Opinion

By the buy

Finance | Iona Joy | 27 Jul 2008

When is it right for charities to buy property, asks Iona Joy. 

NPC sits in a corner of serviced office accommodation in central London which rents space to charities at affordable rents. Renting suits us. We can move to bigger offices as we grow, and maintenance is someone else’s problem. We think a charity should only own property if it increases or helps maintain its effectiveness. Warm and buzzing community centres, embedded in a local area and draw-ing in the hard to reach, do well to own their own premises.

This overcomes the very real risk of landlords changing, increasing rents, or selling premises over the charities’ head for redevelopment. Local councils and the Church of England, the benevolent landlords of the past, are under increasing pressure to shift assfets for the best price. Charities may be forced to leave. Moves are costly, links may be lost with customers, and with property now at a premium, it is difficult to find affordable and suitable community premises in the right area. But owning a property can enhance a charity’s financial security as long as the charity has budgeted for maintenance costs, rates and hassle. There is no rent or landlord to worry about, and when a charity needs cash for expansion, banks are happier to provide an overdraft if the balance sheet has assets.

However, if property ownership hampers effectiveness by tying up resources or stunting growth, then charities should sell up and move on. Buildings can outlive their usefulness. CharterhouseinSouthwark, a community charity, is selling three Victorian buildings where the maintenance bills are now greater than their properties’ value. So the charity will invest the cash raised to fund services transferred to other charities.

Price is important. The initial cost of purchase and refurbishment may look scary, but the benefits to users will be felt over a period of time. Typically buildings depreciate over 25 years, but this can vary depending on area and specifications. The value of the property fat the end of 25 years may, in reality, exceed the purchase price. So if the annual cost of maintaining, depreciating and operating the building is lower than the equivalent rent, already the investment looks financially attractive. If there are no cost savings, it is still worth comparing the cost per user of the two options. Will capacity be increased, and will the quality of service?

Heritage buildings with big expensive maintenance headaches and restrictions to alterations are a poor investment. The charity will find itself working for English Heritage and adapting a Queen Anne manor house for disabled access can be a nightmare.

Other questions are whether the charity has developed a business plan outlining the costs and comparing alternatives, and appointed a project manager to keep an eye on budgets. Has the charity assessed the options objectively? Funding the purchase of existing premises, already occupied, may be a good option which donors should support, rather than insisting on a new build, unless a purposebuilt centre suits the customers’ needs better or is more costeffective.

There are imaginative ways donors can help if big money is needed. Large trusts might want to think about becoming the benevolent landlords of the future, by purchasing properties for charities. Mosaic Clubhouse has 200 regular members with severe mental health problems. It is simultaneously negotiating with Lambeth Council, which is selling its centre, and a large foundation who may buy the freehold to help Mosaic stay.

Alternatively, donors can lend funds to a charity. Maytree Respite Centre, a retreat for the suicidal, was able to buy its cosy terraced house in Finchley using loans from a group of founders. The founders could raise cash temporarily. Over time, the charity has been able to repay the founders’ capital. Core Arts, an arts charity serving 300 members with severe mental health problems, might interest a donor with a taste for property development. It has agreed a price of £1.25m to buy the freehold from the Church of England, and needs £4m in loans and donations to refurbish the premises and develop the site. The affordable housing component would be sold off to repay the loans. And the new neighbours could benefit from the members’ skills in music, art and horticulture.

Iona Joy is senior research analyst at  New Philanthropy Capital (NPC)

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