Investment Analysis

Donation Equation

Here’s how to solve planned real estate gift conundrums.

A tremendous opportunity exists for commercial real estate agents to produce additional income and public relations benefits by providing professional services to some of the 1.6 million U.S. public charities. These charities process roughly $3 billion in real estate donations every year, from property types that include single-family homes, apartment buildings, shopping centers, industrial complexes, timber and mineral rights, medical offices, and vacant land to name a few.

The CCIM Foundation has developed Real Estate Gifting Realized (www.realestategifting.org), a program that allows CCIM members to realize a unique win-win opportunity when they participate in transactions involving charitable gifts of real estate. Practitioners who understand and use the tools this program provides may generate new sources for income, including new listing and sale assignments, consulting projects, joint venture development, and estate trust representation.

The niche market of managing the real estate donation process takes a combination of understanding the various gifting arrangements charities and donors might use, tax implications, and relationship nurturing with the involved parties. CCIMs have these skill sets; by repositioning them, they can access the transaction flow created by gifting arrangements.

Many charities have very broad fundraising efforts with specialties in real estate donation. Donors fund their philanthropic goals while achieving worthwhile tax savings. There are numerous reasons donors decide to gift their properties rather than sell them, including interest in avoiding taxes, stepping out of property management responsibilities, solving estate and family issues, or exchanging equities for lifetime incomes guaranteed by the charity.

A Case Study

The following case study presents some of the issues and challenges that occur in real estate gifting transactions.

A donor approached a fundraising staff member at George Washington University with an offer to donate her rental condominium. She was very excited because it was under contract to sell for $550,000 with closing to take place in 10 days. The university requires the fundraising staff to work with a real estate specialist when dealing with potential real estate donations, and at the first meeting with the donor, they discussed the prearranged sale.

The donor was advised that the university would be happy to receive the gift, but under the circumstances, the donor would be subject to a huge capital gains tax. (The basis in the property was $50,000). The donor did not understand why the charity would not accept the gift and give her full gift credit. The initial gift of the condo was to be the first of two property gifts she would use toward funding an ultimate gift of a $1 million endowed scholarship. She planned to add the equity in a second property to the pool for the endowed fund. Should the two net equities not equal $1 million, she intended to make up the short fall with a provision in her will or use cash assets to fill out the commitment.

Losing credit for the first transaction was not an option if the charity wanted to save this wonderful donation. The team of accountants and attorneys involved in the original property purchase agreement came up with a solution. The donor/seller and buyer agreed to amend the purchase agreement to allow the donor/seller to add a provision for an Internal Revenue Service Section 1031 exchange. By exchanging the equity in the property for another property, it allowed the donor to freely donate the second property without capital gains taxation.

The purchase of the condo was completed as planned. The net proceeds from the closing were placed into an escrow account controlled by a facilitating agent. With the expertise of the university’s real estate specialist, a replacement property was located and purchased within the guidance of IRS 1031 exchange provisions.

Once the second property was closed, the donor leased the property for a short period of time and decided to move forward with a bargain sales agreement. This is a simple agreement in which a donor sells securities, real estate, tangible personal property, or other assets to a qualified charity for less than their fair market value.

The bargain sale reimbursed the donor for costs related to the property exchange and the university for funds advanced to repair the replacement property. After the reimbursements were made, the gift was booked at very nearly the face value of the original property value when it was first offered as a gift.

A buyer was located for the second property and closing took place. Funds were distributed to each party as the donation agreement spelled out.

The professionals who play a role in this type of arrangement included a tax attorney, certified public accountant, title company officer, the university’s general counsel, a facilitating agent, and a Realtor with Section 1031 exchange experience.

CCIM members might be well served to use their creative real estate knowledge to help public charities fulfill their missions. It is estimated that more than $65 trillion of assets will be transferred by this generation to the next during the next 25 years. About 40 percent of this amount is in real estate equities. Seize the day!

Chase V. Magnuson, CCIM, is president of Real Estate for Charities in Arlington, Va. Contact him at chasemagnuson@msn.com.

Recommended

Demystifying Defeasance

Summer 2021

Securitized debt can seem daunting, but it’s possible to sell or refinance assets. 

Read More

Return Policies

Summer 2021

Institutional investment and private equity look to reenter the commercial real estate game after staying on the sidelines during COVID-19. 

Read More

Failing to Plan

Spring 2021

Commercial real estate should be a profit generator whenever possible, which may require creative thinking.

Read More

Surviving Retail in Troubled Times

Winter 2021

The COVID-19 pandemic has exacerbated and accelerated already challenging circumstances for shopping malls and their owners, but there may be other options for these beleaguered assets.

Read More