Nonprofits & Real Estate: When to “build capacity” and when to just help
Rarely does an advertisement provide a pivotal jolt to one’s career. It did for me.
The ad read something like: Are you a child care center director in need of a new facility? Come learn the intricacies of developing a child care center! Our day-long session will prepare you to take on the challenge!
At that time, I was the Director of a neighborhood community development corporation, and I knew just how difficult it was to develop any real estate project – especially in the child care sector. And that’s why my thoughts went directly to: the paved path where good intentions lead!
I’m a big proponent of capacity building as an important tool on The Continuum for strengthening the skills necessary for nonprofit leaders to better manage their organizations. Financial management education is an excellent example of this type of capacity building. The skills are used daily to better manage their organization, to budget smartly, to strategically manage and deploy money for growth and stability, and to enhance their agency’s long-term sustainability.
The idea that we can take the busiest people at an agency and give them another full-time job to do is just plain foolish. We need to re-think how nonprofit facility development is done by taking that stress off nonprofit leaders’ backs.
But real estate development skills are different. They are applied to projects only once every 5 or 10 years – or maybe even just once in a generation. And those projects generally require full-time engagement. The idea that you can train someone to do that in a day is a pretty big stretch. But the idea that we can take the busiest people at an agency – people who are developing curriculum, raising money, hiring staff, recruiting families, applying for subsidies, etc. – and give them another full-time job to do is just plain foolish. Not to mention disrespectful and unfair. There’s no way to do that without something else at the agency suffering. This is the opposite of capacity building, and it can be destructive.
We need to re-think how nonprofit facility development is done by taking that stress off nonprofit leaders’ backs. What those child care center directors in the advertisement (and countless other nonprofit agency leaders) really needed wasn’t training; it was help from trusted real estate developers who value their mission and work. This kind of re-engineered “capacity building” was what I went to work developing back in 1997 when I helped create IFF’s real estate practice focused on nonprofit agencies. A handful of other CDFIs and other organizations have taken a similar approach, but this ought to be a systems-level change adopted by more community-focused real estate practices. This is the kind of support infrastructure that can more effectively address community development challenges – and create more “investable” vital projects.
A formula for success
It’s easy to say that real estate development in under-resourced communities is hard work. It’s harder to really understand how that plays out. Let me give you a specific example.
The neighborhood development corporation where I was working when I saw that ad was founded by local Catholic parishes. While there, I was asked by one of the priests to help Sister Karen with a development project. The goal was to build a transitional housing shelter for Latina victims of domestic violence. Almost impossibly, Sister Karen had obtained program funding and a sizeable capital grant from the City of Chicago. She had deep expertise in this work and was positioned to run the new center.
Within about a year, we were able to open a rehabilitated, six-unit building for mothers and children. Voila! Turns out, the equation for success was simple enough:
funding/financing (City of Chicago grant and IFF loan)
sector program knowledge (Sister Karen)
real estate development expertise (my team)
The thing is…my team didn’t come onto the scene until 5 years into the project. Before that, Sister Karen was trying to do it herself. Real estate development was neither her expertise, nor her passion, and she had other work to do (like literally saving women’s lives). She attended a number of real estate workshops and seminars before we met her, but it wasn’t enough – it wouldn’t be enough for anyone in her position. Only when the City threatened to rescind her funding did our community “re-think” how to really help and bring in full-time professionals for assistance. Turns out, that’s what the project needed all along.
How IFF’s real estate practice works
As a nonprofit facilities lender since inception, IFF was acutely aware that nonprofits really need a lot help with real estate projects – from thinking through the actual program needs to analyzing the costs, understanding financing options, finding a location, managing construction, and so much more. IFF’s Real Estate Solutions (RES) team is comprised of trusted advisors who work with nonprofits from every sector and at any or every stage of a facility development. Our work requires two separate bodies of knowledge that, when blended, are a powerful combination.
The first is the real estate side of things – how to plan, redevelop, financially package, bid, construct, and commission a facility project.
The second is about how nonprofits function – how their funding works, how government funding/contracting works, how their Boards make decisions, and how to leverage their deep program expertise in various sectors.
Most importantly, all of this know-how comes packaged with a very human-centered approach that guides agencies through the very stressful process of buying and renovating properties. It is not uncommon for agencies to walk into our offices and say: “We lost our lease, HELP!” The stresses of facility development for nonprofit leaders come on top of sometimes very stressful “day jobs.” Most nonprofit projects are done on shoestring budgets, with little margin for error. Add to that the challenging regulatory environments of sectors like child care, health care, and education, and…well, you get the idea!
IFF onboards our real estate staff with this challenge: “It is your job to shoulder the project stress for your nonprofit client so that they can focus on the much more difficult task of social justice.”
One of our end goals is to provide our nonprofit clients with economically feasible projects that balance sustainable and supportable financial packages – usually a combination of capital campaign dollars, government subsidies, and tax credits, combined with sustainable debt.
It is our job to shoulder the project stress for our nonprofit client so that they can focus on the much more difficult task of social justice.
The ubiquitous “sources and uses” sheet for real estate project financing is a visual representation of the work required to create this investable financial package. This work requires a significant amount of technical expertise and experience involving multiple “processes” for site/space planning, site acquisition, architect selection and management, construction cost estimating, construction management, and licensing and building commissioning.
Most CDFIs advise their borrowers on the “sources” side of the equation, but rely on the borrower to conduct all of the activities to create the “uses” side. At IFF, we do both. Our lending team works with our nonprofit clients on “sources,” and our real estate team manages the myriad real estate development processes required for “uses.”
It is this sources/uses work that can often stymie vital community development projects long before they even get to a CDFI’s lending desk (or make such weak applications they do not get approved). This process is highly iterative, particularly with the extremely tight budgets of most nonprofits working in under-resourced communities, with a cascade of trade-off decisions around quality, cost, and time.
Examining these kinds of trade-offs overwhelms most small and mid-sized nonprofits, and some of our most important work is to tell agencies things they don’t want to hear (but need to): “You’re not ready,” or “This building can never be a child care center,” or “This ‘free’ building will be an albatross.” Guiding nonprofits through these decisions saves them enormous amounts of money, time, and angst.
It is not difficult to see how a real estate consulting group designed to help nonprofit agencies conceive, plan, and implement vital facilities fits into the Continuum of activities for increasing investable, debt-capital-eligible projects. Our RES work is our form of the CDFI Fund’s required “Development Services” to help communities access capital.
What is less obvious, but vitally important, is that our RES work is a huge risk mitigant for our CDFI. The majority of our facility loans involve real estate development/construction, requiring the classic underwriting of the “project management” team. Nonprofit agencies with no experience/expertise taking on complex, difficult to develop facilities with meager budgets scream red flags to an underwriter. But these projects are EXACTLY OUR MISSION. IFF is very confident in our ability to underwrite the payback risk of a nonprofit enterprise. However, underwriting project management and construction risk is incredibly difficult, and the knowledge that the applicant attended a two-day training provides little comfort. Our real estate practice completely changed that dynamic.
Call to Action
After 24 years, there are few types of nonprofit facilities that IFF doesn’t have experience developing – from schools and child care centers to health clinics, food pantries, small business incubators, and more. To date, our Real Estate Solutions team has developed 3.68 million square feet of nonprofit facility space totaling $360.35 million in development costs. And many of those projects have been financed by IFF as well.
It’s important to note that we are not the only CDFI to take this approach. Consider:
Community Vision (formerly Northern California Community Loan Fund) began similar services, and is supported by the City of San Francisco for very similar reasons.
Self Help, one of the nation’s largest CDFIs, is experimenting with a similar development model.
Capital Link started as a community health clinic development advisor.
Charter School Development Corporation, Civic Builders in New York City, and Pacific Charter School Development Corporation in California all specialize in charter school facility development because they know that school leaders need to focus their time and expertise on educating our future, not on learning how to develop real estate.
But IFF and our colleagues are still only reaching a portion of the country – mostly in major metro areas. Communities in smaller cities and rural areas need this type of assistance, too, and our industry needs to ideate around ways to offer proper assistance on real estate projects – not disrespectful “capacity building” training efforts that will break the backs of nonprofit leaders who, frankly, have better things to do.
Some of this can be accomplished with philanthropic support, which both subsidizes the work and connects us with nonprofits who need our help. IFF first spread our real estate work to major cities through the support of the Polk Bros foundation in Chicago, Skillman Foundation in Detroit, and Hall Family Foundation in Kansas City, to name a few. To reach smaller cities and rural areas, we’ll need different and additional philanthropic support and a regular pipeline of projects to support the proper staffing for excellent work.
But we also need to replicate the nonprofit/community real estate assistance model in other ways. Can LISC and Enterprise Community Partners imagine similar support models in their target communities? Can Civic Builders, Charter School Development Corporation, and Pacific Charter School Development Corporation expand beyond charter school development to other vital community facilities like child care? Can Housing Partnership Network encourage its successful, nonprofit affordable housing developers to add community facilities to their work?
Re-engineering the ways we support nonprofit change makers in smarter ways is part of the Continuum of ways we can all better align capital with justice.
- A blog by IFF CEO Joe Neri