Nonprofit Mortgage Loans: A New Opportunity?
Nonprofits looking for suitable space to run their organizations must consider whether it’s best to lease space or buy a property using a nonprofit mortgage loan. While there are more financial options available today that make getting a nonprofit mortgage loan easier, nonprofit real estate ownership is not always the best solution for every organization. Here’s what you need to know so you can make the best decision for your nonprofit.
Can a 501c3 (nonprofit) Purchase Property?
The simple answer to whether a nonprofit can purchase is property is yes, although (as with all businesses) owning a building or property is not necessarily preferable to leasing space. You can obtain commercial real estate loans for nonprofit organizations from a variety of traditional and alternative lenders. (Note: SBA 504 loans are not loans for nonprofits and are only available for for-profit businesses.)
Whether your nonprofit organization should lease or enter into a nonprofit mortgage loan depends on many factors, including your location and the cost of real estate in your area. A nonprofit must weigh the pros and cons involved with making a significant capital expenditure to buy a building before making a final decision.
Buying Vs. Leasing for Nonprofits
Advantages to Buying Property:
- The nonprofit organization has complete control over the facility (within zoning limitations)
- The facility can be remodeled to fit the needs of the organization
- The organization is protected from problematic landlords or lease uncertainties
- Owning real estate gives the organization a sense of stability in the community
- Owning real estate builds equity in the organization
- Most states do not require nonprofits to pay property taxes. However, some local governments require all property owners (including nonprofits) to pay other local fees for specific services such as street maintenance, fire protection, and city snow removal.
Disadvantages to Buying Property:
- You need to make a significant upfront cash investment
- Your organization is taking on long-term debt
- Maintenance and repair costs are entirely the organization’s responsibility
Advantages to Leasing Property:
- It gives the organization the flexibility to easily move to a bigger or smaller space, as appropriate
- Some lease agreements are rent-to-own, so you don’t have to commit immediately
- Less upfront cash requirement
- Typically, maintenance and repair costs are the landlord’s responsibility
- You don’t have to worry about fluctuations in the real estate market
- The organization does not take on long-term debt.
Disadvantages to Leasing Property:
- When the lease term ends, the organization might have to relocate, or your landlord may increase your rent, raising your expenditures
- It may be challenging to get improvement loans since you don’t have collateral
- Over the long term, leasing can be more costly
- The organization has no control over property improvements
- Nonprofits may have to share space with other tenants
What to Know About Finding Real Estate for a Nonprofit
After weighing your options, if you decide you want to buy a building or some property, you need to look for a nonprofit mortgage lender. It’s critical you take the proper precautions and follow the appropriate steps before signing the nonprofit mortgage loan documents.
Step 1. Before making a real estate purchase, the property should be thoroughly evaluated by the organization’s Board of Directors, Executive Director, and key team members—especially those involved with the nonprofit’s daily operations. A property that looks perfect to one member may have significant flaws in the eyes of another. Then, all the financials involved with the transaction should be thoroughly vetted by the organization’s CFO. Finally, discuss your overall goals and how the property fits in with your long-term growth aspirations.
Step 2. How does the property fit into the organization’s mission? For community-driven organizations, it’s vital the property is accessible to visitors and has plenty of (well-lit) parking. Also, is the location near train and bus services? If the organization’s mission includes a sustainability initiative, will the property cost-effectively transform into a green building?
Step 3. Next, determine if the cost of the property is affordable without impacting the long-term strength of the organization. Will any needed renovation costs to the building overtake the contributions it can make to your mission, vision, and goals? The financial obligations entailed with buying a building should not negatively affect the organization.
Step 4. Owning property can help stabilize an organization’s finances by establishing a set nonprofit mortgage loan payment and give the nonprofit additional tax benefits. Also, you can lease out unused space to individuals, businesses, or other nonprofits giving your organization extra revenue.
Step 5. Finally, it’s essential to evaluate the property from the point of view of existing and potential donors. Purchasing real estate and taking out a nonprofit mortgage loan indicates to donors your strong commitment to the community, and it may help you meet your mission objectives. Moving into a new building is also a good reason to host a “housewarming” event, which may incentivize current donors to increase their contributions and attract potential new donors, as well.
Nonprofit Line of Credit
Taking out a nonprofit mortgage loan is only one option available for nonprofit lending. Although a line of credit is not recommended to fund a property purchase, a credit line can be an excellent solution for covering operating expenses. A nonprofit line of credit, like the one offered by Financing Solutions, allows nonprofits to address their many working capital needs and can be a great backup plan for the times when maintaining cash flow is a challenge. In addition, many nonprofits use a line of credit to pay employees while waiting for pledged donations to arrive or for government reimbursement.
Financing Solutions’ line of credit product is the first of its kind because it is specifically designed for smaller nonprofits that haven’t been approved for a conventional bank line of credit. In addition, Financing Solutions Nonprofit Line of Credit Product costs nothing until used, requires no collateral or personal guarantees, and is very inexpensive over time. So, if you’re wondering if your operational efficiency can be further fine-tuned by adding an affordable line of credit to your financial toolbox, try applying for a Financing Solutions product today!