The following is a guest post by Bob Shapiro & Gerry Gibian, who are experienced brokers at Grubb & Ellis, a nationwide commercial real estate services firm. They have significant experience working with a range of non-profits, including hospitals, cause-related organizations and trade associations.
Non-profits don’t pay real estate taxes on owned property. Therefore, if a non-profit is facing a “lease or buy” decision about how to acquire office space, it might seem that buying is the best way to go. However, taking New York City as an example, the answer isn’t that simple. In New York, buying office space isn’t just expensive, it’s also difficult to find. Approximately 99% of the 350 million square feet of commercial real estate space in Manhattan is for lease, not for sale. That means that even if a non-profit intends to buy, it might have trouble finding a suitable place.
Wondering what’s best for your non-profit? Here are some points to consider:
- Non-profits are only exempt from paying real estate taxes on owned buildings. If a non-profit chooses to lease, it will pay a portion of the building’s real estate taxes as part of its rent. On average, real estate taxes in NYC are approximately $.42 per square foot per year. The tenant doesn’t pay real estate taxes the first year/base year in a leased space but, after that year, real estate taxes increase on average $.42 per square foot per year. That makes the second year’s rent plus $.42psf and the third year plus $.84psf and so on.
- Many non-profits like the idea of owning a building because it gives them the ability to control one of their largest fixed costs. An added plus is cachet that can be used in fundraising. Donors and potential donors may be excited by the idea of contributing to the purchase of the space and having a plaque with their name placed in a prominent location. On the down side, operating a building efficiently is a difficult proposition at best, and is usually not the core competency of a non-profit. That means it requires third-party management, which becomes a new cost factor.
- Many non-profits have migrated to downtown Manhattan where rents are less expensive than in Midtown. The moves enable these organizations to fund more programs and advocacy that support their causes, which is certainly appreciated by their employees, contributors and the charitable rating bodies. New York City has even added incentives to facilitate the move downtown.
In sum, if purchasing a building is not an option, non-profits should consider relocating to downtown Manhattan and leasing space there. While leasing does incur graduating real estate taxes, as described above, these taxes are only a small percentage of the total rental cost over the term of the lease. NOTE: While this post has a distinctly NYC perspective, the issues are fundamentally the same around the country, just not as severe as in NYC.