Balancing the Mission Checkbook

To Build, Buy, Beg, Borrow, or Boldly Lease

For nonprofits, the choice of office space or program space matters. Who doesn’t want the perfect environment that inspires our clients or fuels the passions of our staff and contributors?  Our mission, our brand, and our success can all be tied up in the location and building our organization calls home. With this much at stake, how we go about getting that perfect space matters, too.  Should we own it or lease it?  Should we build it or renovate it?  Should we fundraise for it or borrow for it? 

Each possible solution to an organization’s space needs involves a different strategy and carries different risks. The challenge is to choose the right option for the organization based on its particular circumstances, resources, and alignment with its mission.

Build.

Building a custom facility is an exhilarating option.  A new building can make a statement, show commitment to a cause or a neighborhood, or establish the organization as an institution in the community.  But this choice requires a significant commitment of time and resources to manage the project, to secure funding, and to plan how the space will support program work.  While underway, a building project can alter mission effectiveness as board and staff attention is redirected toward the effort.

Buy. 

Similarly, buying an existing building can have many of the same rewards and carries many of the same risks as building a new one.  Staff leadership will be required to plan for and oversee the renovation. Existing programs may be disrupted by the project.  The undertaking is not resource or time neutral.

In the case of either building or buying, the ongoing upkeep and maintenance after moving is a serious consideration. Operating a facility is complicated. Grounds must be maintained, janitorial service provided, plumbing and electrical repairs made, large scale systems (like HVAC) serviced and updated, and high-dollar structural components (like roofs) occasionally need to be replaced. And if you decide to buy, that significantly changes your nonprofit’s business model, which has ripple effects for your organization. (See How one cookie can change your whole business model blog for more about this.)

Beg.

(And I certainly know that this really is not begging, but I was committed to my alliteration for the blog!) Though the considerations are weighty, sometimes building or buying is still the right choice. If so, then the question is how to finance the project.  Many nonprofits turn to capital campaigns to fund such endeavors.  Capital campaigns are huge undertakings that require planning, leadership, resources, and capacity. Capital campaigns require a particular kind of fundraising acumen that few nonprofits have among their staff or board, so they often need to identify a professional campaign consultant to run an effective campaign. And there is always the chance that only part of the needed money will be raised. 

Borrow.

Before embarking on a major capital campaign, nonprofits should do some basic math. After adding together the cost of consultants and the cost of staff, including the opportunity costs of redirecting fundraising and program energy away from operations to the capital campaign, nonprofits may be surprised to learn that simply borrowing the money (such as securing a loan from NAF) could be a less costly option. With long-term borrowing, the cost of building or buying is spread across many years of future fundraising and programmatic success.  Donors will share proportionately in the cost of the building, each covering an appropriate allocation of the whole cost over an extended period of time. The energy that would have been diverted into a capital campaign remains devoted to regular core activities and fundraising strategies.

Boldly Lease.

The final option is perhaps the most common and often the most fitting for nonprofits.  Entering into a long-term lease may not inspire the passion that building a facility does, but it does offer stability in terms of financial planning.  A well-negotiated lease allows a nonprofit to know its occupancy costs upfront over the term of the lease.  The potential major expenses of building upkeep and repair are the business of the landowner. Unless there are compelling reasons to build or buy, leasing is often the least complicated and least resource intensive option for nonprofits.

For many nonprofits, the space in which, out of which, and from which they perform their good work is tremendously important.  It might be the neighborhood that inspires mission.  It might be the proximity to other stakeholders, collaborators, or clients that draws an organization to a particular place.  Whatever the underlying reason, the choice of location and the building out of which to work carry a lot of meaning and importance.  As in all of our decisions, we need to approach how we acquire and finance our perfect space in the most strategic, mission-focused way to ensure our organization’s success in the long run.

 

Curtis Klotz, CPA, has an education as far removed from his CPA as you can imagine (religion and women’s studies). He loves using his disparate background to translate and integrate nonprofit finance with program functions.