Current economic challenges are leading many nonprofits to take a close look at their expenses. The costs of your facilities may be overlooked during a cost-cutting process because they seem unavoidable. But the choice between renting and buying property to house your organization can have substantial cost implications. This makes it important to evaluate the pros and cons of each option for your organization.
Leasing pros and cons
In general, the advantage of leasing your headquarters is flexibility, which is especially important in a rocky economy. You can test different locations to see which best fits your strategic plan and enables you to serve constituents. Increase or reduce your space as needed while you stabilize revenue sources.
You also may have opportunities to renegotiate your lease for more favorable conditions. This could include an early termination clause so, for example, you can move to a better location that unexpectedly becomes available.
But flexibility may go hand-in-hand with uncertainty. A less benevolent landlord might raise your rent significantly after a single one-year lease period, terminate a lease or fail to maintain the property. (One way to partly mitigate the first risk is to negotiate a multiple-year lease.) Or the landlord could sell to an owner who prefers other types of tenants or wants to use the space. You could relocate, but you’ll incur moving expenses.
Moreover, if you need specialized facilities to do your work, you may find leasing options limited. A landlord might require you to pay for any necessary improvements, which would make you effectively captive to that building. You could face the choice between accepting steep annual rent hikes and abandoning the improvements you financed.
Buying pros and cons
Owning your headquarters provides you with a defense against displacement. This is particularly relevant in areas where commercial real estate values might soar, leading to the pricing out of nonprofits that lease.
Buying your own place also can give your organization higher visibility — an important tool for marketing and branding. The development process, including any capital campaigns, may draw attention from potential donors, clients and members. The actual building is a visual representation of your brand and positions the organization as a neighborhood anchor.
Ownership may provide several financial benefits that you can’t obtain renting. Your facilities cost becomes predictable because you don’t have to worry about rent increases. If you rent out extra space, you’ll receive (potentially taxable) income from tenants. As you pay off the mortgage and if the property appreciates, you’ll build equity, which you could use as a guarantee on future loans.
But the debt associated with a property purchase may render a nonprofit more vulnerable to economic swings such as the one triggered by the COVID-19 crisis. Purchases also have substantial upfront costs that leases don’t. You generally must make a hefty down payment and pay closing costs. Renovations can further drive up the costs.
You’ll also be responsible for capital improvements — for example, if the roof requires replacement or the boiler breaks down — as well as building management and maintenance. The latter usually aren’t nonprofit core competencies, so you might need to hire a property manager. Alternatively, you could assign staff to those tasks if they aren’t already stretched too thin.
Finally, real estate ownership generally means real estate tax liability. You might, however, qualify for property tax exemptions as a nonprofit. Your CPA can provide more specific information on eligibility requirements.
The right choice for your organization will depend on its individual circumstance. With the rise of remote work in the shadow of COVID-19, some nonprofits might even find they no longer need as much office space — or any at all. Your CPA can help you determine the best course forward.