May 30, 1989 - From the May, 1989 issue

Asset Management: School District’s Approach to Develop Revenue, Undertake Joint Ventures

Dominic Shambra, an Administrator of Special Projects and Activities for the L.A. Unified School District and Wayne D. Wedin, President of Wedin Enterprises, Inc., present how L.A.U.S.D. utilizes the asset management approach to bring in additional revenue sources. Asset Management comes in different forms with the most common being "the outright sale of the fee simple interest."

 


"This leveraging concept therefore allows the District to lease a parcel of land, borrow against the lease payments and get its money up front as though it had sold the property, but in fact retain ownership and continuing economic opportunities from the asset."—Wayne D. Wedin

Over the past several years, it has become all too apparent that major shifts in intergovernmental financial relationships have taken place and, when added to the significant alterations in traditional educational operating practices, important impacts have resulted.

As revenue reductions are increasingly felt, all service providers, including the county, special districts, school districts and cities, will look to alternatives to the property tax for financial public services and facility improvements and compete for the very limited uncommitted existing and future revenue sources. One approach to resolving the current shortage of funds for public services is to develop new revenue sources or expand the current revenue base as well as increase productivity.

One of the options presently under significant evaluation by the Los Angeles Unified School District is the Asset Management or Asset Utilization approach to the development of additional revenue sources to meet the educational needs of the young people of Los Angeles.

The goal of Asset Management is to optimize the utilization of available assets. Accordingly, it encompasses strategies to redeploy existing assets in the highest and most productive manner. The process can generate cash resources, and as such, it is a method of creating an alternative funding source.

The most common form of Asset Management is the outright sale of the fee simple interest in property which is considered surplus with the proceeds from the sale redeployed to provide capital funding of the next highest priority need that is not otherwise funded. Surplus property is not only that which is in excess of need, but often property that is located where it is not effectively usable to accommodate current requirements and/or future growth patterns.

A more sophisticated approach to Asset Management involves business arrangements whereby the local school district or other agency participates in a joint venture with private enterprises, and sometimes other public agencies, to develop a parcel or parcels of property to its highest and best economic use. The joint venture partners, of which the school district is one, share in the economic benefit derived from development over time.

The public-private joint venture is usually structured around a long-term participating land lease to a private real estate developer of an asset owned by the local school district. The district provides an attractive development opportunity, and often facilitates the necessary land use entitlements for which the district receives an equitable share of the profits over the life of the development. Entitlements are the governmental and jurisdictional approvals required to proceed with a development plan.

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Economic reward to the district is provided in the form of an income stream, which is made up of a combination of base land rent and participation in the profitability and growth in value of the project over time.

The design of a public-private joint venture is to generate a source of revenue from a parcel of land without putting it at risk.

In contrast to the outright sale of an asset, leasing allows the district to retain a reversionary interest in the land. At the end of the lease period (which is typically in the 50-to 66-year range but can often be longer) the District will get the land back with the improvements free and clear, or will have renegotiated the lease terms based upon the augmented value of the land and improvements at a future time. This reversionary interest is an endowment of the public entity for the benefit of generations to come.

The income stream generated through the public-private joint venture can be “leveraged,” i.e., pledged to the re­payment of long-term borrowing/bonding obligations, the proceeds of which are used to finance current capital outlay requirements. The income stream is expected to grow over time with the appreciation of real estate values and inflation. The amount of the income stream which exceeds the debt service is available for additional capital or deferred maintenance needs, and provides another source of long-term endowment for future financial needs of the District.

This leveraging concept therefore allows the District to lease a parcel of land, borrow against the lease payments and get its money up front as though it had sold the property, but in fact retain ownership and continuing economic opportunities from the asset.

Given the nature of funding scarcity for public education within the state of California, the Los Angeles Unified School District is increasingly looking to any and all options available to them to help address their educational facility needs. The District, as a result, is currently in negotiations with Maguire Thomas on the 17th and Grand property owned by the District and has expressed an on-going interest in the Ambassador Hotel property.

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© 2021 The Planning Report | David Abel, Publisher, ABL, Inc.