- Appraisal and inspection fees
- Environmental report
- Renovations (hard construction costs and soft costs like insurance, an architect’s fee, etc.)
- Financing fees
- Legal/closing fees
- Title insurance
- Survey
- Furnishings
Resources nonprofit leaders can use
IFF has helped more than 1,200 nonprofits create mission-driven facilities optimized for their needs, and we regularly share 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.
When a nonprofit has determined that its facility is no longer equipped to support its mission and can’t be renovated to help the organization achieve its goals, the next step is to find a new facility better suited for its long-term needs. In this scenario, nonprofits have a choice to make: is it more advantageous to lease a new facility or to purchase one?
While it’s not necessary for nonprofits to decide which option is better for the organization before beginning the site selection process, it is important for nonprofit leaders to have a baseline understanding of the financial, operational, and programmatic implications of renting vs. buying a new facility before investing time and resources in the decision-making process.
With that in mind, we’ve compiled a basic overview below of the benefits of each option, along with the upfront and ongoing costs organizations are likely to incur based on the path they choose. Also included is a short list of questions to consider while assessing whether it’s more advantageous to the organization to lease or buy its next facility.
Benefits of Owning a Facility
- Purchasing a facility typically requires a significant amount of capital upfront but, in many cases, monthly mortgage payments will be lower than what the nonprofit would pay in rent if leasing a comparable facility. With more cash on hand month-to-month, the organization can re-invest cost savings in its mission.
- Organizations that purchase a facility are typically better equipped to control long-term occupancy costs by eliminating the possibility of rent increases prompted by changing market conditions. This provides a level of stability that’s helpful in planning for the organization’s future.
- Like individual homeowners, nonprofits that purchase a facility can use it to build equity and net assets, and they also have an opportunity to benefit from property value appreciation that doesn’t exist for organizations that lease a facility. Additionally, an owned facility can be pledged as collateral for lines of credit, equipment purchases, or additional property, helping the organization continue to expand and achieve its long-term goals.
- Owning a facility provides flexibility in how the space is used to support the nonprofit’s mission that the organization may not have if leasing a property. This added control enables the organization to renovate the facility as needed to optimize it for the organization’s work without any approvals needed from a landlord.
- In some states, nonprofits that own their facilities can secure property tax breaks that reduce the cost of ownership. In most cases, nonprofits that lease a facility will end up paying property taxes as part of their monthly rent payment, as landlords generally pass that cost on to tenants. It’s important to check local regulations when considering purchasing property or a facility to determine if this cash-saving benefit is available.
Upfront costs to consider
Ongoing costs to consider
- Mortgage payments
- Utilities
- Maintenance (e.g., janitorial, repairs, extermination, landscaping, etc.)
- Property insurance
- Property management
- Property taxes (unless an exemption is secured)
Benefits of Leasing a Facility
- Without the need for a down payment and other fees associated with the acquisition of a property/facility, nonprofits generally do not need as much cash on hand to lease a new facility that will enable growth as they would if buying the same property. While securing a loan to help with the upfront costs of acquisition may be an option, taking on debt may not be in the organization’s best interests at the time a new facility is needed.
- While nonprofits that own a facility have the freedom to modify it as needed to accommodate growth without the approval of a landlord, nonprofits that lease their facilities generally can relocate to accommodate changing needs far more easily. The short-term nature of leasing relative to owning a facility is particularly helpful if the organization is growing rapidly and can’t yet project what its long-term space needs will be.
- As the owner of a facility, the organization is responsible for the upkeep of the property and will be forced to cover unexpected costs as they arise (e.g., a new HVAC system if the air conditioning goes out in the middle of the summer). This can create significant challenges if enough money hasn’t been set aside for such contingencies. When leasing, however, it’s more likely that the landlord will be responsible for covering these types of costs. If the landlord is responsible for such costs according to the terms of the lease, and responsive to requests for maintenance and repairs, this creates more budget certainty for the organization.
Upfront costs to consider
- Renovations (hard construction costs and soft costs like insurance, an architect’s fee, etc.). It’s also worth remembering that, by improving someone else’s property, the organization will not benefit from the upside of appreciation as it would in a facility owned by the nonprofit.
- Financing fees (if borrowing funds to pay for renovations)
- Legal/closing fees
- Furnishings
Ongoing costs to consider
- Rent payments
- Utilities (may be covered in full or in part by the landlord)
- Property insurance (maybe included in lease rate or landlord may require the organization to pay for it separately)
- Property taxes (unless renting from another nonprofit that has received an exemption for property taxes, this will likely be passed on to the organization by the landlord)
Questions to Consider
The right decision about whether to lease or purchase a facility depends entirely on the organization’s unique needs and goals. What works for one nonprofit may not be in the best interests of another, and it’s crucial to keep this in mind during the decision-making process. Though far from an exhaustive list, the questions below provide a starting point in determining which option is best based on specific organizational needs.
- Does the organization expect to grow significantly over the next five years? If so, leasing a facility is likely the right choice until programs and operations have stabilized.
- Where is the best location for the organization’s programs? Is purchasing a facility there feasible?
- How big does the new facility need to be, and how much space will be needed in five to ten years?
- Can the organization access financing for the acquisition and/or renovation of a new facility? How much debt can the organization handle without compromising financial health?
- What are the likely operating costs in the facilities being considered?
- If the organization is leaning toward leasing a facility, what are the landlord’s long-term plans for the property? What are the terms of the lease(s) and how will that impact costs?
- Will the organization’s investment in a property contribute to gentrification that makes it more difficult for clients to access services over time?
To learn more about the pros and cons of leasing and purchasing facilities, or to discuss specific organizational needs, contact IFF’s Real Estate Solutions team.