Helping a nonprofit refinance a bond or create an entity
Portland, OR · Member since 2013 · 63 posts · 17 votes
This particular nonprofit is paying 8% on 2.5mil loan for a building. The building is worth far more than 2.5mil given it's new zoning and location in Portland. If I had to guess the building is worth at least 10mil. They are building rich and cash poor right now. They are struggling to balance their budget. They would benefit from restructuring the bond to a lower interest rate or somehow getting accessing the equity.
Here are my initial thoughts: It does the nonprofit no good to own this asset. They are not allowed to make a profit and if they ever went belly-up the asset would simply be donated to other non-profits. What they would benefit from is lower payments.
Here are my questions: Is restructuring the bond the best route? Is there another entity that could be created that would own the building and rent it to the non-profit at a cheaper rate? Does anyone on here have any experience doing this sort of thing.
Hi Jessica:
My background includes the formation and management of a housing NP in southern California for around 5 years. That NP still exists, but I "retired" from participation to focus on other efforts.
A few questions:
1. You use the term "bond" for this deal, is it really a bond? Or possibly just a loan? 2.5MM of bond financing would be a very small bond, plus 8% is very high for an actual bond structure interest rate. If it is a bond, what kind of bond? Tax exempt, taxable, who was the issuer, etc.
2. What's the use of the building? You don't say specifically, but sounds like this may be their offices or used for their NP purpose.
3. You indicate "new zoning" but I would assume the new zoning would require a new (or change the existing) building to capture that new zoning. What's the old zoning and what's the new zoning. Does the present use fit with the new zoning?
4. Does the present loan allow for prepayment, or does it have a prepayment penalty? What's the remaining term of the loan, how many years left?
5. You indicate a value of 10MM, where does that value come from? Has anyone done an appraisal?
6. Are there any other restrictions on sale or refinance of the building? Are there any strings attached to the original loan? Example, did a local city or other granting agency help them purchase this building originally and required in the loan docs to not refi or not sell? Why did they buy this building in the first place, if they could not afford the payment to begin with?
A couple of things, a non-profit can sell any asset, there is no prohibition for transacting any asset by a non-profit. They just can't use the proceeds of the sale for anything other than their non-profit purpose for which the IRS granted them non-profit status. Even then there is some latitude for the use of the proceeds, but if they vary too much from the stated non-profit purpose, then they can still sell any asset, they just would pay taxes on it. My saying about non-profits is this: Non-profit does NOT mean NO profit. They can and are "profitable" in that they can buy for 2.5MM and sell for 10MM and make a profit. They just have to use that profit for their stated NP purpose, and not distribute it to their officers. They can donate it to another non-profit as you say, but this is normally done in a wind down situation, where the NP board determines it no longer makes sense to exist and any assets need to be distributed to another NP entity.
I would disagree that it does no good for them to own the assets. Asset ownership is great, that's why we are all hear on BP. You said yourself that the new zoning and it's location give it a value of $10MM. What I think you mean, is that this asset is not correctly structured for their budget, or they are living beyond their means of generating donation, grants, and other revenues such that they can afford the present payment.
Two scenarios seem to make most sense, refinance new loan to reduce payment, or sell and use proceeds to buyer lower cost building.
So the most likely scenario, would be to find a new lender, get an appraisal, have them make a new loan with a lower interest rate and lower the payment (that's what you indicate is preferred scenario). If this is best choice, they should look for other ways to help them make the payment, like sublease a portion of the building to generate revenue.
Or another scenario (this would be my choice as it puts lots of cash in the bank) would be to sell this building for 10MM, payoff the 2.5MM loan, capture 7.5MM in the bank, buy another less expensive building somewhere else, and keep the difference in the bank. Again, the extra proceeds from a sale (the profits) can be kept in the bank and as long as used to support their NP purpose are tax free!!
Answer those questions above and I would be happy to help with more answers.
Thanks.
@Jessica B. Are they using the whole building? Maybe a sale/leaseback agreement ? They get a chunk of cash to fund their efforts. You or another investor get a solid tenant plus additional space to lease?
I think a good first step would be to have them get a few commercial brokers in to tell them what it's worth. Go on loopnet and make a few calls to brokers with similar properties and you will be able to find out about what it's worth. How many square feet is it and what have similar properties sold for /square foot recently?
Thanks Scott,
I tried using the mentions @Scott Choppin but it's not working for me. Forgive me if I lack some of the language. Here are my best efforts at answers to your questions:
@Jeff Brown, @Scott Choppin I figured out the @ thing!
It's on .7 acres and is about 40,000 sqft. Empty land nearby that large is selling for 2mil. Warehouses in less desirable neighborhoods are 6mil. Nearby apartment on less land sold for 7mil, 7 years ago.
While selling and renting is an option, a few other schools in the area are in tough situations due to lease agreements. Also most buildings are not setup to be schools and there are a lot of laws and regulations specific to being a school.
Is there anyway to create an investment structure that allowed families and community members to hold this loan/bond?
Yes, they need to stay in the building.
I'm pretty sure the community can find the money. But I don't think they would just donate the money.
I need to meet with the board and gather those docs. They don't meet often, so it might take a while. But I can send them your way when I get them.
Thanks for the reply.
The idea about a crowdfunding would be for folks to invest in a loan structure through the crowdfunding platform. Meaning, that each person from the community would put up money or invest in a loan to the school secured by the property. All of this would be facilitated through the crowdfunding platform.
I am an offer of help once you get the loan documents. The main question to answer is can the loan be paid off and is there any prepayment penalty.
Thanks.