Should you buy or lease your building?
As the economy shows signs of improvement
and charitable giving begins to pick up, some not-for-profits with stable
donor bases and strong financials are interested in expanding their facilities.
Owning rather than leasing real property offers several advantages. Most
notable: Charities exempt from federal income taxes under Section 501 (c)(3)
of the Internal Revenue Code are generally exempt from property taxes, so
their cost of ownership may be lower than that of nonexempt entities.
On
the other hand, investing in real estate requires a significant financial
commitment, both on the front end and over the ownership period.
Factors
to consider
Owning real estate doesn't make sense for every organization.
The decision to buy or lease depends on several business and tax issues.
Here are some factors to consider when determining whether ownership
is best for you:
Financial stability. If your not-for-profit has stable
and ever-growing funding sources, your staff is probably increasing, too.
Therefore, you may have both the physical need for more space and the financial
wherewithal to acquire it. Over time, it could be more cost-effective to
buy than to lease.
One fast-growing charity found this to be the case.
As the organization became internationally prominent and support for its
mission expanded, it outgrew its existing quarters and was forced to lease
space in two adjacent buildings to accommodate staff. The charity soon
found that it made financial and administrative sense to buy a new building
for headquarters and consolidate operations at a single location.
Debt financing. Many organizations considering a building purchase want room for future
expansion and may want to lease unused space to recoup some of their expenses.
Before doing so, look at the tax impact. If you borrow funds to buy a building
and rent all or part of it to an unrelated organization, you may have to
pay unrelated business income tax (UBIT) on the profit from rental income
and report it on Form 990-T.
The rules surrounding UBIT are complicated
and contain many exceptions. For instance, a common exception to the debt-financed
rules is whether an organization uses 85% or more of the building for
its tax-exempt purpose.
If so, any rental income associated with the excess
space is excluded from UBIT. Real property regulations aren't so clear;
they're more dependent on assessor judgment. If you plan on leasing a portion
of a building you're purchasing, consult with an advisor to learn more
about the potential tax consequences.
Funding restrictions. If you're receiving state and federal funding, check if there are usage restrictions.
Funders have been known to provide grants for renting facilities but not
for purchasing them. Similarly, there are grants available to qualifying organizations
that rehabilitate historic buildings or invest in certain areas.
Fit with your mission. Buying or building an office facility sometimes makes
sense from both a financial and a mission perspective. For example, Heifer
International, a charity dedicated to ending world hunger, is building a
new headquarters on a brownfield, a property that may have hazardous substances,
pollutants or contaminants. The organization says the redevelopment is allowing
it to practice what it preaches by encouraging sustainability.
Ownership
structure. Consider whether any real estate you purchase should be owned
by your not-for-profit itself or by a separate corporation, such as a singlemember
limited liability company. Creating a business entity may protect your
organization from liabilities that can arise from owning and renting real
estate. But there are additional tax and legal factors involved in these
ownership structures.
Consider benefits and drawbacks
Owning real estate
can be an attractive option for your not-for-profit. But before taking
on such a commitment, carefully analyze the potential tax consequences
and ownership pitfalls.
Planning for building maintenance
If your organization decides to buy
or currently owns real estate, you'll want to develop a plan for
projecting future maintenance needs and budgeting for them when you
acquire the property.
Predicting the life span of a building's components
is an inexact science, but you can use some strategies to improve
the accuracy of projections and ensure you're adequately depreciating
real property.
The first step is to break a building down to its individual
components, much like a builder does when planning construction.
A spreadsheet program can perform automatic calculations that assign
an estimated useful life to each component and calculate years
until replacement and projected cost to replace.
This type of analysis
gives structure to planning for building upkeep and helps your
organization set budgeting goals to pay for these expenses. A real
estate or construction specialist, along with your financial advisor,
can help you plan and calculate the costs of building maintenance. |
3 ways to improve interaction between your board and staff
You may
have heard the saying, "The board leads and the staff manages." Although
most people involved with not-for-profits would agree with this assertion,
they might also note that the division of responsibilities is not
always so well defined in practice. It's not uncommon for board members
and employees to be unsure of the boundaries of their respective
roles - and that's when problems arise.
To avoid confusion or misunderstandings,
board members and workers should observe these guidelines:
1. Understand
each group's roles and responsibilities. A thorough orientation
process helps board members understand their place in the big picture.
Give them a written description of their responsibilities and offer
specific examples that illustrate the scope of their duties.
A good
exercise is to list various board and staff activities, such as
approving the budget and providing direction to employees. Ask board
members to identify whether an activity is a board or worker responsibility.
Discussing the results will help them distinguish the separate
but complementary roles of the board and employees.
Likewise, staff
should have clear job descriptions and you should encourage them
to ask their supervisors for guidance if they receive requests from
board members.
2. Work through proper channels in making
requests. It's true that workers are partners with the board - helping it to
advance goals and strategies - but this doesn't mean that board members
have the authority to direct employees. The staff reports to the
executive director, who reports to the board.
Therefore, if a board
member wants an employee to compile a report, the request should
go through the executive director, because he or she manages the work
flow and knows of any competing priorities. Similarly, board members
who have employee-related suggestions should direct them to the executive
director, not the staff.
3. Glean first-hand knowledge. Board
members can improve their effectiveness by understanding the roles
of various employees. One way they can enhance their knowledge is
to "shadow" a
worker as he or she carries out responsibilities.
Program managers or other senior staff might also attend board meetings
to discuss developments in their areas and answer questions.
By having direct
interaction with staff - rather than receiving information
filtered through the executive director - board members can get to
know employees and gain insight into the challenges and opportunities
facing the organization.
Every not-for-profit benefits by having clear
boundaries between administration and governance. If your board members
or employees seem confused about the rules of interaction, consider
this a sign that your organization could enhance education and communication
in this area. |
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that the author, publisher and distributor are not rendering legal,
accounting or other professional advice or opinions on specific facts
or matters, and, accordingly, assume no liability whatsoever in connection
to its use.
