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Evaluating your headquarters options.

Evaluating Your Headquarters Options

With continual growth and change a fact of life for most associations, one activity association management teams almost constantly face is the reevaluation of their headquarters options. When evaluating this issue, associations are faced with several choices: renegotiating their current lease, buying a building, reviewing finance and joint venture opportunities, and so forth. It can seem overwhelming, but carefully evaluating options is the key to arriving at the best possible arrangement for an association's specific needs.

The leasing alternative

Many associations elect to lease rather than purchase a headquarters building. The advantages of leasing include freeing up down-payment money that could be used for other association programs; enabling a growth-oriented association to choose a term that fits its expansion requirements; and allowing smaller or younger association to reside in quality space it can afford.

A number of associations, like the American Society for Training and Development (ASTD), Alexandria, Virginia, choose to lease space upon their initial relocation to a new city, delaying purchase until they have had time to research current prices and desirable locations in the new market.

For many smaller associations, the limited number of management staff makes leasing office space the only alternative. The National Needlework Association based its decision to relocate its headquarters from New York City to Ridgefield, Connecticut, on the preference of its members and on the availability of an economical leasing arrangement.

"In New York we had 1,100 square feet of office space," says TNNA Executive Director Kay L. Cook. Now we have 1,700 square feet of space and will be saving $75,000 in rent over the next five years. Our insurance premiums have been reduced by $2,000 in Ridgefield, and we've found many other costs to be significantly lower."

Sometimes, even though an association does not require additional square footage, the existing office configuration makes the space functionally obsolete. When this occurs, the association may have an opportunity to negotiate a renovation of its space.

If this is the situation, the association is in a strong bargaining position. If the association vacates the space at the end of the lease period, the landlord faces the cost of finding a new tenant as well as providing improvements required by that new tenant. If an agreement can be reached, the association may then have an alternative to the cost and hassle of moving.

Purchasing possibilities

More than 60 percent of the nation's mid-size and large business will consider the merits of purchasing new office space sometime this decade. When they do, unless they are aware of all the financing options and alternatives available to them, they may get unnecessarily discouraged.

The fact is, at least one of every three associations can own its own office building. Several options for financing the purchase of a headquarters building are available. By far the most common, practical, and popular method of financing the purchase of an office building is a conventional mortgage.

Begin with the down

payment

Most associations draw on their reserves for a down payment. Sometimes, when the immediate cash reserves are insufficient to meet down payment requirements, associations employ creative methods to secure the needed cash. The American Dental Trade Association and the Society of American Florists, both of Alexandria, Virginia, are two excellent examples.

In the third year of a well-negotiated five-year lease, ADTA was paying $9 per square foot per year. When DTA President Nikolaj N. Petrovic, CAE, asked the association's landlord what rate he could obtain for an early renewal, he was told the rate would nearly triple. Petrovic realized that a doubling of the association's dues would raise what ADTA needed to purchase its own building in cash. ADTA's board and members voted to accept Petrovic's proposal to have members pay double their regular dues for one year to purchase their headquarters building in Alexandria, Virginia.

The Society of American Florists (SAF), Alexandria, Virginia, took another approach. Ray Roper, CAE, then executive vice president, says the association raised $20,000 to hire a professional fund-raising consultant. The fund-raiser formed a special committee and contacted major firms and leaders in the industry. These leaders contributed to the fund-raiser by donating money as well as calling other individuals who might be willing to support SAF. In addition, one of SAF's most successful fund-raising techniques has been the dedication of offices, conference rooms, and reception areas to the contributors of substantial funds.

As a result, SAF is now happily located in its own headquarters building in Alexandria, Virginia. In addition, soon after moving in, Roper announced at SAF's annual meeting that cash and pledges had even ensured that the association could curtail its mortgage.

After securing the down

payment

Whether reserves are tapped, creative fund-raising techniques are used, or some other method is devised to obtain cash for a down payment, an association still has a way to go before moving into a new facility.

Paying all cash for property is one option. Given the right financial situation, an association might find it advantageous to allocate its reserves to the cash purchase of an office building - thus stabilizing the overhead dollar as it relates to office space and adding an appreciating asset to the balance sheet.

Financing property through industrial revenue bonds is an alternative that was once favorable. Today, however, because of changes in the tax laws, the availability of IRBs has been severely limited. In the metropolitan Washington, D.C., area, for example, IRB financing may be realistic only for 501(c)(3) non-profit educational associations that meet very strict requirements.

Today, the most attractive method of financing a headquarters building is conventional financing. Conventional financing is simple, easy, and understandable. the process of obtaining a conventional loan to purchase an office building is similar to that of securing a home loan, but the loan application package that is presented to the lending institution is vastly different. To obtain conventional financing, most association or corporate loan package applications must include the following: * your current budget; * financial statements for the past three years; * full plans and specifications for an existing building or schematic design plans if the building is to be constructed; * statement of expenses, showing the line items for the principal, interest, taxes, insurance, water, electricity, cleaning, maintenance, and reserves; and * association or corporation materials, such as annual reports, periodicals, news releases, and membership directories.

The lender wants to see that you have been solvent and managed your association's finances well for the past three years. It also wants to see your current budget to be assured that you can afford the cash flow required to carry the principal, interest, taxes, insurance, and all your operating expenses.

Conventional loan terms and conditions are still attractive at this time, especially for associations who purchase and occupy their headquarters building. Naturally, this may change, since rates and terms change almost daily. Nevertheless, over the past 10 years, conventional loans for office buildings have been available at an average of 10 percent annual percentage rate with 20 percent down. Frequently, these loans are due in 5-10 years but are amortized over 20, 25, or even 30 years.

Depending upon your association's stability and track record, and its relationship with a lending institution, all of these factors are negotiable.

Teaming up to own

Joint ownership - also known as tenant joint venture - offers some associations an attractive alternative to traditional business ownership strategies. In this arrangement, a firm usually enters into a partnership with a developer who serves as the managing general partner, builder, and manager of the property. The association becomes the limited partner and tenant.

Many factors influence the decision to choose a joint venture arrangement. None are more important than the two that most directly affect day-to-day operations: cash flow and office building management responsibilities.

Joint ownership can be attractive because it offers easy solutions to both of these considerations. It gives the association an option to minimize its up-front exposure by placing most of the financial risk and daily management responsibilities on the development or management company that becomes the organization's partner.

After renting offices for several years from another association that owned its building in Reston, Virginia, leaders at the National Association of Elementary School Principals decided it would be better to build equity instead of accumulate rent receipts. According to Edward Keller, CAE, deputy executive director, NAESP has a staff of 26 and a budget of $3 million and was looking for space that would accommodate growth.

Working with the developer and local economic development officials, NAESP found a suitable location in Alexandria, Virginia, and a funding strategy that made it affordable. NAESP chose not to commit the funds to purchase its headquarters all at once, according to Executive Director Samuel Sava. "Our developer offered us the opportunity to purchase 70 percent of the building, while it maintained 30 percent and the risk of leasing up its portion."

In addition, NAESP met its long-term space needs by negotiating a provision to buy out the developer's interest on short notice at a price that escalated at a predetermined percentage rate each year. With the developer's assistance, the association then worked with local officials to obtain low-cost, long-term financing through industrial revenue bonds issued by Alexandria. Thus, NAESP was able to assume a major ownership position in a property without a major expenditure of its existing capital.

If you are considering a joint venture for the purchase of an office building, you should decide some issues as early as possible. Among them: * How large an ownership position do you wish to take? * How much space will you need initially, and what is a realistic timetable for expansion? * What are the initial and subsequent cash contributions of each partner to be? * What is the schedule and size of the developer's or manager's fees? * By what method and on what timetable will you be able to buy out the developer's interest, if you desire to do so?

This last point sometimes can prove to be a stickler. Through a standard provision in this type of arrangement, the methods by which this can be accomplished are anything but standard. Like many other details involved, the terms for buying out interests can be structured to accommodate both parties' needs.

Sometimes joint ventures may be structured to provide financial help with both the sale of existing headquarters buildings and the purchase of new buildings. Outgrowing its 55,000-square-foot office building in Kansas City, Missouri, the American Academy of Family Physicians found a nearby 115,000-square-foot building fitting all its criteria for a new headquarters. AAFP's concern was two-fold: selling its existing building and financing the new building.

To facilitate the process, AAFP consulted a local commercial real estate firm that ultimately negotiated a partnership agreement that provided both for the sale of the old building - to a partnership consisting of the real estate firm and AAFP - and for the purchase of the new building by the same partnership. AAFP has the option to purchase the remaining interest in the new headquarters building anytime between the third and seventh years of the arrangement.

Making the decision

Associations are in an enviable position when it comes to headquarters space. Many options - and many modifications to options - are available. Whether you decide to lease or purchase your headquarters building, your goal should be to negotiate the best deal possible for your organization. Never dismiss a possibility unless you have thoroughly investigated it and - above all - keep your options open.

Candice C. Fazakerley is principal of Commercial Real Estate, Inc., Washington, D.C.
COPYRIGHT 1991 American Society of Association Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:includes related articles
Author:Fazakerly, Candice C.
Publication:Association Management
Article Type:Cover Story
Date:Mar 1, 1991
Words:1930
Previous Article:Matched pair.
Next Article:Bush proclaims domestic goals to 750 association executives.
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