March 24, 2011

Pay It Now or Pay It Later

As my husband and I stood surveying what seemed like 100 feet of snow that fell on our roof throughout the winter and taking bets on the likelihood of its collapse, he uttered these dangerous, divorce-inducing words, “You didn’t forget to put a new roof in our budget?”

Did I budget? Of course I budgeted, for all these kinds of possibilities. But I had also nagged about the need for us to consistently save for the work in spite our list of less practical but more enjoyable expenses.  The undeniable truth is that real estate, be it a family residence, a theater, or a school, requires constant care and feeding.

Many nonprofits, like weary homeowners, defer routine building repairs or dealing with other deteriorating systems often to the point of jeopardizing the soundness of the both the facility and the program. Take, for example, a child-care center whose boiler regularly goes on the fritz.

The lack of hot water for sanitation or heating would force the center to close for days—and that in turn would force parents to lose time and income from work. For some of our most vulnerable kids, those closures also restrict critical access to healthy meals, supplemental education, and social services.

That’s why nonprofit facilities should not be viewed as static places where programs are delivered but dynamic programs in their own right that require capital, management, and planning.

Why do so many nonprofits underestimate what they need to do about the wear and tear on their building and other assets?

• Many nonprofits simply can’t afford real estate and gain few economic benefits (such as the ability to moderate fluctuating or escalating rents) from ownership. Nor do they gain significant other benefits, such as an ability to tailor space to their program needs. Nonprofits are plagued by an “edifice complex” or the feeling of inferiority brought on because they do not have their names chiseled on a building or inscribed on a mortgage.

It should come as no surprise that a high percentage of Fortune 500 companies lease space because they would rather place their most sizable investment into income-producing activities rather than income-consuming ones. Ownership is the best option for some enterprises but one that should be weighed carefully.

•  Capital campaigns usually only account for the cost of putting the building up, not for keeping it standing. After the heavy lifting of raising money for construction or renovations, organizations often have little energy or capital left to allocate to maintenance. Nonprofits and grant makers alike should begin to factor the perpetual cost of upkeep into the amount they set to raise before they break ground. Consider it insurance on your purchase.

• Many nonprofit executives have been telling their boards and stakeholders for years that the sky is falling, but to no avail; however, when the sky or the roof or the information-technology infrastructure actually crashes, communities mobilize for action. It doesn’t matter that it would have been cheaper and easier to do preventative maintenance.

• In the hierarchy of allocating resources, facility-maintenance expenses usually come in last place. These expenses are often not fully recaptured in the overhead or rent-reimbursement rates that nonprofits set out in grants and contracts. What’s more, these expenses get deferred in favor of paying for direct services that have more emotional resonance. The day-care center with the bad boiler probably made a trade-off between the joy of buying toys for kids to play with and the hard job of buying parts to fix the heating system.

My cautionary story ends well in that neither my roof nor my marriage collapsed, and I am living the lesson that I teach: If you don’t pay for it now, you will pay for it later.