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U of Illinois Squanders Money

March 22, 2010

UI owns empty space but pays $4 million to rent others

Resposted from News-Gazette Online
By Christine Des Garennes
Created 03/22/2010 – 12:29pm

URBANA – A string of commercial spaces on the first floor of a University of Illinois parking deck sit empty, almost six years after the $26 million garage was built.

Meanwhile, three blocks away, a university unit is paying more than $250,000 a year to rent offices in a privately owned building developed by a firm whose board of directors includes a UI Foundation executive who was also once a UI vice president.

During this time of furloughs and layoffs, the university’s Urbana campus spends nearly $4 million annually on renting space for units ranging from accounting to purchasing.

The university, for example, rents several floors of the Urban Outfitters building, 507 E. Green St., C, for its Public Affairs operations and other units, at $448,000 a year. Several floors of the Gregory Place building, 700 S. Gregory St., U, are leased by the School of Social Work for about $335,000 per year.

“We rent space for nonessential activities. We’ve tried to reserve spaces on the Quad for academic programs. There’s always a trade-off of whether or not you want to build space … or lease,” said Craig Bazzani, the former UI vice president of administration and current UI Foundation executive. He is chairing the university-wide committee reviewing administrative services and where costs can be reduced. Later this spring the committee’s report, including recommendations, will be sent to UI interim President Stanley Ikenberry and the three chancellors, and ultimately it will be shared with the UI Board of Trustees.

Among the questions he and others on the committee are asking: “Are there opportunities to cut back on rental costs? Can we more clearly optimize the use of existing space on campus?” Bazzani said.

UI Foundation and developer

Bazzani himself, however, is involved in a firm that has benefited from the university’s renting office space.

In 2008, the UI Foundation sold several parcels of land at the southwest corner of Lincoln and University avenues in Urbana to Lincoln & University Holdings LLC for $450,000, about $272,000 below what the foundation paid for the land in 2001. The developer, Vermilion Development, whose board of directors includes Lou Mervis, a Danville businessman and UI donor, built the three-story, 32,000-square-foot building. In May 2009, the UI Office for Continuing Education moved into about 16,000 square feet of office space there.

Before the land deal took place between the foundation and the developer, Bazzani – then and still – a UI Foundation employee, was offered a place on Vermilion’s board of directors.

“Lou (Mervis) had asked me to come on the board – I knew him when he was chair of the (Illinois) State Board of Education. I told him I would, but not until you conclude all your transactions,” he said.

Bazzani joined Vermilion’s board, he said, after the real estate deals were finalized. And he said he has since then disclosed his interest to the university.

David Cocagne, Vermilion president and chief executive officer, said Bazzani was brought on because “not only was he CFO of the University of Illinois for 20 years, but also chair of NACUBO, the National Association of College and University Business Officers.” As the development company pursues projects near universities such as Indiana State University in Terre Haute, the firm wanted someone with expertise in “public-private partnerships,” Cocagne said.

Bazzani said his involvement entails meeting for three or four hours three times a year. And he receives a “small stipend” for attending each of the board’s meetings.

The university for years was interested in developing the Lincoln and University corner because, as people drive into town south on Lincoln Avenue, it’s considered an entry point to the campus, according to Brad Hatfield, vice president of the UI Foundation.

As for why it was sold for less than the foundation’s original purchase price, Hatfield said the purchase price in 2001 was probably higher than its market value.

Retail option shelved

While the Lincoln & University building was being built, the 17,000 square feet of commercial space in the parking deck remained vacant.

The deck was built by the university in 2004 and paid for by the sale of auxiliary bonds. The parking department, which does not receive state funding but instead operates on permit fees and citation revenues, is paying off these bonds, according to parking director Michelle Winters.

The ground floor features office space facing University Avenue – currently being rented by the U.S. Geological Survey for $286,000 a year – and the commercial space facing south toward the engineering campus. There are 1,569 parking spaces in the deck; 1,176 permits have been issued for those spaces, according to the university.

Although the geological survey has rented space in the deck since it opened, the south side of the building remained available for rent. The university once marketed it as the “Shoppes at 1201 University” and envisioned a restaurant, coffee shop or copy shop being located there. But the UI has stopped marketing the space.

The deck was built at a time when the university anticipated the construction of a north campus research park, according to Steve Hesselschwerdt, associate director for space management at the UI. The hope was the retail businesses would cater to the pedestrians in the area.

“Unfortunately the deck was off and under construction before the notion of a north campus research park was shelved for a while,” Hesselschwerdt said.

When the deck was built, the idea was the parking deck’s retail spaces would generate income to help pay off the debt for the parking deck, according to Dennis McConaha, associate director of real estate for the UI.

The university had a few leads, but tenants “just never materialized,” he said.

The empty space is “indicative of the market today,” McConaha said, referring to the economic downtown of the last two years and the number of other retail spaces available nearby, such as the ground floor of the Burnham 310 building on Springfield Avenue and on the ground floor of the Lincoln & University building.

Green Street and North Prospect retail areas have done “extremely well” attracting retail, he said. But step a few blocks off of Green Street and it’s more of a challenge to find tenants, he said.

By the end of 2007, the university “folded the tents” as far as pursuing the retail concept, McConaha said.

Campus unit as tenant

As for the idea of relocating university units there, McConaha said, “We shopped that idea from time to time,” but nothing ever came about. He said it was a campus decision on what will happen to the space. Director of Parking Michelle Winters said the plan is now to move a campus unit in the space. She declined to name the unit.

When you’re paying debt service, there comes a point where you realize it’s best to have an income stream, no matter if the space goes to private retail or a public unit, Hesselschwerdt said.

“We’ve come to realize it’s better to have it occupied and pay ourselves,” he said.

Some leases are paid for by federal or state grants, others directly by the campus. Hesselschwerdt said the UI is looking at moving a unit whose lease is paid by the campus.

It would still be at least a year before the space in the deck would be built out and occupied, according to Hesselschwerdt. It’s considered a structural shell, meaning plumbing, mechanicals and flooring and other improvements are all needed.

Cutting back on leases

“There are a lot of factors that go into the decision box,” Bazzani said about which units rent space, where and why they do so. “You have to understand all the decision criteria that come into every one.”

Those criteria include the need for offices to be housed together and the university’s efforts to help develop other areas of town, including Green Street and building critical mass there, he said.

“The university is also trying to be a partner with the community as it attempts to grow,” Bazzani said.

The UI’s Office for Continuing Education moved to its space last May from rented space in the Tower at Third at 302 E. John St., C. In the tower, staff were spread out among three different floors, making it difficult to interact with each other, said Douglas Brewer, UI professor and director of continuing education.

As for Bazzani’s committee, the group does not have the authority to mandate any changes, but it will make recommendations, such as how the university can reduce leasing costs by about 5 percent, he said.

The aim is to find savings without tampering with academic programs, Bazzani said.

“Everything is on the table,” said Bruce Walden, director of real estate services at the UI, when it comes to reviewing leases and consolidating spaces.

One thing is certain, Walden said. “Over the next few years we’ll be renting less space in Champaign-Urbana.”

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