When faced with annual rent increases, pass-along charges and other uncertainties associated with leasing, many organizations consider buying the space they need. Ownership provides a financial asset that can be sold at a future date, and a "permanent home" may make an organization more attractive to some funders. Nonprofit owners are often also exempt from real estate tax, which can be a significant savings.

However, buying space is not advisable for every organization. Changes in funding or space needs can place an owner in the position of having either too little or too much space, forcing it to sell or rent out space at an inopportune time. Further, there are significant initial costs involved in selecting a feasible site and negotiating a deal. They include:

• down payment and mortgage (if financed)
• full purchase price (if not financed)
• legal fees
• architectural fees
• engineering fees

Renovation of the facility is often necessary, adding more upfront costs.

Buyers must obtain funds to cover not only the upfront costs of buying space, but also the ongoing costs of maintaining it. Most organizations require some debt to finance the purchase and renovation of a facility; several options for obtaining loans exist (see "Financing Options"). Thus, debt repayment is a significant ongoing cost that most owners must meet. Maintenance of the facility involves both annual ongoing expenses such as building staff, heat, common area electricity, and service contracts for boilers, air conditioning units, etc. as well as periodic large (i.e. capital) expenses such as replacing boilers, re-roofing, etc. Other ongoing costs include insurance and utilities.

Ultimately, owning space works best for organizations that have a long history of stable programming and funding. Nonetheless, the appropriateness of ownership is not solely determined by economics. The availability and appeal of certain types of space to meet your program's needs are also major factors.

Types of ownership
There are several types of property ownership including an entire building, a condominium and a cooperative:

• An entire building affords its owner the greatest degree of control, but carries the greatest degree of financial risk as the owner is responsible for all management, maintenance, repair and replacement work needed.
• A condominium is a logical alternative for those wishing to purchase space without taking on full responsibility for maintenance and management of a building. In a condominium, the organization purchases a piece of a building, which reduces risk but limits the condominium owner's control over the building itself. Decisions about the building as a whole and common elements are made by the condominium's board of directors, while decisions about the individual units are made by their owners, subject to condominium guidelines. The owners share the cost of building repairs and maintenance through monthly "maintenance" fees, but pay individually for the cost of repairs and maintenance within their own units.
• A cooperative is another alternative if a buyer prefers to share building management and maintenance. In a cooperative, the owner holds shares of the cooperative corporation that entitles it to use a specified space via a sublease. Thus, the owner does not own real property and therefore could not qualify for a real estate tax exemption. If the cooperative corporation itself were a nonprofit, tax exemption would be possible if all of the shares were owned by nonprofits, but this is extremely rare. Unlike condos, most coops have underlying mortgages which become part of an owner's financial responsibility under the monthly maintenance charges.

Negotiating the Purchase Price
The key to negotiating a purchase price is knowing "the market," i.e. prices for comparable properties in similar areas. Real estate brokers can be helpful here. (See Leasing Basics [link to page] for more about brokers.)

Financing Options
Bank financing is one source of capital financing; loans from groups such as the Nonprofit Finance Fund is another. A third option is that the seller may offer a mortgage (a "purchase money mortgage") at an interest rate to be negotiated. Sometimes, if the seller is interested in the tax benefit of a charitable donation, he or she may choose to donate a portion of the purchase price to an organization. This is accomplished via a "bargain sale," which reduces the seller's capital gains tax and other transfer taxes. You should understand however, that most real estate owners do not need tax deductions, so this approach is of limited value.

Deciding What's Best for Your Organization
It is important to consider two main items:

• How well the specific available opportunities for both renting and buying space fit the needs of your organization both now and over at least the next five years.
• An honest assessment of what your organization can likely afford in both upfront and ongoing costs.

Together, they will guide you to make the best facility choice for your organization.

© 2000 by the NONPROFIT FINANCE FUND

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