Seeking a New Lease on Life

Real-estate boom’s soaring rents are uprooting urban charities

Streetcats Foundation for Youth, a San Francisco charity that provides counseling for troubled teenagers, got word last month that it had 60 days to vacate its quarters.

The building’s new owner, hoping to cash in on a hot real-estate market fueled by an influx

of high-technology and financial companies, plans to convert the property to expensive, upscale offices. With an annual budget of only $42,000 a year, Streetcats has yet to find a new home near the kids it serves.

A similar situation confronts the NAMES Project of the National Capital Area, an AIDS-awareness group in Washington. The new owner of a downtown building where the charity occupies a small storefront space plans to renovate the property and charge higher rent. The AIDS group won’t be able to afford the refurbished space, and even smaller offices elsewhere would cost three times its current rent.

“We are still a mostly volunteer grassroots organization with most of our money going into programs,” says Gregg Stull, the group’s part-time executive director. “It’s clear that we will not be able to pay the market rate no matter what.”

In places such as Boston, Chicago, New York, and California’s Silicon Valley, countless nonprofit groups are feeling squeezed by a booming real-estate market that has consumed the supply of affordable space and pushed rents to record levels.

Rent Increases

The problem is particularly acute in New York and Washington, where a booming economy in recent years has been pushing up already-high property costs, and in West Coast cities, where a recent influx of dot-com companies has transformed low-rent neighborhoods into tony commercial enclaves.

Average annual rents in the southern part of San Francisco’s South of Market neighborhood, which has a high concentration of nonprofit groups, have jumped over the last two years from $26 per square foot to $71 per square foot as technology employers have moved in, according to the Sedway Group, a real-estate consulting company. And Manhattan’s Midtown South area — which includes SoHo, a neighborhood home to many nonprofit groups and increasingly popular with businesses interested in a hip, urban location — saw average office rents jump 54 percent just over the first nine months of this year, according to Cushman & Wakefield, an international commercial real-estate company.

A shortage of space is a key reason for the spiraling costs. Citywide, both San Francisco and New York are seeing the highest occupancy rates for commercial space ever recorded — 98 percent and 97 percent, respectively.

Cashing In on a Boom

But not every big-city charity has suffered from the hot commercial real-estate market. Some organizations that own their offices and land are selling them and cashing in on the property boom. In addition, community foundations and local governments are offering grants and taking other steps to help struggling charities find affordable space.

Yet, for many nonprofit organizations, the rise in real-estate costs is taking a heavy toll on budgets and programs.

The Literacy Assistance Center, which trains people in New York to run adult literacy programs, will have to move into more expensive Manhattan quarters because its current building is being converted by a new owner to condominiums. The center expects eventually to pay 14 percent of its budget in rent, compared with 4 percent in its present location.

The tight real-estate market is not only driving up costs. In some cases, it is driving charities out of the very neighborhoods that need them most.

“If we have to move out of San Francisco because we can’t afford to be here, it means that we are not near our street-kid and runaway population, and we are not in a central or convenient place,” says Don Fass, Streetcats’ founder and executive director. “And that could mean that we would not be doing our job.” To avoid such situations, charity leaders often must come up with thousands of dollars to cover steep rent increases. But that isn’t always possible. Nonprofit groups typically have budgets that are too meager to accommodate unforeseen expenses. And donors often are reluctant to give money for rent and other overhead costs, preferring instead to support programs directly.

“People and funders are much more excited to pay for another case manager at a homeless shelter than to pay for rent,” says Cassandra Benjamin, director of Shelter Network, which helps homeless people in San Mateo County, near San Francisco.

To cope with the lack of funds in a rapidly escalating real-estate market, many groups are looking for creative alternatives.

In Boston, five arts groups — including a museum and a foundation that supports artists — are hoping to raise money to purchase property jointly for their own offices and the art projects, artists’ studios, and performance groups that they support. The groups, located in a neighborhood called Fort Point, face huge rent hikes or eviction in the next two years as their leases in old warehouses expire and area developers look to convert the properties into new offices for well-heeled businesses.

In Washington, leaders of the NAMES Project expect to move the group’s operations into the homes of its volunteers while continuing to search for affordable space. “We’re hoping that someone with a philanthropic bent will step in and give us a great deal somewhere,” Mr. Stull says. “What else can you hope for in a market like this?”

Cities Lend a Hand

Other charities are finding salvation in the efforts of municipalities and community foundations that are helping charities locate cheaper space.

The City of San Francisco, for example, recently passed two separate ordinances providing a total of $4.5-million to assist nonprofit groups in dealing with the city’s office-space crunch. About half of the money is being given directly to charities to subsidize rent increases and moving costs on an emergency basis. The rest will be used to help charities buy property or improve their current facilities.

In addition to the cash, the city also has agreed to require developers of all new public projects to sublet space to charities at a reasonable rate. For instance, as part of the impending development of Pier 70, an eight-acre waterfront property owned by the city’s Port Commission, the city will require 150,000 square feet of space to be set aside for charities at $1 to $2 per square foot per month.

In neighboring San Mateo County, the county government in September for the first time set aside money, $1.8-million, for low-interest loans to charities that want to buy property in the county. So far, two charities that are jointly buying an office building have received $750,000 from the fund.

And East Palo Alto, a city in San Mateo County that has seen land values surge as technology companies have spilled in from Silicon Valley, this year granted a special zoning permit to allow a drug-recovery program to relocate to a site that was zoned for residential use. The program, called Free At Last, had not been able to find quarters in a commercial area after its previous space was bulldozed to make room for a new development.

“Municipalities are having to get creative to help the nonprofits that they depend on to provide services to their residents,” says Priya Haji, Free At Last’s outgoing executive director. “Accelerating the process to give us special zoning was a way for the city to help purely through civic leadership and political will.”

The Peninsula Community Foundation, in San Mateo, had tried to help Free At Last and about a dozen other charities that were pushed out of their East Palo Alto neighborhood, too, but even the grant maker’s deep pockets could not provide the solution.

Peninsula had raised $6-million from private foundations and a handful of wealthy technology-company executives to buy property in East Palo Alto for the displaced charities. But buildings are in such short supply that the foundation has been unable to find an affordable space to purchase.

“Every day we wait, the market goes higher and the competition gets tougher,” says Mario Paz, a senior program officer at the Peninsula fund.

Tax Breaks for Landlords

In New York, some nonprofit groups are hoping that the city will step in to ease the way for charities, as it has for businesses that move to new space. Earlier this year, officials increased the tax credit for companies that relocate to areas considered less attractive to businesses, and nonprofit leaders say a similar incentive — perhaps in the form of grants — should be available to charities that relocate.

Other ideas advocated by charity officials include property-tax breaks for landlords who rent space to nonprofit groups at a discount.

Says Mark Rossier, director of development and marketing for the Alliance of Resident Theaters, an association of 400 theater companies in New York City: “It’s understandable that landlords want to cash in now when the market is hot, but we need to find ways to make it worth their while to keep those nonprofit tenants.”

Mr. Rossier’s group is not waiting for the city to provide solutions, though. Last year, the alliance raised nearly $1.3-million to buy an office building in Brooklyn. It now rents space at below-market rates to 20 other performing-arts groups.

The concept of nonprofit groups banding together has been gaining ground because of the booming market. The Marin Community Foundation, in Larkspur, Calif., near San Francisco, this year spent $13-million to buy and renovate two buildings that the foundation will lease to charities at below-market rates.

And the Indianapolis Foundation, which already provides low-cost space to 14 nonprofit groups in a building that was donated to the foundation, is considering buying another nearby property and converting it into a campus for arts groups.

Costly rent and purchase prices may also lead to other forms of cooperation, too, charity experts say. More nonprofit groups may look to save money and, perhaps, improve services, by merging. Others, not ready to take such a big step, could cooperate in other ways, says David LaPiana, a nonprofit consultant in Oakland, Calif. Charities could, for example, share computer systems or fund-raising duties, he says.

“Some partnerships would be trickier than others,” Mr. LaPiana acknowledges. “But when there are certain costs you can’t control, like occupancy costs, you are forced to be creative around things you can control.”