To buy or to rent: Evaluating the right path for your non-profit

For many organizations, occupancy costs can be some of the largest operating expenditures. Reducing occupancy costs is a budget-friendly strategy that can significantly increase the strength and stability of a non-profit organization. Unfortunately, the cost of office rent has reached a record high in Canada, increasing by an additional 1.29% from last time this year. Many non-profit organizations are currently priced out of the market, forcing them to relocate or search for a below market rate. Often, lower rates are only achievable with the help of government funding, or through a non-profit center that offers affordable rents as part of their mandate. In this context, owning property can be an effective solution to managing a non-profit’s occupancy expenses.

Owning property can be beneficial for organizations that are comfortable planning for the longer term and have a clear view of their future needs for the space. On the other hand, renting is more appropriate when minimizing short-term costs is important to your business. Leases generally have a lower cost per square foot, but there are other factors that can influence the amount of rent paid. If an organization is growing and has changing space needs, renting can provide better flexibility. Finally, if a non-profit’s space needs are relatively standard then it’s best not to invest in significant building improvements.

Different organizations will have different space requirements, therefore renting might be better than buying depending on the needs of your non-profit. Taking this into account, here are some reasons why non-profits might want to consider owning their space:

Increased stability through financial control

For organizations leasing or renting their space, small year-over-year rent increases can compound to a significant effect. In commercial real estate settings, rent controls are often weak or nonexistent, making non-profits more vulnerable to market conditions. Mortgages, on the other hand, can allow businesses to build value in the form of equity as time passes. When the mortgage is eventually paid off, the organization will have reduced occupancy expenditures and can focus solely on managing operational costs.

In addition to offering greater predictability and control over occupancy expenditures, owning property can offer significant tax benefits to some non-profits. Depending on the use of a facility, non-profits may be exempt from paying property taxes or could be eligible for a 40% tax rebate. Read the Not-for-profits, taxes and exceptions to learn more. Existing landlords that are not exempt from these costs are likely passing these through to non-profit tenants either directly or indirectly in their rent.

Building assets

Besides improving financial stability, owning a building can also help non-profits build a stronger balance sheet. Non-profits are often penalized for accumulating liquid funds when those funds could be spent on additional programming. This creates structural fragility in the sector, even more so for those organizations that rely on year-on-year operations. Conversely, when an organization buys property, it creates a long-term capital asset.

“The cost to acquire or build an office space often flows through the income side of a financial statement,” said Lars Boggild, Senior Manager of Banking and Investments at VCIB. “This allows an organization to build up that asset position over time, in a way that doesn’t feel competitive to other funding sources.”

Additionally, unlike most other assets, property is something that can be borrowed against. This provides an organization with greater financial flexibility in the future; “We’ve had clients during the pandemic that have come to the bank to ask for a line of credit secured against their building, and the bank has agreed because it’s a very reasonable thing to loan against,” said Boggild. “If an organization doesn’t own their space, they’ll be in a very tough spot during a crisis.”

Permanent presence in the community

Owning a permanent space can help a non-profit maintain or establish its presence in the area it is working to serve. A non-profit’s headquarters can serve as a center of activity for its constituents, providing support to target members and acting as an anchor for the community. For many non-profit organizations it is important to be located in a particular area, especially if the beneficiaries they serve live near that location. For those organizations, leasing could pose a real problem if their rent is significantly increased due to gentrification; “One real issue that non-profits face is dislocation. Many non-profits are located in commercial corridors, and these storefront-style locations are the first places to gentrify relative to other parts of the neighborhood,” explains Boggild. “When these locations get gentrified, the non-profit’s rent goes up, forcing them to relocate away from the people they support.”

For the organizations that find themselves in this scenario, owning social purpose real estate might be the only anchor that keeps their business close to their target beneficiaries.

New programmatic possibilities

Owning office space can also create opportunities for new programmatic possibilities and partnerships. A large space can be used in partnership with multiple organizations that serve different aspects of the communities’ needs, such as counseling, drug addiction and family support services. These partnerships can be seen in non-profit shared service spaces and community hubs. Moreover, when businesses decide to buy a space together, they can collaborate better by physical proximity. A larger space also allows an organization to add more rooms customized to its needs, which is more difficult to do as a renter.

The financial security and sense of place that comes from owning property can be a powerful tool for a not-for-profit organization. When non-profits are invested in the location from which they operate, they build place-based power and become important centers of community support. Ownership allows non-profits to realign their priorities and think of new ways to deepen their impact. Making the transition from renter to owner is a big decision, but one that is worth considering if an organization seeks better financial stability and a deeper connection to their community.

Feel free to get in touch with us if you’d like to talk more about different financing options. Here are some additional resources to get informed:

Disclaimer: The information provided herein is intended for informational purposes only and is not intended to constitute investment, financial, legal, accounting, tax, or other advice and should not be relied upon for such purpose. Always consult a professional regarding your specific needs and circumstances.

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