Real Estate Gifts and Non-Profit Retirement Communities

October 11, 2010

I have recently had occasion to work with several non-profit retirement communities, helping them attract and structure real estate gifts.  My experience with such communities is that their residents may have disposed of their primary home (though some still own them), but many of them continue to own a summer home on the lake or on the shore, or a farm, or an investment property.  Many times these property owners, as they age, are especially receptive to ideas about how they might dispose of their real estate in a way that benefits charities in their life (including the retirement community)  while addressing their tax planning and/or retirement income needs.

In other instances, I have seen non-profit retirement communities work with prospective new residents to see if a donation of their home could meet the entrance fee (or purchase price) requirements of moving into the community.

I have often wondered why more non-profit retirement communities don’t explore ways that they could provide a valuable service to their residents – helping dispose of increasingly burdensome real estate — while at the same time opening up the possibility of substantial charitable gifts, to their organization and others as well.

Why Not a Charitable Gift Annuity Funded with your Property?

October 9, 2010

Let’s say that you are in your 70s, and have for some years not been getting much use out of your vacation home on the shore. Instead, you’ve been renting it out more and more, and have become rather accustomed to the extra cash flow from your property.

But now, as you age, the hassles of maintaining the property (and of paying taxes, utilities, repairs, etc.) and carrying around that responsibility are starting to outweigh the benefits of property ownership. Which means it’s time to dispose of the property.

Let’s also say that you have watched friends go through this process, and this has left you dreading the task of listing the property, working with a broker, adjusting he asking price, fielding offers, and working the process all the way through to a closing. (Not to mention you’re not excited at the prospect of paying a very considerable capital gains tax upon the sale of your low-basis property.)

So, what is the alternative?

Well, if your financial situation permitted, you could make an outright gift of the property to a charity of significance to you. You would be eligible for a charitable tax deduction equal to the current appraised value of the property, there would be absolutely no capital gains tax paid, you would have made a magnificent gift. And the charity, not you, would assume all the responsibility for selling the property.

If you’re not in position to give it away outright, and instead need a continuing stream of income, perhaps you could talk with a charity of meaning to you about funding a charitable gift annuity with your waterside property. With a gift annuity, you would lock in a steady, regular income stream for the rest of your life, you would generate a substantial tax deduction, and you would pass on to the charity (as in the case of an outright gift) the responsibility for selling the property.

More and more charities are interested in working with property owners on this sort of arrangement, because they have become more adept at structuring the arrangement in ways that minimize the risks that they might need to begin making annuity payments prior to the time they’ve sold the property.  Also, an increasing number of charities are recognizing that many property owners want to roll their property into a steady income stream, not the variable income that would come from a charitable remainder trust.

If the situation above sounds a little bit like yours, talk with your advisors, or talk with your favorite charity, about the possibility of a charitable gift annuity funded by a property that you are ready to dispose of however reluctantly.

The Buy vs. Lease Decision

October 7, 2010

I am a fan of the work of the Nonprofit Finance Fund.  Through consulting services, financing, and advocacy, they help all sorts of nonprofit organizations stay in financial balance, so that they’re able to successfully adapt to changing financial circumstances — in both good and bad economic times — and grow and innovate when they’re ready.

Recently, an executive of NFF told me that it was his organization’s experience in recent years that of the nonprofits reporting financial distress of some sort, fully 95% of those financially troubled organizations had real estate ownership problems at the core of their financial difficulties.

For example, a nonprofit was given a property for their use, but didn’t anticipate the long term costs and hassles of property ownership. Or perhaps a nonprofit mounted a capital campaign for acquiring a headquarters building, not fully understanding the impact on their operating budget of the operations, maintenance and capital improvements required over the years.

Too seldom, in my experience, do nonprofits take a hard analytical look at the true costs, advantages and disadvantages, of the buy vs. rent decision.  Too many nonprofits tie their hands through long term ownership, rather than staying nimble through property leases. Too many nonprofits, in my opinion, wind up with way too much of their capital in a fixed real estate investment, when they’d be better off with more of that capital in cash reserves and endowment.

I recently was asked by The Cancer Connection, a wonderful nonprofit here in Northampton, to help them consider the possibility of mounting a capital campaign for the purpose of buying a facility to replace the leased space they had outgrown. As we worked it through, their board became convinced that they were in the business of providing services to individuals and families affected by cancer, not in the business of owning and managing real estate. We then proceeded to find suitable space, negotiate a long term lease, and launch a campaign to raise the money necessary for various leasehold improvements.  The result? Cancer Connection is in larger, better suited space, they raised all the money necessary to pay for improvements, and their cash reserves have remained intact, available for operating purposes and program expansion, not tied up in property ownership.

IRS Study Documents Increase in Real Estate Gifts

October 1, 2010

Starting with Tax Year 2003 the IRS has been producing reports called “Individual Noncash Charitable Contributions.”  IRS researchers have examined Form 8283 (Noncash Charitable Contributions) used to substantiate charitable deductions greater than $500 claimed on Schedule A (Itemized Deductions) of Form 1040.

In the spring of 2010 such a study was issued for the Tax Year 2007.  Here is a quick comparison of key real estate gift data from Tax year 2005 vs. Tax Year 2007.

What does this mean?

I think it means that in the middle of the decade the idea of real estate giving was grabbing hold.  Total real estate giving increased by over 30% during this period, with an especially dramatic increase (261%!) in the average size of the gift for donors 65 years and older.  This is especially significant, as a very high percentage of real estate giving comes from these older donors.

I predict that we will see a continuation of this trend once the IRS issues its report for Tax Year 2009.

When development officers tell me that real estate gifts are time consuming, sometimes complicated, and that some are pursued without ever making it to completion, I agree with all of this. But I point out: If the size of the gift is likely to be in the range of $400,000 or $500,000 or more, isn’t it worth a little investment of time and resources? Explain to me how this is a poor return on investment?

Here’s a link to the complete IRS Report: http://www.irs.gov/pub/irs-soi/10sprbulindcont07.pdf