategic redevelopment

Making the case for strategic redevelopment

Imagine a scenario where adjacent to a newly built modern church facility lies a seniors’ residence. The residence houses aging members of the community in a building proudly funded by the congregation. For this vision to come to life, valuable real estate was exchanged for a new church and a new seniors’ residence facility which will provide an ongoing revenue stream to help fund future programs.

This is a scenario that many institutions would like to realize. Churches, schools, libraries, recreation centres, hospitals, and many other institutional buildings constructed in the building boom of the 1950s and ‘60s are aging and deteriorating and are nearing the end of their physical life.

Although the need for upgrade or replacement may be imminent, this process can be extremely difficult for these institutions to champion for various reasons including financial risks, a constrained business model, dwindling membership, few volunteers, scarcity of donors, rising debts, loss of non-profit status, and more.

And so, as land values increase and physical structures inevitably wear out, rather than simply selling their property and bidding goodbye to their buildings and land forever, more and more institutional administrators and boards would like to consider some sort of joint venture partnership as a means to safeguard their future.

At the same time, however, institutions want to avoid making expensive mistakes. After all, redevelopment projects can present daunting challenges and raise many questions, including, but not limited to:

• How do we honour the values and needs of our members and the community?

• How can we secure our future in the present location?

• Is there a way to preserve the existing building as a landmark heritage site?

• How do we protect our tax-free charitable status?

• How do we raise financing?

• If we work with a developer, how can we be confident it will be a successful partnership?

• How can we minimize financial and other risks?

Concerned about potential pitfalls, limited expertise and funds, many institutions delay these decisions. Sadly, this often reduces the alternatives available to them.

But where to begin? From affordable rental units to residential or commercial strata buildings and mixed use developments, there are many redevelopment options to consider.

Once it is determined that the status quo is no longer an option, institutional administrators and boards can consider the following suggestions. These actions, if undertaken well before making major decisions, will be an effective and affordable way to clarify the current situation, identify appropriate options, and safely guide an institution along a path that will unlock land value and achieve the organization’s goals.

Identify the constraints and opportunities of the property

First, bring in real estate valuation, construction cost, architectural, engineering, and tax experts to begin identifying opportunities for the use of the land. This generally involves assessing the value of the property in its current state and conducting a highest and best use analysis, which considers the current use of the property, its potential future uses, and their corresponding value(s). Studying constraints and opportunities answers a number of vital questions, including:

• What is the current zoning for this property? Can it be rezoned?

• What is the existing and future community vision for the area? Is there a land use plan or municipal strategy?

• Does the existing or proposed zoning align with these plans?

• What government entities have jurisdiction over the property?

• What physical and legal restrictions are there?

• What is the neighbourhood attitude towards new development?

If an institution owns more than one property, it would be wise to conduct a review of the entire portfolio. During this review, properties with short to mid-term redevelopment potential are identified, and a clearly defined planning horizon is developed based on the short to mid-term goals and needs of those properties.

Next, a feasibility study will determine whether potential projects are financially, legally, and physically feasible and whether local regulations will/could permit them. This type of study narrows down alternatives by looking at market conditions, trends, site constraints, and local land use policies while considering an institution’s future financial objectives.

The outcome is a clear picture of the various options that will enable an organization to make sound decisions before committing resources, time, and budget. A feasibility study is unfailingly a worthwhile investment because it also presents the business case that will be needed in order to gain support from the various required stakeholders.

Sometimes, feasibility studies uncover entirely new ideas and, for many organizations, the best option is not always the one that results in the most amount of money. For example, the decision to sell land to an investor who builds a 40-storey luxury condo tower may not align with the ongoing operation of a church and a community centre. Many institutions have unique requirements they wish to include, so they may want to explore other more creative and appropriate options.

A cost-benefit analysis is often the next step. This assesses the strengths and weaknesses of the alternatives by isolating and estimating the specific costs and benefits of different courses of action. Essentially, the analysis adds up the total costs of a project and compares it with total benefits – tangible as well as intangible returns to organizations and to people. This provides essential information for go/no-go decisions.

Assemble a development team of experienced, objective professionals

A well-managed redevelopment can deliver rewarding dividends on many levels, but it’s essential to go about it the right way. Real estate and construction projects can involve complex physical, financial, regulatory, and political issues. Planning and zoning alone can cause complications and delays and lead to serious funding shortfalls.

With this in mind, any development must reduce the risk as much as possible. Despite this, few institutions have the capacity or expertise to guide development through completion, from identifying a development partner who’s the right fit, to structuring a safe joint venture agreement, setting up a reliable financial structure, sourcing sound legal and accounting advice, finding an appropriate architect and engineer, and more.

If your organization doesn’t have the requisite capacity or expertise, consider partnering with an independent third party that will protect your various interests. A partner can help your institution thoroughly explore a range of options and identify the greatest potential returns for the institution, its members, and the community.

It takes more time than most people realize to move through each of the phases and decisions involved in a redevelopment. If your organization is interested in exploring opportunities, don’t delay; start sooner rather than later.

Begin with a feasibility study. It’s an informative and affordable investment for a clear picture of what is possible – after all, it could just prove to be good as gold.