Nonprofits are the backbone of America, ensuring that citizens are healthy, well-fed, and have social support to live active lives. In Arizona specifically, the largest nonprofits provide healthcare and education, but many smaller charities assist with housing, employment, and nutrition.
While many organizations have been able to go remote after the pandemic, most of the 28,695 nonprofits in Arizona provide vital, in-person services to those who need them most. As such, these organizations need a physical location to carry out their work, leading to the pivotal question of whether to rent or buy property.
If you’re starting a nonprofit and can’t decide whether to take on the cost of buying your building, consider these crucial points before you make your decision.
Renting: Convenient But Constricting
Most nonprofits rent their buildings for the simple reason that it has less of an upfront cost; this is especially true for fledgling organizations that are just starting out on their journey to help others. It also allows more freedom of movement for those nonprofits that aren’t quite established and are not sure exactly where most of their clients reside. You may find that the demographics of your clientele shift over time, necessitating a move to a more advantageous location.
However, renting also leads to restrictions on what you can provide, as you can’t make major renovations without the consent of the landlord. For example, if you provide services to homeless individuals, you might find it impossible to add additional amenities like showers, a soup kitchen, or lockers for your clients to store their belongings as they get back on their feet. This may impede your progress as a leading force in your community and lead to “growing pains” as you struggle to identify your niche for your particular service area.
Overall, renting is a good option for those just beginning their nonprofit, but it can eventually feel too restrictive and lead to losing the trust of your clients, especially if you have to relocate multiple times due to rising costs.
Buying: A Major Investment, But a Highly Advantageous One
Once your nonprofit is more entrenched in the community, you may consider purchasing the property you use with a conventional mortgage. These loans, identical to those used to buy a primary residence, are a good option because they are easier to apply for and, if your nonprofit has a good credit score, can often be purchased with a small down payment and a competitive interest rate.
Commercial loans often have strict requirements and may be difficult for a nonprofit to qualify for. Still, some lenders are happy to work with nonprofits to buy certain kinds of property with a conventional loan. These are typically those that are more residential in nature, such as if you’re buying a halfway house for a drug addiction treatment center rather than office buildings.
However, they do have some major upfront costs, which you’ll need to finance using grants or your company’s savings; these include the down payment and the closing costs. You’ll need to show two years of business tax returns and proof of your organization’s registration as a charity or nonprofit.
How much are closing costs in Arizona? They tend to be between 3-6% of the overall purchase price. The down payment can range anywhere from 10% to 20%, depending on the lender, though some will want higher than that.
Why should you consider purchasing your nonprofit’s building? Firstly, this locks in your interest rate and helps make you immune to rising rental costs, ensuring you can continue providing good service to your clients. There are also tax benefits to buying property, which will help reduce the cost.
However, the most important reason to finance an Arizona property with a conventional mortgage is that it allows you more freedom to renovate and develop a welcoming space for clients. You may want to buy a residential home that clients can stay in as they get back on their feet, such as for domestic violence victims or refugees, that you offer to them at a reduced cost that helps to finance the mortgage.
If you’re offering low-cost or no-cost childcare to indigent clients, hosting their children in a homey environment can help develop a sense of safety and comfort for both parents and kids, adding a much-needed feeling of stability to their lives. Knowing that you own the property and won’t need to negotiate a lease renewal will also help your clients feel they can depend on you to be there for them no matter what the economy looks like, further boosting your reputation and helping you secure more grants to expand services.
Ultimately, the choice to rent or purchase property in Arizona for your nonprofit depends on your service area and the stability of your operations. Those who need a more commercial space may choose to continue renting, while those who provide more close-knit and personalized services might find that buying a residential property will improve relations between themselves and their clients. Think carefully about what your nonprofit needs and, above all, rely on a financial advisor or mortgage lender who can guide you to the right property type for you.