Good question, to which there may be no necessarily correct answer.  Ordinarily, I would recommend that an operating charity undertaking an entirely new type of activity, which has a totally separate funding stream and a significantly different risk profile, spin the activity off into a separate nonprofit entity. This is particularly true when the energy for the new venture will be supplied by only certain members or directors of the operating charity and the effort does not have the emotional investment of the whole board, as appears may be the case here. The insulation of the separate structure can protect the current operating entity from a whole lot of downside risk and still redound to its benefit if successful.

The issue is somewhat different with a church, however. Many churches include a variety of educational or social service activities within their religious mission without challenge.  It can be advantageous in part because there is basically no required public accountability for a church.  It doesn’t have to obtain recognition of exemption from the IRS and doesn’t have to file Form 990 tax information returns. The public is entirely in the dark, except to the extent that the church wants to make its information public, about its salaries, finances, governance, and operations generally. That may be information it does not want to share with the public (or even with its members if they are not voting members of a nonprofit corporation who have a legal right to such information).

One complicating issues here are whether a governmental body may constitutionally give free use of public property to a church. Even if the municipal attorney says it is ok, someone who wants greater separation of church and state might challenge and hold the project up for a long time. If the municipality can’t give the church property directly, that probably resolves the structural issue.

But if the government can provide the property free, will it demand financial reporting beyond that directly related to the halfway house project? It may require the church to make cost or other allocations that would involve disclosures not now required by law. The requirement for additional disclosure may also sway the ultimate decision on structure.