Real Estate Crisis Offers Real Opportunities

Tuesday, 24 November 2009 17:10

Fred Scaglione We all may be getting a little tired of hearing that we should “never let a crisis go to waste”. Usually that is an invitation to do something painful – something which is still painful even in these difficult times.

When it comes to real estate, however, the current economic crisis is creating some real opportunities for local nonprofits as prices plummet and landlords show a new level of openness and flexibility.

“It is a great market for nonprofits right now,” says Suzanne Sunshine of S. Sunshine Associates LLC. “There are some great opportunities out there.”

This is particularly good news given the fact that real estate is often cited as the second largest expense item, after personnel costs, for most nonprofits. Sunshine recently completed a survey of local nonprofit executives and found that most felt they were paying too much in real estate costs, regardless of whether they own or rent.

And, a favorable real estate market may be important for nonprofits that are hurting in so many other areas. What may be “strategic opportunities” for nonprofits in a strong financial position can be simply a “path to survival” for agencies devastated by government funding cuts, declining foundation grants and anemic private donations.

Real estate prices have dropped markedly from their peak over the past 18-24 months, say professionals. “Lease costs have gone down 30-40%,” says George Grace of G.E. Grace and Company.

Given typical leasing patterns, this means that many nonprofits may have signed their current leases at or near the top of the market. Now, they are looking out at a real estate landscape where they would be able to rent similar space today for considerably less.

Is there anything a nonprofit in this situation can do? Absolutely.

Renegotiate

“There is a saying that the lease a landlord signs is the best he will do during the course of that lease period,” says Grace. “From the tenant’s standpoint, it is the worst they are ever going to do. Most leases have some major renegotiation that occurs prior to their expiration.”

Landlords may be willing to renegotiate leases under the right circumstances.

“Landlords don’t want to lose tenants,” says Grace. Many will sign new leases at lower rents in exchange for a longer term commitment. “The longer the terms of their tenant leases, the better off the landlords are. The banks see the buildings as more secure and creditworthy.”

There is no guarantee that you can re-negotiate down to current market rates, but significant rent reductions for leases signed at the peak are not out of the question. The closer you are to the end of your current lease, the better your chances.

As with all real estate transactions, location is also a factor for renegotiating leases. The further your space from midtown Manhattan, the lower the likelihood of winning a significant rent reduction, says Lee Allen of Arc Advisors.

“In the outer boroughs, that tactic is going to fall on far less sympathetic ears,” says Allen. One reason is that prices in Brooklyn, Bronx and Queens never had the same gyrations upward as in Manhattan and, therefore, have less room to come down.

Still, there are other opportunities in the outer boroughs, says Allen. Office space which had been fairly hard to come by in many parts of Brooklyn, Queens and the Bronx – particularly as funders pressed agencies to open community-based offices – is now more readily available. And, prices are lower – perhaps 10% or more below levels at the peak. “Landlords might do deals for $20 a square foot now where they had been asking $23 two years ago,” says Allen.

Lease Terms

Any effort to renegotiate your current lease offers a good opportunity to look at the terms and conditions you got last time – and what you will want to get going forward.

“I always negotiate various kinds of exit strategies,” says Charles S. Isaacs, Ph.D. of CSI Consultants, Inc. “One is a good sublease clause so you can find somebody to take over the lease or take empty space. If tenants are particularly dependent on a single source of funding, I try to get them a cancellation clause if that source of funding dries up by a certain percentage.”

It is also important to note that while your lease is a binding contract, it still may be economically advantageous to simply tear it up and walk away – particularly in today’s market. Many leases are secured through a “good guy” clause and a security deposit equal to only a couple of months rent, explains Anthony Gagliano of Safe Guard Realty. Nonprofits facing financial stress could take a short term hit equal to 16.6% of this years lease costs in exchange for long term rent reductions of 30-40% in a new but comparable space.

Bring Your Clients

Landlords hungry for tenants of any type are also more willing to allow nonprofits to use office space for program purposes.

“I had been getting rejected right and left by landlords who didn’t want nonprofits that did workforce development or job training, let alone substance abuse programs,” says Suzanne Sunshine. Now, nonprofits increasingly have more freedom to consolidate programs into office locations, something which can be particularly valuable when forced to downsize due to budget cuts or other financial pressures.

Move in with Friends

Increasingly, nonprofits are turning to each other to find new space or share the costs of existing leases. “It has become a very important trend lately,” says Sunshine.

For organizations which sublet, this can be a valuable way to reduce expenses while remaining in their current location. “They will still be taking a hit between what they are paying on their lease and a lower rental price that the sublease market will bring,” says George Grace.

For nonprofits looking for space, a sublease can be the least expensive of all options. “There is still a risk, however,” says Arc Advisors’ Lee Allen. “You need to know that the organization subletting the space is financially stable. If they go out, their lease – and your sublease – automatically terminates.”

Get Help

Negotiating a successful sublease between two nonprofits is no easy task, explains Suzanne Sunshine. “It is like a marriage; a marriage between the missions, between the executive directors and between the space and how people use the space,” she says.

For these and other real estate transactions, the professionals urge that nonprofits seek out professional help.

“Nonprofits don’t really understand real estate,” says Sunshine.

“All of the nonprofit directors I work with are wonderful people, but this is not what they do,” says Charles Isaacs.

Luckily, this professional assistance often is available at no cost. When looking for new space, brokers representing nonprofits are reimbursed through a share of the building agent’s commission – in much the same way that residential real estate brokers share fees with the listing broker.

Don’t Forget to Buy

And, for those nonprofits with deep pockets, this is an excellent time to buy a property of your own. “It is always better for a nonprofit to own rather than lease,” says Grace. “You are not paying taxes and you are making an investment. The leaders who step out and do that now are going to be setting up their organizations for a very long time. They will have a huge asset.”

Fred Scaglione is the Editor of New York Nonprofit Press.