BU and Greater Boston’s Biomedical Research Concentration

Boston University, with more than 30,000 students in 17 schools and colleges, is the fourth largest private university in the United States. The University owns nearly 14 million sf within its two campuses: the Charles River Campus and the Boston University Medical Campus.

“In an urban campus environment such as the Charles River Campus, even within a well-defined and fairly stabilized area, it is necessary to control the environment,” says Michael DiFabio, associate vice president for property acquisition, Boston University. “It is even more critical at the Medical Campus, in an emerging area with housing gentrification.”

A major center for biotechnology, Boston is home to academic and medical research powerhouses such as Harvard Medical School, Massachusetts Institute of Technology (MIT), the Broad Institute, Tufts/New England Medical Center, Massachusetts General Hospital, and the Longwood Medical Area teaching hospitals.

“Boston is a small place, geographically, in the biotech companies’ pursuit of places to research, invest, and attract talent,” says Robert Dickey, managing director, Jones Lang LaSalle. “Longwood Medical Area and MIT are big attractions.”

In response to anticipated demand for lab space and a need to accommodate future growth on the Medical Campus, Boston University and Boston Medical Center formed a partnership, a separate entity known as University Associates, in the late 1980s to acquire various land parcels in the biomedical research sub-market south of the Boston University Medical Campus.

“We were pioneers, in a sense,” says DiFabio. “We knew we couldn’t immediately attract commercial researchers because the area was in transition. But we had a fair amount of our own research needs, from the hospital’s and University’s standpoint, so the park was initially comprised of our own properties.”

The first phase of the project entailed the construction of the Center for Advanced Biomedical Research (CABR) building, which opened in 1993 and the 180,000-sf Evans Medical Research building, which was completed three years later. A 1,000-space parking garage was also completed during this stage. The second phase includes BioSquare 3 and a second parking garage. A new additional research facility, the National Emerging Infectious Diseases Lab (NEIDL), is currently under construction and scheduled for completion at the end of 2008.

Developing Real Estate into a Performing Asset

While Boston University has a successful history of developing projects internally, the University also realized that certain efficiencies could be gained by using an outside development source to manage design and to control costs. The conventional approach of managing projects internally, while it can lead to the retention and preservation of institutional standards, can sometimes result in delayed schedules and cost overruns.  By choosing to work with a commercial developer, the University benefited from private sector best practices and cost and design controls.

“Working with an outside party mitigated some of the financial responsibility and risk that comes with this type of development,” says DiFabio.

In moving the project forward, the Boston Unversity team was responsible for property valuation and economic analysis, development of RFQs and RFPs, deal structuring, negotiations with developers, and the development of partnership, ground lease, and management agreements.

Jones Lang LaSalle oversaw development and program management, at-risk development, and capital preservation. During this project, the firm consulted on design plans, obtained approvals, provided financing, managed construction within budget and on schedule, and marketed and managed the project.

“It was a $53-million, 161,000-sf project with an 18-month delivery from the time the shovel went in the ground until completion,” says Dickey.

“In trying to advance BioSquare, we came up with a mission statement that includes the objective of developing the real estate into a performing asset,” says DiFabio. “While not the overriding issue, it is very important to get a proper market return on an asset when funds are a commodity.”

Other objectives include advancing the development of biomedical research at an institutional and commercial level, leveraging real estate, research, and resources to help facilitate collaborations with established and emerging biopharmaceutical companies, and serving as a positive economic development force for bio-research throughout Boston.

Business Concepts Key to Project’s Success

An internally driven, self-development proposition tends to be the more traditional approach taken by universities for developing new projects. Pressure to adhere to university quality standards can build over time and restrict exploration of creative design options. These standards often contribute directly to higher construction costs. By having Jones Lang LaSalle manage the development process, Boston University was able to insulate itself from the real estate side of the project, and thereby construct a high quality but cost-effective facility.

Creating an appropriate financial structure was another way of reducing the interal risk of the project. Key elements of the deal between University Associates and Jones Lang LaSalle included an unsubordinated ground lease of 75 years with an escalating base rent and an additional rent component based upon gross revenue.

A ground lease is a long-term arrangement in which the tenant is allowed to improve the land and use it for the term of the lease.  At the end of the lease, the land and all improvements revert to the control and occupancy of the owner. The lessor, or fee-simple landowner, grants occupancy of the underlying land to a lessee.  The main feature that differentiates ground leases from conventional leases is that the lessee normally has the right to construct or upgrade buildings on the land.  If the lessee does not renew the lease, the rights of the lessee revert to the lessor, including all the improvements to the land with no compensation paid to the lessee.

Because it was a participating ground lease, there was an incentive for a higher proforma level, creating two streams of income. One was a base ground rent escalating every year at three percent as long as the ground lease was in place. The other was participation rent based on the gross rents of the entire property. This arrangement provided a market return on the land to University Associates. Jones Lang LaSalle then financed, built, and now owns the BioSquare 3 Building.

Another component of the deal involved separate lease commitments from each of the two institutions for a minority portion of the BioSquare 3 Building. Jones Lang LaSalle took the risk on the balance of the space.

The structure of the land ownership in combination with the minority lease position kept the building off the balance sheet of the respective institutions. This, in turn, preserved the debt capacity available to the Hospital and the University for other core projects.

Lessons Learned

Boston University learned that it was important to gain project efficiencies by working with a well-established, highly reputable developer and construction group from the same firm. Within the group, a single point of contact was created to ensure that communication and coordination were streamlined and there was good team chemistry.

Jones Lang LaSalle recommends setting up flexible and firm guidelines within the business arrangement so both parties are aware of the parameters going into a project. Managing escalating construction costs and minimizing pre-development and tenancy risks are paramount.  Developing a clear understanding of needs before embarking on a research park development and anticipating future requirements certainly help to ensure success, a lesson echoed by Boston University.

By Lisa Brown