Why social real estate should not go to the highest bidder
Fourth article in the series on Culture-led Development
Cultural incubators, artist’s studios and cultural community centres. They are of inestimable value to the city. Yet Rinske observes that cultural and social initiatives are increasingly losing out to the short-term financial interests of municipalities. Together with financial expert Alexander Ramselaar observe she explains why this is neither desirable nor necessary.
Valuable neighbourhood initiatives that become homeless overnight. Cultural entrepreneurs who, after years of placemaking, cannot meet the tender criteria of their own premises. Artists who lose out to a project developer and have to leave their studios. Examples abound that illustrate what can go wrong when municipalities sell social real estate. Municipalities’ real estate departments invoke laws, regulations and policies. But does social real estate really always have to go to the highest bidder?
The short answer to this question is ‘no’. Yet many cultural venues, community centres and citizens’ initiatives have to make way, often for housing. And yet these social places are precisely what is needed to keep a city functioning properly. But this seems to be at odds with the real estate policy of the local government, which likes to sell to the highest bidder. If this trend continues, we will lose valuable cultural and social spaces and be left with a monotonous and unattractive city in the future. In this article, we list where things often go wrong now. But more importantly, we show how the social task of the municipality can be translated into real estate and which buttons can and must be turned.
Many municipalities aim to dispose of ‘non-strategic’ social real estate, buildings that no longer contribute to policy objectives. The policy of Real Estate departments is often aimed at selling at the highest bid. Not infrequently, this is literally the administrative assignment to civil servants, which is often accompanied by concrete financial objectives per year. The idea behind this is that the money earned in this way flows back into the municipal coffers and can thus be used for social tasks. The idea is therefore: the more that is raised, the more society benefits. In Rotterdam, for example, a good sales year provides the municipality with 1% of its annual income of €3.7 billion.
With this focus on the financial returns, a property is not awarded to the proposer of the best plan, but to the party with the biggest bank account. This means that social and cultural added value is overlooked. Moreover, with this approach, municipalities mainly focus on short-term financial returns. The fact that a cultural or social function in particular can yield more in the long term, not only socially but also economically, than a residential function for example, is still relatively unknown. The calculations that prove this, however, have already been made. More on this later in this article.
These social returns and the inestimable value of social and cultural facilities for a city are recognised by other municipal departments. In practice, this means that, on occasion, a Culture or Social Development department will make up the financial shortfall in purchasing by means of an additional subsidy. It is a solution to the shortage, but not a structural one, since Real Estate can continue to stick to its old calculation models. It is also an exception to the rule. Most initiatives fail at a much earlier stage.
When a municipality wants to sell a building with a social or cultural function, this is increasingly done via a public sale. Tenders are issued for this purpose and the highest financial bid is often decisive. This is a major disadvantage for cultural parties. The so-called ‘unprofitable top’, the financial deficit in their exploitation, ensures that they cannot pay the top price. They are no match for the potential buyers who seek a more commercial use of the property. However, they would stand a good chance if the municipality were to impose conditions other than financial ones, for example, with regard to the type of use of the property or the obligation to rent out at reasonable prices. But this does not always happen.
In addition, the call for tenders includes strict financial criteria. For example, the bidder is not allowed to submit a reservation of financing. Even when, in addition to financial criteria, substantive criteria are also included in the call for tenders, the hard requirement is that financing must be arranged in advance. For many, if not all, cultural and social partners, this is not the case.
Six guiding principles for municipalities
To ensure that social real estate remains dedicated to cultural and social use, a municipality has a number of levers to turn. We offer six suggestions to municipalities, as well as advice to cultural parties.
Take all returns on investment into account
In order to retain culture for the city, the municipality should not only focus on financial value. An integral and city-wide vision should give room to a different way of selling. This policy must take into account more factors than just financial returns. Social added value should also be given a place in the calculation models. This means the development of new models. For this, the social and cultural added-value will first have to be clarified and then capitalised. Only then can they be given a place in the calculations. In the introduction to this article, it was already indicated that these kinds of calculations have already been made, but that they are rarely used.
Together with sister organisations DePlaatsmaker (Utrecht), SLAK (Arnhem/Nijmegen region) and Urban Resort (Amsterdam), the aforementioned SKAR commissioned specific research into the economic added value of studios and incubators. Research bureau Rebel investigated the added value of these cultural places in 2020 on the basis of a number of concrete cases. In ‘Meerwaarde creatieve bedrijfshuisvesting’ (pdf) it is made clear that incubators have a substantial economic added value. Seen over a period of 15 years, they even deliver more value than transformation to housing.
Based on data from the studied cases, the following can be concluded. Together with a handful of indirect financial benefits, each euro invested in studio premises (over a period of 15 years) generates 24 euros. Of this, 11 euros go to the government, in the form of taxes and various savings. In short, not only are studios invaluable to artists, they also provide social and cultural added value to a neighbourhood and the city, which in turn can be converted into financial added value.
If this is such a clear calculation, why is it not yet widely used? Because the methodology that has been developed is public and can be found online. According to Olof van de Wal, director of SKAR, there are a number of reasons for this. The most important one is ‘unknown makes unloved’. But people are working hard to make this calculation method known. Rebel will present the method on 13 May at the Stadmakersfestival in The Hague.
Change the policy
Within the current laws and regulations, a municipality can without risk seek out space and impose conditions on the sale. These include the intended target group, the permitted use of the property, differentiation in price policy for incubators and studios, and programming. Also, a municipality always has the possibility to work with other parties than the usual real estate parties. But the administrative assignment to the department of real estate, often laid down in a real estate memorandum, does not usually allow for that. The municipal real estate policy often contains extremely ambitious annual financial targets and thus prescribes that real estate must be sold for the highest price. Real estate merely executes this policy, is the argument. Freedom of movement is therefore only created when the municipal executive does create this space in its overarching policy. When this integral policy vision is in place, there are sufficient instruments available to implement this alternative policy.
Record things well
Sufficient legal instruments are available to lay down the conditions mentioned in the previous paragraph in an orderly fashion. These include an obligation to offer in the event of a resale, an anti-speculation clause or a subsequent payment if the function or use of the property changes in the future. There are enough examples of purchase agreements or ground lease deeds available that include these kinds of clauses.
Give an appraiser the right starting points
When it comes to a private sale, it is important to value the property based on its intended function and permitted use. A property with a social function has a different value than a property with a commercial function. Mention this explicitly in the briefing to the appraisers during a private sale or within the framework of a tender. Include overdue maintenance and other aspects that determine value. And take into account what the cultural tenant, if any, has already done to the property in the past period. This method of calculation may lead to a financially lower valuation, but the neighbourhood, district and city will receive other values in return. Rebel’s research shows that these additional returns can also be capitalised.
Use ‘Didam’ as a guideline
Didam has wrongly made many municipalities extra cautious. But that is not necessary. Because when there is a unique social or cultural function and the municipality can substantiate this, the building or the land can also be put on the market with that specific function. In practice, there is often only one party who can fulfil the intended function. The municipality must publish the intention to sell, with reasons, prior to the intended transfer. Then other parties have the opportunity to make a similar offer. That way, after the response period has expired, no one can claim that they did not get a chance. In this way, the Didam judgment is neatly complied with.
Have an eye for the other and speak the same language
When the municipality wants to conclude an agreement with a cultural party, it does so with a party that has no experience with this and for whom it is not the core business. These parties need more time to finance the project, are familiar with different exploitation models and are not thoroughly familiar with legislation and regulations. Being aware of this makes cooperation easier. It also appears that the various departments within municipalities each speak their own language. Bridging these gaps is an important aspect of the acquisition process. In short, be transparent and work together as much as possible. Ultimately, all parties want a better neighbourhood and city.
For culture makers: be an equal partner
Finally, a few tips for cultural and social organisations that wish to purchase a building or piece of land. They are entering new territory. In order to be a fully-fledged discussion partner for the Real Estate department, they need to acquire or hire new expertise. It is also important for them to arrange the necessary financing on their own. Where there are shortfalls, the ‘unprofitable top’, they need to find additional sources of finance. This hybrid financing mix includes (investment) grants, loans from banks and private individuals, donations from patrons, contributions from funds and, increasingly, contributions via crowdfunding or crowdlending. In recent years, residents have increasingly played a role in the realisation of social spaces. This is for instance the case with the Wijkpaleis Rotterdam, where the initiative raised over 6 tonnes through crowdlending.
Should social real estate go to the highest bidder? No, certainly not. Every municipality has the task to offer space to cultural and social organisations. This should therefore be the basis of the strategic real estate policy. The laws and regulations and the policy instruments leave enough room to focus on conditions other than financial ones. Firstly, by being able to describe which specific function should be given a particular place. Secondly, by including substantive criteria in the call for tenders in addition to financial criteria. Thirdly, by paying more attention to the financing process of cultural and social parties. And finally, by also looking at the social added value and including the increase in financial value in the longer term. Ideally, this should be based on a citywide vision, plus an adapted administrative assignment for the Real Estate department.
Where municipalities and cultural and social parties work together rather than against each other, the best things come about. Ultimately, all parties are concerned with the healthy exploitation of a cultural or social function that contributes to a better neighbourhood, district and city. Investing in cultural and social real estate in this way pays off.