Message to Cultural Groups: Rent, Don’t Buy!

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via / Queens Crap
via / Queens Crap

New Yorkers love to talk about real estate. There is a common refrain about the wisdom of owning: you’re in control; you’re not vulnerable to the whims and moods of nasty landlords. And if you run into trouble, you can always sell and (generally) walk away with more cash than you put in.

This cultural sector has employed the same rationale in recent years: the idea that arts groups (particularly nonprofit theatres) should own their own space. Well, I’m here to tell you that owning your space — and all the effort it takes to prepare a facility for a cultural owner — is often not the right answer. Why not?

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First, there is the basic belief that the capital value of real estate represents an asset for the organization — that it increases the organization’s value (we own more than we owe) and thereby improves sustainability. But a theatre, unlike other assets, is not liquid — you cannot easily converted it into cash to address whatever fiscal challenges might pop up. Yes, you can sell your theatre, but let’s be clear that, at least in New York, you will most likely sell it to a developer who will convert it to another use or tear it down. Theaters are not two-bedroom apartments, with lots of potential owners waiting and willing to purchase the asset at its true market value. It’s true market value is usually anything but as a theatre.

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Second, when theatres change hands, it’s usually because the owners are no longer active or able to pay their bills. The capital asset, then, is sold or transferred, generally at a price well below what was originally invested to make the facility a theater. These transfers are very complicated for nonprofits. Add to this the fact that given the limited ability of nonprofit arts groups to service debt, banks are generally unwilling to lend money for the purchase and improvement of these facilities.

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Third, there are the liabilities a building owner must take on, starting with new expenses to absorb into an annual operating budget — that is, increased fixed costs without a guarantee of increased revenues. New risks (both property and liability) require a combination of insurance and reserves for when something goes wrong. Then there is the need to allocate additional reserves to maintain the capital asset — the carpeting to replace every five years, the roof to replace every 30 years, and so on.

When an organization becomes an owner of its facility, there might be some new confidence and peace of mind around the idea of having a permanent home. But this dramatic increase in operating budget — and the rising resources needed to balance it — inevitably leads toward more risk-averse programming. It makes sense: the stakes are higher; the monthly nut is often twice what it was; there are many more sleepless nights on the part of both staff and board with respect to generating the income needed to keep their home. I don’t think I’ve ever observed a producing organization suddenly become more whimsical or more daring in their programming once they have title to a building. Paradoxically, fixed-cost obligations often reduce the resources available to create the work, so facility-owning organizations often become less active than they were before.

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Let’s also consider the process many cultural organizations go through to acquire and prepare a home. Here in New York City, the Department of Cultural Affairs has a wonderful program to help groups acquire, build and/or renovate spaces. As you might expect, when the funding source is attached to federal HUD grants, the process to qualify for this support and to work through the actual process of buying/building/fixing is lengthy as well as cumbersome. Groups are briefed and trained to go through the process with lots of warnings about how long it might take and how much effort will be required.

A few years ago, my firm surveyed 10 organizations that went through DCA’s capital funding process to receive City support toward developing a new or improved facility. Here’s what we found out:

  • Even though the groups factored some delay into the project timeline, it almost always took significantly longer to complete than anticipated.
  • Most groups underestimated the time required to develop new sources of earned and contributed income, and found that private funding did not increase to support the more expansive operation.
  • Groups did not anticipate staffing changes as a result of new facilities; and in some cases were unable to afford new staff, leading to significant burnout among existing staff even before new facilities were open.
  • Frustrated boards did not appreciate how long it would take to stabilize operations in new facilities, and did not foresee how few financing options exist to help cultural groups successfully transition into new facilities.

Despite all these challenges, we know cultural facilities are important community assets. They drive economic development, cultural tourism, community identity and lots of other good things that benefit many more people than those who simply attend a performance or exhibit. So if we don’t want cultural organizations to own their facilities, who should? My suggestion is that the public and private sectors should work together to create trusts or foundations to take control of these facilities on behalf of cultural communities.

There is a model for this in the Playhouse Square Foundation (PSF), which has successfully renovated and currently operates 10 performance spaces in downtown Cleveland, Ohio. To support its operations, PSF has created a real estate enterprise and business improvement district, which it sees as a working endowment for its venues, with commercial properties generating enough income that, when combined with other earned revenues, ensures their long-term sustainability. PSF properties house Cleveland’s public television and radio outlets, dance studios, art galleries, creative businesses, and the Cleveland Urban Design Collaborative, which is supported by the College of Architecture and Environmental Design at Kent State University.

As a result of all of this, PSF provides facilities for Cleveland’s major producing arts groups, including Great Lakes Theater, DanceCleveland, and the Cleveland Playhouse. It also houses programs of Cuyahoga Community College and Cleveland State University.

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Why might this be a better approach? There are several reasons. First, it frees cultural organizations from the burdens and obligations of managing spaces, allowing them to invest in both the quality and quantity of their creative output. Second, we gain the ability to move cultural organizations in and out of cultural facilities with far less fuss, using tools to measure and monitor success over time to make sure these precious places are well used for the whole community’s benefit. Third, cultural districts protect cultural spaces for cultural uses — while building neighborhood identity in a way that fosters responsible development. Trusts and foundations generally have all the tools they need to partner with the private sector to develop and sustain cultural spaces — air rights, tax-increment financing, improvement districts — without jeopardizing the intended use and value of these facilities.

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There’s a lot to this issue of owning your cultural home, and I’m sure others could make strong arguments in favor of ownership. My hope is to advance the idea that facility ownership is a perilous choice for many arts groups, particularly in developed urban markets like New York City. It thus behooves us to look for alternative ways to develop and protect these facilities across the cultural ecosystem to ensure that we provide artists with the right places in which to create, prepare and present their work, while also ensuring that the cultural facilities themselves are busy, well-maintained, and deliver the greatest possible value to the community.