Expansion

A quiet revolution took place this year on the top floor of Holyoke Center, headquarters for Harvard Real Estate, Inc. (HRE), the University's internal property management firm.

Although the "Old Guard" is still in place--Sally H. Zeckhauser remains HRE's first and only president after nine years at the helm--a close reading of the real estate section of any local newspaper revealed a marked change in the way HRE conducted business this year.

For while HRE continued in 1986 to sell off small, residential properties from its extensive real estate portfolio, Cambridge's largest landlord got even larger by sinking at least $27.4 million into six major property acquisitions. Harvard also made a $4 million bid on yet another piece of property, the St. Paul's parking lot, and attempted to negotiate several local land acquisitions which later fell through.

All that activity, say observers both in and outside of the University, marks a new, aggressive era of expansion into Cambridge by Harvard. That growth has attracted practically no attention from those traditionally opposed to University growth, such as students and the Cambridge City Council.

"We're getting out of the neighborhoods and selling off our small pieces of property," says HRE's Zeckhauser. "Now we're concentrating our efforts on the Harvard Square area."

But now as the dust begins to settle after the University's flurry of real estate activity in the last 12 months, HRE's detractors are beginning to ask how Harvard financed the property purchases, what Harvard ultimately plans to do with its new parcels, why the University is not forthcoming about the sales, and what it all means for future prices in the Square's expensive real estate sweepstakes.

Harvard's higher profile in the Square's property market is the result of a new strategy worked out jointly by the Planning Office, the Office of Government and Community Affairs, and HRE both to combat the community's negative perception of Harvard as a bad landlord and to locate additional space to meet the University's growing needs, officials say.

Zeckhauser calls this current stage of expansion a "consolidation phase" in which HRE is "keeping [its] ear to the ground" in the hopes of acquiring more property holdings in Harvard Square. In Zeckhauser's words, Harvard is "landbanking" property for the future--that is, depositing large parcels of commercial property into its real estate portfolio. Landbanked properties are used either as investments or for future academic purposes. Last year, the University acquired several landbanked properties, including The Architects Collaborative Office Building and the O'Brien Family Properties.

The second component of this so-called consolidation phase involves the construction of faculty housing, such as those Harvard proposes to build on the newly-acquired 245 Concord Ave. site.

The University bought that land "with professors in mind," says HRE's president. "Harvard has not done anything for faculty housing since it built the Botanic Gardens in 1949. So Harvard thought they ought to try and experiment now."

When the project is completed two summers from now, Zeckhauser says, HRE expects to be selling the 22 faculty-designated townhouses at prices ranging from $250,000 to $350,000.

The third component of consolidating Harvard's properties in the Square concerns the construction of small-scale, "in-fill" housing on minor plots of land already owned by the University. Six months ago, for instance, Harvard completed construction on three such townhouses on Gerry St.--a project which Zeckhauser says may become a model for others in the Square.

How all this represents a radical departure for Harvard can best be understood by reexamining HRE's brief, but controversial, history of overtures in the local real estate market.

At its inception, HRE assumed responsibility for an estimated 2500 commercial and residential units of property, 900 of which are regulated by the city's stringent system of rent control. By concentrating on rent-controlled housing, Harvard quickly became a lightning rod for a wide range of complaints about the scarcity of housing for low and moderate-income tenants and the high real estate prices in the Square area.

By the early 1980s, HRE had left an extensive trail of litigation and community dissatisfaction over rent control disputes at places like 7 Sumner Rd., 1306 Massachusetts Ave., the Craigie Arms apartment complex, and most recently, 8-10 Mt. Auburn St.

Something of a turning point came, however, when the University negotiated a deal to prevent a large Harvard Square developer from building two large towers along the banks of the Charles River on a tract of land known as Parcel 1B. Instead, Harvard purchased the land itself and built the University Place office building along with the adjacent University Green condominiums--both of which opened in 1984.

Since that time, Harvard kept a relatively lowprofile in the Square--that is, until 1986.

Explanations still vary for the recent surge in Harvard's property purchases. University and HRE officials say, for the most part, that the acquisitions are unrelated and Harvard is not bent on expanding campus borders.

"It's entirely coincidental that they happened at the same time," Robert A. Silverman, director of Harvard's Planning Office, said in December. He explained that "recent changes in the tax laws...prompted a number of property owners to consider selling property [in 1986]."

Because tax reform abolished the capital gains tax deduction as of January 1, many local landlords were scrambling to unload property while it was still profitable. The University is perceived as a logical buyer because, Zeckhauser says, "Harvard tends to pay cash, and it's a big entity" in the Square.

"There have been a lot of unusual opportunities that have come down the line," Zeckhauser said at the close of 1986, adding that it's "not the kind of thing that takes place every year."

That's for certain. Prior to the record $27.4 million invested in 1986, the single largest expenditure Harvard made for commercial property occurred in 1979, when the University purchased Parcel 1B for more than $4 million.

Another way to understand the scope of property acquisitions made in 1986 is to realize that as of last June, the accrued purchase price of Harvard's commercial and residential properties in Cambridge was $40 million. That figure represents what the University originally paid for its nonacademic properties, says Harvard's Financial Vice President Thomas O'Brien.

In other words, Harvard paid $27.4 million for its 1986 investments, or roughly two-thirds of what it had ever previously spend on real estate.

All of that money came out of Harvard working capital, funds used for the normal course of the University's operation and recently estimated at $600 million. The money HRE earns from the sale of small properties also goes into the same working capital fund.

Harvard is able to pay higher real estate prices in the Square because, as local architecture critic Charles Sullivan suggests, the University is not bound to fair market value.

"As a non-profit institution, the University does not have to show a profit on each purchase," says Sullivan, who is the executive director of the Cambridge Historical Commmission. "The fact that Harvard could buy a piece of property is much more important to them than the actual price."

While some Harvard Square residents and merchants have praised the University in the past for purchasing property in order to keep big real estate developers from destroying the area's smallscale charm, others regard Harvard's recent spate of purchases with apprehension.

Commenting on the University's acquisitions in the Square, local realtor Jean LeVaux, president of LeVaux Real Estate, says "the developers looking for property to develop are upset because [these parcels] are no longer open to the highest bidder. The general public feels shut out. And realtors lose out because these properties are automatically removed from the public domain."

In the long run, if Harvard succeeds in buying up large amounts of Harvard Square and consolidating its control, HRE will face a number of questions about retail use and rental policy, says the Historical Commission's Sullivan.

"Will they want the maximum possible rent from tenants? Will they carry a mix of tenants? Harvard will probably have to start thinking about these issues because the policies they set will impact the whole real estate market in Harvard Square."

The ambiguous nature of Harvard's intentions to dispose of these six recently purchased parcels troubles longtime tenant activist Michael H. Turk. "It's always difficult to determine to what extent HRE is engaged in property acquisitions for the sake of expanding Harvard's commercial property or as a cover for the extension of the University itself," says Turk, a frequent opponent of Harvard who lives in University-owned housing.

Despite the apparent real estate revolution in HRE, Turk says the University's property management company is a long way off from any sort of openness.

"HRE has an attitude of the less said, the less known, the better. That's reflected in the way they've made these purchases, or even the way they've carefully skirted the issue when asked. What's the point in that [secrecy]?"

Turk also wonders why HRE never publicized the purchases of six large parcels of land, even after the fact. "If they did announce them upfront, [HRE] might reasonably expect questions to be asked about the purpose of all these acquisitions and the likely conclusions that might be drawn from them--namely, a new phase of University expansion."