This case study was produced in the summer of 2022 by the Church Properties Initiative at the University of Notre Dame. The Church Properties Initiative is a project of the Fitzgerald Institute for Real Estate.
Executive Summary
To finance the construction of a new, $44 million school and ministry building, St. Austin Catholic Parish and School has ground leased an acre of its campus to a third-party developer who is constructing a $100+ million, 29-story, 423-unit student housing tower. St. Austin will finance the construction of its new facilities with cash from one upfront ground lease payment, $30 million in tax-exempt bank debt, and $9 million of taxable bonds purchased by the Diocese of Austin. Given expected prepayment by the parish, ground lease payments are ultimately expected to cover 88% of total project costs, while also providing the parish and diocese with a revenue stream for decades to come.
table of Contents
- Situational Overview: An urban parish and school leverage their land to build for the future.
- Outcome: A ground lease to a third-party developer provides a revenue stream to fund the construction of new school and ministry facilities.
- Project Narrative: Stages of the project from inception in 2016 to completion in fall 2024.
- Analysis: Key factors in the project’s success, from the perspectives of multiple stakeholders.
- Roles: A dedicated team of parishioners, professionals, and diocesan leaders executed the project.
- Conclusion: Maintenance challenges that threatened the survival of a Catholic school ultimately motivated a forward-looking legacy project project that will benefit the parish, diocese, and broader community for decades to come.
SITUATIONAL OVERVIEW
St. Austin Catholic Parish, founded in 1908 in Austin, Texas, is served by the Paulist Fathers, a religious community of priests established in the United States in 1858. The parish serves approximately 2,000 households drawn from the greater Austin metroplex. St. Austin Catholic School, the urban parish’s pre-K through middle school, serves roughly 220 students. The church and school sit on a roughly two-acre site adjacent to the campus of the University of Texas at Austin.
What motivated the project?
The community’s foremost motive in undertaking a project that would reconfigure the campus was the declining state of the parish ministry and school facilities. The vast majority of parish ministry space was comprised of a former women’s dormitory and a former convent that once housed Dominican sisters who staffed the school. While school enrollment and parish ministry efforts remained strong, the facilities’ progressive deterioration presented a serious threat to the parish's ongoing mission, including the future of the school. The cost of maintenance for the facilities, constructed in the 1950s and 1960s, largely in concrete, and aging poorly, began to outstrip the projected cost of new construction over the long term.
Taking the opportunity to evaluate their space needs for the twenty-first century, the parish defined a total demand for 100,000 square feet of ministry space outside of the church building itself, to house the school, parish life, and neighborhood outreach for generations to come. This represented a 53% increase over previous levels of ministry space.
What were key preconditions for success?
St. Austin benefits from a stellar location adjacent to the campus of the University of Texas at Austin, in a neighborhood in which city planning policies have allowed for explosive new growth in high-rise development, particularly student housing. The parish’s land was thus extremely attractive to developers.
The parish had previously undertaken real estate investment and development projects, having constructed a parking garage with ground floor retail on another lot on the block in 2008, and so benefited from previous experience navigating complex transactions.
Outcome
In order to monetize its excess land, St. Austin is leasing approximately one acre of its campus to a third-party developer on a 99-year ground lease. The developer will construct a $100+ million, 29-story, 423-unit student housing and parking structure which it will own and operate for the life of the lease on land retained by the parish. Two hundred of the building’s 991 beds will be affordable housing. At the end of the lease term, the parish will take possession of all structures on its land. The developer will pay the parish a competitive rent that escalates over the life of the lease and is responsible for all property taxes incurred due to the rental tower's for-profit nature.
Coupling revenues from the ground lease with other funds, the parish will construct a $44 million, 5-story building on the campus to house the school and parish ministries, along with a gym and rectory located on the lower levels of the residential tower. St. Austin has retained the same developer developing the student housing tower to oversee this project in order to enable an integrated workflow on the site and unlock economies of scale.
St. Austin will finance the construction of their new facilities with cash from one upfront ground lease payment and $39 million in debt. The debt package consists of $30 million of senior, tax-exempt bank debt to be repaid entirely by the ground lease payments and $9 million of junior, taxable bonds to be paid by the parish capital campaign and other existing parish income. Given expected prepayment by the parish, ground lease payments are ultimately expected to cover 88% of total project costs. Since the parish will pay cathedraticum (diocesan tax) on its new income, and Greystar will cover property taxes for the land it leases, the project will provide the parish, diocese, and civic community with new revenue streams for decades to come.
Project Narrative
Origins and Initial Due Diligence
Engaged in a $5 million capital campaign to fund building renovations in early 2016, the community of St. Austin parish began to question the long-term sustainability of conducting periodic capital campaigns to fund maintenance projects for aging buildings that may actually need to be replaced. In June, the parish received approval from the Diocese of Austin to issue a request for proposals (RFP) for a commercial broker to represent the parish in exploring redevelopment opportunities on its land as a revenue source to fund new facilities.
After a competitive process involving six firms, the parish hired CBRE brokers specializing in land sales and development and Public Institutions and Education Solutions in December 2016. The CBRE team began proofing out the site’s development capacity, given zoning guidelines and market demand, to give the parish a sense of what was possible.
Under CBRE’s guidance, St. Austin contracted with specialized professionals to conduct initial due diligence on the site to inform the discovery process. Answering key feasibility questions before bringing the property to market allowed the parish to negotiate from an informed position. A massing study completed by an architect found that St. Austin had the right to build 928,000 square feet across all its parcels. A professional site survey provided answers to key physical feasibility questions such as environmental risk factors and the physical capacity of the soil to allow the construction of a high-rise tower. With these studies in hand, CBRE solicited informal feedback on the site as a development opportunity from developers active in the area. They received enough interest to indicate that the site was marketable for a major project.
Building Internal Consensus
Meanwhile, the parish refined its own vision for the site. Project partners lauded St. Austin’s pastor, school leadership, parishioners, and school community for their unity, competence, professionalism, and drive in undertaking this redevelopment project.
The parish benefited from a pastor whose previous priestly posts had entailed overseeing seismic retrofits in the Bay Area and air rights sales in Manhattan. The pastor’s technical experience, rather than drawing him into details, empowered him to delegate responsibility for various aspects of the project in an informed manner while he guided the community to remain unified and to prioritize their mission.
Parishioners with deep professional experience in public engagement and contract negotiation teamed up to spearhead the project from the inside. One parishioner’s skills in project management, public engagement, and communication served him well as he conducted ongoing consultations with the parish community and presented the project’s progress to diocesan oversight bodies. Another parishioner brought expertise in architecture and business to her work on the project, which entailed a meticulous engagement with technical details and an ability to communicate the parish’s interests to the various specialized professionals whose services it engaged.
In addition to the time-intensive contributions of these highly-skilled parish volunteers, a parish committee formally represented the St. Austin community as it defined its vision for the project. The committee was intentionally composed of members who represented multiple generations and constituencies within the parish and school community. Through a visioning process that took place over the course of 2017, the parish community articulated a desire for a total of 100,000 square feet of ministry space outside the church itself. Uses for this space included expanded community rooms, meeting space, a new ministry hall, a nursery, a rectory, and school facilities.
Marketing the Redevelopment Opportunity
Informed by feasibility findings and the parish’s clarified vision, CBRE helped St. Austin produce and distribute a request for development proposals to the development community. This new RFP stipulated the parish’s requirements for the new development, including the fact that it would consider only a ground lease and not a sale, but sought to leave as much open to the creativity of developers as possible. Accordingly, the RFP described space needs and some design requirements for the parish’s own facilities in detail, but specified few limits for the uses on the parcels to be ground leased. This allowed the parish to get a sense for a broad range of possibilities that the market would support.
The Catholic Church’s internal legal code, the Code of Canon Law, requires that large-scale financial transactions at the parish level receive diocesan and Vatican approval. Accordingly, the St. Austin team and their professional advisors presented the evolving draft RFP to these oversight bodies. The Diocese of Austin’s chancellor, CFO, Finance Council, and College of Consultors accompanied the project from beginning to end, holding St. Austin to standards of fiscal responsibility and ultimately entering the project as a bond-holding investor.
Community meetings involving parishioners and school parents yielded strong support for a land lease strategy, with 82% of participants reporting “strong support” and 14% “support” for the project, and the remaining 4% opposed. The Diocese approved the issuance of this second RFP in its final form in January 2018.
The Choice of a Development Partner
Having received six redevelopment proposals in response to its RFP by May 2018, the parish spent four months exploring three preferred proposals and refining the project scope. This exploration period enabled the parish community to understand its options thoroughly and discern its vision for the future of the site. The proposals invited the parish to entertain a variety of options for uses on the ground-leased portion of the site, including office, retail, and hotel projects.
Ultimately, St. Austin selected student housing developer EdR (soon after acquired by Greystar) as its partner in August 2018. EdR’s proposal for housing that would target first-generation college students appealed to the parish’s mission to support inclusion and ease housing pressures in a hot market. Throughout 2019, St. Austin worked through contracts and redevelopment concepts with Greystar.
In January 2020, St. Austin entered into an exclusive option agreement with Greystar, dictating the terms under which the two parties would enter into the ground lease and development agreements. Changes in market demand resulting from the COVID-19 pandemic caused the parties to renegotiate some aspects of the plan. Greystar requested permission to build additional stories, a move which triggered a City of Austin requirement that the project include additional affordable housing. The community of St. Austin welcomed this addition as further supporting its mission of inclusion.
The final agreement calls for an integrated, mixed-use project on the portions of the parish property north and west of the church building, which will remain as is. The new development will contain a 29-story residential tower that Greystar will own and operate for 99 years (while paying rent on the land to the parish) and 120,000 square feet of new school and ministry space whose development Greystar will oversee on the parish’s behalf. The new parish facilities include a gymnasium and rectory occupying the first several stories of the residential structure and connected by a bridge to the new 5-story school and ministry building on the site’s east side.
Financing
The parish assembled a team of three financial and legal advisors to help construct a financial package that would leverage long-term revenues from the ground lease to fund construction in the short term. The financial and legal team consisted of Coughlin & Co., municipal advisor and investment banker; Julius Capital, financial advisor, and consultant; and Immaculata Law Firm, bond counsel. Each was instrumental in helping the parish and diocese to navigate the financial and legal aspects of the project.
The total budget for the new school and ministry spaces was approximately $44 million. About $5 million of these funds came from one upfront, lump sum rent payment from Greystar that was negotiated in the ground lease agreement. The parish then issued $39 million in debt backed primarily by future ground lease payments to make up the remaining funding.
Since the project included a school, part of its financing qualified for tax-exempt debt to be issued. This allowed the parish to secure more funds at a lower interest rate than if all the debt it offered was taxable. The $39 million debt financing package ultimately consisted of a $30 million senior secured tax-exempt private loan from a bank supplemented by $9 million of junior taxable public B-bonds purchased by a friendly lender.
- The $30 million senior secured tax-exempt private loan was provided by Amegy Bank at a fixed interest rate of 2.96% (using an interest rate swap). This $30 million senior loan facility included a “draw” feature that will minimize interest costs during the expected two-year construction period. The senior loan is interest-only for two years, with a 30-year principal payment amortization schedule and a final balloon maturity in 15 years. With an interest rate swap, the parish is able to prepay some or all of the outstanding loan balance at any time and may obtain a gain or pay a penalty depending on prevailing interest rates at the time of such prepayment.
- The $9 million of junior taxable public B-bonds were purchased by the Diocese of Austin at a rate of 3.5%. The $9 million of junior bonds are interest-only for the entire 15-year term. While the bonds purchased by the Diocese of Austin are taxable, the diocese is happy to earn a return of 3.5% while fulfilling its charter to fund projects it supports within its territory. The B-bonds owned by the diocese are also available for purchase by individual supporters of the parish, enabling “balance sheet philanthropy”—giving options above and beyond the traditional cash pledge. In addition, the St. Austin credit facility created at this time permits the parish to issue and sell additional, new B-bonds directly to supporters.
TRANSITION PLAN
As redevelopment plans took shape, school administrators were tasked with crafting a plan to maintain the school’s operations while its facilities were demolished and replaced. Commercial properties were considered, but the school ultimately leveraged the local Catholic real estate ecosystem to find its temporary home.
San Juan Diego, a Catholic high school three miles south of St. Austin’s downtown site, had constructed a new building in 2017, leaving its old facilities on the campus of San José Parish vacant. After inquiring with San Juan Diego’s president about the property, St. Austin’s principal worked out a mutually beneficial rental agreement for the vacated school property with San José’s pastor and parish business administrator.
The transition plan involved developing new security protocols and arranging a bus service between the downtown campus and a temporary location to accommodate families with transportation challenges. Meanwhile, St. Austin’s parish offices, ministry spaces, and some liturgical celebrations were temporarily relocated to retail storefronts near the church that were already owned and managed by the parish. The parish performed minor renovations to make these spaces usable during their temporary relocation. The parish priests also leased a home in the neighborhood as a new rectory will be part of the improved campus.
Managing the Construction Process
With the contours of the redevelopment plan sketched out, the St. Austin team and its advisors still faced a lengthy negotiation process regarding the details of the site and building plans. The parish hired the Windsor Group as its owner’s representative—that is, its lead liaison in design and construction negotiations for the development of the school and parish facilities. Among the complexities were the following:
- Since the St. Austin site remains Catholic property, the ground lease includes terms prohibiting uses that conflict with Catholic teaching. St. Austin had to determine how to articulate these values in objective legal language, while Greystar had to evaluate and communicate the risk these conditions posed to its investors. While the process required work, the parties ultimately agreed to terms that were likely to promote a harmonious mix of uses and activities on the site.
- The parish had decided before releasing its development RFP that it wanted one developer to develop the whole site. Advantages of this approach included the fact that it allowed for close coordination within what is ultimately a multi-use single site, and took advantage economies of scale in the construction process. A disadvantage was the fact that the school project drew the developer outside its specialized expertise in student housing and placed a greater burden on school administrators to justify school-specific design priorities.
- St. Austin and Greystar had agreed upon a Guaranteed Maximum Price for the school development, limiting St. Austin’s liability for additional expenses incurred during the construction process and transferring that risk to Greystar. Professionals at Greystar noted that St. Austin was able to leverage the extreme attractiveness of its property to negotiate from a favorable position, while Greystar took on disproportionate risk for cost increases outside their control.
- The project’s combination of diverse uses in close proximity demanded extreme coordination among stakeholders and great design creativity. For instance, the location of the apartment building’s pool was negotiated with consideration of noise levels near the church and school. School pick-ups and drop-offs demanded finely-tuned traffic circulation design. Colocation of the school and parish facilities in one multi-story building entailed providing distinct, secure circulation spaces for children and vulnerable populations served by parish ministries.
- Rising construction costs made some value-engineering necessary. One strategic choice the parish made was to “shell” the fourth floor of the school: while the floor would be constructed as part of the building envelope, it would not receive final construction finish and become usable until a later date, when additional funds could be allocated. This choice allowed the parish to maintain its budget in the near term without hampering the potential for future growth.
ANALYSIS
Project partners identified the following key factors in the project's success:
Clear Vision
Before establishing a partnership with potential outside users of its property, St. Austin undertook a deliberate process of discerning and articulating its community’s priorities and aspirations. This process allowed a unified parish and school to approach the broader community and market with openness to new possibilities without losing sight of their own mission.
Valuable real estate
St. Austin was able to monetize its property in the way it did because market demand in its location warranted a large, expensive, new development. If considering development, stewards of church-owned land need to understand the real estate market dynamics, community needs, and ecological profile of their property in order to pursue an economically viable development strategy consistent with their mission.
Upfront due diligence
The parish invested close to a million dollars in site due diligence and marketing, including nearly $100,000 on studies and surveys above and beyond the brokerage fee. This significant investment in due diligence was critical: it allowed the parish to identify a world-class development partner with a profitable, viable project, and when it did commit to a plan, to have an accurate sense of the alternatives it was turning down. The parish was empowered by this in-depth knowledge of its property to negotiate from a position of strength at each stage of the high-stakes project, resulting in prudent, informed decisions that more than made up for this upfront investment.
Committed project “champions” within the community
Two parish volunteers dedicated what many collaborators described as several years of near-full-time professional work to steering the St. Austin community through the redevelopment project—a human resource not every parish will have. In the absence of similar in-house project management, community engagement, public communications, and contract negotiation capacities, a parish looking to undertake a project of similar scale would likely need to hire outside help to fill these roles.
In addition to their considerable technical skills, these volunteers also served as internal “champions” of the project and central points of contact and decision-making to coordinate its many moving pieces and keep it moving forward. In these roles, the volunteers acted as true representatives of the parish community as a whole. If unable to fill such a role from within the parish community, a parish should take great care in finding a professional who can effectively represent the parish’s culture and values to outside parties.
Strategic employment of professional services
Most often, rather than providing services themselves, professionals in relevant fields within the parish community helped leadership determine which services were needed and how to obtain them at a competitive rate. For example, the parish retained its own legal counsel (DuBois, Bryant & Campbell) to advise it on legal negotiations concerning the ground lease and development agreements with Greystar. Key players cited these top-tier professional advisors as crucial to the parish’s successful navigation of the high-stakes negotiations the project entailed.
Shrewd negotiation coupled with a willingness to take risk
While proactively protecting themselves from uncontrolled risk through painstakingly negotiated contracts, the St. Austin community nevertheless understood and accepted the considerable risk entailed by a large-scale, long-term development project. The community judged that the only alternative to tolerating a responsible degree of risk was to allow their facilities to deteriorate further, and with them, the future of their community’s life and mission. Instead, the parish and school are entering a sustainable new era with confidence and momentum.
Roles
Conclusion
Maintenance challenges that threatened the survival of a Catholic school ultimately motivated a forward-looking legacy project. St. Austin has replaced aging, ill-adapted facilities with a state-of-the-art campus that will allow growth in school enrolment and enhanced ministry to the local community. Hundreds of university students will find a new home next to a vibrant Catholic community including 200 students who will have access to affordable housing across the street from the university. The parish has secured a revenue stream to support its ministries for the next century. And, since the parish will pay cathedraticum (diocesan tax) on its new income and Greystar will pay property taxes on the land it leases, St. Austin’s visionary project will benefit the diocese and city as a whole. The St. Austin Catholic Parish and School project is a paradigm for other stewards of church land seeking to transform real estate liabilities into assets serving their mission.
Thanks to Fr. Chuck Kullmann, C.S.P. (St. Austin Parish), Tara Cevallos (St. Austin School), Christopher Kennedy (St. Austin Parish), Patricia Dolese (St. Austin Parish), Mary Beth Koenig (Diocese of Austin), Deacon Ron Walker (Diocese of Austin), Eric Dejernett (CBRE), Peter Jansen (CBRE), Nina Farrell (JLL), Michael Schierl (Julius Capital/Immaculata Law Firm), Joe Zuccaro (Julius Capital), Walt Coughlin (Coughlin & Co.), Greg Smith (Windsor Group), and to all anonymous interviewees.
Text and photos by Madeline Johnson (Fitzgerald Institute for Real Estate, University of Notre Dame); other images used with permission.