Nonprofits are considering the real estate game due to a lack of control over rented property, high rent in desired areas, and stricter zoning requirements. Commercial real estate professionals, lenders, and nonprofits can gain a lot from learning the expectations of all parties involved in financing a purchase.
As nonprofit organizations transition from renter to owner, they may find themselves struggling to identify funds necessary to bridge the gap between money needed to purchase and renovate or construct on a property, plus the timing for receipt of donations and grants from a capital campaign or other sources. The pressure to meet contract deadlines, expiring leases, funding deadlines, and needed expansion can be significant. At this critical point, most nonprofits realize they must borrow funds to seal the deal.
Banks and financial institutions are realizing that it can make good business sense and positively impact the bottom line for them to lend to nonprofit organizations. Here are a few things you need to know when lending to nonprofit organizations.
Time for decision: Nonprofits have a longer decision process, as they must get buy-in from their board members, staff, and major donors before making any significant real estate commitment. They must often work through various committees to reach consensus—all of which takes time.
Unique Requirements: Nonprofit organizations have special needs that the traditional real estate market often cannot address. For example, many nonprofits often serve clients in the evenings and on weekends. They also frequently require access to public transportation or be located in underserved areas where there are few commercial properties, so traditional office buildings are not always available. This makes them ideal candidates for repurposing buildings such as churches, warehouses, grocery stores, and bowling alleys.
Financial mishaps: Because nonprofits typically operate on tight budgets, they often seek the lowest-cost real estate options available. Most nonprofit funding comes from multiple sources that must be renewed on an annual basis, and real estate is typically the organization’s second-largest budget item after payroll. Also, donors prefer funding programs versus rent or operating costs. The good news is that most nonprofits have audited financial statements and are used to preparing reports regularly for their boards and funders.
If a nonprofit decides to purchase real estate, its funding options involve creating a capital stack of funds from a variety of sources. The larger and more sophisticated nonprofits know how to tap into these funding sources. However, no matter the size of the organization or project, traditional bank financing is usually a key layer in the stack, and the first place nonprofits tap. Here are some of the other potential layers:
Traditional bank loans
Loans from Community Development Institutions (CDFIs). The Real Estate Council, for example, has a community fund that is a certified CDFI.
Federal or municipal funding, from sources such as HUD, community development block grants, local housing authorities, or Mortgage Assistance Programs (MAP)
Tax Increment Financing district funding from the cities
Tax credits: low incoming housing, new markets, or historic
Traditional grant funding from donors in a capital campaign
Opportunity Zone funding
Hybrid Bridge Loaning:
As providers of needed services to the community, they often expect the lender to make special concessions. Some allowances are not difficult, but others may require significant negotiation.
Nonprofits may consider asking the following questions.
Security. The nonprofit may request that the loan is secured only by a lien on the property. It is extremely unlikely that any of the board members will personally guarantee the lien or that the charity has any sizable assets to add to the collateral. However, pledges from a capital campaign may be used as collateral.
Loan amount. Nonprofits that have been conducting a capital campaign for six months to a year should already have received a sizable number of contributions and pledges. Received donations can serve as equity for the loan and reduce the loan amount.
Rate. Nonprofits expect below-market rates. Expect them to request a rate as close to prime as possible with a 15- to 30-year amortization. Also, expect the nonprofit to request interest-only payments for the initial term of the loan.
Points and other fees. Nonprofits may request minimal to no points and a waiver of any of the legal and appraisal costs incurred by the lender.
Prepayment. Nonprofits may request the ability to repay the loan as soon as possible without any penalty for early repayment. The lender may want to negotiate a fixed duration for part of the term to guarantee some yield from the loan.
Sponsorships. Expect the nonprofit to request that the lender be a significant sponsor to at least one major event every year. The lender should work with the nonprofit to create a partnership that benefits both organizations.
Flow of funds. Nonprofit funding may have significant variance due to events, capital campaigns, grants, and other sources. They may expect the lender to give them preferred pricing on their deposits and checking accounts.
Is it worth all of the work?
Given all the demands and due diligence required when making a loan to a nonprofit organization, is it worth it to the lender? Absolutely. By loaning to an organization that’s “doing good” in the community, the lender has an opportunity to market to a larger audience of business leaders who serve on the nonprofit’s board of directors as well as donors.
Nonprofit loans can create goodwill in the community. Enabling a popular and much-needed community service to expand its capabilities in a new location provides the lender with multiple marketing and community outreach opportunities at ground-breaking and ribbon-cutting ceremonies, in press releases, and all materials related to the capital campaign.
So, feel confident in lending to nonprofit organizations, and enjoy that donation or sponsorship you will be making at the nonprofit’s next major fundraising event.
References:
Eliza Solender, president of Solender/Hall Inc., serves on the board of Origin Bancorp and The Real Estate Council Community Fund. She also teaches “Real Estate 101 for Nonprofits,” a free TREC-sponsored course.
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