On March 12, more than 40 nonprofit leaders, funders, real estate professionals and government officials gathered in Boston for Innovative Strategies for Nonprofit Workspace,* a day-long briefing on multi-tenant nonprofit centers. Organized by the NonprofitCenters Network and TSNE MissionWorks, the briefing covered a wide range of topics from financing basics to governance models and from developing a business plan to advocating successfully for funders to support this type of project.
On average, nonprofit organizations spend 20 percent of their annual budgets on rent, the second highest annual expenditure for the sector after personnel costs. And in a “hot” market, commercial rental costs can suddenly skyrocket, forcing an organization to choose between cutting programs, laying off staff or taking on the burden of moving – perhaps out of the community that has come to rely upon its services.
Be Sure You’re Ready and Have a Mission Fit.
As the participants at Innovative Strategies for Nonprofit Workspace learned, nonprofit centers provide an excellent alternative to paying commercial rent to a for-profit enterprise. In addition, they help to keep essential resources within the sector.
However, developing and managing a center can be a daunting venture. A nonprofit organization needs to systematically determine the feasibility of such an undertaking.
As Robert Cowden, a partner in the Boston law firm Casner & Edwards, LLP, reminded the audience early on, “real estate is not a core competency” for nonprofit staff used to advocating for social justice or providing services to constituents.
According to Cowden, be sure that developing a nonprofit center is a strategic fit that will advance your mission and fill a need. Realize that managing a center will change your organization.
Determine Who Will Run the Center.
Choosing a governance model is a decision that will affect all other aspects of the project. Will there be multiple owners in a cooperative arrangement? A single owner with sub-leases? Or several organizations coming together to form one new entity that will manage the project?
Purchasing a building carries significant risk, with consequences for not repaying loans. Who, then, is liable? There are pros and cons to each model, depending on decision-making power, financial prowess, and tenant desire.
A board made up entirely of tenant organizations doesn’t like to raise its rents, for instance. Who is responsible for programming if multiple organizations share ownership? What role do outside funders play in management? You can’t move forward on buying property if you haven’t decided who will own and manage the building, and how.
Be Clear About Financial Issues.
The biggest challenge is, of course, financing. The amount of debt can be staggering. How can organizations that don’t seek to make a profit begin to pay this down?
Alan Zimlicki, principal of ASZ Associates, walked the attendees through the details of a pro forma – a spreadsheet of financial projections – to give an idea of how some nonprofits can creatively fit the pieces together, but also to show many of the fees and hidden costs that nearly double the project’s cost. He warns that your pro forma will change and be readjusted constantly throughout the process, but it will serve as your guide and keep you on track.
Unsure how to start a capital campaign? CompassPoint has developed a Capital Projects Primer to help guide you.
China Brotsky, executive director of the NonprofitCenters Network, reminded briefing participants that an effective way to raise vast funds is to launch a capital campaign. However, that’s far from the only option available to organizations. Nonprofits can leverage their tax-exempt status to float bonds or sell tax credits.
There are several different tax credits used in development, such as rehabbing a historical building, building in a low-income community or greening a building. (The National Trust for Historic Preservation and the National Park Service are good resources with which to start.) The government gives tax breaks for these efforts, but since nonprofits are tax-exempt, we can’t use them. Instead, nonprofits can sell these tax breaks to a for-profit company for, say, 87 or 90 cents on the dollar (market dependent) and recoup substantial funds to put back into paying off debt.
Find the Right Financial (and Other) Advisor.
Rents initially may need to be set at market rate to make mortgage payments. In only a couple of years, however, local market rates will have risen enough that your nonprofit center’s rent will be below market rate. A pro forma does not assume full occupancy from day one, and there will be build-out and renovation times.
The right financial advisor will help you find a way to make the math work. But be sure your organization is financially strong before you begin fundraising and worrying about bonds.
Research Location, Location, Location.
The next step, once you have agreed on governance and found your financing, is to actually enter the real estate market and begin developing and designing your new space.
- What size building do you need?
- Is being near public transit a priority for your organizations?
- What kind if structure do you need?
- Will you host direct service organizations?
- Will you have public meeting space?
The three key parameters are quality, cost and time. The general rule is that you can meet two but not three of these parameters, and it’s up to you to prioritize what’s necessary for your tenants and clients.
It is strongly recommended that you hire an owner’s representative at this stage. You want someone who can work with the architects, designers, engineers, consultants, LEED-certified professionals, permit specialists and others. But be sure that they do so with your best interests at heart, not those of any of the vendors.
This individual is integral to making sure that communication between all these parties remains open, so that one contractor’s work doesn’t undo another contractor’s work accidentally. This person will also be the primary point of contact with the various unions involved in developing your project .
Decide Critical Next Steps.
There are several other decisions to be implemented once you’ve purchased a building. Will you be managing the property yourself or hiring a management company? It may seem less expensive to manage the property yourself, but make sure that you have the staff to support this.
Also, you may love your tenants, but this is a business relationship – do you want to be the person having the difficult conversations about collecting overdue rent?
- How green do you wish your building to be?
- What resources are available where you are?
- Will you be offering shared spaces? How does this affect floor design?
- What policies (financial stability and mission relevance) do you have surrounding tenant qualifications?
- What sort of feedback mechanism will you have for tenants?
- How will you decide which programming is open to the public?
Be Prepared for the Long Haul.
Remember that putting together a multi-tenant center is a long process encompassing years. There are many high points along the way, but there are also occasional headaches and disappointments. You may find the perfect building but have your bid rejected, or your favorite green architect may no longer be available when you are ready to start building out space. Delays from a contractor could force a prospective tenant to sign a lease elsewhere.
But especially during trying times, always remain focused on your mission and vision. Whether it serves as a community art space or as a home for family service providers or as a space for tiny nonprofit organizations to have meeting rooms, your multi-tenant center is an invaluable tool for your community, the sector and your tenants.
* In the News: Read more about the briefing at massnonprofit.org