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athenahealth, a healthcare computer-services company, and the lead tenant in the Arsenal on the Charles office complex, announced on December 5 that it has agreed to purchase the property from Harvard for $168.5 million to accommodate its headquarters growth. According to the Boston Herald, athenahealth leases 330,000 square feet in the 11-building office complex, which comprises 760,000 square feet. Other tenants, who will remain for the time being, include Harvard Business School Publishing (HBSP). The former military arsenal was redeveloped into a commercial site in 1999, and Harvard acquired it two years later for $162.6 million. The purchase was made to accommodate expected University growth quickly—and at least in part because it was seen as nearby swing space to accommodate dislocated commercial tenants and University users during what was planned as the rapid development of campus facilities on land acquired in Allston.

As reported, since filing a proposed 10-million-square-foot development plan with Boston regulators in 2007, Harvard has scaled back its Allston development plans radically:

Reflecting the financial pressures that forced the University to stop construction on a $1.4-billion Allston science center in early 2010, much of the development outside the HBS and athletics precincts would be undertaken and financed by or with private partners. (For a full discussion of the evolving financial circumstances shaping Allston aspirations during the past decade, see Harvard Magazine’s coverage of the University’s 2012 financial report.)

Into Watertown…and Beyond

News of Harvard’s interest in the Arsenal property first became public in the spring of 2001 (see this contemporary account, with a map and photo of the property). Sally Zeckhauser, then-vice president for administration, said of the prospective acquisition, “All the University departments are very squeezed for space, and Allston has always been a very long-term campus.” Of the Arsenal complex, she said, “It’s up, as opposed to a lot of the other buildings we think about” to accommodate growth. Protracted negotiations followed the purchase to accommodate Watertown’s interest in maintaining its anticipated tax revenues from the commercially redeveloped property, given the prospect that Harvard would convert it to nonprofit use as it occupied the space. An agreement to maintain Watertown’s revenues for a half-century was reached after 18 months of tough negotiations. In return, Harvard was granted the right to convert space to academic use without seeking special zoning permission. Clearly, the University was settling in for the long haul.

In the event, the long haul was ever-deferred. HBSP, a tenant before the acquisition, remained in place, but the rest of the complex, after suffering from high vacancies, remained in commercial use. In 2005, athenahealth arrived and grew rapidly.

The same year, Harvard acquired another landmark commercial property, buying the DoubleTree Guest Suites Hotel fronting the Charles River and Soldiers Field Road. The price, never disclosed, was estimated at the time to be about $75 million. The site borders other Harvard Allston properties, and was then thought to be useful to accommodate guests to what was expected to be a burgeoning science and research campus, or to house faculty members and graduate students (for whom new housing had recently been constructed at One Western Avenue, on the edge of the HBS campus).

A Smaller Footprint?

Once Allston development ambitions were reined in, and as Harvard faced much more straitened financial circumstances, questions arose about what it might do with some of the assets it had acquired there.

In September 2009, Faculty of Arts and Sciences dean Michael D. Smith welcomed faculty and staff members to a financial update briefing. In the questions that followed, a staff member asked whether Allston assets might be a source of needed funds. As reported then, Smith acknowledged discussions were under way on options to “monetize” some of the University’s extensive landholdings as the development plans were rethought. There was talk of property sales, joint ventures with developers, or other ways to reduce Harvard’s financial leverage and increase its cash, but of course commercial-property transactions nationwide were much more difficult in the aftermath of the financial crisis and recession.

Neither the full investment in Allston properties nor any restrictions on their potential disposition (for example, whether they were used as collateral to secure borrowings) has been disclosed. And of course as a potential buyer and seller of properties, Harvard has not wanted to tip its hand in a way that might adversely affect the market value of any of its transactions.

So the Arsenal sale was announced when an agreement was reached, without prior leaks. There has been no information on any other prospective sale of seemingly attractive income-producing properties at the periphery of Harvard’s holdings (like the DoubleTree operation)—but that might change now.

The University’s Perspective

Harvard officials declined to comment on any of these issues. The University’s official statement confirmed that Harvard is reviewing its assets to determine whether they fit with the academic mission, but disclosed no specific additional information:

The agreement arose from discussions between the University and the Arsenal’s major tenant, athenahealth, about the company’s plans for growth in the coming years. The University has been reviewing the property it owns beyond campus to determine how it fits with our long-term mission of education and research, and we were pleased to be able to accommodate the company’s expansion through this transaction, which is consistent with our review.

No information is available yet about what use might be made of the proceeds, expected when the transaction closes in the second quarter of 2013. The University has been paying down its borrowings, redeeming $300 million of outstanding debt during fiscal year 2012; interest expense during the year remained a significant $285 million, and much of the principal repayment on long-term debt is deferred until maturity. Long-term debt outstanding peaked at $6.3 billion in fiscal 2010 and 2011, and Harvard cannot borrow much more without threatening its top-tier credit rating—a painful problem, given current record-low interest rates.

Alternatively, it may wish to use the receipts to fund current capital projects, from the Faculty of Arts and Sciences’ renewal of undergraduate Houses (a multiyear project that will cost more than $1 billion) to the planned renewal of a redesigned Allston science complex. The latter project has been described both as proceeding as soon as 2014, and as subject to substantial fundraising, leaving its status somewhat ambiguous.

Or there may be entirely different uses, from bolstering cash reserves or making new investments.

In any event, the Arsenal sale gives a tangible sense of just how far the University’s plan for future campus growth and development has been altered by changing circumstances during the past half decade—a process that may well continue to unfold.