Real estate: The grant that keeps on giving

“At a time like this, we need to stop investing in treasuries and bonds and start investing directly in our communities.” —Tom Parker, Hutton Foundation

As a family fund these days, you might feel like crawling into a corner and licking your endowment losses. But look on the bright side. Trying times can inspire positive change—and a chance to get creative with your grant dollars.

No one knows this better than the Hutton Foundation in Santa Barbara, California. Hutton has found a way to take this lemon economy and leverage its best asset—real estate. With markets at an all-time low, Hutton has been buying property on the cheap and providing it as office space to its nonprofit partners. In doing so, it’s able to invest in its community and at the same time, boost its own portfolio.

Hutton’s interest in real estate dates back before the economy took its plunge. Back in 1998, Tom Parker, executive director of Hutton, noticed that markets were pushing nonprofits out of his neighborhood.

“I looked at what was tough for nonprofits, and in Santa Barbara, it’s rent,” said Parker. “Rent always goes up, and nonprofits can never control their own destiny. I thought–how much better to have a large rent-controlled facility and have them all share it?”

The Foundation started by sponsoring a low-interest loan program to help nonprofits purchase real estate. After some time, though, the board saw the value in the foundation owning its own properties. Now it has 13 multi-tenant buildings that provide a home to more than 70 nonprofits.

According to Parker, investing in real estate is positive from both a cash flow perspective as well as an investment one. “We’re using our asset base to create cash flow. Instead of having a bond sitting in a bank, we are actually using our assets as an investment that helps the community. And we’re getting a higher return.”

Tenants in Hutton’s buildings pay a reduced rent—about one-half to one-third the current market rate. What’s more, they sign a 10-year lease, providing stable rental rates (and peace of mind) in a fluctuating market. According to Parker, the savings to nonprofits are huge. “We save nonprofits up to $1.7 million dollars each year in rent,” he said. “In effect, we’re giving them a grant before the year even starts. It’s a great feeling!” said Parker.

The Hutton Foundation wasn’t the first to do this; a number of family funds have paved the way. Back in 1981, the Meadows Foundation transformed a dilapidated 22-acre neighborhood in Dallas, creating a home for 38 nonprofits. More recently, the Charles A. Frueauff Foundation moved to its new headquarters in Little Rock’s River Market district, providing affordable office space for four other nonprofits.

Although there’s nothing new about grantmakers creating shared space for nonprofits, whatis new is this: when it comes to real estate prices right now, the getting is good. According to the National Association of Realtors, property prices dropped a record 12.4% at the end of 2008—the biggest decline in 30 years.

Parker encourages his colleagues to take advantage of the price breaks in property while they can. “I won’t buy a building unless I can get it cheap,” said Parker. “We are a cash buyer that comes in quickly, and that can be quite attractive to a seller. Because of this, we often get a tremendous discount.”

“At a time like this, we need to stop investing in treasuries and bonds, and start investing directly in our communities,” he said. “If you’re worth 30 to 40% less than you were last year, this is a way to help your local nonprofits and maintain your giving level,” he said.

Diane Ford Parnes of the Sobrato Foundation would agree. In 2002, Sobrato took a donated facility and transformed it into a multi-tenant center. The Sobrato Center for Nonprofits in Milpitas, California houses 35 organizations—each of which pay only $1 per year in rent.

By offering this space, Sobrato estimates it provides $3.2 million dollars in “in-kind space grants” to nonprofits each year. “There’s no doubt as to the impact we’re making by lowering the costs to nonprofits,” said Parnes. “It has enabled us to leverage beyond what we could provide them in cash grants, and at the same time, provide the community an enormous benefit.”

The Sobrato Foundation recently opened a second facility in San Jose, which houses nine nonprofit tenants. Both facilities offer a conference center where nonprofits from the community can conduct meetings, trainings or fundraisers.

“The synergy of being in shared space is invaluable,” said Parnes. “People from different organizations will bump into each other in the kitchen or bathroom, and suddenly, they are developing a co-program together to enhance their mission or better serve their clients.”

As for managing the buildings, both Hutton and Sobrato outsource the property management and maintenance. “We don’t get into collecting rents or fixing leaky roofs,” said Parker. “We’re there with the dollars and to set up the infrastructure. We help nonprofits transition into the buildings, but beyond that, we pass it on to them.” The exception is, in its newest building, the foundation hired a staff person to help foster collaboration among tenants.

There are many benefits to establishing this kind of nonprofit center. But what about its challenges? Both Parker and Parnes agreed that it’s not for the ill-prepared.

“Before you get into the business of buying buildings, you have to know what you’re doing,” said Parnes. “It’s a tremendous amount of work, and you will need outside expertise—someone who understands about financing and real estate.”

It’s critical, too, to have already-established relationships with local organizations. “For a grantmaker to come along and just plunk a building down without being engaged in the community is a mistake,” said Parker. “You have to first know the nonprofits in your area and identify that a need is actually there.”

If you do find a need for a nonprofit center, it helps to know there are many different ways to structure it. “Know what you want to create and why,” said Parnes, “and then know that you have options.” She recommends anyone considering this consult with the Nonprofit Centers Network (www.nonprofitcenters.org), which has a number of resources and sound advice for the creation and operation of nonprofit office space.

Not ready to buy a building? There are other ways you can help nonprofits take advantage of the current real estate market. Program-related investments—another term for below-market, low-interest loans, can be combined with traditional bank financing and tax credits to keep rents affordable and the carrying costs of buildings low. You might also provide loan guarantees to nonprofits, getting them a better mortgage rate with the bank than they would be able to on their own.

“For grantmakers, there’s such an opportunity right now in real estate. It’s like the Wild West,” said Parker. “Even with the economy the way it is, we CAN still do creative things—all it takes is energy and a willingness to do it.”

MULTI-TENANT NONPROFIT CENTERS: CONSIDER THESE QUESTIONS

Before you jump into buying property and starting a nonprofit center, consider these questions from those who have already done it:

• Ownership—Who will own the building? Will it belong to the family fund, or will you grant the building to the nonprofits?
• Financing—How will you finance or fundraise for the property? What outside expertise will you need for this?
• Location—Which organizations are you serving? Who will be working there, and what are their needs? What transportation options are available to tenants and visitors?
• Rent pricing—Will you offer the space at market rates, subsidized, nonprofit rates or a sliding scale?
• Space allocation—How will you decide who gets what space? What will your selection process be for tenants, and how can you make that process known? Do you want a mix of different types of nonprofits, or those that share a similar mission or client base?
• Shared services—What back-office services will be shared among tenants (reception/administrative staff, legal or accountants, equipment such as copier, fax, etc.)? What common areas will be shared (kitchen, bathrooms, storage, conference space)?
• Operations—Who will clean the gutters and fix leaky faucets? Will you outsource the property management and maintenance? If yes, who pays for this—the foundation or the tenants?
• Programs—How will you support the community of tenants, and foster cooperation and collaboration among them? Will you hire staff to coordinate this, or leave it up to the nonprofits themselves?