The Stoler Report: Non-Profits: Shedding Valuable Real Estate for Endowment and Current Operations

The Stoler Report: Non-Profits: Shedding Valuable Real Estate for Endowment and Current Operations


♪♪[THEME MUSIC]♪♪>>>MICHAEL STOLER: So,
nonprofits, churches, synagogues, charities, all of
these entities many of them own real estate. They also have air
rights on top of this. And over the last two or three years the
phenomena with the hot investment market is that these
nonprofits are shedding some of their real estate to developers
like Sam and Abby and other people and why are they shedding
it? So today I’ve assembled this group of distinguished business
and real estate leaders to provide their insight on how
nonprofits are shedding their real estate for their endowments
and their current cash flow and their operations. My guests
today include Abbey Hamlin who is the C.E.O. of Hamlin
Ventures. Sam Sidhu who is the C.E.O. of Megalith Capital. Tim
Sheehan who is the senior vice president at C.B.R.E. and last
but not least Michael Rudder who is the C.E.O. of Rudder Property
Group. So here we have a diverse group. We have a developer who’s
been involved with nonprofits on both sides of the coin. We have
another developer who has really done a unique deal acquiring a
nonprofit site and also both of you are looking at any site that
has a developer. Here we have an individual who has represented
certain nonprofits in the sale of their properties. We have
somebody who has represented nonprofits in the sale of their
properties and many and being replaced into other properties
so as a business person and also as a person who’s been on the
boards of nonprofits, what your thoughts? Should nonprofit sell
their real estate? I’m going to answer it also, I’m not going to only be the
only one to out you on the->>>ABBY HAMLIN: There is
no blanket answer to that. I think many non-profits have the
opportunity, who have the opportunity, and there are a lot of factors
in what the opportunity is it’s not just owning real
estate. The many factors->>>MICHAEL STOLER:
Broadway and 63rd Street, three hundred million dollars. The
Bible Society. Let’s be realistic. Jehovah’s Witness in
downtown Brooklyn, the Watchtower. They even have to be
there, sell. The Hotel Bossert in downtown Brooklyn, sell.
These properties on Park Avenue South, I mean, beautiful
townhouses.>>>ABBY HAMLIN: Absolutely. It is one way for not for
profits to move their missions forward by selling real
estate that is not an asset that’s currently in need or as
we were discussing before, it’s not going to be needed in the
immediate or near future but not every not for profit or every
opportunity is necessarily one that is beneficial. There can
be, especially when a not for profit has to go back, has to
find space and we can really talk about what the issues are
for finding alternative space.>>>MICHAEL STOLER: But let’s
look at that. Tim a number of years ago one of the property
that you relocated the person to 7 World, talk about that
transaction.>>>TIMOTHY SHEEHAN:
Well that was the New York Academy of
Scientists and they owned->>>MICHAEL STOLER: Their
facility was located?>>>TIMOTHY SHEEHAN:
They were at East 63rd Street, one block in from the park. They had a seventy five
foot wide mansion. And they’d been in that property for fifty
years. The membership was quite attached to the property but
they had a new director who was charismatic and had a vision and
they needed to expand their membership services so the
property really didn’t work for them programmatically. They had
to wrestle with an emotional attachment to the property and
they were able to take advantage in their case of you know not to
get too fancy a word but an arbitrage between what was then
of a still fairly strong residential market and what was
then a relatively weak office market. So they were able to
sell into a high residential market, take the proceeds of
sale and they were actually the first tenant to sign a lease at
7 World Trade. Larry Silverstein was
looking to lease it up the market wasn’t
that strong and they took over->>>MICHAEL STOLER: So in
a way for them it was a win win.>>>TIMOTHY SHEEHAN: Yeah, it was
a win win because they accomplished that
arbitrage of taking those proceeds which paid for their
new quarter’s. will pay their lease rents for at least twenty
years and they actually moved back to where they originally
started, their original home was on Barclay Street. So it really
worked wonderfully for them. But everything had to fall into
place and the key motivator there for them was they needed
the funds so they were long on real estate, short on cash and
they had a facility that didn’t really meet their programmatic
needs.>>>MICHAEL STOLER:
But many nonprofits going back may have
inherited the land you know as a gift from a donor. You know
the estate didn’t have anything, they’d give the property to a
university or to a nonprofit and as I said earlier I was on the
board of the American Friends of the Hebrew University. I wasn’t
on the board when they sold the property but we had a property
right off 69th Street and Madison Avenue. The building was
being converted. It was much more beneficial because we were
on five floors, the efficiency, and we sold the property and we
moved somewhere else but that happens quite a bit in your
market right?>>>MICHAEL RUDDER: Absolutely.
I specialize in the sale of office condos
and we’re busier selling to nonprofits rather than selling
on behalf of nonprofits. What we’ve been
seeing is that nonprofits have been cashing in on this hot
residential market, selling buildings and then purchasing
what we consider a lower cost and more efficient option, which
is a single floor office condo. For example the Federation of
Protestant Welfare Agencies sold their beautiful building a 281
Park Avenue South Aby Rosen->>>MICHAEL STOLER: And they got
fifty million dollars.>>>MICHAEL RUDDER: -Fourteen
hundred a foot and they ended up purchasing an eighteen thousand
square foot full floor office condo at 40 Broad Street for a
little north of four hundred dollars a foot, for about nine
million dollars. It is an absolute win for everyone and
they still get the benefits of tax exemptions for nonprofits.
They were still eligible for tax exempt bond financing, specialty
financing for nonprofits, and they get to you
know grow their endowment in the form
of a real estate purchase.>>>MICHAEL STOLER: I
know that Mt. Sinai, I think Columbia Presbyterian, New
York Cornell Weill, many of them you know, they’re land sized.
There’s not enough space in the medical center for these
organizations and so what they’ve done is they’ve moved a
lot of the administrative functions to other areas that’s
why 633 3rd Avenue happens to have a number of nonprofits. 800
2nd Avenue was another situation over there. So this is given
them the opportunity. Also it’s for certain employees it’s
better over there. Sam, let’s talk about
your transaction, the one that you’ve been working
on with the synagogue.>>>SAMVIR SIDHU: Sure
sure. So Michael, firstly thanks for having me
back. Appreciate it. You know to your earlier point you know
we’re sitting in a very interesting time right now where
you have the residential condo market is very hot. Land prices
are have been going up steadily over the last couple of years
and you have nonprofits, whether they’re religious institutions,
cultural institutions, government agencies, who are
sitting on prime real estate, well located prime real estate,
that they’ve known for decades. On the other hand there’s sort
of an emotional attachment to the sort of locations->>>MICHAEL STOLER: Which is
what Abby was saying.>>>SAMVIR SIDHU: Yes
exactly so you know there are the boards of these
institutions, the fiduciaries of these institutions, the leaders
of these institutions, have been trying to find ways in this
market to think about how they can either fully monetize, take
the proceeds, move to you know another location whether it’s an
office condo or you know another location on the east or the west
side, or in some cases partially monetize you know they they’re
sitting in a small facility where the district has been up
zoned and there’s an ability to actually temporarily move out,
come back in, and partner with a developer where the developer
has enough of a footprint on a site to develop a project that
in our case is a residential condominium above a synagogue
that we currently you know closed on a couple of months
ago. That we’ll be demolishing and rebuilding in the base of
our building.>>>MICHAEL STOLER: Now
you also provided them, you’ve given another site for
them to move temporarily.>>>SAMVIR SIDHU:
Correct correct. With the assistance of
some very creative brokers we found them temporary space and
you know programming is difficult proceeds are difficult
you know we had to release deposit money you know to allow
them to construct their temporary facilities. What’s
also important to know is that we also had a school that we
were dealing with as part of the synagogue and the school has to
be in x proximity to green space etc. It also had to be in the
same sub market which meant you could count them on one hand the
different places so we could move them and trying to match
the timing of what we were trying to do along with what
they needed without the synagogue feeling that they were
going to lose their space because either we were unable to
develop in time or their lease ran out in their temporary space
is you know when you look back it seems like a relatively you
know genius deal, when you’re in it, it feels like a very very
painful process.>>>MICHAEL STOLER:
In addition there’s the moving pieces that we just
discussed, there are many, but there are two other moving
pieces that come into the situation. One is you know
nonprofits are governed under the New York attorney general’s
office so a nonprofit can really not sell. They have to get the
approval of the attorney general’s office that’s one and
then the nonprofit has a board and the board has to say, is
this the right situation.>>>ABBY HAMLIN: And
I’m going to top that. As Tim knows, I’m
currently developing a piece of real estate that I purchased
from the Catholic Church and in addition to the attorney general
this had to go for papal approval, to Rome,
the sale of property for papal approval to Rome.>>>MICHAEL STOLER:
Complicates it even longer.>>>ABBY HAMLIN: Complicates it
even more and I think one of the interesting points, Sam that you
make, is we’re also putting back in, though not a house of
worship, we’re putting back in a community facility for the
church into a building that on top of what is a landmark and on
top of it is going to have condominiums and so we have
construction agreements not just a sale of purchase and sale
agreement, we have a construction agreement and the
decisions about the design of their new space, the shafts and
pieces of the condominium and
other market uses->>>MICHAEL STOLER: And
then the next part which complicates this matter
even more is certain of these neighborhoods you have to go to
the rezoning getting approval from the community that you can
build this. You know, I think on the show that you did your life
story, on Building New York, I had Louise Mira who is the head
of the Historical Society and I believe that I may have read
that they are finally going, with the developer, going to
develop condominiums on top of the historical center which is
another situation because now you have you know you know you
have this beautiful building that’s one hundred ten years
old, you don’t want to lose the texture of the contour of the
space so that goes on. Now what comes first in your opinion? Do
they find the space or do they sell the space or is it the
simultaneous deal?>>>MICHAEL RUDDER: I think that
it is such a tight market, it is so hard to find space, that
that’s a crucial component to it. If a nonprofit has an option
to move to somewhere that makes a lot of sense for them, at that
point they can consider monetizing their asset. The hope
is that the nonprofit gets the opportunity to continue their
good service and they need space to do that and not just selling
cash.>>>TIMOTHY SHEEHAN:
I think Michael and we found is there’s
a long preamble with the board to bring
consensus first and what the nonprofit wants to do because
you don’t want to go to market with that kind of uncertainty.
You want the board to->>>MICHAEL STOLER: That
commitment has to be made->>>TIMOTHY SHEEHAN:
Exactly. Before you engage the market you
have to make that commitment. And generally I mean I used to
say, finding a new location is the hard part particularly in a
hot market. That selling is the easier part. But I’ve found now
that it’s not always the case but typically finding a location
not in the abstract, yeah we’ll move to a new place but the real
new location that everyone has to agree on that’s a difficult
and a time consuming process.>>>MICHAEL STOLER: Now there is
something that you may have not heard about but I did a show on
New Jersey property and the head of a large medical center told
me that the city of Morristown, New Jersey is in court to try to
make the hospital in Morristown pay real estate taxes. They want
the nonprofits to pay real estate taxes. What effect is
that going to have on the nonprofits if that happened in
New York, any idea?>>>MICHAEL RUDDER:
I think that it is a bad thing. I think we should encourage
non-profits to continue to thrive in the city, they’ve
been a major employment force->>>MICHAEL STOLER:
But on the other side, they don’t pay
real estate taxes you know somebody you know if you have
the liberal point of view, the roles of the
real estate taxes are taken off
because of nonprofit.>>>MICHAEL RUDDER: The fact
of the matter is is real estate->>>MICHAEL STOLER: I’m not
debating it I’m just playing->>>MICHAEL RUDDER: You
know a common reason cited for why nonprofits like to own real
estate is because they get tax exemptions if they own. I really
find that to be not the most compelling reason. The fact is
that real estate taxes are about ten dollars a foot. Not
insignificant but when average office rents are sixty sixty
five bucks a foot and->>>MICHAEL STOLER: It’s not the
major component.>>>MICHAEL RUDDER: It’s not a
major component at this point. The ability to get financing
sometimes trumps the real estate tax exemption. But more
important the fact that nonprofits find it easier to
raise money from their boards if it’s going towards the purchase
of real estate and if it’s going towards a rental is more of a
driving force into why they buy real estate. Not the ten dollar
a foot tax savings>>>MICHAEL STOLER: You know
people here as I brought up you know the Bible Society, which is very high
profile and Jehovah’s Witness also downtown, selling for three
hundred million dollars and the Bible Society is even moving out
of New York so are not even over here and Jehovah’s moved
upstate. So there was a different category. But people,
the general public, and maybe somebody can explain do not
understand the subject that air rights on top of the building
can be sold at very high prices. Who wants to try to touch on the
answer of about air rights?>>>SAMVIR SIDHU: Well there’s a
fine balance between trying to monetize what you have as well
as potentially using that as a misstep on trying to monetize
the philosophy we were talking about this before. If you’re
sitting on a building that has fifteen thousand square feet and
the entire site can fit a thirty thousand foot development site
you have fifteen thousand of air rights you sell those to a
building next door either to do an addition or as part of a you
know a development assemblage and you’re left with something
that is not very monetizeable in the future. So while it seems
like a baby step you’re actually clipping your wings
in the ability to do something bigger
in the future.>>>MICHAEL STOLER: But you’ve
sold air rights, right?>>>TIMOTHY SHEEHAN: We’ve sold
properties that have additional development
rights and we’ve been involved in some air rights deals as well
you know it depends for example churches or religious
institutions often have air rights. A number of these are
landmarks so they have a little bit more latitude in where they
can go. But air rights deals are you know you don’t go out to the
market and say I’m going to sell my air rights to the market
because typically they only->>>MICHAEL STOLER: They have to
be within a neighborhood.>>>TIMOTHY SHEEHAN: And you only
have a few buyers.>>>MICHAEL STOLER:
The entity who has been able to sell air rights
is the theaters. OK you know the
Shubert organization probably has more air rights than anyone
else. And ironically they are a not for profit but the
theatrical area that you can sell air rights from 40th Street
to 55th Street has. To 56th Street, which is very valuable and it’s
helped development over there.>>>TIMOTHY SHEEHAN: Because
you have the receiving sites.>>>ABBY HAMLIN: The city
in the case of the theaters to preserve the theaters the city
created a special district and allowed for the transfer
typically you only transfer to an adjacent property or in a
landmark situation across the street but the city with the
theaters as part of their preservation put a special
district->>>MICHAEL STOLER: Now with
regard to the office condominium that a lot of these nonprofits
are moving into, the market we know has gone up high and
everything else. Has it also, have we seen a major
increase in the pricing?>>>MICHAEL RUDDER:
We have. However, it’s been a very active
market in the past half year, in the second half of 2014 we saw
the highest amount of sales in any half year in history of
office condos and that was driven by a lot of non profit
transactions. The Metropolitan College of New York purchased
one hundred ten thousand square foot office condo at 40 Rector
Street. We talked about the Federation of Protestant Welfare
Agencies who sold their building on Park Avenue South, Fedcap had
owned a building on West 14th Street which they had sold to a
residential developer Adel Co. and then they purchased a forty
five thousand square foot floor at 633 3rd. There’s been a lot
of these sales of free standing buildings and prime real estate
taking advantage of the residential market
and purchasing less expensive more
efficient office condos.>>>MICHAEL STOLER: Have you
seen a number of transactions or have you pursued a number I
think on your situation because the deal
was put in for the ingeniously of the year. Eight hundred
people had looked at the deal and they had twenty nine bids on
that so you know prime locations if it’s a non-profit somebodies
are going to try to be creative enough to do something.>>>ABBY HAMLIN: I
lost. I was one of those twenty nine bidders on
that deal. I am finding that I’m looking at more and more deals
where there is a not for profit owner and there’s a dialogue
about not just a sale, purchase, but you know all of
it is talked about.>>>MICHAEL STOLER: See, what
I think you’re bringing out is really important. I think
a smart nonprofit let’s say, and I’m not trying
to be belittle anyone, a nonprofit who wants to
be creative and saying OK you know because I want to be in
this location or I need the location, I’m providing this
community service to the organization such as a
synagogue, perhaps a school, perhaps, you know to give up
that situation is really poor in the long run you know because
one of the big questions as I’ve sat on the boards of non-profit
real estate committees is you know oh you know we shouldn’t
sell the property because we need it or we may need it in
twenty years from now or you know nobody you know, that’s why
I have my crystal apple here I don’t know what the real answer
is going to be and that.>>>TIMOTHY SHEEHAN: I think that
just, as Sam said, if you have not so much a transfer of air
rights but if you have an underdeveloped property that
could support a larger development like Sam’s project.
Then a non-profit it is a more involved process but for the
nonprofit as a seller who’s going to move back in they have
those other considerations because they have to pick the
right partner. So they need someone
like Sam or Abby that’s going to go down
the road for them.>>>MICHAEL STOLER: I think
Tim, that’s the real key. You need the right partner. A number
of years ago a university who I had known, their chancellor was,
I’d call him a deal junkie, he acquired lots of properties and
he subsequently needed dormitory space or certain other things
and what happened was he was the owner of the property and he
then tried to make transactions with certain developers. He may
have been good in acquiring property but he was terrible in
finding the appropriate partner. And this has happened on that
situation. Finding the right partner and somebody who’s
creative enough for the future.>>>SAMVIR SIDHU: Absolutely it’s
something that is very very important to in addition to sort
of making sure you know as a developer when you’re trying to
purchase from a partner with a non-profit understanding their
mission it’s really important to also give them the comfort that
you are going to be the right partner especially if they’re
coming back in. I mean you know you take this situation of house
of worship over here you’re going to be part of it and you
know how it’s going to be you know it’s interesting this was a
number of years ago across the street from Madison Square Park
where they built 1 Madison there was a McDonald’s and it was sold
to a developer who was planning to build an affordable housing,
a building just for affordable housing, it was sold to Peter
Fein and he was going to build an inclusionary housing building
just for that. And subsequently part of the deal was that
McDonald’s had to come back in on 23rd Street. Now subsequently
the building became 1 Madison and people didn’t realize that
in this luxury two thousand and twenty five hundred dollars a
square foot building you had this you know the golden arches
in McDonald’s so it’s something that you have to think about.>>>TIMOTHY SHEEHAN: What the
strong land market has done, it has prompted the question. So somebody on the border or
someone in the executive, they something gets sold nearby and
they start thinking well what is our property worth. Now they
probably should look at this every couple of years because
you always want to see you know is the opportunity cost of
having our asset in real estate still serving our interest of
our clients and our mission. So you have some non-profit whose
service population has left the neighborhoods that they were
originally in. So Children’s Aid Society for example they decided
you know we don’t need a facility in Greenwich Village.
We need a facility maybe in East New York. So they’ve monetized
that asset to program to create programs elsewhere. New York
Foundling. They don’t need a Christopher Street facility.
They can, they want to be in Queens and other neighborhoods
and so they monetize that.>>>MICHAEL STOLER: To discuss
this topic in total twenty six and a half minutes twenty seven
isn’t possible. So hopefully later on in the season maybe
when we can talk about more of these nonprofits we’ll bring you
all back but I think what I’ve provided to my viewers and to
myself is really an opening and I think in summation is if
you’re on the board of a nonprofit the same way that you
do an estate planning, that you’re supposed to evaluate your
estate planning, you should evaluate your assets and look at
it this way. So I’d like to thank Abby, Sam, Tim and Michael
and I’ll see you next week. Or follow us on Facebook, Twitter,
Pinterest and everything else and I’ll see you next week. ♪♪[THEME MUSIC]♪♪

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