Redevelopment CCIM Feature

Donations Demystified

CCIMs can play a role in the real estate gifting process.

Charitable gifting through donations of real estate is one of the most underutilized methods of transferring assets in today’s market. An estimated $300,000 billion of assets are given to more than 1.3 million 501C3 charities in the U.S. each year, but less than 3 percent of those donations involve real estate equities. This disparity is not for lack of availability: Approximately 43 percent of the estimated $64 trillion in U.S. capital wealth involves real estate.

Why is there such a disparity between the value of the real estate available for contributions to charities and the amount that is actually donated? In many cases, the investors/owners are unaware that donation can be a viable means to dispose of property. In addition, charities turn down an estimated 80 percent real estate donations offered to them. Reasons range from fear of the drain on time-challenged staff members to lack of familiarity with donation procedures, evaluation processes, and legal and tax issues, to the perceived complexity of due diligence and removal of encumbrances. Environmental horror stories and holding costs for maintenance, entitlements, and market futures also cause some charities to shy away from real estate donations.

Real Estate Donation Fundamentals

Unfortunately, many development directors at charitable institutions and real estate professionals are familiar with the infamous Boys Scouts of America real estate donation case. In short, BSA was the recipient of an environmentally impacted tract of land located outside of Chicago that ultimately cost the organization millions of dollars.

This case illustrates how improper or insufficient due diligence can derail the real estate donation process. With the assistance of qualified local commercial real estate experts, such as CCIMs, charitable entities have the ability to perform thorough and proper due diligence. The goal — and responsibility — in the real estate gifting process is to ensure that all parties are fully and clearly represented. (See sidebar for a case study of a successful manufacturing facility donation.)

Unlike standard real estate transactions where legal representation is sufficient, gifting of real estate involves a team, which, in many cases, is coordinated by a qualified real estate broker. On the donor side the team includes an attorney, a financial planner, an accountant, and an appraiser. On the donee side, in addition to real estate and legal representatives, specialists such as engineers may be required.

In cases where the charity has neither the time nor financial resources required to proceed with such a transaction, a third-party professional facilitator such as the Education Foundation of the CCIM Institute can be used to streamline the donation process. The foundation is a 501C3 entity that is equipped to manage all facets of a real estate donation on behalf of the charity, including receiving and liquidating the property, for a percentage of the cash received. (See sidebar about the foundation’s Real Estate Gifting Realized program.)

Gift Structures and Benefits

There are many different ways that the gifting of real estate can be accomplished depending on the donor’s goals. An outright gift is the most straightforward method of donating a real estate asset. The main benefit of outright gifting is that the donor may take the full appraised value of the asset as a tax deduction at the time of the title transfer to the charity. The donor also has the benefit of determining the timing of the asset disposal and can mitigate costly delays in transferring title.

Bargain sales are another option whereby the difference between the market price and the sales price is a tax deductible gift. Therefore, a donor can receive part of the equity and at the same time have a tax deduction. Charitable remainder trusts can be structured where the real estate is utilized as a funding source. With CRTs, the donor deeds the property into an irrevocable trust and receives an income stream; upon termination of the trust, the charity receives the remaining assets. Through a CRT, the corporation or individual avoids capital gains taxes and receives a tax deduction and cash flow. Bequests and retained life estates are estate planning methods that can also ultimately benefit the charity.

Although philanthropic intent should be an overriding factor in any charitable donation, several other benefits can accrue to a donor, such as relief from capital gains taxes; reduction of federal, state, and transfer taxes; elimination of management responsibility; and potential for an income stream.

From a real estate broker’s standpoint, there are also many potential benefits. For charitable donations of real estate, brokers can earn fees through the normal commission process or on an hourly basis, depending upon the scope of their services. Working with charities also can provide marketing opportunities and referrals, along with positive public relations exposure.

There are many individuals, investors, and corporate real estate professionals who are faced with non-productive real estate assets that are difficult to move. And, even though a certain value can easily be justified, the ultimate sales price may reflect a significant discount. The charitable gifting of that real estate may actually be the best exit strategy when weighing such considerations as timing, economics, and public relations.

Duncan Patterson, CCIM, is president of Patterson-Woods & Associates LLC in Greenville, Del. Patterson is a past president of the CCIM Institute and of the Education Foundation of the CCIM Institute. He currently serves as a member of the foundation’s Real Estate Gifting Realized program. Contact him at wppatterson@pattersonwoods.com.

Case Study: Obsolete Manufacturing Facility

In today’s market conditions, many corporations can benefit from donating under-utilized property to charitable organizations. Corporations that own properties with strict environmental regulations or special-use limitations, in poor locations, or structural deficiencies can achieve quick disposition of an asset through a charitable donation.

In one such case, a major manufacturing corporation located in the Southeast owned an outdated and economically obsolete property that had been vacant for several years. Located on approximately 47 acres of land within an industrial/light manufacturing area with access to rail and highway transportation, the facilities consisted of three main buildings totaling 103,000 square feet.

Updating the facility would have required funds the owner was not willing to invest. In addition, the corporation was spending more than $100,000 per year in holding costs to maintain the property, not including internal management time.

The solution presented to the owners was a disposition strategy structured as a donation to a charitable 501C3 corporation. For the owners, the donation value based on appraisal was $2.25 million. For the charity, the sale value was $600,000 within 90 days. Moreover, the Internal Revenue Service audited the donation transaction and no adjustment was made to the deduction claim.

In this case, the benefits of donating the property included:

• eliminating the costs and risks of ownership;

• benefiting from a quick transaction;

• receiving a tax deduction equal to the fair market value of the real estate;

• recycling the property quickly, which improved public relations;

• allowing a better allocation of the corporation’s resources;

• eliminating a capital gains tax with the donation; and

• providing more after-tax dollars than with a conventional sale.

In fact, there are circumstances where a charitable transaction may outperform a conventional sale, such as when fair market value established by an appraisal exceeds the most readily available offer, the sale or offer is all cash, or the seller has exposed, taxable income. — Chase V. Magnuson, CCIM, president of Real Estate for Charities in Arlington, Va.

CCIM Foundation Launches Gifting Program

With its best-of-class real estate heritage and its work to advance knowledge and professionalism in the commercial investment real estate industry, the not-for-profit Education Foundation of the CCIM Institute is uniquely qualified to simplify problematic real estate donations for any qualified charity. With Real Estate Gifting Realized, fundraisers may be able to confidently secure the donation of residential and commercial real estate-related assets with less risk and minimal involvement for every gifting option.

CCIM Institute members are well equipped to serve as resources in the charitable real estate donation process. The CCIM education, skill set, and market knowledge give members unique insight into the process of establishing the fair market value for donation properties among other aspects of the transaction. Their services can be structured as standard commission- or fee-based projects and can provide an additional form of income for brokerages.

For fundraisers involved with qualifying foundations, charities, and nonprofits, the willingness of property owners to provide charitable donations of real estate is an avenue for needed funding to help offset reduced donations in other categories. In fact, according to the Internal Revenue Service, the average real estate gift exceeds $700,000 per donation.

The Education Foundation is prepared to facilitate real estate donations for other organizations. Donors may qualify for a tax benefit based on the current fair market value of the property, not the original purchase price. This type of gift is compliant with federal tax code and accepted by the IRS.

CCIMs who have clients that may benefit from donating property or know of charitable organizations that can benefit from real estate donations can work with the Real Estate Gifting Realized program to help clients realize the fiscal advantages of disposing of real estate through a charitable contribution.

Referral Resource

To refer an organization or learn more about Real Estate Gifting Realized, visit www.realestategifting.org, or contact Douglas Strickland, director of real estate gifting, at doug@ccimef.org.

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