Factors to consider in the decision to renovate, lease, buy, or build
When a University unit is considering moving from existing space, expanding its space, or creating a new program that requires space, a thorough analysis of space needs should be conducted. The assistance of an architectural firm may be necessary to review programmatic needs and identify the appropriate amount and type of space required.
For minor projects, the information contained in this document may be sufficient to determine the best option to address space needs. For significant projects, the analysis of the options for acquiring or using space should be part of a comprehensive Business Plan that considers other factors besides those identified below. Elements of a Business Plan are provided at the end of this paper.
With a good understanding of space needs, the relative merits of the factors to be considered should be weighed. First, the critical factors must be identified; then the others, even though not determinant, should be reviewed.
An explanation of the factors to consider follows. In addition, a matrix of decision factors has been provided to define the possible optimal solutions based on these factors. Note that not all projects fit neatly into this matrix; it is simply meant as a guide and special circumstances will require exceptions.
Availability of Space and Market
First, consideration should be given to existing University space that is, or soon may become available. Business unit staff responsible for assignment of space should be consulted to discuss programmatic space needs in order to determine what space could be used.
When University space is not available, lease or purchase may be considered. Each market differs over time. Some areas have an abundance of low cost facilities for rent, while in others it is a buyers' market. Before considering the relative advantages of leasing vs. purchase, the properties available in the local market should be compared. Even when other factors dictate a lease or purchase decision, a comparison of available properties should be made.
If a property offered for sale meets other required criteria, it must be available at a reasonable cost. Usually this is determined by having two appraisals prepared and negotiating for purchase at or below appraised value.
Suitability of Space
When considering suitability of space, questions which should be asked include:
- Is the internal layout of the space appropriate for the program?
- What modifications would be necessary?
- What costs will be incurred to prepare the space for use?
Modifications can result in significant additional costs. If space is being built, or a new facility is to be finished out, it can be designed to suit specific programmatic and/or design specifications. However, when existing University facilities are used, or existing space is leased or purchased, any additional costs associated with renovations to retrofit the space to suit programmatic needs should be considered.
All construction on a University-occupied facility must comply with appropriate codes. Any renovation, build-out or construction with a cost above $25,000 must be done by workers paid prevailing wages if the work is done specifically for the University's occupancy. Work done by the landlord as part of a general finish does not require prevailing wages.
Urgency of Need
The relative urgency of the space requirements may drive the decision to purchase, lease, or build. Immediate needs may require a lease. If there is less urgency, a longer lead time may allow renovation, purchase, or construction. In some circumstances, a combination of these options may be best - with an initial lease while a facility is renovated, purchased, or constructed.
Duration of Need
Generally, purchase or construction of a facility should not be considered when the duration of the need for space is short or unknown. For new programs, it is often best to lease until the success of the program is proven. The exception would be when there is such a significant general need for space that if the program that initially occupies the space is discontinued, the space would be in demand by another program.
The future growth or contraction of the program should be considered. Generally more flexibility is achieved by leasing than by the other options.
One of the first questions to ask is, Should this program be on or off campus? Proximity to an existing program can have a significant impact on the efficiency of operations. The need to physically interact with other units should be reviewed – including the frequency and type of interaction. Costs associated with staff travel and accessing services should be considered. If the program seeking space would function most efficiently in close proximity to existing departments or programs, identifying or building space in the vicinity should be considered. In some cases, this may be one of the primary factors governing the decision.
Each campus has developed a master plan that identifies campus boundaries and areas to be acquired. If a facility within the master plan is offered for sale, both immediate and long-term needs should be considered. An on-campus facility may be suitable as temporary space until the land is needed as a building site.
Location in an off-campus facility may be desirable in order to serve a specific market. Typically, the facilities are leased.
If an existing program is already occupying a facility in a highly desirable location, but the facility is not suitable in its present configuration or finish, renovation should be considered. However, an alternate site may be needed during the renovation and all associated costs should be included in the Business Plan.
For lease or purchase of an off-campus facility, the added costs of providing service should be factored into the decision. Installation and ongoing costs of obtaining secure internet access, parking, and services for computing, mail, maintenance, utilities, custodial, lawn, snow removal, and security should all be calculated.
In an on-campus facility these services are usually readily available from the campus or contractors already serving the campus. For an off-campus facility, all costs associated with obtaining these services should be considered.
A full understanding of all costs is essential in developing a budget and determining the optimal solution. Costs to be considered may include: design fees, construction, moving expenses, and furnishings in addition to operating expenses for the services identified in the paragraph above.
A present value analysis should be prepared to help determine the relative merits of renovation, lease, purchase, or construction. It is particularly important when considering a long term lease, to also consider the option to purchase, if it is available.
All other factors being equal, the present values analysis of alternatives generally will be the determining factor in the selection of a particular option.
Type of Funding
Departmental Funds, income from operations, or grant funding are typically used for leases and/or small renovation projects.
In some cases, a landlord will be willing to provide up-front construction/renovation funds and either absorb the cost over the length of a long-term lease, or amortize the funding by increased rent over the life of the lease. Some leases are structured to provide a payment of the unamortized balance of construction costs if a lease is terminated early by the University.
The Internal Loan Program is useful for smaller dollar, short-term construction or renovation projects. The minimum loan size is $5,000. Amounts over $50,000 or financed longer than 5 years must have special written justification. Loans exceeding $500,000 and/or 5 years in length require a complete financing plan and justification, and the System Facilities Committee must approve the loan. The project must generate sufficient revenue to pay back the loan.
System Facilities Revenue Bonds may be used for large dollar, longer-term construction projects. There must be a debt coverage of 1.5 or better and the Board must approve these projects. In some instances, these bonds can be repaid with facilities and administrative costs (indirect cost recoveries).
Capacity is becoming an issue, both for System Facilities Revenue Bonds, and for Internal Loans. Funding options should be reviewed with the Business Office and/or the Treasurer's Office.
|Availability of Suitable Space||Space available but not suitably configured or finished||Suitable rentals available, competitive market||Suitable facility available for sale, priced within appraised values||No suitable facility available|
|Urgency of Need||Within 6-9 months, or longer for larger projects||Immediate to 6 months||6 months -- 2 years||2 years +|
|Duration of Need||Imtermediate or long term||Unknown, short term, or long term||Long term||Long term|
|Flexibility||Space needs are expected to be constant for proposed program||Program is expected to expand or contract over time||Space needs are expected to be constant -- either for proposed program, or future needs||Space needs are expected to be constant -- either for proposed program, or future needs|
|Location||Proximity to existing program or particular location is important||Near existing program, or proximity is not essential, or particular off-campus location is desirable||Within Master plan, near existing program, location is highly desirable, or proximity is not essential||Proximity or particular location is essential|
|Services||Services to be provided by Business Unit||Services provided by landlord or available in the vicinity||Services available in the vicinity or to be provided by Business Unit||Services to be provided by Business Unit|
|Cost||Present Value Analysis supporting lowest cost option||Present Value Analysis supporting lowest cost option||Present Value Analysis supporting lowest cost option||Present Value Analysis supporting lowest cost option|
|Type of Funding||Departmental funds, internal loan, or bond financing available||Internal loan, operating funds or grant funds available||Internal loan (inexpensive facility), revenue bonds (expensive facility), or reserves available||Internal loan (inexpensive facility), revenue bonds (expensive facility), or reserves available|
|Funding Availability||Planning and construction funds available as needed||Available over time||Funding or financing available at closing||Planning and construction funds available as needed|
Factors that support each option
- Existing space is available, but not configured for programmatic needs.
- Funds are available for renovation.
- Temporary space is available during renovation, or occupancy is not urgent
- Program is of short or unknown duration
- Funding is only available for a short period or a capital investment is not desired
- Suitable facility is available for lease
- Space need is urgent
- Flexibility is needed for future contraction or expansion of space
- Costs for rent, common area expenses, build-out or modifications, and services are reasonable and within budget
- Definite long term need for program or general campus use
- No appropriate University or leased space is available
- Facility is available for a reasonable price
- Location and size (including possible program expansion) is suitable
- Acquisition, build-out, moving and maintenance costs are within budget
- Funding source is identified for initial cost or duration of payments
- Property can be acquired in time to meet the needs of the program
- Within the Master Plan
- Location near existing program, or in a particular location is essential
- Program duration or general campus need for space is long term
- Need is not immediate, or can be met temporarily by other space
- Long term existing University space is not available
- A site is owned or can be acquired at a reasonable cost
- Funding is available for construction and operation
(Program Planning Study: Renovate-Lease-Buy-Build)
A Program Planning Study (PPS) is a document which describes and systematically justifies the need for improved or expanded facilities; evaluates alternative solutions; and prescribes a strategy for implementing a recommended solution. It should clearly demonstrate how the recommended solution will address both qualitative and quantitative deficiencies identified for a particular program.
The PPS permits objective evaluation of the relative needs for capital investment and facilitates prioritization of projects as a part of the capital budgeting process; provides the foundation for project objectives, scope, and budget, as a basis for agreements between stakeholders; provides a guide for further planning, design, and development; and provides supporting material which is required to include the proposed project in the University's immediate capital budget cycle, if necessary.
Program and Space Allocation Plan
Provide background information to the program(s). This information, drawn from historical perspectives as well as recent experience and future trends, should clearly describe the program requirements.
To facilitate a comparative analysis of each project and to allow for the evaluation of current capacity and projected costs, information provided in this section should include the following detail:
- Summarize the program's current mission statement. Indicate projected growth of the particular program. Projections should include 5, 10, and 15 year horizons. Explain the assumptions which support the projections used.
- Compile information related to current space assignments from the University's Facilities Inventory. Show current assignments by type of space and location. Point out any qualitative issues related to existing assignments that support the need for the proposed project.
- Determine space needs based on current and projected needs and staffing levels using space guidelines or nationally recognized standards.
- Provide a narrative explaining parameters used in analyses and show calculations used to determine space needs.
Provide a comprehensive evaluation of alternate solutions to the needs identified in the previous section. This analysis should include the short and long-range implications to the program and operational and life cycle costs.
Describe the benefits of the proposed project as it relates to improving the quality, availability, and support of the academic program(s) affected. Include as much of the following information as appropriate:
- Indicate how this project meets the need for space as documented above. Provide a detailed summary of special facilities, the programs/activities that will occur in the space including any proposed non-university funded activities and facilities available for campus-wide use.
- Outline the capacity of the facility in terms of program needs over time. Identify requirements for future expansion and describe the flexibility built into the proposed facility to accommodate future program changes.
- Describe how the leased, new, or renovated facility impacts other programs. Identify programs that will occupy the vacated space or programs that will be temporarily assigned to some of the new or renovated space until the primary program grows into the space.
- Describe the consequences to the service mission of the program if the project is not accomplished according to the proposed schedule. Describe default plans, if any.
Provide a narrative which describes the site, building size, and any special features which will assist in supporting the project. Include as much of the follwoing information as appropriate:
- Describe and illustrate the selected site and explain the benefits and relationship to the campus Physical Development Plan, if any. Point out any special site development goals that will be accomplished.
- Provide a summary of the existing and proposed space programs for the total project (i.e. office, storage, shared, etc.). Indicate any changes in space type or assignments of existing facilities.
- Describe the type of construction anticipated and any special construction requirements of the facility.
Project Costs and Schedule
For building projects or projects that have a construction component, provide a summary of cost projections and the assumptions they are based on. Identify costs for architectural and engineering requirements by major building component (i.e. structural shell, electrical, HVAC, plumbing, etc.). Include estimated costs for furniture, fixtures, movable equipment, landscaping, and project management/administration, as part of the total project budget.
Describe anticipated sources of funding and schedule for acquiring funds.
Identify the project costs associated with moving to a facility, and ongoing costs for services. For a leased facility include base rent, projected increases, additional rent, and costs associated with obligations of the University. Demonstrate the method of arriving at these costs and show the base data and formulas used.
- Site plan showing project location.
- The architectural program for the proposed project if completed. Provide space and functional relationship diagrams of new, renovated, and existing facilities as proposed.
The following factors should be addressed:
- Availability of suitable space and/or building site;
- Urgency of need;
- Duration of need;
- Flexibility space to accommodate growth;
- Importance of location, and proximity issues;
- Availability of services such as parking, computing, internet, security, custodial, maintenance, mail and other services available on campus versus off campus;
- Cost, as supported by a Present Value Analysis;
- Type of funding available;
- Funding availability.
Present Value Analysis
Lease-buy-build decisions should be supported by a PV analysis.
- Marginal cost of money
- Comparable moving and operating costs between alternatives
- Salvage for purchased off campus facilities
- Construction Project cost versus Buy