The business of operating a mission-driven organization is a full-time job that requires deep knowledge of the work at hand and myriad specialized skills, but knowing the ins and outs of real estate and construction is rarely essential to the success of the organization. Nor should it be.
Real Estate and Construction Resources for Nonprofit Leaders
With more than 700 successful facility projects across the Midwest supported by IFF’s real estate team, providing real estate and construction consulting designed specifically for nonprofits is a core element of IFF’s organizational DNA. Having accrued quite a few learnings along the way, we’ll be making a concerted effort this year through a new content series being kicked off here to share some of the knowledge nonprofit leaders need in order to understand what’s involved in facility projects.
Capital projects are relatively rare occurrences in the lifecycle of most nonprofits. When the need for a new facility arises, it’s often the first time seasoned nonprofit leaders have had to confront such a project. One of the foundational challenges in this scenario is gaining an understanding of what facility projects entail, which requires a basic grasp of the vocabulary of real estate and construction.
Below, we’ve compiled a list of terms nonprofits leaders need to know before embarking on a facility project, that’s informed by more than 25 years of supporting nonprofits with specialized real estate and construction consulting. Familiarity with these terms is the first step toward making informed decisions about what tasks can be accomplished in-house and when it’s in the organization’s best interests to bring in outside experts to support the process.
By bringing technical experts to the table to supplement the organization’s capacity, nonprofit leaders can devote more time to mission instead of to the intricacies of determining the feasibility of a project, budgeting, conducting a site search, managing the construction process, and more. Absent these supports, projects typically take longer, cost more, require greater organizational bandwidth, and, in some cases, simply don’t take place at all.
Click the terms below for brief explanations of what each term means, and, where relevant, to access additional resources related to the topics.
An opinion or estimate of the value of a property. There are generally three approaches to determine value: replacement cost approach, income approach, market comparison. Most lenders require an appraisal before extending a loan to a borrower for a facility project, but appraisals make it harder and more expensive for most nonprofits to access affordable debt – which is why IFF has always offered non-appraisal-based loans.
- Building Reserve
Money set aside to pay for facility upkeep over time. Building reserves are often used to cover costs that are difficult to accommodate in a single year’s budget, like the replacement of a roof.
- Capital Improvement
An improvement, rather than a repair, that adds long-term value to a facility.
- Certificate of Occupancy
A certificate issued by a governmental authority indicating that a building is ready and fit for occupancy and that there are no building code violations. The last step before moving into a new or recently renovated facility.
- Change Order
An order to a contractor from the owner, architect, or engineer on a construction project authorizing changes or modifications to the original work as shown in the contract drawings, plans, or specifications. A change order usually changes the original contract price.
- Deferred Maintenance
The postponement of building upkeep, which often occurs because organizations are either unaware that systems need repair, or they lack the funds and/or staff to manage the projects. Find three tips for managing deferred maintenance here.
Loss of value of an asset like an owned facility due to a variety of causes usually associated with physical deterioration and functional obsolescence.
- Draw Schedule
A detailed plan at the outset of a facility project that outlines the milestones during construction at which the builder will be paid for their work.
- Environmental Remediation
The clean-up of a site where a new project will occur, removing contaminants from the property to ensure the health and wellbeing of future visitors to the site, and to mitigate environmental damage. For example, a nonprofit that wants to build a new headquarters on a lot where a gas station once stood will likely need to engage in environmental remediation before beginning the construction phase of the project.
A process by which money and/or documents are held by a third party until the terms and conditions of an agreement are satisfied. Escrow is usually used for the disbursement of construction funds.
- Feasibility Study
An assessment of whether a proposed project will fulfill the organization’s objectives. The results can be negative, or unfeasible, though that doesn’t mean there isn’t a path forward to achieve the organization’s facility goals. Learn more here.
- Furnishings, Fixtures, and Equipment (FFE)
Movable items in a nonprofit’s facility that have no permanent connection to the building itself. Examples include desks, chairs, tables, and other items needed to execute on the organization’s mission. It’s critical to include a line item for FFE when developing a project budget to avoid unexpected costs after construction is completed.
- Hard Costs
“Brick and mortar” costs (i.e., what’s directly required to build a facility). Lumber and drywall are two examples of hard costs associated with almost all construction projects.
- Leasehold Improvements
Renovations to a leased space to customize the property to support the leaseholder’s operations.
- LEED Certification
A scoring system, based on a set of required “prerequisites” and a variety of “credits” in six major categories: sustainable sites, water efficiency, energy and atmosphere, materials and resources, indoor environmental quality, and innovation and design process. Attaining LEED certification can help reduce operating costs in the facility by ensuring energy efficiency.
A claim against another’s property securing either payment of a debt or fulfillment of some other monetary charge or obligation.
- Lien Waiver/Waiver of Liens
A waiver of mechanic’s lien rights, signed by a general contractor and their subcontractors, that is often required before the general contractor can receive a draw under the payment provisions of a construction contract.
- Operating and Maintenance Expenses
The ordinary expenses of operating and maintaining a property, such as taxes, insurance, repairs, security, utilities, etc.
- Operating Reserve
Money set aside to be used to offset unexpectedly high operating and maintenance costs.
- Owner’s Representative
An expert hired by the owner or leaseholder of a facility to manage the construction process. Owner’s representatives serve as a liaison between the project team and the owner or leaseholder to ensure their interests are protected at each stage of the project. Common tasks for owner’s representatives include conducting site visits and analyses, managing the design process, working directly with general contractors to execute the client’s vision, and project accounting and reporting, among other examples.
Predevelopment is anything that needs to occur to define the where, what, when, and how for a project before hammers meet nails. Example of pre-development activities include needs assessments, feasibility studies, hiring a project team, etc. The length of the predevelopment phase for a project depends largely on the organization involved and the type of project they’re pursuing – taking anywhere from a few months to several years. Learn more about what the predevelopment process can entail.
- Request for Proposal (RFP)
A document that outlines the services required by the nonprofit from an architect and/or general contractor. After publicizing the RFP and reviewing proposals, interviews with prospective members of the project team are critical to finding the right fit. Learn why here.
- Site Search
A process – often led by a real estate broker – to identify properties and/or facilities that meet the criteria established in a nonprofit’s space plan (see below).
- Soft Costs
Expenses, other than hard costs, required for a real estate/construction project. Examples of soft costs include legal and architectural fees.
- Space Plan
Driven by the nonprofit’s programmatic offerings, a space plan takes into account the building specifications needed to for the organization to serve the desired numbers of clients, house the desired numbers of staff needed to support program operations, etc.
- Strategic Facilities Plan
A formal process that helps nonprofits determine short- and long-term facility needs based on the organization’s business goals.
Set by local units of government, zoning laws create restrictions on what can be built on specific properties and how the completed facility can be used. For example, if a property is zoned for a single-family home, a nonprofit seeking to operate on the site would need to secure a zoning variance from the municipality before moving forward with a facility project on the property.
While the terms above provide an introduction to the real estate and construction vocabulary necessary to more holistically understand facility projects, it’s not an exhaustive list. For information about topics that aren’t addressed, or to discuss any of the topics that are included in greater depth, please contact IFF’s real estate team.