Beth Jo Zeitzer

During the Great Recession, nonprofits had a tough time with capital campaigns as well as normal donations. In the midst of the COVID-19 pandemic, we are experiencing similar economic challenges, although from a different cause: cancellations and delays of traditional fundraising events amid a soft economic environment. As was the case during 2008–2009, this is an excellent time to take a hard look at underutilized real estate assets, with the potential for nonprofits to deploy them as an alternative fundraising strategy.

The financial impact of COVID-19 on Arizona’s nonprofit community has been widespread and devastating. Nonprofit Quarterly reported that “fundraising and program cancellations as a result of COVID-19 have cost Arizona nonprofits an estimated $53 million in lost revenue (as of June 11)…while 25% of nonprofits indicated that they’ve had to lay off or furlough employees, and 69% report a loss of critical program volunteers.” Read the full article: Nonprofits Struggle to Stay Alive amid COVID-19.

Real Estate Strategies for Nonprofits

Generally speaking, there are three main ways that nonprofits can tap into real estate assets to fulfill client needs. These opportunities include:

• selling under-utilized assets;
• restructuring operations/holdings which may include leasing or sale of real estate; and
• sale-leasebacks, where the non-profit sells the property, but retains possession of the property for a period of time, which enables the non-profit to be able to maximize the value of the property, while retaining occupancy.

In some cases, assets such as a home or land have been given as donations—but all they do is sit on the books and rack up property taxes. Other buildings may not serve the same purpose they once did, or might require expensive renovations to be optimized for use. Now is an excellent time for board members and other nonprofit stakeholders to take an unemotional, objective look at all of their real estate holdings and ask: What is this property worth? Are we fully maximizing the potential for this building, or is there something else we can do with it? How can we best marshal our resources to the benefit of our organization?

At the time of a 2018 survey by the Nonprofit Finance Fund, about three-quarters of nonprofits had cash reserves for six months or less. Although the coronavirus has depleted the coffers of many organizations even further, it is also likely that the hidden value of many real estate assets could serve as a valuable lifeline.

If your nonprofit wants to maximize the value of its real estate assets—and to learn the best options to make that happen—please contact R.O.I. Properties at 602-319-1326 or [email protected].

Additional Articles on Nonprofit Real Estate:

Real Estate for Your Nonprofit: Should You Rent or Buy?

Vetting Real Estate Donations for Your Nonprofit Organization

In good economic times, single tenant net lease properties can be quite lucrative for investors. In less certain times, the risk proposition of having a solo tenant rears its ugly head: You are either running 100% occupancy or 0% occupancy. While net leases have had the hot hand in commercial real estate in the past few years, the COVID-19 pandemic has drastically curtailed the appeal of these deals.

As you might assume from shelter-in-place and social-distancing regulations, the hardest-hit businesses included theaters, health and fitness, and restaurants, as detailed in Challenges Are Baked in for Phoenix Restaurant Real Estate. Not surprisingly, those enterprises also had the biggest challenges in paying rent in April and May. On its quarterly earnings call, Phoenix-based real estate investment trust Vereit Inc. told investors and analysts that about a third of their tenants had requested rent relief. Requests from Vereit’s tenants were not uniform across industries, however: 69% of restaurants, and only 28% of industrial tenants and 8% of office tenants.

The news on June 10 that Starbucks will be closing 400 stores and refocusing on pickup/to-go service illustrates another element of risk. Even what would have been considered a safe, triple net lease (NNN) investment from a credit tenant cannot be assumed under current conditions.

COVID-19 has also influenced the underwriting for net lease transactions, adding to the pandemic-driven challenges of pricing discovery. According to The Boulder Group’s 2020 Net Lease Casual Dining Report, national cap rates in the single-tenant casual dining sector, for example, jumped to 6.59%—a 27-basis point increase over the previous year. Guaranteed-lease properties did slightly better with cap rates at 6.25%, while franchisee-leased properties came in at 7.00%. Those higher cap rates represent the market’s recognition that casual restaurants are riskier within the overall net lease retail segment. The Boulder Group notes that investors will be closely examining the potential to regain pre-COVID-19 sales performance, in-place rents, residual real estate, and the strength of the lease guarantor and restaurant brand—as well as their flexibility in accommodating curbside and takeout options.

A final risk proposition to consider is what happens to net lease properties and commercial real estate in general when the PPP loans dry up in phases over the summer. Currently, businesses are incentivized to make their rent payments and keep their payrolls full. In the coming months, as we ramp up business activity, we will be testing the post-pandemic financial viability of businesses without the assistance of loans and forbearances.

Along with numerous challenges, the coronavirus aftermath presents plenty of opportunity in the Phoenix commercial real estate sector. Whether you want to buy, sell or lease, the team at R.O.I. Properties can help. Contact us at 602-319-1326 or [email protected].