This article appeared in the Commercial Investment Real Estate Journal (March/April 1997). This reprint is by permission of the publication.

Commercial investment real estate specialists should not look a gift horse in the mouth -- in this case, the charitable market sector. Charities may be the gift that keeps on giving, offering brokers and consultants opportunities to develop long-term relationships

As Baby Boomers age and contemplate the future of their real estate holdings, and as charities seek ways to replace disappearing government support, this area holds future promise for growth. It is estimated that, in the next two decades, more than $10 trillion in real estate will change hands due to the aging of America. Charities are eyeing a large portion of this asset pool to replace shrinking federal dollars.

Yet, most charities do not invest in commercial real estate with the intent to own and create an income stream. Instead, many find properties dropped into their laps--and they must react. It's time for brokers and consultants to gain a basic insight into the world of charities and their potential beneficial relationships with this sector.

While planned-giving officers associated with charities are the primary point of contact, brokers should not overlook relationships they have already established with investors and other active clients who have reached this stage of estate planning. Donors often recommend their own brokers to handle the details. Commercial investment real estate brokers should not let lack of knowledge close the door on this area of services.

Know the Code

Understanding the charitable-market sector begins with Internal Revenue Service (IRS) Section 501(c)(3), which governs not-for-profit charities. These charities receive tax-free status in return for following IRS guidelines. One requirement regarding gifts is that charities spend the majority of the proceeds they receive. Although gifts come in many forms, this discussion focuses on real property.

Real Estate Donors

The world of qualified charities includes about 590,000 tax-exempt entities that receive nearly $140 billion annually. About 20 percent of this amount is in real property. Donors have several gift options including bequests, charitable remainder trusts, gift annuities, pooled-income funds, and lead trusts. The latter was notably used by Jacqueline Onassis

The average donor is 72, fairly affluent, and has a sincere philanthropic intent. Appreciated real estate is a good vehicle to achieve this goal. However, donors often supplement their retirement income by setting up charitable remainder trusts or by facilitating bargain-sale arrangements. As an example, a donor who owns an apartment complex worth $1 million can donate 60 percent to the charity and receive 40 percent of the value in cash, which can be reinvested for additional retirement income. (However, the tax advantages in such a donation are not as great as an outright gift.)

Commonly donated properties include vacant land, resort condominiums, shopping centers, apartment and office buildings, and foreign properties.

Benefits Beyond Philanthropy

By donating appreciated property, donors bypass capital gains taxes and reduce current income taxes and federal estate taxes. Thus, through donations, donors can conserve more of their estates for heirs and use their tax savings to purchase wealth-replacement insurance, of which the face amount is to equal the value of the donated asset. If the heirs own the policy, they owe no tax on the proceeds. However, there may be an annual gift tax due on the premiums because the donor financed the policy.

If the life insurance is purchased within an irrevocable wealth replacement trust, the policy is owned by the trust, not the heirs. Heirs receive proceeds tax free, and life insurance proceeds are not included in the estate of the insured at death. If the trust is set up properly, there is no annual gift tax due on the premium.

One type of wealth replacement policy is a "second-to-die" policy, in which proceeds are paid after both parties of an insured couple have died. By covering two lives, the premiums are greatly reduced and fit nicely into the preservation of an estate.