Commercial Real Estate News / Investing / Schools as Commercial Real Estate Investments

Schools as Commercial Real Estate Investments

Published: 09-07-23 Category: Investing

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

There are a little over 32,000 private schools in the US, with an additional 2,200 private for-profit colleges. Private schools can offer profit margins up to 16%, and private school activity is relatively recession-resistant: Various governments offer grants to get new schools off the ground.

Here, we'll cover the basics that investors should know about schools as commercial real estate investments, how investors can benefit from investing in schools for sale, and how the acquisition of a school for sale actually works. We'll also discuss profitability and the ways in which schools generate revenue.

Let's get started.

What Can I Do With Schools for Sale?

The idea of buying a school for sale might be confusing: What exactly can and can't you do with school property? The most obvious answer is to use the building for educational purposes. Investors could buy a school for sale and turn it into a private non-profit or for-profit school.

But opening an educational facility doesn't have to be the only use for your newly acquired real estate. Depending on the school building's amenities and location, it may be possible to turn it into something else. For example, many investors have bought defunct public school buildings to convert into office space or affordable housing.

Are Schools Commercial Real Estate?

Schools as Commercial Real Estate Investments

Public schools that receive government funding are public property and not commercial real estate. The state owns the property, and it's held in trust by a school board that oversees its use in the interest of the public.

With non-profit and for-profit private schools, the answer gets a little more complicated. The property on a non-profit or for-profit school campus is usually owned by the private school itself or owned by a landlord that leases the space to the school. In those cases, certain buildings on the school campus can be considered commercial property.

Even if a private school is commercial property, it must still follow federal policies relating to education and discrimination. Also, most cities and states require private schools to obtain some kind of license and certification to operate.

How Does Buying a School Work?

It's important to realize that a “school” is not really a definable legal asset, so any sales agreement will have to clearly specify exactly which tangible assets are included. Buyers can buy just the assets, like the physical property, or they can buy the company, which includes assets and the company's brand, financial history, etc.

If you're looking at buying a school for sale to operate as a business, you can look at a SBA 504 loan for financing options. SBA 504 loans can provide up to $5 million in funding for the construction, acquisition, or improvement of private educational facilities. Prime rates for SBA loans are between 1.25% and 2.75%.

The best way to approach buying a school building or educational facility is by working with a commercial real estate broker that specializes in educational facilities. School brokers can help you locate colleges, K-12 schools, and preschool facilities, negotiate sales contracts, and analyze real estate financials.

Types of School Real Estate to Invest In

When it comes to school investing, below are some of the main types of buildings and educational institutions investors can focus on.

#1 – Daycares/Early Childhood Education (ECE)

Early education centers are an interesting option for school investing as they typically offer both educational and daycare services. According to data from IBISWorld, the ECE market was worth $15.9 billion in 2022 and grew 1.1% from 2017 to 2022.

#2 – Private School Real Estate

Many non-profit and for-profit private schools don't own their own campuses and instead lease facilities as part of a franchise or management contract.

As the owner of the facilities, landlords can secure long-term leases with private schools to occupy space. Building owners can also hire an education management company to handle day-to-day management and upkeep of facilities.

#3 – Abandoned Schools

One other option for school investing is to buy an old, abandoned school building and renovate it.

Districts might abandon school buildings because they've outlived their usefulness or the school has merged into another district and switched locations. Private individuals can often buy these buildings at a discount—even buildings that used to be public schools.

How Do Schools Make Money in the US?

Public schools in the US receive virtually all of their funding through local income taxes, property taxes, and federal funding. About 40% of educational funding for public schools comes from property taxes, and an additional 40% comes from local taxes.

How Do Private Schools Make Money?

Private non-profit and for-profit schools make the vast majority of their revenue from tuition fees, but some also get money from private donations and fundraisers. Charter schools straddle the line between public and private as they often receive public money but operate independently from the local school district, similar to private school management.

From the perspective of an investor, the majority of revenue from a school building investment will come from tuition fees from educational services. However, the school building itself can appreciate in value.

Many private schools also gain income from their investment portfolios. Universities can invest endowment funds from private and government sources to fund capital projects, like building construction, research, professorships, and more.

How Profitable Are Schools?

Private school profitability has slightly declined in the past decade or so. According to IBISWorld data, private school revenue in the US had a five-year compound annual growth rate of 0.4% between 2018 and 2023 and decreased by 1.8% between 2022 and 2023 to $90.6 billion.

Some of this recent decline in revenue is due to the lingering effects of incorporating virtual education models during the pandemic. Some for-profit education operators are also worried about the Biden administration's recent moves to regulate the for-profit education sphere.

Find & Connect With Commercial Agents & Brokers Near You for Free on MyEListing.com

MyEListing.com maintains one of the largest databases of commercial agents & brokers in the country. Use it for free to find an agent or broker near you!