Seattle Aikikai, a nonprofit martial-arts studio in Seattle, knew in the spring that it needed to do something about its lease. It was clear social-distancing rules meant the studio wouldn’t be able to reopen for a long time. With a year and a half left on its lease, it was time to talk to the landlord.
“We don’t have any reserves, and without any income, what are you going to do?” says Alan Marks, the chairman of the nonprofit’s board.
The discussions initially revolved around a short-term deferment or reduction in monthly lease payments. Marks calls those “gracious” offers, but they didn’t provide the kind of relief the nonprofit needed.
With help from Communities Rise, a Seattle nonprofit that connects nonprofits and small businesses with pro bono legal services and other types of assistance, Seattle Aikikai persuaded the landlord to terminate the lease as long as the nonprofit made payments in full through June.
“At the end of the day, they weren’t happy, but they were satisfied,” Marks says. “For a process that’s really, really difficult, I think it went quite well.”
For now, Seattle Aikikai is doing some outdoor classes. Marks says his organization hopes to start shopping for a new space next year — one that better fits its needs in a changed world.
“It’s not just a tragedy, it’s also an opportunity,” he says. “We can decide what we want to look like for the next 10 years.”
Like Seattle Aikikai, nonprofits across the country are finding ways to save significant sums of money on their real-estate expenses. Some are negotiating early terminations or subleases. Others are striking deals to extend their leases for low rates, while others are getting short-term rent reductions. Another option: persuading a landlord to forgo all or some rent payments for a few months while deducting that amount from the nonprofit’s security deposit.
Leadership Enterprise for a Diverse America recently cut a deal with its Manhattan landlord to reduce its monthly payments by 30 percent for six months, says executive director Lamont Gordon. The nonprofit is about halfway through a seven-year lease, Gordon says.
Gordon described the negotiations as “perfectly amicable,” and he encouraged other nonprofits to step up and have conversations with their landlords soon if they haven’t already.
“It never hurts to start the conversation,” he says. “We’re all dealing with the same challenges right now, and people have to advocate for their organizations.”
Experts say commercial building owners are nervous that occupancy rates may never return to pre-Covid levels as organizations become more adept at remote work arrangements, so many are willing to cut deals.
“You’re much more important to landlords than ever,” says Jane Brody, managing director of Vicus Partners, which represents tenants in lease negotiations, including many nonprofits.
‘Hiding Out’ Doesn’t Work
The scale of the change in nonprofits’ attitudes about office space was highlighted by a recent study from Community Resource Exchange, a nonprofit consulting firm that works with nonprofits, foundations, and government agencies.
The organization surveyed 129 New York nonprofits and found that only 31 percent expect a full return of all staff workers to their offices within the next six or 12 months. Twenty percent said remaining all-virtual was the top option they were considering for the future.
The first step for nonprofits struggling with real-estate expenses is to contact their landlords and let them know they want to work out a plan. Some nonprofits may be tempted to avoid contact with their landlords as they miss monthly payments, says Brody, but “hiding out is not a good strategy.”
Paul Wolf, co-founder and president of the real-estate firm Denham Wolf, says now is the time for nonprofits to strike a deal with their landlords because the relationship between landlords and tenants may get more adversarial as the financial pressure on building owners grows.
“Right now the attitude is, since everybody is in trouble, we all have to figure out how to get through this together,” says Wolf. “At some point, that will break.”
Ownership Considerations
For nonprofits that own their buildings, different considerations come into play. Wolf says most nonprofits that own their space and need to downsize are trying to avoid selling for at least a few months, if possible, which is the right move.
“If you can hold off until the market is more stable, you will do better,” says Wolf. “So we’re not yet seeing desperate sales.” He adds, “You may see that yet in the fourth quarter of this year.”
Patrick O’Sullivan Jr., a partner at Herrick Feinstein, a New York real-estate law firm, agrees that now isn’t the right time to sell, but nonprofits that may need to shed property should start getting ready.
“These efforts can take a significant amount of time,” O’Sullivan says. He adds, “You don’t want miss that next window.”
Not Only About Money
But nonprofits must consider more than just cash flow as they assess their options in dealing with a huge monthly mortgage or lease payment.
Trella Walker, director of advisory services at the Nonprofit Finance Fund, a nonprofit community-development financial institution, says paring real-estate costs can present a morally troubling dilemma for some nonprofits whose identity is closely tied to their location and building.
For example, she says, try to imagine the Apollo Theater moving out of Harlem — no matter how much the neighborhood gentrifies, it would be a severe blow to the history and culture of the organization, Walker says. Nonprofits with a strong historical connection to a particular building may not be in a position to move to a less expensive neighborhood and may have to try to cut costs elsewhere.
“This is a place of pride,” says Walker, who is based in Los Angeles. “It’s a place of orientation for the community.”
Move Fast
For those nonprofits that need to cut their real-estate expenses, experts warn them to move quickly. The environment could soon turn far more adversarial.
Right now, landlords are ready to strike deals to keep their tenants in place, says Bert Rosenblatt, a partner at Vicus Partners. “They’re desperate. They’ll take anything. So there are some real opportunities,” he says.
However, the environment will likely change quickly at some point, Rosenblatt says, with landlords suddenly getting aggressive as their own reserves dry up.
“There’s going to be a lot of blood on the streets,” he says. “I don’t want to give you the picture that everything is going to be fine.”
Some nonprofits are already finding discussions with their landlords turning ugly.
Anthony Burrell, founder of the Anthony Burrell Center for Dance, says his nonprofit was suffocating under $7,200 monthly rent payments for its 4,980-square-foot dance studio in Atlanta. Revenue slowed to a trickle in the spring when the studio canceled live classes in favor of virtual instruction at sharply reduced rates.
“We weren’t making enough to even cover our utilities,” he says.
Burrell says his organization was in the second year of a five-year lease. It stopped paying rent in April through August. The landlord offered to waive those missed payments and reduce the organization’s rent slightly, but only if he would sign a 10-year lease. Those concessions weren’t enough, given the uncertain future of live instruction, Burrell says.
“He had the upper hand,” Burrell says.
Litigation was averted with Burrell agreeing to pay the landlord $40,000 to walk away from the lease.
Burrell recently signed a lease on a different, 2,400-square-foot space for $3,500 a month. The new landlord agreed to a one-year lease, which was important with the future so uncertain. Burrell says the just-opened space is “right-sized” for the era of Covid-19.
“I’m really in a tough spot. I’m basically a one-man show,” he says. “I’m starting from scratch.”
