Buy, Sell Or Stay Put
June 24, 2013 Patrick Sullivan
Father John Sheehan found himself having to adapt to the wide-ranging effects technology has on the Xavier Society for the Blind and its constituents. Devices such as iPads, refreshable Braille e-books and even a recently announced Braille smartphone have gained traction among blind readers and eliminated the Xavier Society’s need for a large library.
Xavier Society, for which Sheehan is the board chair, no longer needs about 10,000 square feet of space. It drastically reduced the size of its library, eliminated its large print library entirely, and sold its Manhattan headquarters in April for $9 million. “As the world changes, how we do things change. We realized we had to restructure, reorganize and focus,” said Sheehan.
The headquarters sale was about 10 months in the making. It went on the market in June 2012. Sheehan said there were plenty of people who wanted to buy the building, but far fewer serious offers. “Some bottom feeders said, ‘Oh, it’s a little Catholic group, we can buy it for chump change,’” said Sheehan. “But we did not have a deadline so we could be patient, which was a blessing.”
The time appears to have been right to sell for Xavier. But, nonprofit financial managers are split on whether this is the correct time to be assuming capital debt to build or acquire property. The NonProfit Times asked 100 nonprofit executives what they thought of real estate related debt. Just 25.3 percent said yes without any restriction if it will advance mission. The largest response group (26.4 percent) said yes, but only if the annual debt service is less than 15 percent of the annual operating budget. Tied at 24.2 percent were the last two choices: Yes only if the debt can be retired in seven years; and, no under any circumstance, the funds should be raised from contributions.
Paul Wolf and Stephen Powers of Denham Wolf Real Estate Services in New York City said that although it depends on the neighborhood, New York City is a seller’s market. “If you have an asset, prices are so high right now that it might make sense to sell,” said Powers, director of leasing and transactions.
The outlook is good even for nonprofit buyers. That’s because “cultural spaces are considered a sexy partner to have,” according to Wolf, a principal at the firm. Developers might look to nonprofit partners because of the cachet their programs bring, and because most nonprofits don’t need the foot traffic that retail spaces do and can thus be more flexible in terms of location. “Nonprofits are good partners in larger developer projects,” said Powers. “There’s interest in having a community partner.”
Such was the case for Gary Greenberg, executive director and CEO of the Boys and Girls Clubs of Hudson County in Jersey City, N.J. Greenberg’s organization, housed in a retrofitted coal bunker since 1984, will move to a new facility about 200 yards away at no cost. Ironstate Development and Kushner Real Estate Group (KRE), developers of the new building known as 18 Park, approached Greenberg to ask if he would consider selling a portion of current property. Talks soon moved to selling the entire lot, and the developers suggested the Boys and Girls Clubs move into 18 Park, which is slated for completion next year.
Having a nonprofit on the ground floor is “helping to get notoriety and in general, the community, the city and lenders feel great about it,” said David Barry, president of the Hoboken, N.J.-based Ironstate Development. “Overall it’s a great thing and people feel good about it. Whether it has a direct impact on dollars per square foot on the apartments, I can’t really say.”
The deal consists of selling the Boys and Girls Clubs’ current land and moving into the new space, and the Club will get to keep the difference between the sale price and the cost of the new space. The net gain for the Boys and Girls Clubs could reach up to $5 million, said Greenberg and Barry.
The sale of the old building closed in early May, and Barry said it sold for “roughly $12.5 million.” He added, “The city allowed us to zone (the old site) for additional development, and that allowed us to pay more than just the cost of relocating the Boys and Girls Clubs.”
Most of 18 Park will be luxury rentals, but Greenberg will have about 35,000 square feet on the ground floor, which is roughly the size of his current space. The new construction means fewer upkeep and repair costs. “There isn’t a day that’s gone by in the last 20 years we haven’t been fixing or repairing something. It’s a fortune to run and maintain,” said Greenberg about the current space. Once the club moves, he said, “Rather than spend funds on occupancy, we’re able to use those funds for the kids and the programs. It saves a tremendous amount.”
The club’s presence in the building is also beneficial to tenants, said Greenberg. He’s going to keep the facility open after hours so 18 Park residents can use the gym. “Imagine you’re a young guy, still playing a little ball, you know after the kids are gone you can go down and use the facility,” said Greenberg. The clubs’s space is “a community center for the building, as well.”
An alternative to either buying or selling is to lease. Nonprofits can be either lessor or lessee. Although leases can be more complicated than sales, according to Wolf, there are benefits to being on both sides of the bargaining table. Leasing space it owns gives a nonprofit regular cash flow as opposed to unloading the asset. “Once you sell it, it’s gone,” said Powers. Leasing instead of buying requires less of an up-front expense.
“A majority of nonprofits lease more than own, primarily due to cash flow, flexibility in contracting or expanding, and capital investment,” said Ron Burkhardt, managing director of real estate firm Newmark Grubb Knight Frank. “But sitting on two (nonprofits’) boards myself, I much prefer a nonprofit to own rather than lease. The nonprofit has an asset versus a liability. If you’re donating to a nonprofit, it’s nice to know that they’re being as smart as possible with real estate.”
Whether your organization is interested in buying or selling, you’ll need to know what you want, said Wolf. “A lot of it is internal soul searching of organizational readiness both for acquisition and disposition,” he said. One of the most common problems Wolf said he sees is not planning for the windfall of the sale. “If you don’t plan for what to do with the cash, it can become part of general operating expenses and get spent very quickly,” he said.
Sheehan knows what he wants for a new Xavier Society headquarters. Ideally, it would be between 4,000 and 5,000 square feet in Manhattan, down from about 15,000 square feet the Society presently occupies. He’d also like it near public transportation to make it easy for volunteers and staff to get to and from, and near a post office to conveniently ship Braille books.
Though it has sold its headquarters, the Xavier Society built into the contract a four-month extension, which allows it to continue operating at the building. Sheehan hopes to have a new space secured before the Xavier Society must vacate the headquarters.
“Temporary headquarters are really challenging,” said Powers. He said that most organizations don’t sell their buildings until they have a new place to operate. “It’s difficult to make sure you have a transitional space,” he added.
The Boys and Girls Clubs won’t move until the new building is completed, something to which all parties agreed at the time of the deal. “They’re building (18 Park) first, moving us in, then they can take (the current) building down,” said Greenberg. “We won’t need temporary headquarters.”
Shawnee Community Services (SCS) in Shawnee, Kan., opened its new, $1-million community center in early May. The group had been operating from a temporary office and separate food pantry and storage facilities since last October, when its original building was demolished to make room for the new center. Executive Director Sylvia Terry said the experience was trying.
SCS had to suspend a number of programs while it was in temporary facilities. It could no longer provide furniture to those in need, nor accept furniture and goods for resale revenue to help clients with rent and utilities. “People had a terrible time finding us” in the temporary location, said Terry. She added that there were problems with mail and telephone forwarding, and the organization had to close in harsh weather because it was dependent on its host location for facility maintenance.
The new center opened in May at the site of the former headquarters. Terry said SCS sent letters to partners and clients, had an article in the local newspaper, and ran newspaper ads to promote its new location. “It’s easier for people to find us where we used to be,” she said. “They’ve been watching, and we’ve had people stopping in to ask if we’re open.”
Even more difficult than operating from a temporary headquarters is not having a building at all. “If you don’t have a building, there’s a lot of grants you can’t get. A lot of people aren’t interested in you,” said Karen Ritch, board president of Longview World of Wonders (LongviewWOW) in Longview, Texas.
LongviewWOW was formerly “a museum without walls” in Ritch’s words, until it purchased a building for an undisclosed sum in April. The organization, which does not have staff, plans to add an executive director and expand its operations once the building is up to code and opened during the first quarter of 2014. The building, which sat abandoned for a number of years, will become a children’s discovery and learning center, Ritch said.
Burkhardt recommends trying to find a seller or a landlord passionate about your mission. It might take longer, but he said it’s almost always possible. “A typical transaction would take about a year,” said Burkhardt. “I like to start about two years in advance so we’re able to locate landlords and sellers who are more likely to do something unique in nature.”
Ritch said the owners of the building were amenable to selling to a nonprofit and gave them “a favorable purchase.” Another building the owner’s family had owned became an art museum, “so the family has a history of philanthropy in that way,” said Ritch. “I think it was primarily because they had good hearts and wanting something of this nature to go (in the space) that they were willing to work with us.” E