Niche properties

Investing in the Arts

Theaters, museums, and other cultural venues stage growing opportunities for commercial real estate professionals.

"John says he found us a needle in a haystack," says Diane Litsey, executive director of the Children's Dance Foundation in Homewood, Ala. "And he did."

The needle was at least 10,000 square feet of dance studio space with 50 parking spaces, an unheard of entity in Homewood's downtown. An upscale suburb just minutes from Birmingham, Ala., Homewood is flush with thriving shops and restaurants but very short on parking.

The nonprofit dance studio had outgrown its current home but didn't want to leave the area. Many of its students came from the surrounding residential neighborhoods. But in the 12-block area, only about 10 properties were for sale, says Bryan Holt, CCIM, of Retail Specialists, in Birmingham. At the time, Holt was working with John Lauriello, CCIM, of Southpace Properties in Birmingham, to find CDF a new home. "None of them worked," Holt says. "So we started identifying properties that weren't for sale. We found one and convinced the owner to sell."

Today Litsey sits in her office only about two blocks from CDF's previous location. After a year's renovation, the new space has five studios, including a 99-seat performance space, and plenty of parking. What she remembers as the most challenging aspect of the transaction - which involved a bidding war over the sale of the previous space and a leaseback arrangement so CDF could stay put while renovating the new space - are her own misgivings. "In the thick of it, when things were moving very quickly, my fear was that we didn't think enough about our needs. This was the one time we were going to do something like this, and we needed to do all the right things. My concern was, did we have all the conversations we needed to have?"

And that, says Arlene Wysong, senior managing director of Colliers ABR's nonprofit division in New York, is what drives transaction brokers crazy. "Nonprofits are very process driven. You have to have the patience and ability to understand that fact. If you fight it, you end up tearing out your hair."

A Growing Opportunity

Because of the process, "We work longer and harder," Wysong says. "And because nonprofit deals often involve lower-end real estate product, the commissions based on the transactions are often lower."

Despite that caveat, commercial real estate professionals may find increasing opportunities to serve nonprofit clients in the cultural arts. Big space users such as hospitals, churches, national charitable organizations, and large cultural institutions dominate the nonprofit client sector, but in many markets numerous small and mid-size arts organizations such as theatrical companies, dance studios, specialized museums, and art schools are clustered at the lower end.

They form a growing economic engine. The nonprofit arts industry generates $134 billion in economic activity and $24 billion in tax revenues, according to a 2002 Americans for the Arts study. Direct spending by arts organizations has increased 45 percent since 1992, and Americans attending plays, concerts, and other events spend more than $80 billion on corollary items such as hospitality, parking, and food.

Once seen as the result of economic development, the arts now are viewed as a catalyst for job creation. As many as 90 secondary and small cities currently are looking to arts organizations to jump-start a vibrant community - and economic - life. In particular, the Midwest is a hotbed of arts-related economic development, as older industrial states try to compete with coastal and southern cities to attract knowledge workers and industries. Michigan's "Cool Cities" campaign is partially funding 29 projects, some involving mixed-use and retail development. The program also offers state grant funds, tax credits, and loans to help create mixed-use downtowns. The "Imagine Iowa" program doubles Iowa's historic preservation tax credit to 25 percent and has created property tax abatements, rehabilitation tax credits, and sales and income tax exemptions for the creation of 100 cultural and entertainment districts throughout the state.

In addition, arts organizations need good real estate advice, according to the Nonprofit Finance Fund's cultural facilities study. Although arts companies make significant investments in facilities, they often rely on architects, capital campaign consultants, and board members for advice, they underestimate the time and sophistication needed to find or build a facility, and they use in-house staff with little real estate experience as project developers.

Proceed With Caution

But, as Wysong warns, working with nonprofit arts organizations is not for everyone. She identifies three factors that separate these entities from other commercial real estate clients: the decision-making process, financing, and space needs.

"These are the essential differences, but they are not small issues," she says. "You might be working with an organization that has been trying to make a decision to move or build space for eight years," she says. "They are on the hamster wheel, going round and round on the same issues."

As a first step, Wysong and her colleagues provide a decision-making matrix that "helps the organization prioritize, rate various factors, quantify issues so people can see them graphically, and help the group buy into the process, so everyone feels a part of it."

That illustrates another difference: There is rarely one decision maker. "These organizations have boards, a constituency, and staff, so you have to build consensus," Wysong says.

Skilled Communication

That's one area where Holt and Lauriello excelled, Litsey says. "They were very communicative and worked well with the board." Like most arts organizations, CDF's 15-person board was stacked with business-savvy representatives that included a banker, an architect, a certified public accountant, and a couple of attorneys.

But she still heavily relied on Holt and Lauriello's advice. "Bryan and John managed the transaction. They were very instrumental with folks on the board and they always were willing to work with [the board] to come up with ideas on how to get the most from the situation," she says.

On the two-acre property CDF bought stood a 4,000-sf metal building. CDF added two 5,000-sf wings on either end to increase the space. The old space was put on the market for $900,000 and sold for $950,000, Holt says. "We negotiated a year's leaseback so CDF could stay in the old building until the new one was finished."

Such negotiating skills helped, because part of working with nonprofits is squeezing every dollar. "My job is to use the resources we have and stretch them as far as possible," Litsey says. CDF funds about 70 percent of its operating expenses through earned income, a much higher amount than most nonprofit organizations, so keeping the classes going while relocating was paramount. "During the 18 months we did not lose a day of programming," Litsey says.

Money Matters

Nonprofit financing is an education in itself, Wysong says. "You have to understand how they raise money for operating expenses. Often ticket sales are a small part of that; most raise money through grants, donations, and government financing sources."

Despite the lack of a reliable income stream, most nonprofit arts organizations like to own their own spaces because they are exempt from real estate taxes and "it's much easier to raise money for bricks and mortar than for operating expenses, so it becomes a fund-raising tool," Wysong says. In fact roughly 41 percent of U.S. nonprofit theaters own their own performance space, and 43 percent own their own office space, according to Theatre Communications Group's 2004 annual fiscal survey.

Larger nonprofit arts organizations may qualify for tax-exempt bond financing, but the upfront costs are so high that deals need to be in the $3 million to $5 million range to make it work, Wysong says. Smaller organizations need to be creative, sometimes relying on seller-provided gap financing or lease-to-buy arrangements.

Creating the Right Space

Buying their own space gives arts organizations stability and a local identity. However, in a bid to save money, theaters and galleries often opt for real estate in developing neighborhoods.

Some cities use arts organizations as redevelopment tools, to stabilize neighborhoods and encourage concurrent development. These arrangements can provide local government support for new facilities. For example, the Art Academy of Cincinnati opened a new facility in Over-the-Rhine, a city neighborhood plagued by a decade of racial tensions and poverty. With plans to build a $52 million arts high school nearby, the city hopes AAC will be a cornerstone for an emerging arts district that already contains two theaters and the city's music hall.

"Combined with financial assistance of city grants and historic tax credits, the AAC was able to afford much of its original vision," says project consultant John Greiwe,CCIM,vice president of Miller-Valentine Group in Cincinnati. But it took more than five years even to begin construction on the new space. In 1998, the school separated from the Cincinnati Art Museum and hired MVG to study relocation possibilities. "Its current facilities were housed in two separate locations," says Greiwe, about a half-mile apart. "We analyzed the feasibility of purchasing two adjacent warehouses located within a dense, downtown urban area."

The plan called for consolidating the two structures into one 120,000-sf facility. In 2000 AAC bought an 80,000-sf industrial building in Over-the-Rhine located next to a 40,000-sf building owned by the art museum. It transferred ownership of one of its previous buildings to the art museum in exchange for the smaller industrial building. After a $13 million fund-raising campaign, construction began in June 2004 with a fall 2005 move-in deadline. The buildings were gutted but the façades retained to utilize $2 million in historic tax credits.

The renovation illustrates the unusual space needs that arts organizations often require. The school has a main-floor gallery and cafeteria, 25 studios on the top two floors, as well as classroom facilities for printmaking, photography, lithography, sculpture, drawing, and painting.

But no two arts organizations have the same space needs. For instance, CDF not only was concerned about parking but safety issues as well, since many of its students are children. "It was very important for us to be easy to get to," Litsey says. "This is a safe area, and if we moved, we might have lost students."

As the arts grow in stature and popularity, more real estate opportunities will evolve. "It's a vital sector of the economy that's been overlooked," Wysong says. "Most brokers don't understand the organizational decision-making issues." But she adds that her psychotherapist background provided good training. "I enjoy finding solutions to their problems, but you have to have a certain inclination toward wanting to be a part of it."