Published: February 19, 2016
Charities and other third sector organisations are often defined by their intended positive contribution to society in contrast to businesses who often report success in terms of accounting profit. However, the one thing all organisations have in common is the need to sustain a robust and reliable revenue stream. This is essential for the successful management of organisations, profit-maximising or otherwise.
It’s common for businesses both small and large to borrow funds and this often fuels an effort to achieve their primary goal either more quickly or on a greater scale. In the context of a business, this would be increased profits, but for a socially focused organisation borrowing could lead to greater social impact sooner, which would be considered positive. In both cases borrowing can be beneficial in achieving the long term goals of the organisation.
With regards to property ownership, owning a property can come with some related benefits. As a landlord the owner can let free space for a return and acquire a sustainable revenue stream which can be used to defray loan costs or be used towards mission delivery. Occupation costs can be largely fixed as there is no rent review looming round the corner every few years. Where a property is already owned either unencumbered or with modest finance it can be mortgaged to provide funds now and help support mission delivery as long as the organisation is sure that it has a certainty of revenue stream to make future loan payments. There is no end to the number of times in the future that the property asset can be leveraged to provide cash injections to the organisation.
One of the undeniable downsides to borrowing is risk. Being unable to repay borrowed funds can result in financial difficulties. However, there are some simple rules to follow to make sure that the risk is always manageable.
Do not try and repay too quickly. Most property funding should be viewed as a long term
commitment by both you and your funders
Do not over borrow on the property. Make sure sufficient equity will exist in most conceivable circumstances to help you and your funders continue to take a long term view and sleep soundly at night!
Understand how the property will generate income and where possible contractually pre-let any space prior to development to guarantee income. Where space is to be let on completion of a development have a clear understanding of what income can be generated, how long it will take to let.
Fix costs wherever possible – whether it is the cost of borrowing or the costs of development. Having certainty in outgoings will help to make sure that the organisation is able to meet its budgets
Use property professionals with suitable skills and experience relevant to the property or the development. Too often local professionals sitting on Boards offer their expertise with the best of intentions without being able to commit the ‘hands on’ time or having the specific expert experience relative to the organisation’s needs. In too many cases this results in poorly planned projects, poorly managed developments and escalating costs which reduce viability and create long term pressure within the organisation and with its funders.
A wide and varied skill set is often a strong asset in any organisation but there exists a tendency for the passion and ambition held by those at the top to become detrimental in achieving the overall goal. What becomes evident is the fact that management and leadership are the means by which such passion can be carefully channelled towards a productive end.
A combination of structured leadership and specialist advisors who can contribute with an objective and critical view of future revenue streams can be advantageous. Understanding and allowing for project sensitivities will almost certainly mean that a successful outcome is more likely.