The Bargain Sale, and When to Use It

by Dennis Bidwell
April 2013

In my experience there are many property owners with the motivation and financial capacity to make an outright gift of their real estate. That is why I always urge development officers to begin conversations with a prospective property donor with the possibility of an outright gift. When it becomes clear that the donor isn’t in a position to make an outright gift, but could make a partial gift of some sort, there are many different directions to go in at that point.

One of those directions—and one that is quite underutilized, in my experience—is the bargain sale. Not all donors wanting something back as part of the gift arrangement need to have someone else invest funds on their behalf for purposes of making period cash payments, i.e. charitable remainder trust or charitable gift annuity. Often such a donor would be quite delighted to receive a lump sum cash payment.

Enter the bargain sale. A property owner selling their property to an exempt non-profit organization at a price below the appraised fair market value of the property is entitled to a charitable deduction for the difference between the sales price and the appraised value. The deduction from this gift portion can often be used to offset some or all of the exposure to capital gains tax on the sale portion of the transaction. A charity contemplating such a transaction will need access to working capital to cover its purchase price and holding costs prior to the time it sells the property (unless simultaneous sales are arranged.)

Some non-profits are able to use cash in an endowment fund for such a purpose. And some charities, facing the need to come up with cash for the initial purchase, have had success in going to donors to ask for a short-term loan to cover the purchase cost.  It’s a loan that would be returned when the property re-sells.  Some friends of the organization are delighted to see their funds leveraged in this way.  If a donor is told, for example, that their short-term loan of, say $100,000, will make it possible for a net gift to the organization of $150,000, they might find this very appealing.

Technically, a charitable gift annuity funded with real estate is a form of bargain sale, where the “sales price” for the asset being “sold” is the value of the CGA contract. Similarly, the donation of property subject to mortgage is considered a bargain sale, because the non-profit’s agreement assume responsibility for the debt is the bargain “payment” made by the charity.

These are among the situations where I have seen a bargain sale work well for all involved:

  • Some property owners are eager to part with their property but dreading the marketing process. Some such owners are delighted to take considerably less than market value for their property in exchange for having the charity handle the marketing and the satisfaction of knowing they have made a meaningful gift.
  • Other property owners need a lump sum of cash (rather than a stream of income) for things like children’s’ weddings, purchasing other real estate, family travel, etc.
  • And some property owner would rather go through their existing investment relationships to generate income than have funds invested by a charity on their behalf.

A bargain sale can also be a very useful tool for organizations looking to acquire property for their own use at a discounted price. Land trusts seeking to acquire conservation-worthy property, and housing organizations  looking to acquire property for development as affordable housing, have enjoyed success in  offering a property owner a combination of discounted sales price and tax deduction as an alternative to negotiating with full appraised price as the starting point.

A very recent U.S. Tax Court decision confirmed that certain elements must be in place for the bargain sale to trigger a charitable deduction: 1) an acknowledgment letter from the charity stating that the charity paid $X for the gift of the property; 2) a qualified appraisal commissioned by the donor/seller; and 3) evidence of donative intent.
See https://www.ustaxcourt.gov/InOpHistoric/Boone3.TCM.WPD.pdf.

My advice to gift officers talking with property owners who have indicated a readiness to part with their real estate:  After pursuing the outright gift possibility, keep the bargain sale possibility in mind!

Bargain Sale Case Study: A Washington DC Condo and George Washington University

by Dennis Bidwell
April 2013

Take-aways from this gift scenario:

  • Approval of this gift involved various departments at George Washington University: Planned Giving, Risk Management, Legal, Facilities Management, CFO, and Vice President for Advancement. It all worked smoothly because GWU had previously invested time in thinking through the procedures for evaluating and accepting real estate gifts such as this.
  • The gift was made possible by GWU’s access to $1,000,000 of “working capital.”  It turned out to be a pretty good use of capital: a return of 75% on a $1,000,000 investment, in four months time.
  • Word of this transaction is working its way through the Capitol Area brokerage community. GWU has already received other inquiries about bargain sales.

In mid-2012 George Washington University was contacted by the owners of a very large penthouse condominium in Washington, DC –  a GWU alumna and her sister.  The owners had consolidated what had previously been five separate units, and extensively renovated their enlarged unit in the 1980s. The donors’ recent appraisal valued the property—including four parking spaces—in excess of $2,000,000.

The donors understood that there was a way to make a partial gift of their condominium to the university, so that they could emerge with some cash on their part.  The parties agreed that a bargain sale would work for all involved. For the donors it would provide a lump sum of cash, a substantial charitable deduction, and reduced capital gains exposure. The arrangement would also relieve the donors of the hassle of marketing the property themselves.

Once there was a meeting of the minds as to the basic terms of the gift, GWU undertook extensive due diligence, including a home inspection, a Phase I environmental assessment, and a life safety inspection.  GW also commissioned its own appraisal.

Once due diligence investigations proved satisfactory, the parties proceeded to closing. In December, 2012, the university paid the owners $1,000,000 for their property, using funds from its General Fund. The difference between that sales price and the appraised value determined by the donors’ qualified appraisal will be treated as a charitable contribution by the donors.

GWU immediately listed the property for sale, and found a motivated and qualified buyer in fairly short order.  In March, 2013, the university sold the property for $1,900,000.

In the end, the net value of the gift to GWU was about $750,000—the $900,000 difference between their purchase price and their sales price, less about $150,000 in expenses (realtor fee, due diligence costs, transfer taxes, closing costs, etc.)

–  Thanks to my colleague Chase Magnuson at GWU for providing the basic facts of this case study.

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.”