Questions charities and social enterprises need to ask themselves before they buy or rent a property.
Last year, 83% of our loans to charities and social enterprises related to property. Owning assets can benefit a social purpose organisation in a number of ways, including reducing rental costs and attracting additional income. However, whether you decide to buy or rent, there are numerous considerations to keep in mind. We spoke to Simon Taylor from The Ethical Property Foundation (EPF) to find out the key questions that charities need to ask themselves.
This interview took place before the COVID-19 pandemic. With profound changes now taking place in the workplace, EPF strongly recommends undertaking a risk assessment before taking on a property.
Buying a property
Consider the why
According to Simon, ‘why?’ is the most important question. Why do you want to buy property? Do you actually need to own property? What benefits will owning property bring? Are you buying because having control over the property will help the charity? As Simon states, “Remember that your primary focus is your clients. Property isn’t why charities operate, but it’s the second biggest cost after staffing. Go back to the aims and objectives of the charity – are you meeting a fundamental need with this property or will it enable you to meet your objectives in another way?”
Make sure it’s the right property
An opportunity may arise to buy a property that you’ve been renting. The numbers may add up – the loan repayments could be less than the rental costs. But is it the right property for your charity? Is it the right size for the organisation? How much work does it need? Does it have all the facilities you need? Is it fully accessible or does it need modifications? Could it be renovated or extended if needs be? If the answer to any of the above questions gives you cause for concern, you may want to consider looking at other properties.
Think about the location
The property might be perfect, but is it in the right location? Will staff and service users be able to get to the building easily, e.g. by public transport? The neighbourhood may be ‘on the up’, but it could take years for it to improve. Will your clients feel comfortable coming to the area as it is now?
Can you afford the cost of renovating (if needed) plus the loan repayments and all the running costs now and into the future? Simon has seen too many charities locking themselves into a property situation without having the projected income to pay for it. He also recommends considering “whether the deposit and loan repayments are a sensible use of your charity’s money. Trustees need to know that there’s a robust business case for such a long-term commitment.” And you can’t rely on grants to cover your costs. According to our UK Social Sector Health Check report, 86% of charities are concerned about future grant funding.
Factor in maintenance
Can you afford to maintain the property? You need to factor in a maintenance budget when you’re considering costs. As Simon explains, “If you don’t spend money at the right time, the building will deteriorate quicker and could cost you more in the long run. Replacing a roof always costs more than repairing it, for example. Taking on a property involves responsibilities. That building is an advert for you as a charity. If it looks tatty or the electrics are unreliable, it’s going to reflect on the whole organisation.”
Consider worst case scenarios
Can you comfortably manage the loan repayments and all other costs if your income reduces? What happens if you lose a significant number of service users or experience a drop in fundraising?
Be realistic about increasing income
Charities often buy a property in order to increase income. You might be planning to rent it out, or offer new services, such as a café. Do you have experience within the charity of running that type of business? It may be very different to what you’re currently doing. Do your trustees understand the liabilities and responsibilities of running a business? Simon comments, “Ask yourself what you’re trying to achieve. Is it doable? What is the critical path to getting you there? Will it require a totally different skill set? Something simple, such as letting out rooms for training, may be fine, but anything involving food, entertainment or beverages can be tricky. You’ll be competing head on with other businesses and you’ll have to provide a service that’s fit for purpose.” If you don’t deliver a good service, you could risk exposing the charity to negative publicity, fines or worse.
Look to the future
The property might meet your needs now, but things change. Will it still be suitable for years to come? Can it accommodate a growing workforce and volunteer base? Conversely, with more people wanting to work from home, could you end up with empty rooms? What opportunities will the building open up? Is the area improving? It’s likely that regulations will get stricter when it comes to sustainability standards; how difficult would it be to make the building more energy efficient? This is particularly important if you’re planning to let the building out, as you may not be able to do so without making improvements.
Discuss whether you need one large property or several small properties
Simon explains, “Sometimes charities try to run all their services from one location, when it could make more sense having a central point with additional satellite offices around the city.”
Consider environmental upgrades
Inefficient buildings can be expensive to run. Could you make improvements to reduce long term costs and make the building more pleasant for workers, volunteers and service users? Climate change is becoming more of an issue and stakeholders are likely to take an increasing interest in whether charities are playing their part in reducing emissions. Improvements such as bicycle racks, new lights and insulation aren’t super expensive, but other improvements may need more thought.
Don’t get caught in a daydream
Simon explains, “All too often we talk to charities who have had these amazing designs drawn up for a new building. They’ve spent money on the designs but haven’t worked out the build cost or the running costs, and it turns out they can’t afford them. Quite often a property project takes on a mind of its own. Expectations have been raised and it’s disappointing for everyone if you can’t deliver.”
Consider whether you can sell or let the property in the future
If your needs change, how easy will it be to sell or let the building? If you need to adapt the building to your charity’s needs, will you then have to make expensive changes before finding another organisation to take it on?
Build a strong board
Do you have a broad skill set across your board? Does anyone have property experience? Does anyone have legal experience or accounting experience? If not, can you strengthen your board or utilise independent experts? It’s not just about identifying whether an opportunity is a good deal or not; the trustees need to be able to take a holistic approach and determine whether the property is a good fit for the organisation and whether the purchase is right for the charity.
Take expert advice
Have you taken independent advice about the deal? Simon recommends taking advice from a firm that specialises in social organisations. “Charities have to consider issues that commercial organisations don’t. A commercial surveyor may be interested in the quickest deal, not a charity’s reputation, and so on.”
The Ethical Property Foundation advises up to 200 organisations every year. Simon explains, “We’ll sit down with the trustees and other members of the charity to get to understand both their needs and the needs of their customers. We look at whether the charity’s property plans are helping to meet those needs and futureproof the organisation. We can also look at what the charity should be spending money on, and where it can make savings.
“The Charity Commission recommends that charities take advice before buying or selling property. There have been a couple of cases recently where charities have disposed of a property and not achieved the full value. That led to investigations by the Charity Commission, and because the charities had failed to take advice, the trustees were liable.”
Renting a property
If you’re thinking of renting a new property or extending your lease, many of the questions you need to ask yourself are the same as if you were buying it. Namely, is it the right property for your organisation and your service users, in the right location? You also need to:
Consider long-term costs
Can you afford the property now and in the future? Simon often sees charities signing up to a long-term lease on the basis of grant funding that’s due to run out long before the end of the lease. What happens if you can’t make the rent? If your lease includes a dilapidations bill, are you factoring those costs into your budget? Can you afford a planned maintenance budget? If not, you could end up with an enormous dilapidations bill at the end of your lease to put the property back into good condition.
Look into reducing energy costs
Can the costs associated with running the property be brought down? Look at the costs over the lease period. Is the boiler really old? Are the windows only single-glazed? If so, it might be cost effective to replace them. You may even be able to get a grant towards improvements, or negotiate for the landlord to pay for them.
How long are you locking yourself into a contract for? Will the property be suitable for your needs throughout that contract? What happens if your charity grows? What happens if you have to cut services or reduce overheads?
Scrutinise the service charge
Is the service charge fair? All the expenditure that the landlord wants to charge must be set out in the lease and should not be uncapped. The landlord can only recover 100% of the costs of building. Annually, landlords must give tenants service charge budgets, including appropriate explanatory commentary. Do you know what the costs are and what those costs are for?
Make sure you understand the lease agreement
Have you sought professional advice on your lease agreement? Simons states, “Employ a property professional to negotiate your lease. How long are you committing yourself to staying there? What are the terms of the rent review? If you’re aiming to generate income through the property, e.g. by opening a café, does your lease allow for that? Remember, it’s all up for negotiation.”
Simon is frequently asked questions relating to a landlord doing something unexpected. “We get asked, ‘Why is the landlord making us pay for the roof?’ or ‘Why is the landlord kicking us out?’ and so on. Quite often, the confusion is because the charity doesn’t understand the lease agreement it has.”
Get advice on your rent review
Do you know what to expect from future rent reviews? Ideally, get advice about the rent review when you’re first signing up for a lease. Simon comments, “We often see charities stuck in a property they can’t afford. They started off with a low rent as a sweetener from the landlord, which then got significantly increased. If you’re in an up-and-coming area, could the rent increase significantly in the future? You may be able to negotiate a discount on market rate for future rent reviews, but if so, it needs to be in your lease agreement. You also don’t want to end up spending money to bring the property up to standard, only to end up then paying increased rent for it as a result.”
If you’re negotiating a rent review on an existing property that you’re renting, have you scrutinised the Terms and Conditions (T&Cs) of the lease? Is the rent review based on the property as it stands today, or is it based on the property now that you or the landlord has spent money improving it?
Plan for the end of the lease
Simon states, “At the end of the lease, the tenant has responsibilities. Those will be set out in the lease.” Do you know what you’re signing up for? Will you need to leave the property in as good a condition as it was when you took it on, or better? If you don’t, will you be responsible for continuing to pay rent? At least a year before the end of the lease, read through the agreement and take advice. Can the landlord put a ‘to let’ board on the building? If so, how are you going to communicate that to staff and customers so that it doesn’t come as a shock?
If you wish to find out more about The Ethical Property Foundation please visit their website at www.propertyhelp.org.
The guidance provided on this page is the view of The Ethical Property Foundation. Nothing in this article constitutes advice or a recommendation and professional advice should be taken before any course of action is pursued. Links to external providers should not be considered a recommendation or endorsement of those providers’ products and/or services.
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