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Nonprofits Striking It Rich by Selling Real Estate In Multifamily Boom Markets

Rising Demand, Short Supply and Low Interest Rates Prompt Nonprofits to Consider Cashing In on Owned Real Estate
January 8, 2014
From San Francisco to New York City, charitable organizations and other nonprofits are increasingly looking to unlock the residual value in their real estate by selling older properties, and in some cases moving to more modern leased space, while using the sale proceeds to fund programs in their communities.

The trend is especially prevalent in New York, where condominium and other residential property prices remain at elevated levels. However, nonprofits such as Goodwill Industries and United Way have sold or begun to market their owned real estate in a growing number of urban markets where residential housing is in short supply -- including the Bay Area, Washington, D.C., and Denver -- and lease or build expanded facilities in less expensive locales.

In San Francisco, Goodwill Industries of San Francisco, San Mateo and Marin Counties is prepping its property at South Van Ness Avenue and Mission streets near Market Street in the emerging Mid Market area for sale as a potential redevelopment site for a reported $60 million.

In a statement, Goodwill President and CEO Maureen Sedonaen said the local chapter’s steady growth as a social enterprise and the innovation path being outlined in its strategic plan mandate that it seeks new space.

"A potential sale of our Mission Street property would open up tremendous possibilities for us to serve more local people in need, place more people in local jobs, and help preserve the economic diversity and family stability in our region," Sedonaen said.

Goodwill previously attempted to sell the property in early 2007, when the nonprofit retained Jones Lang LaSalle to offer the property, a deal that fell through during the recession after going under contract to local developer David Choo.

Also in San Francisco, the City of Refuge Community Church and nonprofit foundation last August sold its 21,000-square-foot building on Howard Street in the booming South of Market area to a private buyer, who purchased the property for $5 million with plans for a possible mixed-use project on the site. The church and nonprofit bought a less-expensive replacement building in East Oakland on Enterprise Way

Like their for-profit counterparts, nonprofits are learning to become increasingly sophisticated in efficiently managing their property holdings and the role real estate can play in supporting their financial health following the Great Recession.

The majority of respondents to CBRE Group’s annual Nonprofit Real Estate Benchmarking Survey said they, like nearly all other types of organizations and companies, are increasingly seeking more efficient workplaces. The average square feet per person for nonprofits with 20 or more employees has decreased sharply from 403 square feet per person in 2009 to 345 square feet in 2013.

Also as CoStar economists noted in a recent U.S. office market outlook, the office-to-residential conversion trend has been a major source of transaction activity in not only New York, but also Baltimore, Chicago, San Francisco, Philadelphia and Northern New Jersey. Nonprofits are among those queuing up to sell as developers look to reposition office properties to meet growing demand for urban residential space, particularly in transit-oriented markets.

"The strategy to monetize assets and add to endowments could play out anywhere that these economic factors exist, but you need a robust housing market where demand is outpacing supply," said Ben Tapper, senior director at Eastern Consolidated, which recently brokered the sale of a 9,995-square-foot building at 149-151 East 78th Street in the Upper East Side of New York City owned by the Ackerman Institute for the Family to a developer in an $18.25 million transaction. "In addition to monetizing the asset, nonprofits can play the arbitrage game and get the same, or more, space while simultaneously adding money to their endowment."

At the same time that strong demand for residential condominium-conversion projects in certain markets is prompting developers to pay top dollar for older properties ripe for redevelopment, the commercial leasing market has been sluggish. As a result, landlords with big vacancies to fill are more willing to consider leasing space to nonprofits.

Also, in some markets nonprofits may qualify to be exempt from real estate taxes. In New York City, for example, the New York Times recently reported that nonprofits can be exempted from paying taxes if they own their property or if they sign long-term leases known as leasehold condominiums and meet certain other conditions. If they qualify for the tax exemption, nonprofits can realize big savings on their rent, and afford higher quality commercial space.

But the demand for affordable land in close-in locations is the primary factor behind the trend. In Denver, for example, the Mile High United Way had outgrown the 45,888-square-foot headquarters building the orgnaization had occupied for 40 years. Although located in a once less-desirable neighborhood, the area known as Lower Highland (LoHi) recently has emerged as one of Denver’s hottest new residential and commercial districts, said Ryan Arnold, a Jones Lang LaSalle vice president who served as the listing broker in the $10 million sale of United Way’s building to Southern Land Co.

The Franklin, TN-based developer plans to build luxury apartments on the property, and United Way will use the proceeds to build a new facility in another neighborhood on the periphery of downtown.

"We’re in a bit of a perfect storm of low interest rates, rising demand and short supply in which nonprofits can step back and take a global look at their assets and figure out where they can generate revenue," Tapper said. "Moving from a high-rent district to a lower rent district may be an option."

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