As the real estate market continues to recover in many areas of the country, charities are reporting increased interest in gifts of real estate. Like the beautiful but dangerous Sirens in Greek Mythology that lured sailors to their doom, gifts of real estate lure planned giving officers with the promise of six and seven figure gifts. Just as Odysseus successfully navigated his crew past the seductive Sirens, the charity’s objective with gifts of real estate is to identify the risks, determine if there is a safe route of passage, and then conclude if the risk is worth the reward.
Charities large and small are (rightfully) wary of gifts of real estate. Thorough due diligence is mandatory, but careful evaluation is time consuming and potentially costly. As such, the charity should conduct its due diligence in stages, so as to complete the process in the most cost-effective fashion.. The first stage should focus on obtaining as much information as possible with minimal expenditure of the charity’s funds. After assessing this information, the charity can determine if the potential gift warrants further due diligence involving professionals who will charge fees for their services. Even if the charity’s gift acceptance policy does not allow for gifts of real estate, the first stage of due diligence should be undertaken. There are options to accept these gifts outside of the charity. This is discussed later in this article. Here’s how to proceed with the first – and least costly- stage of due diligence.
Will the property be used in the charity’s mission (for example, does the property adjoin a college campus)? If so, then the charity may be inclined to assume greater risk, providing the risk is known. Commercial, industrial, multi-family properties and land can be lucrative gifts, but may raise more complex issues than residential real estate. This article assumes that the property to be contributed is residential, will be given as an outright gift, and is to be sold as soon as possible.
Is the prospective donor known to the charity? If a college or university, is the donor a member of the alumni body? If a national cause organization, has the donor ever made a gift? If the donor is not known and has never made a gift, ask the donor why your charity was selected. If the donor can be visited, go visit! What are the donor’s expectations for this gift? Is a gift to charity the donor’s last resort to get rid of the property? Don’t be reluctant to perform due diligence on the donor as well as the property.
Much of the information about the property can be obtained by sending a questionnaire to the donor. However, to rely only on the information provided by the donor would be careless. The adage “trust but verify” could be updated to “verify and verify.” On-line databases contain a wealth of information at little or no cost. If your charity has a prospect researcher, they are expert at obtaining this information.
(a) Title. Who or what legal entity is the record owner of the property? Are there other owners along with the donor?
(b) Chain of title. When did the owner acquire title, and how (i.e. purchase, inheritance, lifetime gift)?
(c) Mortgages, judgments, liens, taxes. What is recorded against the property? Are there outstanding mortgages? Judgments? Tax liens? Pending litigation? This is one area where an investment in a title search is money well spent.
(d) Zoning – How is the property zoned? Is the current use of the property legal? A call or visit to the zoning office in the municipality where the property is located will yield this information.
(e) Associations. Is the property part of a condominium, co-op, or homeowners association? If so, obtain the governing documents from the donor. If the gift progresses, get an up-to-date copy of the documents directly from the management company. Are there any restrictions that might prohibit the gift? Call the management company. They won’t give you information about the owner’s financial situation, but in many cases will disclose community situations such as pending assessments, litigation, or community issues that need to be disclosed to a prospective owner.
(f) Occupancy. It is always preferable to get a vacant property. If the property is subject to a lease, you must obtain a copy of the lease agreement from the donor. If the gift proceeds to the next step, you will want to verify with the tenant, in writing, that the lease is correct and that there are no collateral agreements, written or oral.
Just as Odysseus had a strategy to avoid the Sirens, the charity needs a strategy to liquidate the property once the gift is completed. As part of this first stage of due diligence the charity will want to consult with real estate brokers in the area to assess marketability. Go on-line and see which real estate firms have a market dominance in the location of the property. This can be determined by reviewing the properties listed for sale near the subject property. Call one or two real estate companies and ask for the office manager or broker of record. You don’t want to rely on the person who answered the phone who may have obtained their real estate license the day before. Be discreet with the exact location of the property, at least at this stage of due diligence. If you move to the next stage of due diligence, you will want three Realtors to do a written comparative market analysis for fair market value and the projected time required to market and sell the property.
At the Crossroads
Up to this point, the charity has spent mostly staff time and few if any funds to perform the first stage of due diligence. It is now time to present your findings to charity leadership (ideally the charity will have a Gift Acceptance Committee) to review the information that has been compiled. Is the gift worth pursing such that the charity is willing to spend funds for an environmental report, building inspection, and real estate attorney where the property is located? Should the charity wish to move forward, the donor will need to obtain and pay for a qualified appraisal meeting IRS requirements to document the income tax charitable deduction. The charity will want a copy of the qualified appraisal.
Exploring Alternatives for Accepting the Gift
If the charity does not accept gifts of real estate or does so with great trepidation, there are alternatives. A Single Member Limited Liability Company (Single Member LLC), with the charity as the sole member, can be established to accept the real estate. The Single Member LLC protects the charity’s other assets in the event a liability issue arises with the property. Professional advisors should always be consulted in these matters.
Another option to accept a gift of real estate without the direct involvement of the charity is to use a community foundation with which the charity has a relationship. Some community foundations will accept and administer a gift of real estate on behalf of other charities. It’s getting more difficult to find a community foundation that will accept real estate, but they do exist.
Some of the larger investment brokerage companies have established IRC 501(c) (3) charitable entities to sponsor donor-advised fund programs. The property can be transferred to a donor-advised fund at the sponsoring charity maintained at the investment company. The donor gets their income tax charitable deduction. After the sale, the sponsoring charity makes a grant of the proceeds to the charity suggested by the donor. The threshold required for the value of the property being contributed can be quite high. Even so, this option is worth exploring.
Gifts of real estate can be a source of significant resources for charities. Some basic and inexpensive due diligence can indicate if the voyage from acceptance to liquidation will be smooth or stormy. Be prepared to bring in experienced navigators if needed. May the winds be at your back for all gifts of real estate.