In most cases, nonprofits don’t have a facility or property on hand ready to be developed, so acquiring one of those items is one of the major costs associated with building projects. Working with a realtor to get a sense of what’s available, and at what cost, is a good first step in developing an initial estimate for a development project.
Resources nonprofit leaders can use
IFF has helped more than 1,100 nonprofits create mission-driven facilities optimized for their needs, and we’re making a concerted effort in 2023 to share some of the learnings we’ve accrued along the way. To access past content designed to provide nonprofit leaders with foundational knowledge needed to successfully complete facility projects, click here. If there’s a question that we haven’t addressed before that you’d like to know the answer to, we want to know! Email firstname.lastname@example.org, and we’ll do our best to cover the topic in a future piece.
As IFF CEO Joe Neri wrote recently in an article for Nonprofit Quarterly, facilities communicate, sending a message about what their organizations value. For many nonprofits, ever present pressure to devote as much funding as possible to programming means facilities too often fall by the wayside, preventing organizations from creating inspiring spaces that amplify the impact of mission-driven work and send a clear message to occupants, visitors, and the neighborhood that they are important, with intrinsic value, and a realizable vision of hope.
Operating in this environment, the perceived cost of developing a facility ideally suited to the organization’s mission can become an impassable roadblock to even considering such a project. And while cost is a real factor in a nonprofit’s ability to purchase, lease, renovate, or build a facility optimized for its needs and that of its community, getting a ballpark understanding of what’s needed to do a project is the only way for nonprofits to determine if it’s even possible.
With that in mind, we’ve compiled an overview below of real estate and construction costs associated with facilities projects. Our goal is to provide nonprofit leaders and their boards with a basic understanding of these costs as a starting point to estimate the financial capacity needed to create spaces that increase efficiency, maximize impact, and reflect the true value of the work that takes place in them.
While the list may look intimidating, and there’s no denying that real estate and development projects are significant undertakings, it’s important to remember that:
- Every project won’t incur every cost on this list.
- Project budgets are living documents, and an initial estimate is just that. The project (and budget) will evolve as more information becomes known over time through a formal feasibility study and the predevelopment process, and the initial estimate will move closer to becoming a final project budget. Don’t devote too much time or energy to trying to fill precise numbers for every line in the budget when first assessing the potential cost of a facility project.
- Breaking projects up into multiple phases can be an effective strategy to develop high-quality, functional spaces over time within the financial capacity of the organization.
- There are a variety of partners nonprofits can lean on for support. Real estate and construction projects require specialized expertise that may not exist within the organization (nor should it). Working with partners who can help bridge those gaps and reduce the time burden for the organization by helping solve financial, real estate, and construction challenges is essential, both in developing a budget that aligns with the available resources and as the project progresses and evolves over time.
Keeping that in mind, here’s what to consider when estimating the cost of a project.
Acquiring a Building or Land
Before committing significant financial resources to the acquisition of a facility, it’s imperative to know what the condition is of the building in question, as well as how much it will cost to make any needed repairs. Completing thorough due diligence requires electrical, plumbing, mechanical, roofing, and structural inspections, which are costs that need to be factored into estimates of total project cost.
Not every facility needs to be renovated to meet an organization’s needs, and the types of renovations from one project to the next can vary widely, along with the cost to complete them. Determining the cost to renovate the building to the organization’s specifications is best estimated by an architect, project manager, estimator, or general contractor who understands the organization’s programming and space needs. If extensive renovations are needed, they may not need to take place all at once, helping control project costs.
Like renovation costs, determining the cost of building a new facility is best estimated by an architect, engineer, or general contractor who understands the organization’s programming and space needs. Cost varies widely based on the size of the building, the types of materials used, etc.
A set-aside for changes in cost during the course of a construction project to mitigate as much risk as possible from the process. A healthy contingency line item in the budget helps insulate the organization from what it can’t know when estimating project costs. If the cost of lumber increases as construction is beginning, for example, the contingency can help absorb that increase without stalling the project or putting the organization in a precarious financial position.
The amount of money to budget for a contingency depends on the type of building project, project-specific circumstances, and the organization’s own risk tolerance, meaning it should be determined on a case-by-case basis with support from a partner with construction experience.
Environmental clean-up can be needed if a property has contaminated soil, underground storage tanks, lead paint, or asbestos, among other possibilities – which is determined during an environmental assessment (see the “Professional Fees” section below). This is a budget line item that is challenging to estimate when developing an initial estimate of project costs but will become quantifiable after the appropriate due diligence has been completed if the organization decides to move forward with the project.
These are relatively straightforward administrative costs for every project that can be estimated by contacting the local building department and utility companies to inquire about costs.
This cost covers the design of the building, preparation of construction documents, and construction oversight, and is typically based on a percentage of the construction costs. The scope of services and associated fees are negotiated directly with the architect.
Separate from the architecture and engineering fees, these are costs incurred during the project for expenses such as travel and printing. Organizations can, and should, set a limit on these costs with the architect while negotiating fees to contain this budget exposure.
To determine whether environmental clean-up is needed at a property, the potential purchaser can hire a specialized consultant to assess the site. An initial evaluation of the property (referred to as a Phase 1 environmental site assessment) is often required by lenders during acquisition of commercial properties.
If the initial evaluation identifies environmental concerns, a “Phase 2” assessment must be performed to complete additional sampling and testing, and to compile recommendations to remediate the environmental issues. After reviewing the recommendations, an organization interested in purchasing the property can determine the cost of cleaning up the site and make a decision about whether the organization is willing to take on those costs before completing the purchase. The fees to complete environmental reports fluctuates from one project to the next based on the number of tests that need to be completed and the type of analysis performed.
Geotechnical work is conducted by engineers to examine the soil conditions of a potential project site. This helps inform the design of foundations that will support the facility planned for the site. Fees for geotechnical exploration generally depend on the number of soil samples taken from the site.
These are services employed during construction by specialized engineering firms to confirm that materials incorporated into the project meet specifications and support the overall structure of the building. Fees for these services depend on the type and number of tests called for by the architect.
Legal fees are unavoidable expenses, helping facilitate the project and protect the organization from risk. Legal fees can be incurred for services like reviewing loan documents, an escrow agreement, and contracts between the organization and a project manager, architect, and contractor.
The cost of an individual or firm that assumes responsibility on behalf of the organization for coordination, management, and oversight of the project. Having an experienced project manager to support the organization can be an invaluable resource, helping reduce unnecessary costs and facilitating the smooth completion of the project.
The cost of hiring a general contractor or estimator to provide a detailed estimate of construction costs prior to hiring a project team. Using an estimator helps prevent surprises when construction bids are received. Fees depend on the size of the project and the number of estimates provided.
A document provided by a surveying company with the legal description of a property, actual dimensions of a building or vacant land, topographical information, and utility and easement information. Lenders and title companies require surveys, and the cost for surveying varies based on the size of the land or building being assessed and the level of detail provided in the survey.
An opinion of a property’s value provided by an appraisal company. Appraisals are usually required by lenders before financing for projects is approved, though IFF does not require appraisals for its standard loans because they make it harder and more expensive for nonprofits to access affordable financing to create facilities optimized for their needs.
Services provided by a title company to record mortgages and provide title insurance to the organization and any lenders involved in the project, which protects the nonprofit from liens. Fees vary depending on the number of documents that must be recorded and the number of title “endorsements” required by the organization’s attorney and lender.
Services provided by a title company for overseeing the organization’s construction escrow account, which manages payments to contractors and subcontractors, and maintains title insurance during construction. Fees vary based on the size of the construction budget and number of construction payments, and can be determined by calling a title company directly to inquire about costs for this service.
Many nonprofits are debt-averse, but securing financing can enable organizations to achieve greater impact, more quickly, under the right circumstances. There are, however, sometimes fees that a lending institution charges a borrower to cover its expenses. One example of this is a fee for submitting a loan application. IFF doesn’t charge application fees on its standard loans, but many lenders do. It’s important to understand these distinctions between different lenders when considering taking on debt.
Put simply, the cost of borrowing money to finance the construction project. This is what is owed to the lender in addition to the principal (the amount of money borrowed). Interest rates vary from one lender to the next, so it’s important for nonprofits to explore options with multiple lenders. It’s also important to understand that the lender with the lowest interest rate isn’t always the best option if the loan comes with stipulations that reduce the organization’s long-term financial flexibility. Examples of these types of stipulations are prepayment penalties, penalties for failure to make a payment on time, and fees charged to take on a permanent, amortizing loan after a construction loan is closed out vs. simply converting from interest-only, construction loans to permanent amortizing loans when construction is completed with no fees, as IFF’s loans do.
Property taxes may become due and payable during the course of the construction project. If taxes are unpaid during construction, the title company will not provide title insurance. Because taxes are usually due in arrears, organizations should budget for property taxes and seek a property tax exemption and reimbursement at a later date.
Insurance coverage is a required component of construction projects. The cost of insurance depends on the size of the project, and the organization’s existing insurance carrier can generally provide a quote for the purposes of developing an initial estimate of project cost.
There are several types of insurance to inquire about: general liability (covering the organization for general claims), property (covering the organization for property loss), and builder’s risk insurance (covering the replacement value of improvements to the property as they are being made).
Furnishings and Equipment
Administrative and office equipment needed for operations in a new facility. The cost for program equipment will depend on how much new equipment needs to be purchased for a new facility. If the organization is relocating from another location, it’s likely that much of the existing equipment can continue to be used. And, if additional equipment needs to be purchased, it may not all be needed at once, helping reduce costs in this category.
The costs of phone and computer cabling and equipment, which are sometime included in the construction budget. Cost varies widely based on the needs of the organization completing the project. If the organization already has a provider supporting IT, they can help provide an estimate of costs in a new space based on the scope of the project envisioned.
The costs of equipment and cabling for a security system for a new or renovated facility. Cost varies widely based on the needs of the organization completing the project.
Essentially, any other furnishings needed for the organization to operate in the facility. Some furnishings may be purely discretionary, like artwork, and some may be truly necessary, like furniture for a waiting area in the building’s lobby.
For help calculating an initial estimate of the cost for any of the categories above, or to discuss how to assess what costs are necessary based on specific organizational needs, please contact our real estate team. IFF has helped more than 1,100 nonprofits across the Midwest develop almost 36 million square feet of real estate since 1988, and that experience can be an invaluable resource in assessing whether a facility project is possible based on the organization’s needs and budget.