The COVID-19 pandemic has undoubtedly made shifts in the way every industry works, including associations. These include key financial impacts on every business that will likely have far reaching effects into the future. AAMFT has been fortunate enough to minimize the short-term impacts on the Association’s operations. Clearly, however, there are longer-term implications that impact AAMFT’s future. The most notable of these are related to our largest fixed asset, the AAMFT office building.
Following this analysis, the AAMFT Board of Directors, in consultation with its long-time auditing partner Gelman, Rosenberg & Freedman (https://www.grfcpa.com), concluded that the building ownership had shifted from a low-risk, high-reward asset to an increasingly more volatile asset. Acting in its role of fiduciary responsibility for the Association, the AAMFT Board of Directors unanimously voted to pursue the sale of the AAMFT office building to maximize returns on the investment for the AAMFT membership. These returns will be reinvested in the Association’s future stability as well as expansion and advancement of the MFT profession.
Please read on to find out about AAMFT’s various homes throughout the years and how changing business conditions impacted these homes, key factors that went into the AAMFT Board’s decision, and what our future home will look like.
A Message from the President & CEO
History of AAMFT’s Homes
Our office space has always served as a home for AAMFT but that physical home has changed over time as work and environmental needs have evolved. See our timeline >>
Making the Decision
Why has the Board voted to move forward with the sale of the AAMFT office building?
Fiduciary responsibility for AAMFT and its assets is one of the chief responsibilities of the AAMFT Board of Directors.
In its review with professional real estate consultants and financial advisers, along with input from AAMFT staff, the Board determined that the Building is no longer serving as a low-risk, high-reward asset as part of the overall investment portfolio. In particular, the consultants advised the Board that a growing number of risk factors involving the Building have increased moving it out of the low-risk assessment category. These risk factors include:
- Advancing age of the Building: Over the last few years, AAMFT has needed to pay for costly repairs on the Building including roughly $300,000 for a new HVAC unit in 2020. The Building generates only a very small annual profit when fully rented, meaning that any large-scale repairs must be paid for by AAMFT with members’ funds. This repair figure alone equates to the annual dues of over 1,380 members. While normative repairs are expected on an asset, the Building’s age means that there are several more costly repairs that are expected in the next few years.
- Window of high return on Building investment is likely closing in the near-term: Recent trends and indicators in the local commercial real estate market project that the resale value of the building is likely at a high, particularly because of the recent addition of the Amazon HQ2 campus in the vicinity. Over the next year, Amazon-adjacent businesses are seeking property acquisitions to support their business relationships. While this is a good development for the value of the Building, the COVID-19 pandemic has started to flood the market with lower cost available leasing options as many businesses, in particular associations, are looking to reduce their office footprint and lower their unnecessary overhead costs. This creates a window of time for AAMFT to maximize its return on its investment in the Building for the long-term benefit for AAMFT and its members.
How often does AAMFT evaluate the real estate market?
AAMFT, in consultation with various advisors and professionals, reviews its investment portfolio on an ongoing basis to ensure a balanced and advantageous strategy is in place to benefit the association. The AAMFT Building, being the largest fixed asset portion of the portfolio, is reviewed as a part of that process, along with a regular review every year of the current commercial real estate market.
What types of consultants does the AAMFT Board consult when it makes a decision
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The AAMFT Board regularly meets with dedicated professionals and consultants to advise it on decisions, particularly those of a fiduciary nature. Regarding the real estate analysis and sale of the Building, AAMFT’s auditors, Gelman, Rosenberg & Freedman were consulted for their familiarity and expertise with both AAMFT’s finances as well as those of the broader association and business market in the metro D.C. area. West, Lane & Schlager were brought on as real estate consultants to examine AAMFT’s changing real estate needs as well as to advise on the current and anticipated future real estate market.
As work environments change, the need for specific amounts of space and the way that space is designed to meet strategic work goals have changed.
Working to Serve the Association
How has changing work methodology impacted this decision?
As work environments change, the need for specific amounts of space and the way that space is designed to meet strategic work goals have changed. As outlined in the review of the past AAMFT homes, along with cost analysis, this has often been the driving force behind decisions the Board has made around office space.
Over the last 10 years, there has been an increased emphasis on video conferencing. This has allowed for reduction of barriers to inclusiveness and increased diversity for volunteer and member participation. Further, video conferencing has provided the opportunity for a reduction of overhead tied to costly in-person meetings and business travel. These adaptations have created a shift in business space design necessitating less individual footprint space and more collaborative workspace with more dedicated areas for meetings and videoconferencing.
AAMFT was already examining these impacts on its space over the last few years including potential design changes to accommodate challenges to office space needs. While costly investments, the changes would be necessary to accommodate operations.
The COVID-19 pandemic forced AAMFT, and its fellow associations, to accelerate the look into impacts on office space and work/life balance to advance an understanding of what the workplace of the future was most likely to look like. Survey results have indicated that nearly 65% of all businesses in the Washington D.C. area have said post-COVID they would be adopting a hybrid working environment with many turning to alternative real estate solutions such as sub-leasing portions of current space, entering into new agreements with less overall space, or exploring co-working opportunities to right size their overall footprint. These decisions are being made with the goals of decreased overhead, elimination of under-utilized space, and cost savings of funds for potential reallocation to programmatic budgets.
Are there human resource implications related to the sale of the building?
There are several items the Board examined related to the Building that would fall under human resources. They included:
- Staff time redirected to management of the Building away from AAMFT’s mission and core work: Because the Building generates little to no profit, and moving into 2021 may operate at a loss, there is no additional funding for dedicated building management. Typically, office buildings have staff dedicated to their operations including vendor and repair management, work with local regulators, and coordinating tenant services. Because the AAMFT Building’s budget cannot accommodate this, it requires AAMFT staff to redirect time away from the Association’s core mission to handle these tasks. Association staff are not typically versed in these skill sets nor is it directly tied to AAMFT’s mission for either AAMFT Board or staff to handle the requirements of being a landlord.
- Offices in the DC metro area have been adopting hybrid and flexible work schedules for several years to accommodate the unique business environment and anticipate increasing this post-pandemic:
The Washington D.C. metro area has long been known as one of the worst commuting areas in the U.S., annually ranked anywhere from 2nd to 5th longest. Washington D.C. also ranks among the top five most expensive cities to live in (Goetz, 2021). AAMFT’s competition in the local employment market ranges from high paying corporate and lobbying jobs to federal government jobs with expansive work/life benefits. To be able to remain competitive in the recruitment and retention of employees, it has been important for AAMFT to make adjustments where it can, particularly in the work/life balance. Prior to the pandemic, AAMFT had adopted work from home options one day a week for staff. As we move into a post-pandemic world, 60% of surveyed DC-based businesses have indicated they will move to hybrid flexible work environments for their employees (Ford, 2021). With many also indicating an intention to right-size their footprint of their physical office space accordingly to reduce overhead costs, these competitors’ decisions also impact AAMFT’s HR policies moving forward. By adopting more flexible work environments, AAMFT also strives to reduce barriers to employment and continue to increase our very diverse workforce.
The COVID-19 pandemic forced AAMFT, and its fellow associations, to accelerate the look into impacts on office space and work/life balance to advance an understanding of what the workplace of the future was most likely to look like.
Financial Implications
Is AAMFT in financial trouble?
Absolutely not. As reported annually via the Business Meeting and AAMFT’s Mid-Year and End of Year Scorecards, available to members at aamft.org/management, AAMFT is in a very secure financial position. That secure financial position is attained through strong reserve management and constant review and adjustment of AAMFT’s portfolio, combined with intentional business strategies that are responsive to changes in the market and the operating environment. As one of the largest assets in AAMFT’s portfolio, the Building has long been a part of that strategy. However, it is a fixed asset meaning that the value cannot be easily allocated towards emergent member needs or opportunities. It is also an asset that’s value is heavily impacted by the external environment.
Does this sale create instability for the association from a financial standpoint?
No. Unlike in traditional personal finances where a property asset might be leveraged for loans or influxes of cash to take advantage of emergent opportunities or to address needs, with a business, taking out such a loan would subject AAMFT to a 37% unearned business income tax penalty if not repaid before sale of the building, creating excessive risk and cost to access funds in this manner. Transfer of sale funds to AAMFT’s portfolio will make it more liquid and reduce this concern. This action can create imbalances in our financial ratios, such as our reserve ratio. But these can be managed through dedicated investment and operational strategies thus better positioning AAMFT for the future.
Are there cost efficiencies for leasing versus owning office space?
Yes. Between a combination of lower leasing costs and right-sizing to AAMFT’s necessary office space footprint for the future, estimated savings for leasing versus buying over eleven years (a normal commercial leasing term) ranges from $370,000 to $2.6 million dollars. These represent funds that can be redirected into AAMFT’s programmatic budget to serve members in addition to any proceeds from the sale of the building.
Using more flexible office space within a co-working environment also provides extended benefits to staff and offers AAMFT an even more flexible recruitment structure, with potential savings estimates of up to $2.5 million over 11 years.
The chart below was prepared by AAMFT’s real estate consultants, West, Lane & Schlager, using real properties available for lease in the vicinity of AAMFT’s current office building. Thirty-two scenarios within these spaces were considered with the most realistic options for consideration shown here.
What are the risks associated with owning a building space? Leasing office space?
There are risks to any real estate scenario, but the key ones identified by the consultants in our discussion are outlined below.
Owning
- Expensive repairs or increasing associated costs (taxes, utilities, upgrades, etc.).
- Tenant loss and cost to replace/cover vacancy.
- Loss on market value of asset due to increasing inventory or decreasing prices on alternative competition.
- Distraction from AAMFT’s mission
Leasing
- Rent accelerators.
- Lease length could be prohibitive to business changes.
- Landlord responsiveness issues.
What are the benefits associated with owning a building space?
There are benefits to any real estate scenario, but the key ones identified by the consultants in our discussion are outlined below.
Owning
- Forced savings plan.
- Potential growth asset assuming strong market.
Leasing
- Leverage for negotiations.
- No direct responsibility for changing regulations, maintenance
costs, or building upgrades. - Flexible leasing terms available allowing for closer alignment
to changing business needs over time.
What are the benefits of selling? What are the risks of selling?
Benefits
- Eliminate risks associated with being a building owner/landlord and tending to tenants.
- Redirect staff time for building operations and corporate management to AAMFT mission.
- Reduction of cash needed to support building improvements, unexpected repairs, and building operations.
- Redirect cash used to support building operations to AAMFT programming.
- Proceeds will be reinvested in the Association’s future stability as well as expansion and advancement of the MFT profession.
- Simplification of AAMFT’s corporate structure and legal obligations with the closing of the 501(c)(2) AAMFT Property Corporation.
Risks
- Low or no sales offers resulting in need to remain in the building and continue to financially support building operations.
- Locking into a too long of an office lease that may not serve our needs post-COVID.
- Real estate market does not follow predicted trends and there is potential additional profit lost.
How will AAMFT ensure we can see a positive return for members on this sale?
As with any sale, potential offers will be evaluated for maximum return to AAMFT. The Board of Directors will also approve a plan with the sale proceeds to ensure that the return on investment is protected as a generative asset for AAMFT and any reinvestment will serve to advance the profession and/or the association. Additional cost savings from reduced real estate overhead costs over time will be reinvested back into AAMFT’s operational budget.
Estimated savings for leasing versus buying over eleven years (a normal commercial leasing term) ranges from $370,000 to $2.6 million dollars.
Looking Forward
What is the timing for the sale?
What will our new AAMFT home look like?
Just as AAMFT’s previous homes have addressed the changing business needs facing the association at the time, our new home will be a place that can support the operations and work that we are doing. Key factors in our new space will be:
- More collaborative working spaces with video conferencing ability.
- A smaller overall footprint to reduce costs while honoring the growing commitment to work/life balance and hybrid work schedules.
- Access to varying sizes of conference space with cutting-edge technology to host governance, orientation, and training meetings for members in a cost-efficient manner.
- Proximity to public transportation options and amenities.
References
Ford, B. (2021). Many businesses see hybrid work continuing after pandemic. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2021-03-25/many-businesses-see-hybrid-work-continuing-after-pandemic
Goetz, L. (2021). Top 10 most expensive cities in the U.S. Investopedia. Retrieved from https://www.investopedia.com/articles/personal-finance/080916/top-10-most-expensive-cities-us.asp