• San Francisco faces an overheated property market, driven in part by its status as a centre of the tech industry.
• Community Arts Stabilization Trust (CAST) is a public-private partnership, which buys and leases property at below market rates to non-profit arts organisations, using a ‘lease to own’ model.
• Despite the challenge posed by the capital-intensive nature of its operating model, CAST has succeeded in establishing itself as a trusted broker among arts organisations, private developers, and property owners.
What was the challenge?
Over the last decade, 75,000 people have moved to San Francisco as a result of the city’s tremendous rebound from the recent recession. One of the reasons for this growth is the influence of nearby Silicon Valley, which has made San Francisco a world centre of innovation and start-up culture. While the city’s unemployment rate has been cut in half to less than 5%, the housing market has not kept up with the influx of new jobs and new residents to the city, with only 17,000 new housing units created within the same period. Similarly, the tech sector has driven up the prices for commercial real estate – as a result, San Francisco has become the most expensive property market in the United States.
Despite the urgency of the situation, there is a lack of information about the size of the problem: there have been no city-wide or Bay-Area-wide reports produced within the last fifteen years speaking broadly to the property market. Specifically, there is no data available on the cost of commercial properties, or the terms of rental and purchase for non-profits and arts organisations.
The concept of CAST grew out of work by a group of funders including the Kenneth Rainin Foundation in the Central Market area of San Francisco in 2010. At that point the neighbourhood had a high vacancy rate, but the city’s Central Market Economic Strategy had a rapid impact in attracting tech companies and other businesses, with a number of leases under negotiation and large-scale properties being scouted. It became clear that stabilisation of the area needed to be an immediate priority.
What does the project involve?
CAST is a nonprofit real estate development and holding company, established in 2013, which was created to address the affordability crisis in the arts and culture sector. It uses a community development corporation business model, adapted to serve arts non-profits. Investors in CAST receive tax deductions: the money is used to purchase property, which CAST leases at below market rates to non-profit arts organisations on a ‘lease to own’ model. Due to the urgency and the widespread nature of the problem, CAST also provides short- and medium-term solutions through grants and technical assistance.
The CAST model attempts to address the affordability crisis through a long-term permanent solution – facilitating the purchase of property by arts organisations – rather than postponing the problem by offering only short-term, below-market-rate rents. It also provides expertise and knowledge to arts organisations – which often find the property business unfamiliar and culturally alien – and serves as an ‘honest broker’ among arts organisations, private developers, and property owners.
How did the project work?
Because of the urgency of the issue, there was little time for extensive research or study before. CAST was established in 2013, with a board drawing on expertise in funding, philanthropic art collection, real estate management, community development, technical assistance, cultural engagement and policy, as well as social investment and enterprise, and an extended network of support from both the private and public sectors.
CAST received its first 5 million USD from the Kenneth Rainin Foundation for two pilot projects: purchasing and renovating two buildings. The renovation process was challenging due to high demand for construction labour, leading to delays and higher than anticipated construction costs. However, these issues seem inevitable in an overheated property market. The pilots were a success; the non-profits that are now occupying the buildings will be able to exercise their options to purchase in 2020-21, with a three-year extension, if necessary.
Over the past two years, CAST has raised an additional 16.5 million USD and has over 50,000 square feet of property in development. It has five full-time-equivalent employees with expertise in finance, arts organisations, and property development. Its goal for 2018 is to raise 34.1 million USD to obtain a total of 100,000 square feet. The next step for CAST is to expand to Oakland, CA, which is located across the bay from San Francisco. It has started a real estate mapping project, supported by the National Endowment for the Arts the San Francisco Arts Commission, and the Mayor’s Office of Economic and Workforce Development, to clearly identify what cultural assets already exist, evaluate the needs and uses for arts and culture facilities within the city, and whether CAST should invest in these projects.
What has been learned?
• All of these projects take a long time to negotiate and are very capital intensive. A key lesson is that it is very difficult to implement the model without significant start-up capital. The long-term goal is for CAST to take property out of the market and reserve it for non-profit arts organisations. However, competing on the open market is difficult, so it is currently focusing on ‘off-market’ (not publicly listed for sale) properties, and working with private developers and property owners who share the same vision.
• CAST is a very local project responding to the needs of San Francisco’s arts sector and artist community. There are a number of similar cities with similar problems, but the needs of the community and the existing tools and policies will be unique to each location. It is necessary to make the right connections with the private property development community and to find the right private and public sector leaders with shared common goals. Collaboration is essential for success.