Institutions are Expanding
24 November 2006
Marc Laderman

Institutions are expanding in Boston like a Victorian cartographer’s red stain seeping from Cape to Cairo. Why? Institutions are given huge incentives.

The first incentive is the Institutional Master Plan, the IMP. An institution with an IMP in Boston is not subject to underlying zoning. Zoning normally controls the density of growth. They can build whatever is described in their approved IMP. If, for instance, the Boston Redevelopment Authority (BRA) directs a college to add 1,200 dormitory beds on its existing campus, its IMP will be amended by an additional 400sqft per bed or 480,000sqft. Normally, developable square footage in a neighborhood like the Fenway sells on the open market for $35/sqft. That’s a $16.8 million value the college will add to the value of its land by pursuing this IMP amendment. This density bonus is a real value to the institution. Institutions have been known to try to liquefy this value in many ways.

The development potential is supposed to be fixed to a particular campus parcel as described in the IMP, but institutions have been known to sell these rights to private developers. Other institutions have made claims that the development rights are transferable to other campus parcels or to parcels purchased since the last IMP was approved. If a college has completed all of the allowed development in its IMP, it has the option of beginning another IMP process. Proposing 2.6 million square feet of new construction adds $91 million in value to the campus. Therefore, there exists no mechanism to halt development on an institutional campus. Campuses can always ask to become denser by creating additional, valuable development rights.

Being subject to an IMP means that the institution can only develop what is in their approved IMP. When I look to buy land, the value is based on how I can use it. The dimensional limits are defined by the zoning. A 20,000sqft parcel with a dilapidated church building on it in a FAR (floor to area ratio) 4.0 zoned area can be redeveloped into 80,000sqft of housing by a private developer. At $35 per allowed square foot, its land sale price should be about $140/sqft or $2.8 million. A college, looking to transfer its development rights to this parcel by buying it and including it in its IMP, can ignore the past zoning and propose a denser, FAR 5.0, dormitory for the site. The college can afford a $3.5 million acquisition cost. In effect, paying $28/sqft for an equivalent purchase price.

The second incentive is payment in lieu of taxes (PILOT). Residential property pays $10.73 per valuation $1000 in 2005 in Boston. Institutions are not-for profit corporations who are eligible to ask for relief from property taxes. Many eligible properties pay no taxes. More recently, for new acquisitions, institutions have been known to negotiate PILOT fees at 20 cents on the dollar. That’s $2.15 per valuation $1000 paid. In other words, the taxes avoided, an $8.58 per valuation $1000, can be used as an additional revenue stream for institutional expansion.

Construction costs have been rising. A developer can expect to spend $300/sqft to build housing after property acquisition costs. For those 1,200 dormitory beds mentioned above, the construction cost can therefore expect to be about $144 million. Assuming the valuation is equal to the construction cost the college is receiving a revenue stream of over $1.2 million per year. Assuming a target internal rate of return (IRR) of 6%, $1.2 million will finance an additional $20 million of construction or subsidize almost $42/sqft.

The final incentive for institutional development is access to redevelopment grants. Institutions are well placed to access these grants. The trouble is that in many cases they compete directly with community development corporations (CDCs) for the same funds that could be used to create housing. For the church redevelopment described above, the CDC developer would pay $335/sqft for the redevelopment that would cost only $286/sqft for the college (a 17% advantage). Given this imbalance, and the need for residential housing development in the City of Boston, the incentives for institutional expansion seem to be excessive.

Institutions bring great value to the City of Boston. We can afford to provide some of these incentives for institutional growth, but unlimited expansion can become a red stain overwhelming our residential communities. Cecil Rhodes should be best remembered for his contribution to educational access, the Rhodes scholarship, not for his violent and destructive imperialist career. Similarly, Boston’s institutions may be viewed in their differing incarnations, as the best we have to offer or as the despoilers of the city. If our neighborhoods are losing their residential character the incentives to institutional development have swung too far in their favor. If the mechanics of institutional expansion seems too theoretical, I can ground them in one simple argument. I live in the Fenway.