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Business Officer Magazine
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Threat or Opportunity?

Faced with a real-estate dilemma, Linfield College looked for the opportunity within and realized enormous gains.

By Carl Vance

A bold decision? Yes, particularly since we already owned 78 acres that Linfield had obtained through gifts and purchase during its 140-year history. The process of assessing the external threat and negotiating the details took several years to play out, with some of the benefits just now coming to fruition. So how did this potentially risky venture come to pass?

HP Closure Hits Hard

In late 1996, McMinnville residents fretted about how HP’s closure would hit the local economy. After all, HP—one of the largest employers in the community of 24,000 located 40 miles southwest of Portland—helped set the local standard for wages and benefits and was viewed as a model corporate citizen supporting many local charities and service clubs.

HP offered many of its McMinnville employees jobs at another one of its facilities in Massachusetts. As employees began relocating, a glut of homes appeared for sale, driving down local residential real-estate prices. Town officials worried about falling local property tax revenues, which would put pressure on the municipal government to cut expenses.

At Linfield College, we watched with concern. Our institution shared a common property line for a quarter mile with HP and had formed countless symbiotic relationships:

  • HP paid the tuition price for many of its employees to complete their undergraduate degrees through our division of continuing education.
  • HP allowed our athletic teams rent-free use of 15 acres for practice fields; in turn, HP employees got free use of various athletic facilities.
  • The company donated thousands of dollars worth of used equipment to the college annually.
  • HP employees played in the college band, sang in the choir, and enjoyed free use of the campus library.
  • The company and the employees contributed generously to Partners in Progress, the college’s volunteer-led annual fund drive that raised more than $250,000 from the local community every year.

At first it appeared that HP might transfer its McMinnville plant to another division, but Wall Street pressured it to cut costs. In February 1997, HP senior management decided to sell the facility to the highest bidder and hired a real-estate adviser to manage the liquidation process. The 115-acre property contained four buildings totaling 106,000 square feet. While HP anticipated expanding manufacturing at some point in the future, the majority of the land was leased on a short-term basis to a local farmer for growing grass seed.

When our board met that February, members knew that if we did not obtain any of the land we would have to somehow replace the practice athletic fields. The board decided to try to convert this external threat into an opportunity.

Let the Negotiations Begin

While conducting appraisals to determine the value of the property and before listing it for sale with a broker, HP’s real-estate adviser asked us if we were interested in making the purchase. We indicated that we would welcome a donation of the property. “HP does not donate property,” he replied. He explained that his job was to maximize shareholder value.

We expressed interest in acquiring the property but added that we would need time to put together a comprehensive offer. This marked the beginning of 40 months of negotiations.

We formed a small negotiating team to develop strategies concerning the acquisition. This group included a tax attorney who understood that maximizing shareholder value meant the highest after-tax net revenue to HP. So the college began by gathering research on the property’s cost-basis and HP’s corporate tax rate.

The HP property was zoned for manufacturing. It would need to be rezoned for multifamily use if the college wanted to use it. The value per acre for multifamily residential land was much higher than for manufacturing property. We eventually proposed a combination sale and gift that would generate higher after-tax revenue than a full-price sale as a manufacturing facility. As part of the proposal, we offered to assist in getting the land rezoned.

Interested in this concept, HP officials decided to divide the property into three separate transactions:

  • the 17-acre parcel that contained all of the buildings, which would be rezoned for multifamily residential use;
  • the 70 acres of vacant land that HP also wanted rezoned; and
  • the final 28-acre portion. For this section, HP hoped to obtain retail commercial use, an even more valuable zoning.

Agreement on 87 Acres

By April 1998, we reached the first agreement on the purchase of the 17-acre developed parcel. We would pay $4.95 million for the land and buildings, and HP would donate the 70-acre parcel pending successful rezoning.

During the negotiations we spent countless hours on environmental issues. Because HP had used hazardous materials in its manufacturing process, we wanted to make sure we were not purchasing a toxic problem. HP officials insisted that the company not have any extended liability for cleanup. Both parties hired environmental consultants. At one point, we had a call with nine attorneys determining how to write the environmental clauses in the sale/gift agreement.

HP donated 70 acres to Linfield in March 1999. The appraised value of $5.6 million made it the largest single gift in Linfield’s history. As a result of the earlier negotiations, we then had an option to buy the remaining 28 acres. After consulting with a commercial developer, we decided the most we could pay was $3.4 million.

HP rejected our offer and listed the commercial land for sale with a broker. Soon after, HP announced that a California developer had agreed to a much higher price.

One More Round

At a donor-appreciation luncheon more than a year later, an HP official indicated that the selected developer could not close on the 28-acre purchase and asked if Linfield was still interested.

After a brief caucus, our original negotiating team agreed to modify the original offer for 28 acres. Our terms: We wanted all 28 acres but could not pay more than our initial offer of $3.4 million, which represented only 60 percent of the developer’s offer. “Would HP be willing to donate the remaining 40 percent of the commercial property?” we asked.

Using the language from earlier agreements, we drafted another purchase-and-gift agreement. Within a few weeks, we announced our third transaction: Linfield would purchase 17 acres for $3.4 million, and HP would donate 11 acres worth $2.3 million. When this final closing took place on May 31, 2000, the college had obtained all 115 acres from HP through three transactions in which Linfield paid $8.4 million and HP donated land worth $7.9 million.

HP has since advocated our transaction as a model for disposing of other corporate real estate.

Tips for Smooth Transactions

During the lengthy negotiation process, Linfield College learned four valuable lessons that may benefit other business officers involved in real-estate transactions.

  • Listen carefully to what your entrepreneurial partner wants, and try to make sure every transaction benefits both parties.
  • Be patient. If your original effort doesn’t succeed, keep looking for new alternatives that may be of interest to a commercial partner. Each of Linfield’s real-estate transactions required multiple years of discussion.
  • Fully understand the tax implications of any transaction for you and your partner. Are there legitimate ways that your tax-exempt status can benefit your potential partner?
  • Creatively resolve environmental issues. Corporate managers and attorneys are often concerned about future potential liabilities. If you can assuage their environmental concerns, you will have an advantage in a real-estate negotiation.

Master Planning a Must

With the acquisition of this land, Linfield clearly needed a new master plan. The charge for the combined trustee, faculty, and staff committee included the following objectives.

  • Link the existing campus with the 17-acre HP campus.
  • Recommend building sites for the boiler plant, music/theater facility, and student housing.
  • Identify additional building sites for future campus development.
  • Improve vehicle circulation and parking.
  • Enhance pedestrian and bicycle circulation by designating wider pathways and sheltered areas for bicycle parking.
  • Accommodate a potential increased enrollment of up to 1,900 students.
  • Define campus edges and develop appropriate entrance signage.
  • Advise the trustees on how much and which land to reserve for future college development.
  • Determine whether the college should keep outlying parcels.

Promoting Passage Between Campuses

After 16 months of committee work, the faculty assembly, the board of trustees, and the city council sequentially adopted the new master plan in May 2000. The plan included both new and renovated buildings that would become part of a comprehensive fundraising campaign.

The first project: a new boiler plant and underground steam distribution system that was necessary for all subsequent construction. To link the two campuses, we constructed along the former boundary line six new apartment buildings that provide accommodations for juniors and seniors. Focus groups identified features of interest to students, such as individual washers and dryers in each unit, Internet access in all rooms, campus voicemail, cable TV, and new furnishings. More than 200 students signed up for the apartments within the first hour they became available.

Because of the expected growth in enrollment, the college needed a larger post office with individual post boxes for each student. The relocated post office became part of the new apartment complex, ensuring that every student would travel at least halfway to the HP campus on a daily basis. Next door, a historic observatory that could no longer be used because of the increased light pollution became a new convenience store. These facilities cemented the important linkage between the old and new campuses.

Determining which academic departments should move to the HP campus was not clear-cut. After the physics department expressed a reluctance to be separated from the other sciences, the art department seized the opportunity. The idea of building an arts quadrangle with the art, music, and theater departments located next to the library became a compelling concept.

Our previous attempts to build new library and theatre facilities had been thwarted by the cost and the space required. The acquisition of the HP property solved the space problem with one stroke. The campus expansion, while presenting new cost issues, also presented a historic fundraising opportunity.

To implement the new master plan, Linfield’s trustees nervously agreed to set a goal of $70 million for our capital campaign, an increase of $42 million over a proposed earlier target. At the end of June 2004, we celebrated the successful completion of that effort with $73 million raised. Early in the campaign, two foundations contributed $7.5 million for the campus expansion, raising the bar for subsequent contributions from both foundations and individuals. (Although we exceeded our total campaign goal, we are continuing fundraising for one unfulfilled component, a $4 million music instructional building.)

We used a combination of gifts, endowment, and new debt to pay for the new land and improvements. Rather than harming the local economy, the closing of HP’s plant led to $57 million in capital improvements at the college and lots of new jobs.

Additional Revenue Development

As a tuition-dependent institution with only a modest endowment, Linfield focused extensively on developing new sources of revenue to improve academic programs.

One of the goals established for the planning committee was to identify portions of the HP property that would not be needed for current or future academic functions. The master plan identified 83 acres in three areas available for development. The board of trustees passed a resolution against selling any of the HP property and created a real-estate committee to explore development options.

Funding Capital Projects

Project Completed Cost Still to Be Completed Funding Source

HP Buildings Purchase

$4,950,000

 

gift

Programming & Master Plan Fees

$305,000

 

gift

HP Building Renovations

$15,265,000

 

gift

Music Instructional Building

 

$4,000,000

gift

Site Improvements & Construction Manager

$913,000

 

gift

HP Campus Subtotal

$21,433,000

   

Deferred Maintenance

$3,674,000

 

bond

Energy Management

$8,095,000

 

bond

Post Office & Convenience Store

$587,000

 

bond

Student Apartments

$10,216,000

 

bond

Dining Hall Renovation

$1,500,000

 

bond

Entry Signage & Practice Fields

$275,000

 

bond

Main Campus Subtotal

$24,347,000

   

Residential Property

$5,600,000

 

gift

Commercial Property

$5,692,000

 

endowment/gift

Non-Academic Subtotal

$11,292,000

   

Grand Total

$24,347,000

$4,000,000

 

Linfield used debt funding only to pay for improvements that either reduced expenses (energy management) or increased revenues (food service and apartments). There was no net increased burden for debt service in the operating budget.

After successfully negotiating a lease of the 28-acre commercial parcel for a regional shopping center, the project almost collapsed in the post-September-11 economic downturn. The lease has now been revised to develop the project in two phases. We retain approval rights on all exterior design and signage, but a Florida corporation leases and operates the shopping center. We divide the monthly tax-free rent checks between the operating budget and endowment.

Some of the first tenants in phase one include AT&T Wireless, Blockbuster Video, and Quiznos. Additional leases have been signed with Starbucks, Cold Stone Creamery, and Great Clips. The commercial real-estate investment made from the endowment fund locked in a double-digit rate of return for the 40-year term of the lease. At the end of the lease, all improvements will belong to the college.

Another extended negotiation continues with the sale of 12 acres to the local school district for a new elementary school. From the beginning, we thought a new elementary school next to campus would offer multiple benefits: Linfield student teachers would have more access to classroom teaching experience, and college employees would value the opportunity to have their children attend grade school next door.

Two hurdles slowed the deal. The school district was unwilling to lease land, and some adjacent environmental contamination had crossed the property line. We are close to resolving the environmental contamination by getting the state and county governments to clean up the abandoned property. Our board ultimately decided to sell to the school district in order to buy more adjacent commercial properties that will enhance the access to and income from the shopping center. One of the two substitute parcels has been purchased; negotiations are still under way to resolve an environmental problem with the remaining site.

We are considering a variety of options for the remaining 34 acres not needed for curricular purposes. After studying the concept of a par-three golf course to enhance recreational opportunities, our real-estate committee decided that the development investment would not be sufficiently profitable. We continue to research the possibility of senior housing units.

Connecting Learning, Life, Community

In 1997, Linfield’s trustees took a risk in attempting to dramatically expand the size of our campus. Now faculty members praise the new library, theatre, and art buildings. Students clamor for the new apartments, and sales volume from the improved food-service options has grown considerably. As a result of its intensive planning and fundraising effort, Linfield has developed a more focused and more marketable mission. The short version is just six words—Linfield: Connecting Learning, Life, and Community.

Our transformation is well under way.

Author Bio Carl Vance is the vice president of finance and administration at Linfield College, McMinnville, Oregon.
E-mail cvance@linfield.edu