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.”

Case Study: Real Estate-Funded Charitable Gift Annuities at Kendal Retirement Communities

by Dennis Bidwell
September 2012

Take-aways from these gift scenarios:

  1. Real estate-funded CGAs are attractive to many property owners wary of variable CRT payouts.  Also, the relative simplicity of a CGA contract, compared to a lawyer-intensive CRT document, is appealing to many donors.
  2. Many residents of non-profit retirement communities continue to own property—often a vacation home—long after they have moved in to their new community.  And many of these residents, as they move in to their eighties, are attracted to the prospect of having someone else assume responsibility for marketing their property.
  3. For non-profits, there are proven ways to manage the risk of CGAs funded with real estate. Besides deferring the CGA one or more years and making prudent adjustments to payout rates, the use of option agreements, pre-marketing and other techniques are available as risk-management approaches.

In recent years Kendal Charitable Funds (KCF), formed to support the charitable purposes of the Kendal network of non-profit retirement communities, has been offering to help communities structure, process and close real estate gifts, including charitable gift annuities. The marketing undertaken by Kendal has recently produced two real estate-funded CGA gifts that have worked out well for all involved.

The Wallaces (not their real names), residents of a mid-west Kendal community, had arrived at a point in their lives where continued ownership of their vacation home in North Carolina was more trouble than enjoyment.  With the agreement of their three children, they approached their Kendal community about donating their property in exchange for income for life.  KCF, working with the Wallaces, determined that the property was marketable and devoid of environmental issues.  Based on the Wallaces’ appraisal and local market investigations, KCF and the family agreed on the terms of a one-year deferred charitable gift annuity.  The face amount was based on the donors’ appraisal, but the rate was discounted from ACGA-recommended rates based on a conservative estimate of marketing time, holding costs and eventual sales price.  Fortunately, an abutting property owner stepped forward to express interest in the property, and KCF sold it to him without incurring brokerage costs.

When all was said and done, the Wallaces were able to turn over the marketing of their property to KCF, they began receiving their promised quarterly annuity payments one year later, they received a substantial income tax deduction, and they have the satisfaction of knowing they have made a very generous contribution to their Kendal community. At the time the CGA matures, Kendal Charitable Funds will remit to the Kendal community the balance in the CGA account, less the expenses incurred in structuring the gift at the outset.

A short time later, the Bigelows (not their real names), residents of mid-Atlantic Kendal community, expressed interest in donating their near-by home to Kendal in exchange for annuity payments for life.  Market investigations revealed that the home might require some investment before sale, and might represent somewhat of a marketing challenge. All of this was factored in to the discounted CGA rates agreed to by the parties. As with the Wallaces, the CGA was deferred one year, with a face value equal to the appraisal commissioned by the owners.  Despite deteriorating market conditions, a good local broker was able to obtain a buyer for the property, long before the first annuity payments to the Bigelows were due. The Bigelows were relieved to have KCF handle the marketing of their property, and were delighted to make a substantial gift resulting in lifetime income and a tax deduction.  As in the case of the Wallaces, KCF will remit the balance in the CGA fund, net of expenses, to the local Kendal community at the time the CGA has matured.

Kendal Charitable Funds and the Kendal communities expect that the example set by the Wallaces and the Bigelows will motivate other Kendal residents to consider similar gifts.