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Nonprofit Overhead Cost Project | Getting What We Pay For: Low Overhead Limits Nonprofit Effectiveness (Urban Institute Center on Nonprofits and Philanthropy)
From an Ask-NCN Discussion
Katie Edwards, Nonprofit Centers Network, 7/22/14
A new member recently asked me a question, and I wanted to get your thoughts:
This developing center is planning to offer prospective tenants a number of shared amenities in addition to shared space. The costs for these shared amenities will be included in the rent. However, after working out the costs for both the space and shared services, the rental rate the center needs to charge is several dollars above the going market rate per square foot.
How do you convince prospective tenants to rent from your center when they can get cheaper space elsewhere?
I know there are a few centers in the network that have marketed their space in a way that shows how all of the benefits make up for the cost. Can you share how you went about it or any marketing materials you prepared?
Karen Maciorowski, CT Nonprofit Center, 7/22/14
The CT Nonprofit Center may be a bit different model; we partnered with a nonprofit development corporation and they own the buildings (86,000 sq feet – 2 building). Our MOU with them is to provide a $2 – $4 below market rent (all in with operating expenses included). This is based off our joint ability to raise funds to offset the need to build a large capital improvement reserve; the low interest rate on the mortgage; historical tax credits and CHEFA bonds when/where appropriate.
When the organization signs a lease with our partner for the space, they also sign a separate membership agreement with us. The membership agreement assesses a $1.50 per square foot charge for the associated benefits:
- Staffed reception desk to greet ALL visitors of the nonprofit center members, 8:30 – 4:30 M-F (does not include phone coverage)
- Use of 4 conference rooms (1 – 10 person; 1 – 20 person; 1 – 25 person; 1 – person; and combined 75-125 people) – monthly hours allocated according to # square feet leased
- Meeting space includes use of all planned meeting technology at no extra cost (presentation, audio/video conferencing, video streaming, etc); coffee, tea, water, paper supplies, creamer
- Use of kitchen/café (seats 25) for all employees; available for dinner meetings/parties
- Monthly free educational workshop and/or social gathering of Center members
- Nonprofit liaison to coordinate activities
- Participation in leadership/governance committee
- Upgraded data cabling for VOIP phone and network to cat 6 and centralized to main data closets (all covered by funding)
- Shared high-speed fiber internet (monthly cost is shared across tenants; first year is paid 50% by funding until we have enough nonprofits to share); installation covered by funding
- VOIP system – negotiated low fee and set equipment pricing; all nonprofits must participate to create collaborative community; each nonprofit receives $500 from funding we raised towards purchasing equipment
- Centralized data closets – racks w Power over Ethernet switches for VOIP system – covered by funding
- Opportunity to participate in hosted virtual server network at significantly lower costs (contracted fees to be paid directly by nonprofit to nonprofit technology partner)
- Improved facilities planned (funding to cover) – new sidewalks, parking lots, windows, blinds, heating/air-conditioning, bathrooms, lighting, security alarm, etc)
- Access to copy/fax/scan/printers for at cost pricing
- After hours access/use
Marketing – the most important message/marketing that we deliver to nonprofits, is the ability to reduce their rentable footprint. Example, if they share the kitchen, reception, conference room, many can decrease their footprint by 1,000 sq feet or more at $13/sq ft for a $13,000 savings annually. If they rent 2,000 square feet and pay a membership fee of $1.50 per sqft per year, their fee is $3,000 for a net savings of $10,000 per year. PLUS all of the above benefits and residing in a collaborative/sharing community where the opportunities to find greater efficiencies through sharing exist.
I am attaching our flyer used for handouts at different locations. We also are provided an opportunity by the community foundation (across the street!) to speak to grantees at their quarterly meeting; through our quarterly magazine that goes to 7000 nonprofits; and we are busy developing a web site (www.ctnonprofitcenter.org) as well as a flyer. We’ll share when we have a more comprehensive marketing package.
Just to note, I do find it difficult to convey the savings message if the nonprofit is coming from outside of Hartford, CT and pays a lower rent because when they look at the membership fee, they do not distinctly see the different between rent and the fee. It is a balancing act and if there is one person working with the organization from the beginning, it is a easy win-over; but if I come late into the conversation with the agreement, it can be a deal breaker.
I look forward to see how everyone else is handling it; our system isn’t perfect, but it is the best that we can dream up.
Shelly B. White, Children and Family Services Inc., 7/22/14
Our per square foot rate is less than market rate but we have a second multiplier for conference rooms that increases the rentable square feet for partner tenants. We break our lease rate per square foot into components for the cost of space (including utilities, janitorial, common areas, conference rooms, etc), collaboration, shared services infrastructure and technology. This helps if prospective tenant complete a thorough cost comparison and you can convince them of the value of some of the intangibles. The last tenant we obtained provided the information necessary for us to complete a cost comparison. Unfortunately, 75% of the time prospective tenants only compare the total annual rent.
Shelby Fox, Knight Nonprofit Center, 7/22/14
All inclusive is the word we use for facilities and although it may appear at first glance we are more when they add in utilities, maintenance, security, property insurance, housekeeping, etc. they soon see that our price is below market. Even for some people that are “given” a free place elsewhere when they calculate all the things they have to do in the “free” place it ends up costing the same or more and they don’t get the added benefits of what our center offers. Also we only charge for the actual office space. The meeting rooms, bathrooms, break rooms, etc. are all common areas and not charged to them so they are paying a square foot price but the amount of square feet needed is much less.
However we do not include services such as internet, phone, or copy that is a “add on”. For instance internet, copy, phone, etc is added based on size of organizations number of people or number of offices etc and it is a monthly fee that is separate from rent and doesn’t cloud the rent price but when they look at the service package as an add on and see it is still cheaper than if they got all of it on their own it seems like a real deal. And it is a selling point on the space because all the things they need are very easy to get and things they do not have to research, sign contract for etc.
That is just how we handle it and it seems to work because what appears to be “above market” isn’t really when they compare apples to apples. It also wouldn’t hurt the marketing to have a side by side comparison of another place to show them the difference. For example List the Center space and all you get for $X amount per square then list another place that is less per square foot and add an estimated cost of all the other things utilities, maintenance, insurance and show how it adds up.
If you merely say we are $x per square foot you will turn people off before they understand. We advertise as below market rates even though technically we are not but when you add it all up and show it as an apple to apple comparison they will see that it is. I hope that makes sense.
I agree with you. I’ve gone to asking to see their current lease and then I prepare a cost comparison summary for them. One organization was able to double their space for the same fee they are currently paying, but yet when they first came to tour the space, they said they had a low per sq ft rent. Another organization was calculating their rent per sq foot currently at $1 per sq ft so once they showed me their lease, I was able to show them their actual cost was around $10 per sq ft. We are working on a template to give to people to help them compare apples to apples, and expect to include the intangibles to an extent. Thanks for sharing.
Eli Malinsky, Centre for Social Change, 7/23/14
In our model, we charge 2x market rent – sometimes 3x market rent – when you look strictly at the office footprint and pricing. However, our model includes lots of extras, as do most of yours. As a nonprofit ourselves, we don’t have a Foundation partner to keep our rent low, so the mark-up is necessary to keep the doors open (I.e., cover our operating costs).
We try to avoid sq ft pricing whenever we can, though we’ll gladly share it when pressed. Instead, we refer to the total price – e.g., “this office is $1,200 per month”. The way our team handles it when we show an office is to readily acknowledge that you can get cheaper space somewhere – we never compete on price. So we often say something like “You can definitely get an office that’s twice – or even three times – as large out there in the free market. But you won’t get five meetings rooms, an event space, a massive open kitchen, someone else to look after internet and copiers and, most importantly, a community of hundreds of likeminded organizations. So, you need to decide whether those extras are worth it for a smaller personal footprint…”. For some, it’s not worth it – but our history of growth suggests it can be very compelling for many.
Anyway, that’s our approach…
Mandeep Sidhu, Vancity, 7/23/14
Our most recent shared space project faced a similar issue: if organizations can get cheaper rent elsewhere, why move in with us? And in a very expensive real estate city like Vancouver, this is often the question that organizations lead with. While our shared space isn’t above market rents, organizations could get cheaper space elsewhere in Vancouver.
We took advantage of the fact that this project is one of the first of its kind in the city: a curated, intentional co-location space that, while didn’t offer the cheapest rent in the city, did offer a certain measure of tenure security. We speak about all the benefits of co-locating but we really emphasized our uniqueness with these two points: 1) come be a part of an innovative project and, 2) as an organization you had safe, secure and appropriate office space for at least 5 years if you moved in here.
My advice would be to look at the 1 or 2 things that really make your space unique and focus on that: is it location? Or the mix of tenants that will provide amazing programming or advocacy synergies that you wouldn’t get by locating elsewhere? Sometimes it’s simply organization realizing that when they look beyond their square foot per cost in the new space, they’re getting other great amenities that they wouldn’t get elsewhere (access to a variety of boardroom space, bike racks, near rapid transit, etc.).
We didn’t prepare marketing materials but when organizations contact our head lessee Ecotrust Canada, they’re very open that yes, this space may cost the same or slightly more than your current space for less square feet, but here are the other benefits you get. You need to point out that in addition to dedicated square feet, you also have “this much of shared space” (figure out a calculator that shows this number in square feet). Also ensure you show the ancillary services being offered that would normally be outside of basic rent (like reception and office management services, rent admin services, cleaning, internet & secured IT equipment etc.).
We understand that by not being an ‘affordable’ per se, we’ve lost some organizations that would make great mission-aligned tenants, but we’re confident that this project will show that it’s time for a new way forward when it comes to space in an expensive real estate market – we’re going to have to be innovative and collaborative if organizations want to stay in the city centre in order to continue to contribute to our city’s vibrancy and diversity.
Thaddeus Squire, CultureWorks Greater Philadelphia, 7/24/14
While there are ways in which you can argue the value of rent, our view is that the space and its accoutrements are the least valuable asset you’re selling. The key is getting people out of the “we’re looking for cheaper space” value proposition — or even away from a space-based value proposition, period. Naturally there will be some comparisons, but it’s so easy to loose that argument. If there is any space-based value proposition that may be worth advancing, it is flexibility, if indeed flexibility is something you offer (i.e., no long-term lease obligations). Flexibility of access and membership terms is among the highest ranking value motivators among our membership, related to the business relationship around our space.
We’re seeing a proliferation of shared space offerings, but the key to the value proposition is the sense of community and other aggregated support services. Our coworking space owes most of its success to the sense of community and, in particular the other services and support to which the space provides access.
Jonathan Spack, Third Sector New England, 7/24/14
I’d like to second (third?) what Mandeep and Thaddeus wrote. Although our building has been full for several years now, in the first few years we were faced with the same market-rate challenge. You won’t persuade every potential tenant that the value of being part of a welcoming community and enjoying other amenities outweighs a few dollars per square foot, but over time, if your value proposition is sound, you will persuade enough of them to make your endeavor successful. So to what my fine colleagues have written, I would add, “Take the long view.”
Similar Conversation on Ask-NCN 6/20/17
Faisal Abid, The Nonprofit Center of Boston
At the NonProfit Center of Boston, Shared Space tenants pay a flat monthly fee. However for our private suites, our tenants are responsible for a proportionate share of the increase in operating expenses as compared to what it was at the time of their first lease year (base year). The understanding is that that the per square foot rates we offer are based on the market conditions at that time and may change as union rates, service fees, facilities, etc. go up.
So if the space the tenant leases is 2% of the overall leasable square footage, and the building operating costs for the second year of their lease term goes up by say $10K, then the tenant would be responsible for $200 in operating charges for the second year. And if in year three, the operating expenses are $20K more than their base year, then they would be responsible for an additional $400 during the third lease year.
Similarly, for electricity charges here, we bill back a proportionate share to tenants each month.
Doug Vilsack, Posner Center
We cover building-related expenses like electricity, internet, and building staffing via rent, essentially pegging our rental rates at the amount required to break-even (increasing roughly 3% per year). We fundraise to cover other costs like our collaboration fund and other programming, as not all tenants take advantage of those benefits. That said, we did charge a small “participation fee” roughly equal to one month’s rent when we opened to close out our capital campaign. That fee is still paid by new tenants to cover costs of onboarding/signage, etc.
From an Ask-NCN Discussion 12/12/16
(See Tenant Recruitment – for actual documents)
Jenny Camhi, Leichtag Foundation
We are making the challenging step of moving from a free space for nonprofits to charging rent to our tenants. This is a much needed move towards sustainability, but comes with many interesting twists and turns!
Does anyone have a tenant agreement that they would be willing to share? We are planning on doing month to month leases since we are still in an experimental phase with fees and capacity.
Jimmy Martin, Chicago Literacy Center
Key things to note about this document and our setup.
– We do not own the space we’re in, rather we lease it. The creation of individual subleases would complicate things considerably, as each would have to be approved by our landlord. We chose to only offer month-to-month agreements to avoid the wealth of complications associated with offering subleases to our residents.- This document is intended as informational as opposed to legally binding.- This document is a work in progress. We have to update it regularly as we realize its loopholes. We realize it is by no means a perfect document. (in fact it needs to be updated, already)- Another reason we chose to offer month to month rentals instead of subleases is that our members are constantly evolving. We want them to grow and thrive. We don’t think it beneficial to lock them into a fixed agreement where they have no flexibility to grow or open their own office as time and finances allow. This setup also allows us to be their partner instead of just their landlord.
China Brotsky, The Nonprofit Centers Network Board MemberThe thing about leases is that they vary widely based on local law. I would suggest you get a local real estate attorney to write you a lease and ask them not to go to crazy on all the provisions to screw your tenants that most commercial leases have. And then you could add the collaboration clauses or anything else that is special to your situation. For example can they bring dogs, if so what behavior allows you to ban dogs. Or do you expect them to attend tenant’s councils,etc. (see collaboration clauses)
The licence agreement that LiteraCenter uses might work if you don’t want a real lease but whatever you do I suggest it be reviewed by a lawyer and signed by both parties.
If you’re charging rent for the first time you might also want to be specific not just about their space but their usage of conference rooms and other amenities. And think through whether there rent should be just on their square footage or include their share of costs for common space.
Finally I would just say that month to month leaves you quite vulnerable. What about a lease that allows your tenants to cancel their space leases on three months notice. That allows you a chance to start filling the space right away.
Jenny Camhi What do you require tenants to provide in terms of insurance, workman’s comp, etc? Our HR department requires a certificate of insurance listing this property as additionally insured and workman’s comp insurance. Is this standard?
Pam Mauk, Together Center Our leases were designed as China has described. A number of lawyers for our tenant agencies along with our own board reps created a standard lease a couple decades ago. As I got more familiar with leases, I realized it was really a boilerplate lease that would have been about the same even without the process. It is not short. It does have a responsibility to participate in our tenant association. Our standard is a three-year lease. We have month to month leases which require a year at the upfront (due to our signage changes and the like) before becoming month to month. We require two full months of notice (no prorating of months.) 90 days would be better. I have simplified this a bit, but not wholly, for agencies meeting our mission by providing advocacy and referral help at our Front Door on a part-time basis, but even those leases have liability and insurance discussion among other key leasing factors.
Erin Prefontaine, The Jerry Forbes Center We are using what we call a Collaboration Charter, that rather than part of the lease agreement, is part of the on-boarding process. We used the Kukui agreement as a starting point but moved toward a charter because our Board felt that making part of the lease was too much of a “Thou shalt…” angle. By making it part of the onboarding and involving the organizations, the Board feels that they will take the reins and engage in collaboration a lot more quickly. With that though, I have bumped up all of my collaborative language elsewhere and focus on it a great deal in the site visits and applications of tenants so they know what they are getting into. Attached is just a draft, but it’s what we’re starting with. I hope it’s helpful!
China Brotsky Hi all, In addition to the other examples of charters and lease clauses on this email thread (all attached here), i’ve attached the Thoreau Center’s original Community Charter which fell out of use but is now being rewritten.