Vanishing Tax Subsidies Scatter NYC Charities

May 1, 2008       Mark Hrywna      

The Guttmacher Institute explored several options when its lease at 120 Wall St. in Manhattan was getting ready to expire, from consolidating the staff of 65 with 10 others in Washington, D.C., to moving uptown, closer to Columbia University.

After surveying employees, however, the institute realized many of them were not likely to make the move to either location, said Sharon Camp, president and CEO of the sexual and reproductive health research organization. “Staying in Lower Manhattan as close as possible to where we were would be the least disruptive to staff,” she said.

The Guttmacher Institute examined its options a year before it moved last July, one year before its lease at 120 Wall St. expired. It ultimately purchased the seventh floor of an 18-story commercial condominium on nearby Maiden Lane for about $10.5 million, with closing costs, lawyers’ fees and renovations pushing the total cost north of $12 million for the 25,000 square feet, according to Camp.

During the past few years, nonprofits have begun vacating the subsidized rents at 120 Wall St., a grand experiment that put charities in the heart of the world’s financial district. But those tax breaks are coming to an end and there are many decisions, including examining the hard numbers, such as rent per square foot, to intangibles that might be unique to an organization.

The Guttmacher Institute had about 19,000 square feet at 120 Wall. “We looked at the possibility of renewing but could only get a commitment to another five years. If we waited five more years to get control of our occupancy costs, by that time we’d be priced out of the Manhattan market,” Camp said.

“With the way rents were going up in the area, our only choice was either to lock into a very long-term lease, which was not available at 120 Wall, or to move. We decided to bite the bullet and buy a commercial condo, knowing at least for the next 15 years or so, we would have adequate room for expansion and total predictability in occupancy costs.”

Doreen Wilburn-Smith, regional director for INROADS New York/New Jersey, began looking for new space in March 2007, a year before the group’s lease was up at 120 Wall St. She saw a lot of nice places but nothing that fit the needs of the nonprofit, which trains and develops minority youth for careers in business and industry.

Many of the other spaces were within $10 per square foot of each other, she said, including nearby Battery Park, but the organization required some renovations to create classroom-type space. Everything she examined was within a 10-block area of 120 Wall St. since the majority of its clients do business in the financial district.

The nonprofit has about 8,000 square feet and 13 employees. It eventually renewed with a 10-year lease, said Wilburn-Smith. The new lease stipulates an average rent of $44.50 per-square-foot, nearly double the $22.75 it was paying before its original lease expired at the end of March. There is a provision in the new lease that allows the landlord to give the tenant one year’s notice to move should the building become residential after the first five years.

“Moving from one end of Wall Street to the other didn’t make sense. Other spaces were too big or too small,” Wilburn-Smith said, while other spaces needed more specific work done, like a classroom, to accommodate their business.

The Ms. Foundation is the latest nonprofit to be leaving the so-called “Association Center” in the 1929 Art Deco building at the intersection of Wall and South streets. The organization plans to cross the river into downtown Brooklyn by the end of this summer. It started looking for new space in September 2006, in anticipation of its 15-year lease expiring in January 2009. “There are very few places in Brooklyn we would really consider,” said Susan Wefald, chief operating officer, adding that the area is very accessible by public transportation. The new lease is $38.50 per square foot in addition to “generous” contributions from the landlord to build out the space, according to Wefald.

Ms. Foundation will have roughly the same amount of space (15,000 square feet) but will be all on the same floor, compared to the three different floors it occupied at 120 Wall. The organization searched for new space primarily downtown and in the financial district, but also looked into the far West Side of Manhattan. Though that turned out to be cheaper, it was inconvenient in terms of public transportation, Wefald said.

The Center for Urban Community Services (CUCS) found a new home in the Harlem section of Manhattan, some 10 miles from its former space at 120 Wall St. With the help of tax credits, the organization purchased and renovated more than 25,000 square feet at a cost of about $10 million in a six-story condo, according to Paul Gualano, chief operating officer.

CUCS moved this past November after closing on the new space in January and is now subleasing the remaining five years on its 15-year lease at 120 Wall St. lease, which started in 1997. A combination of factors led to finding new space, primarily that there was no room for expansion while the nonprofit continued to grow. “We knew there was no way we’d sustain ourselves for the remaining five years,” Gualano said. The organization also wanted to return to its roots near Columbia University and be in more of a neighborhood setting, especially areas where it provides services, he added.

Gualano said he looked at about 30 spaces, starting in 2004, particularly at ownership opportunities, which was “one of the reasons why it was so difficult. There are not a lot of commercial condominiums available for nonprofits.” In the long term, he said, ownership was a more affordable option for CUCS, and one that develops an asset for the organization.

Nonprofits are budget sensitive and are trying to rent space now in the $30s (per square foot), according to Susan Sunshine, vice president of the Nonprofit Practice Group at CB Richard Ellis in New York City.

“Downtown Brooklyn is hot,” Sunshine said. It’s not just local nonprofits that are now interested in the area, she said, but state-based and national organizations. “It’s a very interesting phenomenon; six months ago it wasn’t happening.” While many nonprofits typically have as much as half of their staff living in Brooklyn, “you can’t make decisions based on employees alone,” she said. Nonprofit boards are realizing that Brooklyn has good transportation and is only a few more stops on the subway from Manhattan.

While recent rents in Brooklyn have been about $40 per square foot compared to Manhattan’s $47 or so, Sunshine said it’s an apples-to-oranges comparison because of the services and quality offered. “It’s more than just rent driving this now. If you can believe it, downtown Brooklyn feels more global, more cosmopolitan than Lower Manhattan to some nonprofits,” she said.

Still, by far the most leases signed last year were in Lower Manhattan, said Sunshine, because it provides the most opportunity of any other market in New York City to nonprofits, with the best transportation, pricing, product and landlords. She estimated at least 65 percent of the leases signed last year were in Lower Manhattan.

Harlem is an interesting area for nonprofits, Sunshine said, because there are opportunities for less expensive space. “It’s an opportunistic market like downtown Brooklyn,” she said, but it doesn’t have the supply that Lower Manhattan does.

The Guttmacher Institute and CUCS “both were extremely opportunistic,” Sunshine said. “There’s just not a lot of commercial condo space in New York but they went out and did it. It took just an incredible amount of resourcefulness to be able to motivate their boards and get it done.

“It’s not so easy to be opportunistic for a nonprofit,” Sunshine said. “You have to be very nimble and very fast, and you’ve got to be ready with money and financing or find an opportunity that nobody wants.”

Nonprofits tend to be countercyclical — strong leasers, and buyers, of space when the market goes down, according to Sunshine. “They’re long-term players and they can afford to wait, typically, and actually they can’t afford not to wait, because they’re very price sensitive,” she said. “The last really big cycle of leasing was after September 11, when nonprofits grabbed up lots of the dot.com space that went bust.”

Office space sought by nonprofits is a very steady sector in the market, according to Sunshine, ranging from an annual average of 800,000 square feet currently to as much as 1.2 million, the highest she’s seen in the market. “I think it’ll continue to go up because nonprofits tend to love down markets,” she said. “Nonprofits are opportunistic and really price sensitive,” Sunshine said, adding that she wouldn’t be surprised to see the square footage sought increase by later this spring.

Several nonprofits credited the tax abatement with not only allowing their organizations to afford office space in Manhattan but also being vital to their growth.

“We were able to move into that building…because the property tax waiver made the rents affordable,” said Guttmacher’s Camp. “We would like to think the city valued nonprofits enough that they would consider doing the same thing again, because without that kind of incentive a lot of nonprofits, unless they’re foundations with big endowments, won’t be able to stay.”

Originally based out of the psychiatrist’s office where it was started, the American Foundation for Suicide Prevention (AFSP) moved into 120 Wall in 1996 with about five employees and a $600,000 annual budget. Today, the foundation has 17 employees at the site and its annual budget has grown to $8 million.

The Association Center “made it possible for an organization like ours, which was very small, to have an office,” said Robert Gebbia, executive director of AFSP. “It grew a little bit and they needed to have space and this program made it possible. It’s also kept our costs down, even as we’ve been growing.”

The foundation’s lease expires in October 2011. While Gebbia would prefer to stay, given the market, that appears unlikely. The nonprofit’s rent is in the mid-$20s, with about 3,600 square feet, in addition to another 2,500 square feet in nearby 110 Wall St.

It’s hard to predict what the market will be like when the lease expires in three years, Gebbia said. “One thing that also factors in is that we as an organization have had enormous growth since we originally came here. My goal would be to try to put everyone back under one roof if we can and we’re projecting some additional growth over the next 3 1/2 years,” he said.

Lambda Legal is in much the same boat as AFSP, with its lease also expiring in October 2011. The nonprofit started out with 9,000 square feet, a $4 million annual budget and 22 employees. Today, it occupies more than 14,000 square feet, with almost 60 employees and a budget of more than $12 million, according to Kevin Cathcart, executive director.

“Higher rent, lack of tax abatement, and more space means expecting our occupancy costs will go up dramatically. I don’t want to look too soon because I don’t want to find anything that might tempt us. I want to postpone that increase in cost as much as we can into the future,” he said. There are many variables involved, he added, including the state of the economy and the nearby rebuilding of the World Trade Center. NPT

Sidebar:

Some Groups Become Landlords Washington, D.C.-based Independent Sector (IS) paid $30.5 million for a nine-story, 48,000-square-foot building at the end of February that it hopes will become a center for nonprofits. The lobbying coalition initially planned to lease a new space after outgrowing its current space and increased rent. But after examining the financials, it made sense to purchase property, said Diana Aviv, president and CEO.

After examining six or seven leasing options, the organization realized that within seven years, without raising any money for this building, “we would be at the same place we’d be if we were renting,” Aviv said. “It turned out to be financially cheaper for us to buy the building than to rent.”

The decision to buy was based on “what was the best financial model for this organization,” she said, adding that the District of Columbia’s nonprofit financing also made it very attractive. The softening housing market hasn’t affected Washington, D.C.’s central business district, Aviv said, which has a 5-percent vacancy rate. The only buildings small enough that could house only IS were three- and four-story walkups, and there are very few condo arrangements to purchase an entire floor.

Currently housed on one floor at 18th and M streets, IS will occupy three floors at the new location at 16th and L streets. Aviv hopes to move in before the end of this year. The remaining floors will be leased and managed, for which IS will hire outside firms to do the work.

“We see this as a central location for a variety of nonprofit organizations,” said Aviv. “We’ve had interest from a number of national nonprofits, foundations and charities that are located in other parts of the country, that are interested in having a Washington presence and exploring with us the possibility of coming in together and having a nonprofit space so that they can share the benefits of all being together… and at the same time not have to build up their own separate space,” she said.

“Our interest is in creating a stable model for ourselves of increasing the sustainability of Independent Sector.” The goal is to increase sustainability and make sure future dollars are going toward program, not operating costs, in a stable, predicable and reliable way and creating the kind of state-of-the-art center that will be a place for the nonprofits, foundations and charities around the country to come and to feel is home to them and for our local groups to feel very comfortable being a part of it,” she said. Ñ Mark Hrywna

Sidebar 2:

It’s Moving Day Nonprofits are staying in the city this time By Mark Hrywna It was an exodus of nonprofits and associations from New York City during the 1980s that prompted a program offering substantially below-market rents at 120 Wall St. Today, another exodus is under way, only this time it’s usually an intra-city move, from the so-called “Association Center” at 120 Wall St. to locations around Manhattan, and even nearby Brooklyn. Most of the nonprofits in the 34-story building have leases that expire during the next few years, if they haven’t already, said Joel Dolci, president and CEO of the New York Society of Association Executives (NYSAE), which helped push for tax abatements to create The Association Center.

“They probably will have to find some other space but we are extremely interested in helping them out,” Dolci said. “We don’t want a repeat of what happened in the 1980s where we in effect lost associations and much of the not-for-profit community.”

Crediting the administration of then New York City Mayor David Dinkins, Dolci described the Association Center as “the beginning of the end” of the exodus of associations and nonprofit from New York. “They left because of the high cost of doing business, and when they identified what the high cost was, it was primarily rental and inability to purchase space at affordable rates, and that’s why the Association Center came into existence,” he said.

Looking to shore up the downtown real estate market, the city’s Economic Development Corporation and the building’s landlord, Silverstein Properties, partnered on an incentive program to offer nonprofits reduced rent starting during the early 1990s. Nonprofits agreed to 15-year leases with an average annual rent of $19.74 per square foot — including $22.74 during the last five years — an annual tax exemption of about $5.26 per square foot, which was the tax rate when the program was started. At the time, market-rate rentals downtown were about $25 per square foot, but today have soared well past $40, according to reports.

Today, 81 percent of the building is occupied by nonprofits, according to Dara McQuillan, a spokesman for Silverstein Properties. At one time, nonprofits occupied the entire building.

While the tax subsidy expired in 2002, McQuillan said that five nonprofits have renewed leases during the past year or two at market rates. “Even at market rates, it shows nonprofits are interested in staying in the building,” he said. Others have remained downtown after leaving 120 Wall.

Though there have been rumors about the building going residential — given the views of Brooklyn and the East River — McQuillan said there are no plans right now and he “couldn’t indulge in a hypothetical” about whether it will be considered.

NYSAE’s Dolci would like to create a new program, similar to the Association Center, and if increasing rents “is becoming an issue — and I believe it might very well be becoming an issue –the leaders of the nonprofit and association community likely will look into doing something similar in the future.”

A spokesman for the city’s Economic Development Corporation said no one has approached the city about starting a similar program, but added that the city helps nonprofits expand and improve their facilities through bond financing.

To some, the city had better start doing something, and quickly.

“Five years from now I think there will be significantly fewer nonprofits in Manhattan,” unless the city provides some incentives to stay or incentives for landlords to make rents affordable, said Sharon Camp, president and CEO of the Guttmacher Institute, whose lease doesn’t expire until July but purchased a nearby commercial condominium last year. NPT