Know When to Hold ‘Em: Real Estate Strategies for Nonprofits and Communities
Saul Ettlin presented on nonprofit real estate holding entities at the Nonprofit Centers Network’s Sharing Innovation 2017. Saul is a real estate consultant for the Northern California Community Loan Fund and serves on NCN’s Steering Committee.
The physical spaces nonprofits utilize play a key supporting role in the success of organizations, from specialized program space anchored in their communities to having quality, affordable administrative space that promotes collaboration and attracts and retains talent.
However, many nonprofits face a myriad of challenges when it comes to having the program and/or office space that best meets their needs. Nonprofits can face:
- Acquisition Challenges. Generally, the commercial real estate market, and its capital, moves fast. In contrast, nonprofits take time to assemble resources
- Development Challenges. When nonprofits do acquire space, the leader of the organization often becomes an accidental developer, slowing down projects and possibly adding costs.
- Leasing Challenges. When rents are on a fast-paced rise, nonprofits can find themselves vulnerable.
- Ownership Challenges. Owning a building can be like running a program. It has a budget, needs dedicated staff and has financial and other metrics to be measured by.
Nonprofit Real Estate Holding Entity as a Solution
Traditionally, a real estate holding entity mitigates risk associated with the ownership of real estate assets. Here, the goal it is to bring expertise to the development and operation of nonprofit space that caters its design for and welcomes the types of uses the sector provides. These holding entities can:
Create a path to ownership
A well-capitalized holding entity can purchase a building or site and develop it. The nonprofit can move in once complete and run fundraising efforts simultaneously to ultimately buy out the holding entity.
Hold and lease space
The holding entity can also acquire, develop and lease out the space creating new nonprofit centers. The goal here is to establish permanent, affordable, quality office and program space and shield the asset from market forces.
Property & asset management
The holding entity can also develop a fee-for-service line of business by offering property and asset management services to nonprofits that find building operations distracting from their core mission. Operations expertise also optimizes building performance.
Why a Nonprofit Real Estate Holding Entity?
A nonprofit real estate holding entity brings mission focus and knowledgeable staff to a city, region or state. Because real estate transactions can be complicated and infrequent, having a team working across a geographic area means the sector has a trusted partner to help get into the best space possible in alignment with their missions. Holding entities can:
- Assemble capital and have the ability to transact quickly by leveraging philanthropic and government support.
- Develop a deep understanding of nonprofit needs for a given area and readily assemble a set of tenants/members.
- Should such a holding entity offer asset and property management, it would bring valuable expertise to operating and maintaining nonprofit assets as well as achieve some cost efficiencies across its portfolio.
While nonprofit real estate holding entities are not widespread, some examples exist.
To scale or to create
There are two options to establish a nonprofit real estate holding entity in your community.
Scaling an existing organization can mean a quick start up because of established organizational infrastructure. Community land trusts and community development corporations have real estate experience, but generally don’t engage in commercial real estate. This is an opportunity for growth. Certain nonprofit center operators could bring their commercial real estate operations and possible development experience, as well as organizational and legal infrastructure.
The other option is to create something from scratch, which can bring a new perspective and possibly attract new funding resources. If building a holding entity from the ground up, it’s likely it will need a place to incubate.
Whichever structure is used to start a holding entity, it will take significant support from foundations, government and others to properly capitalize the entity.
A successful holding entity needs significant support from either foundations or government and ideally both. Foundations and governments will need to capitalize and provide initial operating support to the holding entity to do its first transaction(s) and help get it off the ground (hire staff, etc.). Government may have to provide additional support of gifting (or an extended lease) underutilized public asset that can be activated for community service. These community partners’ initial investments can be leveraged (through tax credits, debt, etc.) to deliver projects. In the long term, the holding entity hopefully becomes self-sustaining as it develops a portfolio of projects under management.