Opportunity is knocking: here's a sub-prime path for the future.(STREETSMART NONPROFIT MANAGER)

File this tidbit in the back of your mind and be ready to pull it out sometime during the next few months. The misery index is rising, which means that opportunity for streetsmart managers is likewise rising.

It's not the increase in social needs that comes from the combination of increasing unemployment and inflation (the so-called misery index). Although it's true that many nonprofits experience an ascent in demand for services when the misery index goes up, that's a perverse definition of opportunity, not the kind being discussed here. This is about the possibility of acquiring real estate at below-market prices.

The convergence of predatory lending practices and high bank debt is creating conditions ripe for streetsmart nonprofit managers to position their organizations well for the future. The failure in the sub-prime mortgage market is by now well-understood, but its ramifications are just beginning to be known. Regardless of how widespread the damage might be in the future--and at press time there were indications that the problem will expand--there are almost certain to be opportunities for the shrewd nonprofit manager.

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Here are three stories that best illustrate the nature of the opportunity. These are different enough situations encountered by real nonprofits that readers are likely to see one or more in their own settings. All three stories have one common thread, smart nonprofit managers recognized an opportunity to solidify and advance organizational mission at a less than expected cost. All of the cases deal with "distressed properties," a phrase that sounds like it originated in a time when people swooned and had the vapors, but which really just refers to the pinch a real estate owner feels when their economics suddenly go sour.

MOTEL FOR SALE

During the late 1980s and early 1990s, savings and loans institutions (S&Ls) ran into serious financial trouble and dumped the equivalent in today's dollars of over $20 billion worth of real estate onto the market. These assets were previously owned by former borrowers who could no longer afford them when the economy went bad, and an S&L was holding them when it went bankrupt itself.

A medium-sized nonprofit serving disabled individuals bought a three-building motel from the Resolution Trust Corporation (RTC), which was the entity set up by the federal government for the purpose of getting distressed properties back onto the marketplace and from there into private hands. It took two of the buildings out of the motel business by converting one for use as a program site and the second for use as their administrative headquarters. It left the third building as a motel, which it began to operate as a social enterprise, employing some of its clients as well as regular motel employees.

WHAT TO LOOK FOR

Three times in history the federal government has created an RTC-like entity to help smooth the migration of distressed properties to new owners. In addition to the RTC, this happened initially during the Depression and then again during the mid-1980s. Each time the solution was a corporation set up to accumulate and dispose of distressed properties. This had the advantage of concentrating the flow of assets into a single funnel under the oversight of the federal government while offering a way to try to keep the cost of the federal government-sponsored bailout as low as possible.

History truly does repeat itself. So if the current wave of distressed properties grows larger, look for the creation of an RTC-like entity. This offers the streetsmart nonprofit manager a single point of entry into the distressed properties marketplace, where bargains might very well be available (or not, depending on the nature of local demand). Note that the sub-prime meltdown right now only affects residential properties. But if the crisis were to widen and take on more of the characteristics of previous eras, office buildings, apartments, and retail centers could be in the mix.

OFFICE BUILDING RELUCTANTLY FOR SALE. AGAIN.

Another nonprofit looking for a smallish urban office building to serve both as a program site and administrative offices had long coveted a particular building. It was offered for sale at one point but was financially out of reach. Then the winning bidder itself went bankrupt, dumping the property back into the hands of the bank.

Banks are good at keeping track of money and making loans but they're not good at managing distressed properties. What's more, they know it. When the forward-thinking chief executive officer heard about the foreclosure he approached the bank and noted how much the building had become a public relations black eye for the bank and how much of a hassle it must be to manage. He offered to take it over for a certain amount and to make a big deal about the bank's helpfulness to community organizations thereafter.

The bank thought about it for a while and then offered to sell the building to the group at a very reduced price--if the deal would close in a very short time frame. Having already lined up financing from its own bank, this streetsmart nonprofit promptly completed the deal.

WHAT TO LOOK FOR

Distressed properties appear all the time, and preparing them for the market costs money that reduces the proceeds from an eventual deal. The difference from the first scenario is that an RTC-like entity packages large numbers of buildings expressly for the purpose of unloading them as fast as possible. This scenario occurs on a one-by-one basis, so the only practical way to identify it is to have good contacts in the local business community who are likely to know of these situations.

Incidentally, it's possible to work backward to these situations. Look for telltale signs of disrepair and deferred maintenance in a building near otherwise reasonably well maintained properties.--s kind of outlier may indicate ownership's difficulties. Find the name of the owner through public records and make them an offer.

HOUSE OF ILL REPUTE

Another streetsmart nonprofit, looking for a place to locate a program serving troubled teens, found the ideal property on the fringes of a residential neighborhood adjacent to a low-density industrial area. Making the indifferent owner an offer, they prepared for the usual not-in-my-backyard fight with neighbors but instead were welcomed. The reason for a welcome just short of a parade was that for several years the house had been the club house and crash pad of a motorcycle club.

WHAT TO LOOK FOR

Look for motorcycle clubs or just about anything else that depresses the value of a building and gives neighbors and (hopefully) the owner an incentive to make a deal.

Owning property might not be the of-course-why-not opportunity that it has been for decades. In fact, some nonprofits are succeeding precisely because they opt out of the property ownership hassle. Others are selling long-held property at a profit. But for some groups property ownership still makes sense.

Of course, all this presumes that the organization has two things in its favor. First, it must be capable of financing the property. Either it has to have the liquidity to carry out the purchase, or it must know that a bank or other financing source is available. Second, the operations planned for the property have to be able to support the costs for the term of the financing. This means it must have programs and services in place that could pay for the property's use.

One additional ingredient would be helpful. Nonprofits' missions require them to be creative in good times--and even more creative in bad times. If you have mastered that ability, it may be time to start listening for opportunity's distinctive knock.

Thomas A. McLaughlin is a national nonprofit management consultant with Grant Thornton in Boston. He is the author of the book "Nonprofit Strategic Positioning" (John Wiley and Sons, 2006). His e-mail address is thomas.mclaughlin@gt.com

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