My wife and I are board members of a 501(c)(3) public charity and also own real estate, including several buildings, that is leased to the nonprofit at a below fair market rate. We are relocating an additional building to the site for which the nonprofit has received significant financial contributions. Would it be best for us to also own this building and include it under our current lease arrangement or have the nonprofit own it due to the significant outside financial contributions received? If we would own it, we would agree to reimburse the nonprofit for the un-depreciated value of the building should the lease ever be terminated.
As directors of a public charity, you are “disqualified persons” with respect to the organization and are properly concerned about an “excess benefit” transaction in which you receive greater value from the charity than you give in return. You can face a significant tax if you are involved in such a transaction. (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions”) Your current below market rate lease is fine. (If the 501(c)(3) were a private foundation, your current and proposed transactions would be “self-dealing” and effectively prohibited.)
It is not clear who owns the building to be relocated. If the organization owns it, you would have to buy it from the organization in order to add it to your personal property. Assuming that the donors have not imposed restrictions that prevent a transfer of title, the price would have to be at least fair market value, and perhaps more if the total contributions exceed the fair market value. If it is owned by a third party, you would have to reimburse the charity for the contributions it has received, assuming that the donors’ didn’t impose restrictions. Then you could lease the real estate at fair market or below so that the charity could use the building.
Your purchase of the building would require a substantial current expense for you and may not be an attractive transaction to you. If you allow the charity to relocate the building to your real estate, you can lease the land again so long as the rent is fair market value or less. Consult with a real estate attorney or broker to determine what is fair market value for ground leases in your community. With a short-term lease, you will probably have to agree that the charity would have the right (with adequate time) to relocate the building again upon termination, or that you would buy it at its then current fair market value, which would not necessarily be the same as the “un-depreciated value” you refer to. Admittedly it is difficult to value a levitated building that has no land on which to sit, but it can be done. You may also be able to do a long-term lease with a sufficiently low current rental that requires the organization to surrender the building to the landlord upon termination without any payment. You can let your grandchildren worry about the termination of that one.
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