Buy land. They’re not making any more of it. But on second thought . . .

Everyone in the sector–no kidding, everyone!–should read this Nonprofit Quarterly piece by Clara Miller of the Nonprofit Finance Fund about the practices most likely to make nonprofits vulnerable to financial disaster.  Pay particular attention to Ms. Miller’s skepticism about the value of owning one’s own building.

The Nonprofiteer has argued for years that the likelihood of a building’s being a good investment is significantly smaller than the likelihood of its being a money pit, particularly for arts organizations who make over-optimistic estimates of their likely rental revenue.  But now someone who actually knows what she’s talking about is saying the same thing.

So listen up!  Please.

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2 Responses to “Buy land. They’re not making any more of it. But on second thought . . .”

  1. Stuart Levine Says:

    It may be, as a practical matter, inefficient for a non-profit to own its own office. The reason is that a non-profit cannot utilize the tax benefits of depreciation from the building. Better to have a third-party purchase the building and lease it, on a long term basis, to the non-profit, with the third-party enjoying the tax benefits, but giving some of the economic benefit back to the non-profit via a reduced rental. (Note, however, there may, in some jurisdictions be a counterweight to this: If the non-profit is exempt from state or local property taxes but the private lessor is not, the income tax depreciation will be offset in whole or in part.)

    • Nonprofiteer Says:

      Stuart, Thanks for the clear summary of the competing concerns here. In other words, every nonprofit in every state will have to do its own calculus about whether renting is better than owning, which in turn will be based on a straight numeric comparison of the value of depreciation and the value of property tax exemption. I suspect that, as local governments get hungrier, property tax rates will go up, meaning that a secure property tax exemption will be hugely valuable–but note, that’s a secure exemption. And as local governments get hungrier, there will be fewer and fewer of those.

      It’s also true that any nonprofit capable of doing the rigorous analysis you’ve prescribed and I’ve described will probably also be capable of projecting the costs of ownership. But many nonprofits lack the management skills to do either, and those are the ones whose buildings prove to be millstones around their necks.

      Thanks for writing.

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