Q&A with Transwestern’s Stephen Powers: Mission-Focused Nonprofit Real Estate Strategies

By Transwestern’s Stephen Powers

Q: What trends are you seeing when it comes to nonprofits regarding their real estate?

A: Large organizations are looking to increase liquidity so that they can have additional leverage when considering mergers and acquisitions, as well as have further independence from government funding streams or restricted assets. From a real estate strategy perspective, this translates into organizations selling owned assets to create larger endowments, and entering leases for their replacement in the short term.

Q: What is mission-focused real estate?

A: A nonprofit and its advisory team need a thorough understanding of the organization and its mission before launching a search for new space. Many tax-exempt groups require conventional offices for administrative and back-office functions, but they also need a different type of space to carry out programming, such as dormitories, commercial kitchens and dining areas; an auditorium or hall for large meetings; truck docks and floor space to process and store donated goods; a retail showroom; or other usage-specific real estate. Affordability is always a consideration, but there may be other imperatives related to services offered. Even if the actual cost is reasonable, offices that appear ostentatious may detract from a service organization’s desired image. Nonprofit operators need to also consider security and access. A facility sheltering survivors of domestic abuse, for example, may need to preserve the anonymity of the people it serves by offering a secure entryway separate from the main entrance used by employees, volunteers, and administrators. With a complete picture of the ideal space, the site selection team can narrow its search to appropriate properties and occupancy scenarios.

Q: Nonprofits strive to maximize the cash flow from donors to its mission. What real estate savings, if any, are available to tax-exempt groups?

A: Nonprofits are uniquely positioned to lower overall occupancy costs by implementing a real estate strategy that capitalizes on their tax-exempt status. In a typical lease or co-operative, the real estate tax burden passes through to the tenant or occupant, regardless if the user is tax-exempt. This expense can be avoided entirely by rejecting traditional leasing options and instead buying the organization’s desired real estate. While this may seem like an aggressive strategy, the nonprofit may be able to issue tax-exempt bonds to finance the acquisition and exercise its exempt status on state or local taxes associated with closing costs or property transfers. Strategies such as these can mitigate the required upfront cost for the acquisition.

If owning real estate is not an option, nonprofits can still achieve the benefits of their tax exemptions while leasing conventional commercial space, though the exact scenario will vary based on state and local tax practices. For example, nonprofits can utilize a leasehold condominium structure in New York as long as the agreement is binding for at least 30 years. Transwestern advised Children’s Aid, a private child welfare organization in New York City, on its acquisition of a 65,000-square-foot office condominium under construction in Harlem to be used as its new headquarters. Also in New York, Transwestern negotiated a 45-year lease for Neighborhood Charter School to develop a 60,000-square-foot facility in the Bronx. In Chicago, Transwestern assisted in creating the 40,000-square-foot Literacenter, the country’s first shared workspace for more than 70 organizations dedicated to literacy.

Once committed to a space, whether owned or leased, nonprofit organizations should be conscious of the sales tax that could be incurred on construction materials, furnishings and fixtures. The organization can continue to capitalize on its tax-exempt status by purchasing those items directly rather than through the general contractor building out the space.

For comments, questions or concerns, please contact Dennis Kaiser