A little reality check on real estate

The Fall issue of the Nonprofit Quarterly contains a timely article (in print edition only) detailing the pros and cons of purchasing real estate.  Now that the real estate market has finally crashed, there may be a tendency among nonprofits (as among other bargain-hunters) to finally purchase that home they’ve always dreamed of.

Authors Gabriella DiFilippo and Tanya Vartivarian of the Illinois Facilities Fund provide the following straightforward bit of advice:

With few exceptions, new nonprofit organizations should not focus on real estate ownership.  Instead they should establish the organization and its value to the community.

The Nonprofiteer hopes that even established nonprofit organizations will heed this discouraging word. Especially among the social service agencies, the process of “establish[ing] the organization and its value to the community” is nearly never-ending, and the business of making sure the roof doesn’t leak is often nothing more than a gigantic distraction from making sure that value continues to be provided.

And, as anyone who’s ever bought a home knows, even if it’s not an out-and-out money pit, it always costs more than you think it will.  And that’s money you could instead be using to serve your clients.

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5 Responses to “A little reality check on real estate”

  1. Ellen Wadey Says:

    One of the regular justifications that I hear from nonprofit arts organizations for buying a building is that they’ll be able to earn income by renting out the space during the times they don’t use it. Having been through two capital campaigns with two different organizations, I’d like to debunk that myth. First, the organization who owns the building generally reserves all the best times for the theater or the gallery for themselves. (They need to expand their programming to please all those donors who gave them the money to get into the building. No donor feels satisfied to see an organization make the jump into a building and not do something new and dazzling as a result). So what the organization is really talking about is renting the least desirable times to others, which doesn’t really go that well. Second, they don’t think about the fact that being a venue for others requires that you have staff who will work with the renters — some who must have specialized technical skills — someone who will coordinate the rental schedule, make sure insurance is in order, etc. In other words, factor in the additional staff costs.

    Though there have been a number of social service agencies who have either bought a building or been given one by the city and created successful centers, attention should be paid to population trends. There have been more than a couple centers who more quickly than they imagined found themselves in a gentrification version of Catch 22. The clients that they serve are forced out of the neighborhood by changing population trends — which are most often socioeconomic but not exclusively. Instead of serving people in proximity, they then have to ask their clients to travel to their services, which causes hardship for the clients and more than a little fuss from the neighborhood, or they begin shipping their staff out to community-based centers — for which they had to pay rent — so that they can serve their clients in their own neighborhoods.

    I wouldn’t say buying doesn’t work across the board — sometimes it is a good choice for the organization — but the full list of pros and cons need to be considered. “We wouldn’t have to rent any longer” just isn’t a good enough reason to stand alone. It has to be the right organization finding the right property at the right time.

  2. Nonprofiteer Says:

    A much more thorough summary of the problems than I was able to give–thanks so much.

  3. Anita Bernstein Says:

    Seconding Ellen Wadey above. I have personal knowledge of how the rental-income fantasy can crash: I was teaching at a Chicago educational institution when it built a new building in 1992. They/we built two floors we didn’t need, to be leased out. Our construction bond financing required our tenant to be a nonprofit, which obviously constrained the market, but we were in pretty serious talks with a local prospect that as a lessee would have given our school great PR.

    Whaddaya know–the rental deal didn’t work out! Shocking. Many a slip twixt the cup and so on. The 1992 building remains a great success, and the extra floors made sense to build, but we faculty wasted a lot of time on distracting pseudo-landlord prattle.

  4. Yana Davis Says:

    Sound advice. Even nonprofits that own their buildings free and clear, like some think tanks and others in Washington that come to mind, spend small fortunes on maintenance, repair and security every year. Unless your endowment is the size of Harvard’s, renting is the best way to go.

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