CGNA: Chapter 1 - Real Estate | Quick Take-Aways

CGNA: Chapter 1 - Real Estate | Quick Take-Aways

Article posted in Assets on 22 August 2017| comments
audience: National Publication, Bryan K. Clontz, CFP®, CLU, ChFC, CAP, AEP | last updated: 24 August 2017
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Summary

As we get further into gifts of noncash assets, we begin with one of the most common, real estate.

This article is an excerpt from Charitable Gifts of Noncash Assets, a comprehensive guide to illiquid giving by Bryan Clontz, ed. Ryan Raffin. Published by the American College of Financial Services for the Chartered Advisor in Philanthropy Program (CAP), with generous funding from Leon L. Levy. For a free digital copy, click here, and to order a bound copy from Amazon, click here.

By Bryan Clontz

Below are quick take-aways on gifts of real estate. Real estate topics are based on the following paper I co-authored with Dennis Bidwell, “Converting Real Estate Wealth to Gifts—Opportunities and Challenges.” For quick take-aways on gifts of real estate, see Real Estate Quick Take-Aways. For a review based on that article, see Real Estate Intermediate. For an in-depth examination adapted and excerpted from the article, see Real Estate Advanced. For further details, see Real Estate Additional Resources or cross reference to the asset’s ownership entity (e.g., LLC, Limited Partnerships, etc).

As an asset class, real estate has both the advantages and disadvantages of familiarity. Although a vast proportion of the nation (and world’s) wealth is in real estate, it is often perceived as a difficult asset to donate. Below is an overview of the advantages, disadvantages, and possible wrinkles of real estate donations.

Advantages of donations of real estate include:

  • Real estate is often highly appreciated in value, in particular when commercial property has been depreciated, meaning a large fair market value deduction for donors.
  • Donated real estate may create significant revenue for the charity on sale.
  • Since real estate is such a commonly-held asset, there is a large pool of potential donors.
  • Laws and regulations governing real estate sale and ownership are readily available and generally clear.
  • Real estate can be an excellent outright major gift or used to fund flip charitable remainder unitrusts or income producing real estate for charitable lead trusts.

Disadvantages of donating real estate include:

  • Real estate might create UBIT for the nonprofit organization if it is operating an active business or if it generates debt financed income, which may also create immediate gain recognition to the donor under bargain sale rules.
  • Charities must develop and follow comprehensive screening procedures to avoid marketability, environmental, and legal issues.
  • Gifts of real estate can be costly and time-consuming if the charity does not have internal or external experience with the process.
  • Real estate is generally not a good funding asset for charitable gift annuities or charitable remainder annuity trusts.

Wrinkles in the process to consider include:

  • Everyone must know his/her role, from internal evaluation and screening to the final sale.
  • It is important to have a clear memo of understanding with the donor, which will be a road map for completing the gift.
  • Communicating the willingness to accept gifts of real estate is essential.
  • Experienced internal staff or external professionals (e.g., real estate brokers, legal counsel, real estate appraisers and environmental assessors) are essential.
  • Nonprofit risk tolerance and the internal process and infrastructure should be a guiding principle when evaluating potential gifts.

Discovery Questions

Donor Questions
  1. What is the donor trying to accomplish with the gift (e.g., can’t sell property, concerned about liability/tenant issues, wants to take advantage of hot real estate market without recognizing capital gains)?
  2. What is the value of the real estate and how was that determined (e.g., appraisal, brokers opinion, opinionated brother-in-law)?
  3. How is the property owned and where is it located?
  4. Is there any debt, how much, and when was the mortgage placed on the property? Any other encumbrances?
  5. What is the property’s present use (and past use if known)?
  6. Are there any unique aspects that we should be aware of (e.g., tenants, leases, liens, repair issues, title problems, etc.)?
Advisor Questions
  1. What is the current adjusted tax basis?
  2. If the property was held for investment, was straight-line or accelerated depreciation used?
  3. Is there an executed legally binding contract to sell the property?
Charity Questions
  1. Is the effort and risk worth the expected benefits (i.e., is the juice worth the squeeze)?
  2. Has the screening and due diligence process identified any potential problems and can the risks be mitigated?
  3. Is there the necessary expertise to accept gifts of real estate in a timely way?
  4. Should indirect gift acceptance be considered, like using external third party foundations or supporting organizations to receive the asset?
  5. Is there a clear liquidation plan to maximize the sales proceeds as soon as possible?

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