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Deals & Dealmakers

What landlords need to know about non-profit tenants, their finances and their stability

David Lebenstein and Carri Lyon, co-heads of Cushman & Wakefield’s Not-For-Profit Specialty Practice Group, and Jodi Pulice of JRT Realty Group, Inc. discuss the not-for-profit real estate sector with Cushman executive vice chairman James Nelson

James: Tells us about your practice and how you help advise not-for-profits about their real estate needs.

Jodi: We try to find out what their growth potential is for the next three to five years. Then we discuss whether or not it is best to purchase or lease.

David: We help not-for-profits problem solve with their real estate. It could be a lease, purchase, disposition of property, expansion, contraction, or renewal. We educate them on the market, the numbers, and the best choices they might have available. And we become their real estate staff and their advocate.

Carri: David and I were originally at two separate companies, Cushman & Wakefield and Cassidy Turley/DTZ. When the companies merged, we were able to create a strong national not-for-profit practice that draws upon Cushman’s many service lines including financial consulting, research, valuation, project management and security as well as our diverse skills and 25+ years of experience.

David Lebenstein, Carri Lyons, Jodi Pulice and James Nelson
David Lebenstein, Carri Lyon, Jodi Pulice and James Nelson

James: What is the best way for these not-for-profits to make decisions internally? Do you find yourself dealing with the executive directors and the board?

Jodi: It is very important to establish a sense of trust with the board or executives of the not-for-profits. Generally speaking, they are not real estate savvy. It can be a long process where there is an exchange of information and education, so patience is a virtue for both the broker and the not-for-profits.

Carri: By law, most nonprofits are required to have board approval before entering into a lease, purchase or sale of property. Before requesting board approval, however, many nonprofit managers seek a “buy-in” from the stakeholders including funders, staff, clients and the board finance committee. We’re often called upon to make presentations to aid in this effort, and we’ve seen that it pays to keep the various parties informed.

James: Where are you seeing most of these nonprofits going today?

David: Primarily Manhattan. I have yet to see any significant flight to the boroughs, but I believe it will happen. The clients have people coming from the five boroughs, Westchester, New Jersey, Long Island, and these days, half the workforce tends to live in Brooklyn. Therefore, they want to be in lower Manhattan or somewhere else centrally located ,like Midtown. Today, Downtown Brooklyn is generally more expensive than lower Manhattan, and many of the Class B and C buildings in Midtown (near GCT) may soon be more affordable than the Class B buildings in the Flatiron or Chelsea area.

Carri: Although face rents in lower Manhattan have been increasing, when you factor in all the extras you typically get from lower Manhattan owners, the deals Downtown often end up being cheaper. For example, many of the Downtown buildings include cleaning in the rental rates whereas other properties often do not. Also, many buildings in lower Manhattan qualify for CRP which is one of the few benefits available to nonprofits. CRP benefits are like free rent that is passed onto the tenant, and the benefits can add up to about ten dollars per foot over the lease term.

James: Tell us more about the CRP. Where is that coming from?

Carri: CRP stands for Commercial Revitalization Program – a program designed to increase commercial tenant occupancy in older buildings in lower Manhattan. In return for making investments in their pre-1975 buildings, owners are provided with tax abatements which are passed on to their tenants in the form of free rent. The program is administered by the NYC Department of Finance, and it applies to many buildings below Chambers Street.

James: Should a not-for-profit own their space or lease it?

David: You really have to look at the facts and the specifics of the group, how stable they are, how much money they have, how long they have been around, whether they expect to grow a lot or contract. The worst thing you could do is buy something that you grow out of right away and then maybe a recession hits and you are stuck with an illiquid asset. For the average nonprofit they should probably lease rather than purchase, and should try to be on one floor or two to have efficient operations.

James: So what about an office condo or co-op and the advantages of ownership, of not having to pay real estate taxes or not all of the transfer taxes?

Carri: If a nonprofit is able to purchase a commercial condo or co-op, the advantages to ownership are many. There’s asset appreciation over time; generally stable and predictable costs (and those costs could be less than a monthly rent); condos (but not co-ops) are exempt from real estate taxes; property ownership can be a good vehicle for fundraising; and, in many cases, the nonprofit has the ability to make the property a reflection of the organization and its image.

David: I’m seeing a reverse trend now. I’m seeing nonprofit owners of commercial condos selling them. We handled the College Board which was in two buildings. We took a 14-floor tenant and owner and moved them to three floors of 165,000 s/f at Brookfield Place. And they are leasing. The problem with buying is there are only a handful of condo or co-op options available, and they are expensive. Carri and I are selling two floors right now.

James: When you go out for a space search and are deciding whether to buy or lease, are you just focused on community facility space?

Carri: Because community facility space limits office/administrative use to no more than 25 percent of the total space, many not-for-profits don’t qualify for it. However, for schools, day care centers, churches, medical offices and other community facility clients, we find that community facility space can be the best value. Community facility rents are often cheaper because of the use restrictions; loss factors can be lower; and, the floor plates are often larger than in typical office space.

David: I worry that there will be a glut of community facility space and we are over building it and will saturate the market.

James: What are some the considerations for a nonprofit when building new space? What is the best way for them to manage the process to make sure their interests are represented?

Jodi: Some nonprofits have many clients and customers coming through their space so they want to make sure that the building is not getting over utilized. It is very important to consider how many people are coming in and out of their doors every day.

Carri: It’s important to start out with a strong team. One of the ways we assist our clients is to help them in interviewing and hiring architects, engineers, project managers, furniture vendors and IT consultants. Once the team is in place, you want to make sure that the budgets are constantly being refined and updated as new information comes in. Regular project team meetings are a must, and while construction is ongoing, they should be on-site. Also, it’s essential that the broker stay involved for the entire buildout process through move-in and beyond. Beware of the hit-and-run broker!

James: Can you talk more about the creativity when working with a not-for-profit that owns real estate?

Jodi: We are currently working with a church, and today many churches are seeing a decrease in the amount of parishioners. This leads to less revenue, which is very important to the survival of the church. However, the church can find themselves with a great real estate asset that can help them to continue their mission. In this case, the church is looking to possibly sell the property and retain space within the new building for worship and serving the community. We hired an architect to help draft plans for a developer to understand the needs of the church and certain sensitivities that members have to various objects they want to retain. We also have to search for temporary space during the development period of the property for church services.

David: We had a wealthy church that was looking for a new facility. They ended up buying a four-story parking garage on the Upper West Side of all places and converting it into a church with a nine hundred seat sanctuary. I called the deal, “Miracle on West 83rd Street”!

Carri: At the moment, David and I have numerous requirements for non-office space or “specialty” uses. There’s very little existing space that fits the need, so we have to be creative. Fortunately, landlords have been willing to work with us. In one case, we’re working on converting a parking garage to a medical facility; in another, we’re looking at converting a sound stage into a school. Every day we get to use our creativity.

David: But landlords also have to be educated about nonprofits, their finances, budgets and stability. We spend a lot of time exploring which clients are better credit risks to the owner than traditional companies.

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