Thinking about land use ventures
People have asked me, how do you do an air rights deal or a zoning lot merger or a joint development project or a major renovation or a corporate acquisition involving real estate, land use, or some other fascinating venture – as if I even knew the answer, or could explain it in a phone conversation or over coffee. Even if I could answer the question in relatively succinct terms, why should I attempt to make the answer seem any less complex than it actually is?
Our sector is increasingly confronted by these exciting possibilities, but is not necessarily prepared to successfully move forward. New skill sets, new sensibilities, new relationships and new understanding of revenue and expenses are required. Doing “deals” is frequently only minimally about programs, with which we generally feel more comfortable, and a lot more about other factors or strategies.
So in my first few weeks of retirement, and before I make a decision as to whether or not I should write a “Land Use Planning 101” manual for the nonprofit sector, I’ve drafted a summary of “Strategic Issues” and “Random Best Practices” just to encourage more discussion. As I have argued in many forums, more documented stories are needed for sharing, derived from the many successful projects in the field.
Before considering the following lists, remember a few key factors. (1) Understand your shorter and longer term organizational needs for space, money, expansion, and growth. This analysis should precede major real estate or land use moves, rather than the other way around. (2) Understand your current and future property needs and available resources. (3) Understand your personal interests and investment, since commitment is an important variable.
Finally, I offer here NO specifics regarding the details of any land use project or decision. For example, calculating what air rights you have and what they are worth and what City policies may affect this information is beyond the present scope (e.g. what may or may not be happening in Midtown East). Similarly, making a decision to acquire a property or sign a major lease expansion or partner with a for-profit developer is serious business, with no appropriate short answer. These issues focus, instead, on how to think about moving forward, the first steps in what will always be a long process.
Here are some strategic issues to remember.
* Build the right planning and implementation team: Any reasonably complicated real estate or land use project/decision requires a set of experts representing skill sets well beyond the internal management and board capacities of the typical organization. These experts would include but are not limited to: a law firm with expertise in either real estate or land use issues relevant to your project, a zoning analysis expert, which may be present at a law firm; an appraiser with experience in the type of project being considered; architects capable of providing assistance and expertise at all stages of the project; construction management support and expertise, preferably in the guise of an owner’s representative. This would be considered the “external” team supporting top management and the Board.
* Make sure there is a team leader: There must be a lead person in the organization with longitudinal investment in the organization and in what could be a multi-year project. This person needs to know enough about each of the components of the project, enough about the contributions of each area of expertise, enough about the points raised below, to carry the vision of the venture and see the project through from beginning to end. Expertise in these areas is not a prerequisite! This could be the CEO or another top management person of the organization or a designated knowledgeable board member, or the owner’s representative (an outside professional and member of the team).
* The team may not be needed or operational all at once, but must be available on demand: Almost any land use or real estate transaction can be very expensive to accomplish, and since many projects never actually get implemented, it is important to avoid costs which cannot be made up if the project fails or is stopped for good reason. Members of the team must also be able and willing to stay engaged over an extended time frame, ready to work when the work is needed, since no project is ever completed on a predetermined schedule. Changing members of a team, like changing high level management staff, has considerable costs.
* Think about the initial project numbers/budget, several times: The numbers are never right and are dependent on many factors beyond your control. Build in a huge error factor – especially since in the nonprofit sector margins of error are rarely considered or financed – no real estate or land use venture ever costs what people say or think it will cost. Cost overruns or other types of projections are, by definition, fluid.
* Understand the longitudinal time dimension of real estate and land use decisions: Others in our sector usually work on a different clock, more attuned to program contracts and budgets. There is no such thing as an “annual” land use or real estate venture. A longer time dimension also means that risks are hard to determine ahead of time and almost impossible to avoid. Be prepared including understanding that the long term benefits of the venture may exceed your tenue but be part of your legacy.
* Never forget or underestimate the role of financing, review and regulatory agencies involved with your project: The list of external parties and stakeholders is too long to summarize based on the project, but the list will be long and not under your control. These external parties are what makes the longitudinal time frame so exasperating. There seems to be little or no interest at the various government levels to assist in expediting projects despite the rhetoric, so patience (and money for help) are essential.
* Keep the board and other key stakeholders engaged: Never get too far ahead of them or yourself. There will be too many points where the project could fall apart, or where the direction and expectations will need to be reset, or where more funds or support are needed. So to minimize risk to you and the organization be transparent and inclusive.
* Trust no one. Including me: Don’t trust time estimates, prices, construction estimates, expert advice, or anything else, but don’t project the distrust. Build in multi layers of risk analysis and tolerance. Go with your instincts and judgment. Try not to be too wrong.
Here are some specific best practices to consider.
* Do not sign any leases without at least three conditions: A right to terminate the lease at key stages if the funding sources which initially paid for the lease are lost and no suitable replacements are found; the length of the lease should closely correspond to the funded length of the program contracts or grants which will occupy the space; if space is used for administrative purposes, ensure that sufficient indirect or general support funds are available over the length of the contract to meet the obligation.
* When the annual audit, usually in the notes section, documents future-year lease obligations, which are above and beyond the liabilities contained in the current audit year, have available for board review the projected income sources to cover those leases.
* Have a reliable mechanism for keeping up with any violations or penalties associated with all your properties, including the Department of Buildings, and other oversight agencies (perhaps best done by hiring a service to do this for you), and make sure penalty payments are made on a timely basis.
* Avoid mortgages to the greatest extent possible, irrespective of the funder or terms. Owning property is always a temptation, but obviously requires a long term commitment and presumption of off-setting income. Our sector is “trained” to assume that such obligations will always be met one way or another, but this has proven not to be the case in an increasing number of circumstances.
* The pot of gold at the end of the real estate transaction (e.g. air rights sales, so-called “free” space in a private development, etc.) is not always what it seems to be. Initial numbers can be enticing, but sometimes do not take into account replacement costs, time lost in transition, future operating expenses, living off-sight during the project implementation, a poor rate of return on investments, and so on. And when/if the money arrives in your account, you may feel better but it might not actually dramatically change your organizational life style. For example, converting “air rights” in to cash is actually converting one asset for another, and spending down assets is NOT what nonprofits should be doing. There is a difference between having financial security and having disposable money to spend.
Complexity and risk are the key characteristics of any land use planning or real estate transaction, but it may well be the best strategic decision for your organization to consider. Bottom line, get the right assistance when and where you need it, and make sure the top management team and the Board are ready for a journey.
So when I have received phone calls, or if I continue to get phone calls, my response has been and will be to say some or all of the above. And sometimes I get a free lunch out of the conversation.