Association for Public Policy Analysis & Management

Research on real estate investments for individual firms has typically been confined to the for-profit arena. This might be because nonprofits, especially small firms, have a tendency to be undercapitalized and thus have fewer opportunities for investment. Or the achievement of social mission objectives have traditionally superseded financial goals in the nonprofit arena. Despite the lack of information on how nonprofits make real estate decisions, we do know that nonprofits invest in real estate. A study of nonprofit arts organizations revealed that at least $15 billion was invested in facilities construction between 1994 and 2008. Further, the use of tax-exempt bonding among nonprofit organizations significantly increased between 1993 and 2010, suggesting that these organizations were also investing more into real estate during this time. Further, according to data from the 2014 Annual Capital Expenditures Survey conducted by the U.S. Census Bureau, companies with employees in in the museum sector – where approximately two-thirds of firms are nonprofit incorporated – spent $2.576 billion on structures and equipment.

There is evidence that a different set of factors relate to real estate investment decisions for nonprofit managers than for for-profit managers. Likely the decision-making factors for real estate investments vary by nonprofit field (e.g., arts, health, education); however, like the corporate literature suggests, factors stemming from operating need as opposed to market valuation are more prominent. Real estate transactions in the nonprofit arena are also governed by the unique situation of nonprofit finance. For example, nonprofit firms have access to unique forms of capital, such as municipal bonds and grant funding, that for-profit firms do not.

This study seeks to answer the following research question: what are the financial determinants of investments in real estate for nonprofit firms? We use IRS Form 990 data to evaluate a sample of nonprofit organizations that both did and did not make investments in land, building and equipment between 1998 and 2003. We model the determinants of real estate investments using OLS, logistic regressions, and a two-part model, thus varying the use of a binary variable for the decision to invest in real estate and a continuous variable that measures the level of real estate investment by a nonprofit firm.

In general, the results show that nonprofit organizations with a greater proportion of public funding (relative to total revenue) and fixed costs (relative to total expenses) are more likely to invest in real estate. Nonprofits with access to debt are also more likely to invest in real estate, as are larger organizations. Conversely, nonprofits with greater proportions of existing real estate (relative to total assets) and greater operating reserves are less likely to invest in real estate. Further, firms in the education sector exhibit higher probabilities of making real estate investments than firms in other sectors (e.g., the arts, health). The results of this research start to fill gaps in understanding the financial behavior of nonprofit firms, particularly in regard to investments in real estate.