Real Estate Gift Acceptance Has Its Swamps
December 1, 2009 Michele Donohue
The Nature Conservancy (TNC) takes two types of real estate gifts: land that donors give to be permanently protected or gifts called “trade lands,” which are real estate gifts that the donor permits the organization to sell to support the mission.
The trade land program has raised nearly $300 million for the Arlington, Va.-based organization since it began in 1981. Harry Estroff, real estate gifts manager at TNC, said the number of gifts and dollars raised was down for trade land gifts during Fiscal Year (FY) 2009, but he is hopeful for FY 2010. He explained that he’s seen an increase in promising inquiries since July and that a renewed and returning confidence about the economy might have helped increase the number of inquiries received.
“When they don’t know what’s going to happen with the economy, when they’ve seen their other sources of income, retirement and otherwise, contracting, they are hard pressed to give anything away,” said Estroff. Not including FY 2009, Estroff said TNC averaged 17 real estate gifts a year and an average eight charitable real estate bequests a year for the previous five years.
Caroline Camougis, managing director of New York City-based Delphi Partners, which deals exclusively with non-cash charitable gifts, explained that now it’s harder than ever to get a donor to write a check for $100,000. “When you look how people’s net worth is held, most people have most of their net worth in illiquid assets like real estate and other properties,” said Camougis. Real estate donations offer donors a way to give a gift, with additional benefits that a cash donation doesn’t have, such as deferring capital gains tax and getting rid of any carrying expenses. Camougis explained that development officers can make a compelling proposition to donors that they could get more bang for their charitable buck by donating appreciated property.
Camougis said that real estate as a percentage of household net worth can vary widely depending on household income level, with lower net-worth households sinking more of their net worth in real estate than most higher net-worth households. She explained that real estate and other personal property account for 40 to 60 percent of a household’s net worth on average. Tanya Howe Johnson, president and CEO of Partnership for Philanthropic Planning (PPP) in Indianapolis, Ind., formerly called the National Committee on Planned Giving, said those nonprofits that are already comfortable in the real estate arena might experience the largest increases when the market rebounds. High-volume real estate programs, those that reported 10 percent of total contributions to an organization from real estate gifts during the past three years, were broken out from general responses in a PPP Web-based survey of nearly 600 gift planners and development directors in May 2008. During the past three years, 1 percent received no inquiries, 38 percent had one to five inquiries, 22 percent had six to 10, 14 percent had 11 to 20, and 25 percent had more than 20 inquiries for high-volume real estate programs. That’s compared to all respondents: 11 percent had no inquires, 61 percent had one to five, 16 percent had six to 10 inquiries, 5 percent had 11 to 20 inquiries, and only 7 percent had more than 20. “We need to be looking at all types of giving options for our donors. We can’t just say one-size-fits-all, outright gifts are all we’re going to offer because people need to able to maintain their relationship with that charity, even if they can’t make that outright gift or make the same amount. So, being able to offer them alternatives is an important part of charitable planning,” she said. “In these hard times when owning real estate is more of a headache than it’s worth and sales are slower, this is a good time to be talking to people about it,” said Johnson.
And it seems like development professionals have seen more donors are receptive to real estate gifts. In the survey, 22 percent reported donors were more receptive to real estate gifts and 74 percent saw no change in attitude, while only 4 percent said donors became less receptive. She explained that even if the nonprofit isn’t ready to market real estate options, organizations should have at least an acceptance policy in case a real estate bequest comes in. “You would like to be prepared and not have to develop these things under the gun. So being proactive is helpful,” said Johnson.
Camougis agreed that nonprofits should take internal steps to make sure board members and staff members are on the same page about real estate giving, “so that when an offer of property comes in, people aren’t scrambling trying to figure out where you start.” Those gift policies could include whether or not to take real estate that has a mortgage or if the real estate must be in a specific geographic location in order to be accepted. “There is nothing worse than a poor donor calling all excited saying, ‘I want to give you my apartment in New York.’ And then the nonprofit saying, ‘We will get back to you’ and months later they are trying to figure out how to respond,” said Camougis. It’s important for nonprofits to comprehend that real estate gifts won’t be accepted and sold with realized gains overnight. TNC employs a vigorous due diligence process that could take anywhere from months to years, according to Estroff. The process includes an evaluation of value by local brokers who understand the area and type of real estate to evaluate what the property is worth and how long it would typically take to realize that amount. Estroff said those questions of worth and time could be harder to answer with the precarious state of the economy. Real estate gifts through TNC also have to go through an approval committee, have a representative from TNC visit the property, perform a title search and occasionally go through an appraisal. Estroff explained that the due diligence is well worth the time, and explained, “As I often say, I have to make sure that this gift becomes an asset and not a liability because they do have that potential.”
“You’ve got to make sure you know what you are getting yourself into before you accept property,” said William Samer, senior vice president of planned giving and endowments at UJA-Federation of New York. He explained that before a property even gets to a UJA decision committee, the property must go through an environmental study and the organization requires documents such as title report, financial statements and insurance information. “It’s very easy for charities, if you don’t have those checks and committees, to just accept property without due diligence,” he said.
Samer explained that an extensive investigation into liabilities is necessary to assess whether accepting the property is in the nonprofit’s best interest. Environmental damage or other liabilities can eat at a nonprofit’s profit on the property and can sometimes balloon into a cost if the organization doesn’t employ due diligence practices. “And if they [nonprofits] can’t do that, I don’t think they should accept property, fundamentally, because there are too many risks associated and too much liability for the organization in on-going costs if they can’t dispose of the property quickly,” said Samer. Russell N. Howes, vice president for legal affairs at the University of Wisconsin Foundation in Madison, Wisc., explained that nonprofits, particularly those with smaller budgets, should also examine if the property fits into their financial constraints. “In a market where properties aren’t turning around in three of four months, they are turning around in a year or a year and a half, you have to think about whether you are going to take that property and where you are going to pay the carrying costs from,” said Howes. For example, Howes said the organization was offered a gift of a resort home in Florida. Even though Howes described the property as a wonderful residence, the organization has to analyze how long it would take to move the property in a market area that has collapsed and additional carrying costs, including upkeep of an indoor pool and any property taxes. The organization has to consider how much those maintenance and tax costs would be and factor in that it may be holding the property for upwards of a year or more. Howes said nonprofits with smaller budgets may want to accept real estate gifts, but they need to look outside the generosity of the gift and see if it will be profitable. “You have to have the ability to say ‘no’ in circumstances where you don’t really think this is the right thing to do,” he said.
Estroff explained that even if the process seems extensive, real estate gifts, when handled the right way, can be profitable for a nonprofit and shouldn’t be shunned because of the many steps involved. “I do encounter frequently a feeling among other charities that do have the resources that real estate gifts are just big and scary and complicated and they have heard all the horror stories and feel that they should stay away from them,” said Estroff. “And I really discourage that because I do believe that most charities, at least most medium and large sized charities, can handle this, especially if they deal with them according to increasing difficulty and increasing complexity,” he said.
Estroff explained that nonprofits trying on real estate may want to start with bequests, followed by outright gifts and retained life real estate. Income-generating real estate donations are increasingly intricate. Samer recommended nonprofits disclose all possibilities for real estate gifts and be upfront to donors that a real estate donation will not be an overnight process. “I think that’s the best way to be honest with your donors and give them as much information to make an educated decision to support the charity they love,” said Samer.
“Regardless of whether this is a good time or bad time for real estate gifts, I think they are not sufficiently appreciated, mostly because they have this bad rap, which is somewhat deserved because they are complicated and fraught with peril. But it’s not as deserved as it is widespread, in my opinion,” said Estroff.