Debunking Six Myths about Real Estate Gifts

by Dennis Bidwell
November 2012

Myth #1: If a property owner is offering a piece of real estate as a gift, there must be something wrong with it.  Most of the time this is simply not true. These days property owners are exploring giving away perfectly fine pieces of real estate because: 1) they have grown weary of continuing to own and manage a property — often a vacation home — they no longer use; 2) they are wary of marketing the property themselves; 3) they like the idea of making a wonderful gift while retaining their cash; 4) they can use the substantial charitable contribution deductions triggered by such a gift, and then like avoiding  or reducing the capital gains taxes that might have been payable in the case of a sale.

Non-profits that have ramped up their real estate gift activity have grown very good at quickly deflecting the problematic gift offerings, and spending their time instead on the promising real estate gift possibilities. Also, charities that actively pursue real estate gifts – through marketing and by initiating conversations with prospects – tend to see a much high quality of property offered up than those who don’t market and see only the occasional, often problematic, property that is sometimes being shopped around.

Myth #2: The staff time and upfront expenses of evaluating and structuring a possible real estate gift just isn’t worth it. In the latest IRS report on non-cash charitable gifts (2009), the average real estate donation for donors 65 and older (the bulk of real estate donors) was reported as $585,000. Yes, real estate gifts can be time-consuming and require some investment in due diligence investigations. And yes, not every gift explored makes it across the finish line. But, I would argue, the magnitude of real estate gifts more than justifies an investment in ramping up a carefully thought-out real estate gift effort.

Myth #3: Most gifts of real estate are deferred in some way, meaning we won’t have cash to use for many years.  In fact, surveys show that more real estate gifts these days are given outright than through life income arrangements or subject to retained life estates. Outright gifts are often liquidated and fully useable by the charity in a matter of months.

Myth #4: Most property offered as a gift has a mortgage on it.  This is not true. The vast majority of property offered as a gift of some sort is offered by donors over 65 years of age. And we know (from the Statistical Abstract of the U.S.) that 83% of the real estate owned by folks 65 and older is debt-free.  In situations where a property is encumbered with a mortgage, there are often work-arounds making it possible to complete the gift nonetheless.

Myth #5: Property owners are resistant to having development officers talk to them about their real estate holdings. To the contrary, it is my experience that many aging owners of property welcome fresh new ideas about how they might dispose of real estate that is weighing on their minds. When a non-profit representative presents the outright gift possibility, or life income arrangements, or a retained life estate as a possible approach to a dilemma, the property owner often welcomes the introduction of new possible solutions. Whether a gift results from such conversations or not, it is my experience that the prospect usually appreciates the suggestions.

Myth #6: You should never accept real estate as the asset funding a Charitable Gift Annuity. The traditional reluctance to fund CGAs with real estate is gradually giving way to the realization that many property owners want to convert “non-performing” real estate assets into supplemental retirement income, but would only do it if they could lock in a return (as opposed to being exposed to the market variability of a real estate-funded Charitable Remainder Trust.) This transition is aided by the availability of various proven techniques for avoiding the liquidity risk associated with real estate-funded CGAs. Among these techniques: marketing of the property prior to the charity taking title; deferring the CGA one or more years, to allow ample marketing time; using a “charitable put option” to identify a qualified buyer prior to issuing the CGA contract; and making downward adjustments to the CGA payout rate to reflect the estimated holding costs and other expenses of working through the CGA arrangement.

Case Study: Outright Gift of Florida Condo Funds Bryn Mawr Scholarships

by Dennis Bidwell
November 2012

Take-aways from this gift scenario:

  1. Many donors have the capacity to make outright gifts of real estate, which can be converted to cash and put to use in a very short period of time.  For this reason real estate gifts are being pursued as often by major gift officers and principal gift officers as planned gift officers.
  2. A condominium association will often be quite cooperative in facilitating the gift and resale of a condominium property.
  3. Florida properties owned by Northeast residents can make wonderful gifts. Many institutions have generated real estate gifts by discussing the vacation homes, in Florida and other states, owned by their aging alums.

In the fall of 2010 a Bryn Mawr major gifts officer was visiting an alumna — a 70-year old successful New York judge and lawyer – who mentioned in casual conversation that she was no longer using her Broward County, Florida seaside condominium.  The gift officer raised the possibility of gifting the property. Because the grateful alum was hoping to make a significant gift to the College, she liked the idea, particularly if the donation could happen by year-end. She said “I had always hoped to make a substantial contribution to Bryn Mawr and express my gratitude for the excellent education that contributed to the professional success I have achieved.” She was very much aware of recent declines in the Florida condominium market, but trusted Bryn Mawr to sell the property at the best price attainable given current market conditions.

A team was quickly assembled: an attorney to arrange a title search and handle conveyances, a broker to help determine market value and to implement a marketing strategy, and a building inspector.  No problems with title, marketability or building conditions emerged from these due diligence inspections. College officials agreed to accept the property gift, but couldn’t guarantee that the gift would be completed by year-end.

Meanwhile, the property owner commissioned her own appraisal, to substantiate the charitable deduction she expected to take on her current year’s tax return. She also facilitated discussions with representatives of the condominium association, whose approval was required both for the donation to the College, and for the College’s sale to a new owner.

Once the condo association’s approval was in hand, the property was deeded over to the College, in December, and the donor’s IRS Form 8283 was completed by her appraiser and CPA, and signed off on by the College. The College assumed responsibility for property taxes, condo fees, and for looking after the property.

Marketing of the property began immediately, with an initial emphasis on other owners within the seaside building.  After several months, mailings and print advertising were used to generate additional interest in the property, which sold in April of 2011.

The donor is thrilled that her gift could be put to work immediately funding scholarships.  She said: “During challenging economic times, students will be able to complete their education uninterrupted and unburdened.  Making this gift gives me great satisfaction, knowing that I am extending the Bryn Mawr experience to future generations of young women.”