Nonprofit Facility Planning Myths, Misconceptions, and Red Flags: Takeaways from The Columbus Foundation’s Nonprofit Forum February 16, 2022

When IFF launched its Real Estate Solutions practice in 1997, the reason was simple: nonprofits are experts at delivering services that strengthen communities, and they shouldn’t have to be experts in real estate and construction too. For 25 years, we’ve played that role for them by providing hands-on support for hundreds of projects across the Midwest from the earliest stages of planning to ribbon cuttings and beyond – and often coupling that support with flexible loans that provide nonprofits with the capital they need to realize their facility goals.

In January, we shared some of what we’ve learned along the way during a virtual forum for Ohio nonprofits hosted by The Columbus Foundation. During the 75-minute session, IFF’s senior lender in Ohio, Omar Elhagmusa, and director of real estate solutions in Michigan, Robin Toewe, discussed a wide range of topics relevant to nonprofits at any point in the facility planning process, including:

The discussion also dispelled a variety of common myths and misconceptions about nonprofit facility planning, while identifying several red flags nonprofit leaders should be aware of before embarking on a facility project. Though the event was designed for Ohio nonprofits, the takeaways are universal. Continuing our “Ask a Real Estate Expert” series, we’ve highlighted several of them below.

Myths, Misconceptions, and Red Flags

If we build it, they will come

Successful facility planning requires just that: planning. And as part of the planning process, nonprofit leaders and their boards should gain a thorough understanding of the space they’ll need to support their work. While it can be tempting to build beyond that with the expectation that additional space can be leased out for community events or to permanent tenants to create a new source of revenue, that’s a risky proposition that can also lead to mission creep.

Private companies don’t do that, and nonprofits shouldn’t either without an established relationship with a strategic partner intent on subletting space that precludes the possibility of having to market the space, manage scheduling, negotiate leases, collect payments, etc. Nonprofits’ business models focus on mission-driven work, and it’s imperative to stick to that when planning a new facility to avoid an unnecessary financial and operational burden down the road.

Nonprofits’ business models focus on mission-driven work, and it’s imperative to stick to that when planning a new facility to avoid an unnecessary financial and operational burden down the road.

My board member knows an architect or contractor who will work for “free”

Nonprofits often work with narrow margins, and the prospect of leveraging relationships to cut costs during a facility project is appealing. If an architect or contractor that someone on the board knows offers to complete a project for free (or at a heavily discounted rate), it’s not necessarily a bad thing, but it warrants scrutiny. More often than not, the offer of free or heavily discounted work means that there will be a junior person leading the project who lacks the necessary expertise, the project will not be a priority when there’s a problem or an urgent need, or both.

A nonprofit leader that is 100 percent certain they can avoid both scenarios should still be wary, because the professional providing pro bono services may not be an expert in the type of work their project requires. A world-class contractor that specializes in hospitals can probably complete a community center, but the process to build the facility may not be as smooth and the end product not as functional as it could have been with a contractor experienced in that specific type of project.

The bottom line? Nonprofits shouldn’t unequivocally rule out the potential of pro bono work, but leveraging it successfully requires careful consideration.

It’s okay to buy the building first then apply for a loan to renovate

A nonprofit leader and their board have been searching for months for the perfect building to serve as the organization’s future home, and they find it. The only problem is that it will require renovations before moving in, and they haven’t raised enough money for that yet. What should they do? The correct answer is “nothing yet.” It’s far too risky to acquire the building without knowing exactly how renovations will be paid for, because there’s no guarantee that financing will come through. Unlike buying a home, getting a loan is unlikely without a detailed plan for how to get the facility renovated and occupied. Buying the facility first unnecessarily overextends the organization and should be avoided at all costs.

Free or $1 buildings are just that

Like an offer of pro bono or heavily discounted design and construction services, a $1 building isn’t inherently bad, but there’s a reason someone is willing to sell it at that price. Understanding what it will cost to renovate the facility is imperative, because it’s the only way to determine whether acquiring the facility for $1 or no cost makes more sense than devoting capital to the acquisition of a facility that is closer to move-in ready.

There’s no need for due diligence because the facility is “move-in ready”

Speaking of move-in ready, there’s often more than meets the eye in determining just how ready a facility is to serve as a nonprofit’s permanent home.

There’s often more than meets the eye in determining just how ready a facility is to serve as a nonprofit’s permanent home

For example, an organization that serves children and their families could find a facility in a great location that it can afford to purchase by tapping into its strategic reserves. Confident in its ability to cover the cost of renovation through a capital campaign and not wanting to take a chance that another buyer will snap up the property while the organization conducts due diligence, its board elects to move forward with a cash purchase.

Later on, the Executive Director learns that there is an easement on the property for a significant portion of the outdoor space where a mission-critical children’s play area was going to be built. Perhaps there’s a way to work around the problem, but that’s likely to require a costly design pivot. If no solutions are feasible, the nonprofit has now sunk capital into a facility it won’t ever be able to occupy and is back to square one in a site search. That’s just one example of the many reasons it’s worth investing in the due diligence process before making the decision to move forward with an acquisition.

Using the same broker who listed the property for sale is a good way to reduce costs

Using the same broker who listed the property one is interested in purchasing to reduce costs is a decision fraught with potential pitfalls. Acquiring a facility is likely to be one of the most financially consequential decisions a nonprofit will ever make, and there’s significant value in having a broker whose sole role is to represent the organization and protect its interests. What that costs in commission fees is almost always worth it. One of the few exceptions to this rule is when a nonprofit is purchasing the facility from a seller it knows well, where a level of trust already exists and has been validated over time. In those cases, it may make sense to use the same broker to save on transaction fees, but that’s a decision that is best evaluated on a case-by-case basis.

Facilities projects require nonprofits to stretch beyond their primary areas of expertise, which can be challenging. But those that embark on a project with a clear understanding of the inflection points in the process where momentum can be derailed position themselves for better outcomes, irrespective of the type of work they do or their specific facility needs.

Watch the full presentation from The Columbus Foundation’s Nonprofit Forum here. To learn more about how nonprofits can best navigate the process to identify, acquire, renovate, occupy, and/or maintain a new facility, read past installments of our “Ask a Real Estate Expert” series.

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