How You Can Cash In on the
Gift Of Real Estate

by Chase V. Magnuson, CCIM

This article appeared in Today’s REALTOR (December 1996). This reprint is by permission of the publication.

Expertise Needed

Most large charities have professionals that handle planned giving, but they usually are most familiar with cash and bequest donations. When the gift is real estate, the planned-giving staff must work with a team of professionals to ensure the gift's viability. Charities may reject or discourage real property donations because they lack in-house expertise or have trouble locating the professionals necessary to manage real property donations.

Brokers and consultants should consider marketing their services to planned-giving officers to develop this area of business. Since commercial real estate professionals regularly deal with environmental impact studies, the Americans With Disabilities Act (ADA), wetlands issues, leases, and service contracts, their expertise may make charities more responsive to accepting gifts of real estate. With their help, planned-giving officers can make more informed decisions about accepting or rejecting donations.

Thus, relationships with charities are important, but they can take time to develop. Mistakes in judgment can be costly to the charity and could damage the planned-giving officer's reputation. Brokers and consultants must provide the information and expertise so that charities aren't tempted to reject property donations because of potential risks.

How does a planned-giving officer decide who to use for a real estate issue? Often, the donor suggests that the charity use the donor's agent, although once the property changes hands, the charity is free to select its own representative. But because many donors make as many as five gifts during their lifetime, the charity may cultivate a relationship with the donor's agent.

Courting the Market

Commercial real estate brokers and consultants interested in courting the real estate business generated by charities should be prepared. Their resumes should include past transactions by property type, indicating primary market coverage, as well as electronic and business alliance networks.

In addition, attending seminars and exploring planned-giving programs will broaden brokers' knowledge of this field. Colleges, stock brokerage firms, financial planners, and bank trust offices give workshops regularly. Brokers also can consult an industry publication, the Chronicle of Philanthropy.

Network and business alliances increase brokers' value to charities. Being able to market properties promptly and nationwide through electronic networks such as the CCIM Real Estate Network provides much greater exposure in the disposition of properties.

Other large, well-known networks include GVA Worldwide, Prudential Referral Services, New America Network, and Oncor International. These networks all have international cooperative partners, which are important for foreign property donations that still provide donors with U.S. federal tax relief.

Other Offerings

Consultants in commercial investment real estate can offer other services to charitable organizations as well. One is market evaluations, as all donations require a current appraisal before being transferred. In addition, annual updates are required for certain types of trust assets. If the property produces income, the recipient will need property management, lease analysis, and owner representation for additional leasing activity.

Charities are prohibited by law from holding properties as investments without subjecting themselves to income tax on the cash flow from such assets, known as non-related business income. Therefore, charities are strongly encouraged to sell donated properties as quickly as possible. However, they may hold property for their own use and may buy, sell, and lease property regularly to meet the needs of their organizations.

Donated properties are no different than others on the market. They have the same cap rates, return rates, and tenant mixes whether in Texas or Indiana. However, the vast majority of these donations are given free of debt, with environmental and ADA reports and a current appraisal.

Normally, charities like all cash at the appraised value. But alternatives are to carry financing or to do an exchange, using Internal Revenue Code Sections 1031, 1033, and 1034 to accommodate buyers, taxpayers, and exchangers. Charities can't borrow money, but they can lend it. Thus, they are perfect candidates to accommodate deferred exchanges and workout scenarios. In some cases, they can participate in joint ventures, although their actions are dictated by very strict IRS rules and regulations.

An Untapped Market

The charitable community is an untapped market for the real estate industry. Few agents have done more than a single sale or lease transaction for a charity. With the federal government withdrawing billions of dollars in support, charities are searching for ways to replace these funds. Real estate may be an answer. If the brokerage community can demonstrate an understanding of the benefits and processes of real property donations, brokers and consultants can encourage charities to work with them to solve the liquidation problems.