Eliza Solender is president of Solender/Hall, Inc. and serves on the board of directors of Origin Bancorp.

Nonprofits

The Business Case for Lending to Nonprofit Organizations

Lenders with little experience doing so need to be aware of a few important differences, says Eliza Solender of Solender/Hall.

Less availability of affordable rent in desired locations, stricter zoning requirements, and a desire to have more control over their property have led many nonprofit organizations to consider purchasing real estate. Commercial real estate professionals, lenders, and nonprofits can gain a lot from learning the expectations of all parties involved in financing a purchase.

As nonprofit organizations transition from renter to owner, they may find themselves struggling to identify funds necessary to bridge the gap between money needed to purchase and renovate or construct on a property, plus the timing for receipt of donations and grants from a capital campaign or other sources. The pressure to meet contract deadlines, expiring leases, funding deadlines, and needed expansion can be significant. At this critical point, most nonprofits realize they must borrow funds to seal the deal.

Banks and financial institutions are realizing that it can make good business sense and positively impact the bottom line for them to lend to nonprofit organizations. However, lenders with little experience doing so need to be aware of a few important differences. Nonprofits differ from for-profit organizations in three ways:

Decision-making. Nonprofits have a longer decision process, as they must get buy-in from their board members, staff, and major donors before making any significant real estate commitment. They must often work through various committees to reach consensus—all of which takes time.

Unique needs. Nonprofit organizations have special needs that the traditional real estate market often cannot address. For example, many nonprofits often serve clients in the evenings and on weekends. They also frequently require access to public transportation or be located in underserved areas where there are few commercial properties, so traditional office buildings are not always available. This makes them ideal candidates for repurposing buildings such as churches, warehouses, grocery stores, and bowling alleys.

Financial limitations. Because nonprofits typically operate on tight budgets, they often seek the lowest-cost real estate options available. Most nonprofit funding comes from multiple sources that must be renewed on an annual basis, and real estate is typically the organization’s second-largest budget item after payroll. Also, donors prefer funding programs versus rent or operating costs.  The good news is that most nonprofits have audited financial statements and are used to preparing reports regularly for their boards and funders.

If a nonprofit decides to purchase real estate, its funding options involve creating a capital stack of funds from a variety of sources. The larger and more sophisticated nonprofits know how to tap into these funding sources. However, no matter the size of the organization or project, traditional bank financing is usually a key layer in the stack, and the first place nonprofits tap. Here are some of the other potential layers:

  • Traditional bank loans
  • Loans from Community Development Institutions (CDFIs). The Real Estate Council, for example, has a community fund that is a certified CDFI.
  • Federal or municipal funding, from sources such as HUD, community development block grants, local housing authorities, or Mortgage Assistance Programs (MAP)
  • Tax Increment Financing district funding from the cities
  • Tax credits: low incoming housing, new markets, or historic
  • Traditional grant funding from donors in a capital campaign
  • Opportunity Zone funding
Nonprofit Bank Loans

Most nonprofit organizations seek a hybrid bridge loan. Lenders should expect the charities to be somewhat demanding in their loan requirements and to bid the loan to competitive lending institutions. As providers of needed services to the community, they often expect the lender to make special concessions. Some allowances are not difficult, but others may require significant negotiation.

Expect nonprofits to ask the lender to consider the following when making a loan:

  • Security. The nonprofit may request that the loan is secured only by a lien on the property. It is extremely unlikely that any of the board members will personally guarantee the lien or that the charity has any sizable assets to add to the collateral. However, pledges from a capital campaign may be used as collateral.
  • Loan amount. Nonprofits that have been conducting a capital campaign for six months to a year should already have received a sizable number of contributions and pledges. Received donations can serve as equity for the loan and reduce the loan amount.
  • Rate. Nonprofits expect below-market rates. Expect them to request a rate as close to prime as possible with a 15- to 30-year amortization. Also, expect the nonprofit to request interest-only payments for the initial term of the loan.
  • Points and other fees. Nonprofits may request minimal to no points and a waiver of any of the legal and appraisal costs incurred by the lender.
  • Prepayment. Nonprofits may request the ability to repay the loan as soon as possible without any penalty for early repayment. The lender may want to negotiate a fixed duration for part of the term to guarantee some yield from the loan.
  • Sponsorships. Expect the nonprofit to request that the lender be a significant sponsor to at least one major event every year.  The lender should work with the nonprofit to create a partnership that benefits both organizations.
  • Flow of funds. Nonprofit funding may have significant variance due to events, capital campaigns, grants, and other sources. They may expect the lender to give them preferred pricing on their deposits and checking accounts.
Determining the Viability of the Nonprofit:

So how does a lender determine whether they should lend to a particular nonprofit? To assist in making that determination, these items will help the lender assess the organization’s viability:

  • Longevity of the agency: Most foundations will not give to a nonprofit unless it is at least five years old. This should be an absolute minimum for a lender.
  • Services or programs: Does the nonprofit have a narrow focus, or does it offer a broad range of services that enable it to adapt to changes?
  • Financial support: There is no standard regarding comfortable percentages of funding from various sources. However, nonprofits that are dependent on one source for the majority of their funds are more likely to experience cash flow crunches.
  • Board and charity management: Charitable board members take their fiduciary responsibility quite seriously. The lender should review the list of board members, CEO, and development executives and their backgrounds.
  • Financial reporting: Nonprofits should have recent audits and a financial management system that enables them to produce reports quickly.
  • Previous experience with capital campaigns: If a nonprofit has previously mounted a successful capital campaign, prospects of another success are high.   However, lack of experience with capital campaigns should not disqualify a nonprofit from a loan. Capital campaign experience can be obtained by retaining the services of fundraising consultants.
  • Collateral: A lien will usually secure the loan on the property with full recourse to the nonprofit. Most nonprofits do not want to be landlords, so there will not be any revenue generated by the property. If the property is being also used for special use, such as a daycare center, shelter, school, or community service center, alternative uses for the property should be discussed in the unlikely case that the lender must assume responsibility for the property and sell it. Fortunately, there are very few cases of lenders being forced to foreclose on a nonprofit property.
  • Business-like approach: The nonprofit should conduct due diligence and use consultants as would be expected from any business borrower. Exhibiting this approach is a strong indicator of how the nonprofit will perform as a borrower.
Nonprofit Lending is Worth the Work

Given all the demands and due diligence required when making a loan to a nonprofit organization, is it worth it to the lender? Absolutely. By loaning to an organization that’s “doing good” in the community, the lender has an opportunity to market to a larger audience of business leaders who serve on the nonprofit’s board of directors as well as donors.

Nonprofit loans can create goodwill in the community. Enabling a popular and much-needed community service to expand its capabilities in a new location provides the lender with multiple marketing and community outreach opportunities at ground-breaking and ribbon-cutting ceremonies, in press releases, and all materials related to the capital campaign.

So, feel confident in lending to nonprofit organizations, and enjoy that donation or sponsorship you will be making at the nonprofit’s next major fundraising event.

Eliza Solender, president of Solender/Hall Inc., serves on the board of Origin Bancorp and The Real Estate Council Community Fund. She also teaches “Real Estate 101 for Nonprofits,” a free TREC-sponsored course.

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