Questions and Answers on United Synagogue s Plan to Sell Its New York Office Space

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1 Questions and Answers on United Synagogue s Plan to Sell Its New York Office Space Overview: The sale of office space is part of a three pronged strategic financial plan that includes cutting expenses, expanding philanthropy, and converting our real estate into liquid assets. The first two reducing costs and expanding philanthropy have been underway for the last three years. Before deciding to pursue the third prong of the plan monetizing assets USCJ staff and board, with the help of professional advisors, undertook a comprehensive analysis of numerous possible financing and sale options. After weighing each option, it was determined that selling the New York office and leasing new space was by far the best way to achieve our strategic goals. The market bore our projections, and we were able to sign a contract to sell the space for $15,939,000. Here are questions and answers about the sale and the vote that will be taken on the issue by member congregations. 1. Why is United Synagogue selling its New York office space? Selling the New York office space is part of a larger strategy USCJ has pursued since adopting its 2011 Strategic Plan. This strategy has involved streamlining operations, cutting expenses, and finding additional revenue sources all in order to focus on our core mission of strengthening and transforming Conservative kehillot for the 21st century. As part of this strategy we have cut expenses by $1.5 million and significantly expanded revenues from philanthropy. In the past three years, unrestricted and restricted giving has increased from about $800K to nearly $3.0M. At the same time we ve invested in initiatives to strengthen kehillot, such as the broadly expanded Sulam Leadership programs, a new family engagement initiative, enhanced district conferences, a new synagogue inclusion initiative, funding for PJ Library and a PJ Library professional, an expanded menu of webinars, training for synagogue educational leaders, work on new dues models and financial sustainability, and USCJ conventions that have been refined and reimagined to better serve kehilla needs. The third prong of our strategic restructuring has involved monetizing a significant asset, the office condominium we own in New York. We felt this property would do much more for our kehillot and Conservative Judaism if it was sold and proceeds invested to support our mission. Furthermore, a part of the monetization is needed for USCJ s short term liquidity and placing USCJ in a fiscal position which will enhance our ability to achieve our mission to kehillot. We are also analyzing certain monetization alternatives for portions of the Fuchsberg Center in Jerusalem. To explore this possibility, our senior staff and board, in consultation with outside professionals, undertook a comprehensive review of numerous possible financing and sale options. After weighing each option, and doing extensive financial projections, it was determined that selling the New York office and leasing new space was by far the best way to achieve our strategic goals. 1 P a g e

2 The sale will help us continue funding our most effective programs and seed innovative new initiatives for USCJ congregations. Equally important, it will create a more secure, sustainable future for USCJ and the work we do on behalf of our kehillot and Conservative Judaism. Also, like many other non profits selling real estate, the fact that 75% of our assets are tied to illiquid real estate strongly suggests that a rebalancing of our assets is financially prudent and mission critical. For all of such reasons, monetizing our office space is a critical part of our Strategic Plan. 2. After selling its office space, where will United Synagogue move? The plan is to rent a space in the Financial District, in lower Manhattan. To arrive at this plan, USCJ professionals and lay leaders, with the help of a highly regarded commercial real estate firm, spent months canvassing New York City and environs for suitable, well priced rental properties that would be available when needed. This included looking at areas outside the city, such as nearby parts of New Jersey, Brooklyn and Queens. We also explored renting space near, or in partnership with, some of our sister organizations in the Conservative movement JTS, Women s League, Mens Club, and Masorti, which are located in upper Manhattan. Unfortunately, either there was not enough space in these facilities or no space was available within the time frame needed. As for areas outside Manhattan, none offered significantly lower rents than the Financial District of lower Manhattan, which currently offers some of the most attractive rents in the city and has been attracting many non profits, including several Jewish organizations. 3. What are major terms of Purchase & Sale Agreement? The principals of the LLC that is buying the property are leading partners of a 75 year old law firm in NYC and their family members. Seller: United Synagogue of Conservative Judaism Price: $15,939,000 Deposit: 10%, or $1,593,000, paid to Seller s law firm, as escrow agent Right of First Refusal to Condominium: Condominium has right to acquire the 10th and 11th floors per the Condo Declaration and By Laws Closing: 60 days after the expiration of the Due Diligence Period, with right of Seller to extend closing to get waiver from Condominium and approval from the New York State Attorney General, which includes the need to get Kehillot approval. Based on current Kehillot and Attorney General approval processes, likely Closing Date is early May. As is sale: Purchaser disclaims existence of, or reliance upon, any seller rep, warranty, etc. by Seller, except for customary representations/warranties expressly set forth in the Contract Due Diligence Period: o Due Diligence period expired 12/29/14, at which time the Purchaser s deposit of $1,639,000 went hard i.e., the Purchaser has no right to a return of Deposit unless Seller defaults under Contract, or Condo Waiver/Attorney General, including Kehillot 2 P a g e

3 Approvals, not secured by a certain date, or there is major damage or destruction to the Premises Attorney General and Kehillot Approval: Seller is provided six (6) months from the date of Contract, December 9, 2014, or until June 9, 2015 to get AG and/or Court Approval. We have been advised that the Court Approval will not be required Default Provisions: If Purchaser defaults, deposit (with interest) is the extent of Seller s damages. If Seller defaults, Purchaser has right to either (a) terminate Contract and get back Deposit, or (b) commence an action for specific performances within one year of Seller s default Post Closing Occupancy: A condition of closing is the right of Seller to remain in occupancy for up to 12 months pursuant to the Use and Occupancy Agreement, which is attached to the Contract. All terms of the Use and Occupancy Agreement have been finalized. 4. Is the Buyer s deposit non-refundable? The deposit on the property of $1.539 million, which is non refundable unless a) the seller (USCJ) defaults on the contract, or b) the waiver of right of first refusal from the condominium board is not secured, or c) the approvals of the NYS Attorney General and our kehillot are not secured. (On February 12, the waiver was received from the condominium board.) 5. Are we getting a fair, equitable and market competitive price for our current office space at 820? In December 2014, USCJ engaged Leitner Group Inc, a real estate appraisal firm, to conduct an appraisal of our current New York Offices located at nd Avenue, 10 th & 11 th Floors. They conducted a study of the premises (through an in person walkthrough), as well as studied sales of comparable real estate in the area. Based upon their review, they valuated the 2 floors that USCJ currently owns at nd Avenue at $15,900,000. As part of the sale, USCJ engaged Savillis Studley, a well known real estate adviser with expertise in the sale/purchase of real estate for non profits. Attached as Exhibit A and as a link is a spreadsheet of similar per square foot sales in the Grand Central/Midtown East area of Manhattan. As you can see, USCJ s sale price of $630 per square foot is the second highest in the area. 6. What will it cost to sell 820, build out the new space, and move the office? Sale, Buildout and Moving Costs min per Sq. Ft. max per Sq. Ft. Estimated Build out Cost ($80.00) ($85.00) Furniture, fixtures & equipment ($20.00) ($25.00) Other Fees (Moving, Wiring, Contingency, etc.) ($28.00) ($28.00) Landlord Contribution $60.00 $60.00 Capital Cost Per Sq. Ft. (including contingencies) 16,331 sq. ft. ($68.00) ($78.00) Total Buildout and Moving Capital Cost (for new space) ($1,110,508.00) ($1,273,818) Transaction Costs (for sale of 820) ($1,091,035.00) ($1,091,035.00) TOTAL COSTS (min/max) ($2,201,543.00) ($2,364,853.00) 3 P a g e

4 7. How does the rent in the new space compare with USCJ s cost in their current space? Year nd Avenue New Space Difference Current $361, Year 1 $453, $617, $164, Year 2 $469, $630, $161, Year 3 $485, $657, $171, Year 4 $508, $684, $176, *This projection assumes a 3% annual increase in maintenance costs as well as capital improvements and assessments. *The rent of the new space is net of subtenant rent of 65K annually generated from subleasing approximately 1500 square feet of said new location. *We have executed on February 13, a non binding Letter of Intent for space in lower Manhattan, so the location and space/cost numbers are subject to change if the final lease negotiations are not completed. 8. How will USCJ use the proceeds of the sale? Our board of directors is still in the process of determining the exact uses of these funds. That said, the board has made clear that a majority of the monies will go into a restricted fund to ensure a secure future for USCJ and the work we do on behalf of kehillot. Such funds will be managed by a separate board of directors and third party professional financial managers. In addition, there will be threshold standards for the release of funds, per guidelines to be developed by the Board. This fund would provide capital reserves, help sustain current programs, and seed innovative initiatives. The other net proceeds of the sale would go to pay down debt and provide working capital. More specifically, from the expected net sales of $13.5 to $14 million, the proceeds are expected to fall into the following categories: Repay line of credit loan $2,000,000 Working Capital $2,000,000 4, 000,000 Long Term Restricted Investment Fund $8,000,000 $10,000,000 The use of any Sales Proceeds will require advance USCJ Board approval. 9. What types of innovation initiatives would we support? There are numerous possibilities under discussion, based on our research and extensive work with congregations, as well as trends in Conservative Judaism generally. Ideas include: awarding micro grants for innovative programs for kehillot; engaging young adults, possibly through macro grants and developing new communities; seeding new kehillot in areas with large, unaffiliated populations not served by Conservative kehillot; 4 P a g e

5 investing in new technology for USCJ and its congregations; launching a new initiative to engage, and re engage, Baby Boomers; developing new marketing and communications initiatives for Conservative Judaism. Selected initiatives will be phased in over the next few years, subject to Board approval and progress on the deficit reduction plan outlined below, and the receipt of new philanthropy targeted for such initiatives. 10. What is USCJ s past financial performance? The single biggest financial challenge facing United Synagogue is a structural operating deficit. USCJ has been working for the past three years, and will continue working, to eliminate this deficit by cutting expenses, increasing revenues from philanthropy, and streamlining operations to focus on core functions. Over the last two years, we have cut expenses by about $1.5 million. Philanthropy has increased significantly. We are continuing to reduce overhead and administrative costs in order to eliminate the operating deficit completely over the next 3 4 years. USCJ Operating Deficits: FY 12 13: $1,800,000 FY 13 14: $1,070,000 In addition, there are several non operating budget items, such as debt service on certain loans, which has resulted in cash drawdowns on average of $500,000 to $600,000 per year. See our Independent Audited Financial Statements for the past several years on our website. 11. What effect will the sale have on USCJ s financial situation? Financial projections show that combined with continued expense cuts and expansion of philanthropic revenues, the sale will enable us to eliminate USCJ s current operating deficit in the next three to four years. Our financial projections take into account the fact that annual rental costs will be somewhat higher than carrying costs for our office condo. The overall impact of monetizing this real estate asset will be to greatly reduce debt service and provide working capital as we cut expenses, expand philanthropic revenues, and grow investment income from the proceeds of the sale. 12. What is USCJ s plan to eliminate the structural deficit in the next 3 to 4 years, and how will the sale affect such financial picture? Based on current conditions, USCJ s structural deficit (which includes debt service) is projected to average $(1,280,000) over the next three years. We plan to reduce and eventually eliminate this deficit primarily through expense reductions at USCJ, including the Fuchsberg Center, which average $800,000 through FY18. These reductions are in addition to the $1,500,000 in annual operating expense savings we have realized over the past two years. 5 P a g e

6 I. SUMMARY ANNUAL PROFORMA FY16 TO FY18 BEFORE DEFICIT REDUCTION PLAN Projected Average Gross Revenues $19,000,000 Projected Average Operating Expenses $19,900,000 Non Operating Expenses, such as debt service Up to $380,000 Average Structural Deficit per year $(1,280,000) II. PROFORMA PLAN TO ELIMINATE $(1,280,000) DEFICIT IN 3 4 YEARS Reductions in Debt Service and Other Payments (1) Up to $200,000 Expense Savings (2) $800, Sale: Additional Occupancy Costs $(170,000) 820 Sale Investment Earnings $350,000 to $400,000 Average Structural Deficit after Savings and Sale of 820 $(100,000) (1) By FY 17 (2) One half of reductions are in place as of February Does the sale mean that congregational dues to USCJ will be decreased? It does not. Congregational dues remain an essential component of support for USCJ s ability to provide valuable programs to kehillot and strengthen Conservative Judaism. In fact, because of the financial challenges facing many of our kehillot, since 2008 the total dues we collect have substantially decreased. Through our variance process, USCJ currently provides $1.3 million annually in unfunded dues subsidies. In addition, as background, between FY 2009 and FY 2013 the basic dues rate remained the same. There was a small increase ($1 per household) in FY And then in June 2014, after a vote of approval by our kehillot, we made changes that equalized the rates among districts. This change led some dues rates to go down and some to go up. For the last few years, we have offered a 5% early payment reduction. Using FY2009 as a base year, total dues collected have decreased $1,824,000 or 19.7% from $9,239,000 in 2009 to $7,415,000 in Our rates remained constant from 2009 to 2013 at $69.50 per member. In 2014, rates increased to $70.50 per member. If annual rates increased in proportion to the previous year s CPI, they would have increased approximately 2% per year (according to the Bureau of Labor Statistics). In 2014, our rate would have been $78.00 which is $7.50 or 10.6% higher than the rate $70.50 rate charged. The bottom line: Any reduction in dues would adversely affect our capacity to deliver the current programs for our kehillot and youth programs. 14. Do we have a plan if the sale is not approved? 6 P a g e

7 We have been spending much time and thought analyzing which hard asset at USCJ should be monetized and under what terms, as well as developing numerous alternative plans for expense reductions and the implementation of the Strategic Plan, based on available resources and projected philanthropy increases over time. Should our kehillot not approve the sale of 820, we would need to look at our liquidity and make additional personnel and program reductions, all involving significant further cutbacks in our services to kehillot and our teen programs. Simply put, such outcome would necessitate a drastic restructuring of USCJ. 15. What happens now? Under New York State law, the sale of the office space must be approved by a vote of USCJ congregations. Two thirds of congregations voting must approve the sale. NOTE: This is not a weighted vote based on membership. Each kehilla receives one vote. The vote will take place electronically between February 20 and March 12. The sale must ultimately be approved by the Attorney General of New York State. Once all approvals are obtained, the sale will be closed. The move to new offices is expected to take place in August or September. 16. How will congregations vote? On January 12, all USCJ member congregations received a notice of the sale. In advance of the vote, USCJ has provided ongoing information about the sale and opportunities for members to ask questions. This information has also been posted on our web site. There will be a two part voting process: first, registering to vote and then, the actual vote. Both will take place online. On February 11, congregations received instructions about the online voting process. On or before February 19, congregations will receive instructions about registering to vote and will be asked to register one person to vote on their behalf. After that person is registered, he or she will be sent an online link by which the actual vote will take place. Online voting will occur between February 20 and March How can congregations ask questions about the sale and vote? USCJ has notified congregations about two live webinars in which to learn about the sale and ask questions. One webinar was held on Tuesday, February 10 at 9 PM EST. The next will be held on Wednesday, February 18 at 1 PM EST. These webinars are being recorded for later reference; a link to the first is already posted on our web site. USCJ has set up a dedicated address, officesale@uscj.org, to which you may send any questions about the sale or vote and receive answers in a timely manner. 7 P a g e