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.