The number of for-profit colleges
shutting their doors across the country has been making headlines.
ITT Technical Institute – which
closed its 130-plus campuses in September – is the latest fatality; that
follows last year’s closing of Corinthian Colleges. Others like Regency Beauty
Institute, Career Education Corp., Westwood College, and several others are
shutting down all or many of their campuses.
Not only have these closures left
thousands of students in limbo, but the question also becomes: What happens to
all of their space?
Once seen as a pretty safe bet for
landlords, investors, and lenders, for-profit colleges are no longer assumed to
be a guarantee.
“You used to look at for-profit
schools and said they were a significant user of space, and they were all
fairly well-heeled before these changes were instituted with the Department of
Education,” Dan Gleason told Hightower, a leading leasing and asset management company . Gleason is executive director of
brokerage services for Bloomington, Minn.-based Cushman Wakefield/NorthMarq.
Last year, the Department of
Education announced that it would crack down on for-profit colleges accused of
“aggressive recruitment techniques” and “misleading job placement rates” after
graduation. The Department also said it will no longer recognize the
Accrediting Council for Independent Colleges and Schools -- the biggest
accreditor of these colleges.
A Risky Business?
Andre Cuadrado, founder of Rhenium
Capital, told Hightower that after looking at thousands of deals, his firm
identified for-profit colleges as the “No. 1 riskiest deal” for lenders and
building owners due to the “massive regulatory risk that this business model is
facing.” Rhenium is a CRE finance, sales and advisory firm based in Fort
Lauderdale, Fla. Rhenium also noted that there is currently $1,800,000,000 in
CMBS with for-profit college exposure.
“They could be here today, gone
tomorrow with this current economic and political environment,” Cuadrado said.
“We saw this coming for years and now it has accelerated.”
Not Your Traditional Commercial
Spaces
Since most for-profit colleges don’t
have their own campuses, they lease office or “flex” space. Oftentimes,
landlords require them to sign long-term leases, since the way they use their
space is a bit out of the ordinary. For example, much of the space has been
converted into classrooms. They also have unconventional hours, holding classes
on nights and weekends, which means additional operating expenses and capital
improvements on the landlord’s part. They also require significant more parking
than office tenants.
To meet these specialized needs,
some colleges opt for a build-to-suit deal in which a developer builds a
facility for them and leases it back to them. Either way, the abundance of
closings means that these unconventional spaces will be dumped onto the market.
These closings are tough for owners
— especially since for-profit colleges often sign 25- to 30-year leases, pay
above market rents, and amortize the tenant improvements over that time,
according to Cuadrado. The specialized build-outs make it tough to re-lease the
spaces “as is” and that there are sizable costs involved in converting them to
general offices.
Every Situation Is Different
“I’m intricately wrapped into a
number of these [deals],” Gleason said. “I have three buildings right now where
[they’re vacating space]. We just got a letter two weeks ago from ITT
Technology that they’re filing Chapter 7 and we will get the space back in one
of my buildings. And Le Cordon Bleu is in one of our buildings, and we’re going
to try to work with them to re-tenant that and work out a buyout.”
Gleason said situations vary. Since
ITT Tech filed Chapter 7, all of their space will go back to the landlords. In
other cases, the buildings may go back to the lender -- and some properties end
up for sale. For example, the Westwood College building in Denver went back to
the bank and is on the sale block.
Cuadrado said when it comes to these
sales, investors have the opportunity to get a “deeply discounted” note for a
well-located property. “Buyers have a sweet opportunity and lenders are the
biggest losers in the deal,” he said.
Re-leasing the Space Likely Means
Knocking Down Walls
Finding other educational tenants to
backfill the space is an option, but an unlikely one.
“You can try and hunt some schools
down, but many seem to be retrenching or going out of business,” Gleason said.
“But if anybody is looking for classroom space, you’re going to have more
options than you can shake a stick at.”
Gleason believes much of the space
that landlords get back will be demoed. “I think you’re probably demoing the
classrooms and converting it back into either open space for cubes or private
offices or whatever anybody else might need,” Gleason said. “Don’t see it
as this huge, unique situation. It’s just classrooms and you knock the walls
down and start over. We do that all the time.”
Opportunities for New Tenants?
Gleason said many of these buildings
are “generally in good locations,” have high parking ratios, and additional
HVAC and restrooms, which would work well for call centers.
By Liz Wolf, October 2016
Liz Wolf is a Twin Cities-based freelance writer with 30 years of
business and commercial real estate reporting experience. She previously
served as editor of the Minnesota Real Estate Journal.
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