Non profit receives a donated property?

[jyl]

For RE and other braintrust consideration.

I’m on my neighborhood association (NA) board. We are a 501c3. A non profit in the neighborhood owns a property (land + building) that is used as a rental venue - weddings, parties, meetings, classes, dances - as well as for their own events. They are in financial straits and have floated the idea of donating the property to our NA. For reasons related to how they received the property, they cannot sell it, they can only dispose of it by gifting to another non profit. Their organization and our NA have worked together over the decades. Our NA is fairly familiar with the building, as we’ve held our board meetings there for many years as well as some large neighborhood fundraisers and other events. I know their board president and helped publicize their activities and tried to help them get more members, via our neighborhood newsletter. So we’re friendly organizations with personal and historical ties.

It may be an opportunity for our NA to acquire an income stream that we can use for community needs. The building is historically significant to our neighborhood and we’d like to make sure it is preserved. Naturally, we’re interested.

I’ve come up with these issues to study in our due diligence. Can you think of others?

1. Revenue, operating expenses, capital needs. We’d review their accounts related to the property to see how economically viable its been for them, as a rental venue.

2. Property condition. We know some things about the property and needed work. We can get it inspected (we have architects and contractors who volunteer with our NA, one is on our board), and review city records for any violations/pending issues.

3. Management. It isn’t clear that our NA board can, should, or wants to handle the operation of a rental venue. I may propose contracting with a manager, ideally but not necessarily someone from the neighborhood, to operate the property. There are a number of potential persons I know here - think successful people who did similar businesses then took a hiatus to have kids and are now looking to re-enter the work-outside-the-home world, but don’t need to make big bucks because the family income is already more than sufficient, that kind of thing. I am thinking a profit share arrangement might create suitable entrepreneurial incentives. We would need to think through employment issues.

4. Legal structure. Our NA is a non profit, and if we have too much unrelated business income then it complicates our tax filings and could jeopardize our non profit status. We probably need to remain a non profit, for various reasons. I’m talking to a non profit consultant (conveniently, also on our board) and will consult a CPA and non profit attorney about structures that would minimize our unrelated business income or its effect on our status.

5. Legal title and liens. We’d do a title search and have a real estate lawyer review it.

What am I missing? Anyone have experience in this stuff?

[1990C4S]

I don't get the finance side.

Does the venue presently not generate enough income to cover the costs? You think the new ownership can reverse the losses?

[MBAtarga]

Insurance costs would be in opex - but what about liabilities - injuries, etc - law suits?

[GH85Carrera]

It would be nice to see the financial reports of the current ownership and see where their excessive debt is coming from. If it was a profitable venue, they likely would not be trying to dump it.

Does the current neighborhood association have the cash on hand and resources (workers) to maintain the property and manage the rentals? It will require more work for someone. If that is a paid position, it is likely a financial disaster in waiting. If you can find the volunteers to inspect the building, and the association has the money to fix all issues and get it ready for rentals, how much rental income will it need to make a modest profit?

[Sooner or later]

Originally Posted by GH85Carrera

It would be nice to see the financial reports of the current ownership and see where their excessive debt is coming from. If it was a profitable venue, they likely would not be trying to dump it.

Does the current neighborhood association have the cash on hand and resources (workers) to maintain the property and manage the rentals? It will require more work for someone. If that is a paid position, it is likely a financial disaster in waiting. If you can find the volunteers to inspect the building, and the association has the money to fix all issues and get it ready for rentals, how much rental income will it need to make a modest profit?

I agree. If they are short of money why would they unload profitable property.

Who knows.

[unclebilly]

Do you / they have to pay property tax? That could be another big hole.

[jyl]

The info we have so far, which we’ll check before counting on:
- 2019 gross revenue $180,000
- Operating costs $10K/mo (including manager). Believe that includes prop tax, but not capital needs.
- Costs when property not operating $3K/mo (insurance, prop tax, base utilities, one part time employee)

I am not sure why the non profit is unable to retain the property. But it’s been shut down for 6 mo and its not part of their core mission.

[jyl]

I wouldn’t want to go forward if the financial plan relies on volunteer management. That doesn’t feel sustainable.

[wdfifteen]

Originally Posted by jyl

neighborhood association

Those two words would have me running for the hills. What the heck is a neighborhood association going to do with extra revenue except fight over how it's spent?

[legion]

Could the HOA assume ownership and promptly sell it?

[jyl]

We aren’t a HOA that has actual authority over neighbors.

We are an old fashioned neighborhood association, a group of volunteers who do community-building things. Examples include maintaining our local park, cleaning graffiti from some historic arches and statues, organizing neighborhood picnics, pressuring the city to cleanup and remove homeless camps in our neighborhood and deal with dangerous intersections and crossings, holding a giant annual neighborhood garage sale and an annual neighborhood cleanup, fund raising for the local school, etc. We also have an emergency team that is supposed to be ready for a natural disaster (read: earthquake) with an emergency medical and radio station and about 40 folks trained and organized as first responders (that’s all set up as a city-coordinated program). In recent years we got our neighborhood designated a historic district, which in Oregon only means that it is harder to demolish a historic house and there are some tax benefits for restoring historic houses. When Covid hit we organized volunteers to help old folks with grocery shopping and errands (that was early on when masks weren’t available and seniors were afraid to go out). Various programs like that. And we have a newsletter.

This may sound weird, but it is a small, distinct, and pretty close knit neighborhood. Lots of people have lived here for 50 years, or grew up here and came back to raise their kids here, etc. I think the association really became organized in the 1960s when the city was going to run an 8 lane freeway right through what was then a bunch of old houses from the 1910-1920s that the planners didn’t care about; that never happened, thanks to a lot of neighborhoods getting organized and fighting back. (We seem to be in that time again, now the planners want to see this and similar neighborhoods replaced with apartment blocks.)

Whether we actually need more income is a good question. There are programs we’d like to do that will require some budget. Elderly neighbors on fixed incomes, our neighborhood school and the needy kids there, our large park that gets almost no city tending, etc. In theory the city and other public agencies are supposed to do all this stuff, but in practice they do less and less, and it’s going to get a lot worse now.

What I find is that the people who want to step up and volunteer their time to help out tend to have the least money to contribute, while the people with money are willing to donate for a one-off project but not a continuing program. A couple years ago we raised $70,000 in neighborhood donations in just a few months for a specific project, but that can’t happen more than every several years. So, if we could get a modest continuing income stream from this property, that would be very useful.

I don’t know if we could receive and sell the building. Have to study the title documents. However, it would have to remain much as it is - for various reasons, we wouldn’t want to sell it for demolition and redevelopment. It was built in 1912 (?) as a neighborhood “club” - apparently was quite the happening place for dancing, tennis, dining and society, back in the day. The building is basically a ballroom and stage plus kitchen, offices and utility areas, and some large lawns. It really isn’t useful for anything but a venue, entertaiment, meetings, dining.

[Hendog]

Originally Posted by jyl

The info we have so far, which we’ll check before counting on:
- 2019 gross revenue $180,000
- Operating costs $10K/mo (including manager). Believe that includes prop tax, but not capital needs.
- Costs when property not operating $3K/mo (insurance, prop tax, base utilities, one part time employee)

I am not sure why the non profit is unable to retain the property. But it’s been shut down for 6 mo and its not part of their core mission.

Did it shut down due to Covid-19? Now that gatherings are basically not happening may be the reason for the stall in revenue. If that's the case your NA will be in the same boat.

[jyl]

Yes, the commercial (venue rental) use of the property shut down in March due to Covid. The non profit has been carrying the property with no revenue for six months. I think we’d have to plan on the venue rental business remaining infeasible for another six months (to Mar 2021) or even nine months (to Jun 2021).

We could use it for our own neighborhood association purposes during that period - as a community center - even if there aren’t actually many (any?) people going there for the near future, given Covid restrictions (indoor gatherings of more than X people are prohibited here, though restaurants may operate with severe capacity restrictions). The bare minimum operating cost should then be not much more than utilities and property insurance, and light maintenance/cleaning. I’m going to guess $1K/mo. That wouldn’t cover any capital needs (new roof etc) but the property is very unlikely to need such in the coming year or two, from what we know. As a 501c3 non profit entity ourselves, as long as we don’t conduct any commercial business there, we should qualify for a property tax exemption. So I’m thinking we would be able to carry the building, without needing to generate revenue from it, for as long as Covid restrictions are reasonably likely to last.

The question is, then what.

[unclebilly]

Could you guys obtain it and then sublet it to private enterprise for a restaurant or to run and manage?

It seems like this could be win-win if you could find someone to lease it from you that would take care of maintenance etc.

[jyl]

Yes, something like that could work.

The debate on our side is going to be: Do we run it as just a volunteer managed resource for the neighborhood association - a place for the association to hold monthly meetings and occasional events? It would be handy but would be a cash drain - not too much on a day to day basis, but when it needs a new roof or other larger expenditure, that’ll be a problem.

Or, do we run it - or have others run it for compensation - as a commercial for-rent venue, that the neighborhood association could also use (when not rented by paying customers)? It would then generate income, almost certainly enough to eliminate any cash drain and build reserves for future larger expenditures (or future pandemics), maybe some more to fund other neighborhood projects.

The non profit that currently owns it chose the second route. It worked okay for them for many decades, until Covid hit.

[jyl]

Originally Posted by MBAtarga

Insurance costs would be in opex - but what about liabilities - injuries, etc - law suits?

You mean, liabilities not covered by, or exceeding the limits of, the insurance? Like someone gets sloshed and falls during a wedding and becomes a quadriplegic and is awarded $20 million?

Good question. Our neighborhood association has bank accounts but no other assets. Our board and volunteers are covered by a $1 million liability and D&O policy, which I need to review. We could buy lots and lots more insurance coverage, I guess. Maybe structure a holding company.

[jyl]

Originally Posted by unclebilly

Do you / they have to pay property tax? That could be another big hole.

They do, and that’s likely part of their problem. We might, depending on how we use the property.

[MBAtarga]

Originally Posted by jyl

You mean, liabilities not covered by, or exceeding the limits of, the insurance? Like someone gets sloshed and falls during a wedding and becomes a quadriplegic and is awarded $20 million?

Good question. Our neighborhood association has bank accounts but no other assets. Our board and volunteers are covered by a $1 million liability and D&O policy, which I need to review. We could buy lots and lots more insurance coverage, I guess. Maybe structure a holding company.

Your example is exactly what I was getting at in terms of liability and insurance needs. You need to insure (ha! no pun intended!) that your liabilities are covered in the event someone decides to go the lawyer route after an incident that they believe requires you to pay them.

[jyl]

Starting to get more info on operating costs of this property when actively rented as a venue. Looks like there’s three possible states.

1. Mothballed. Cost $1K/mo to hold it, zero revenue, net loss about $12K/yr. We can support that for years. However, eventually a major expense will arise (most likely roof, in few/several years), and property won’t have generated enough income to pay. Not a long term strategy.

2. Limited use, just occasional use for neighborhood meetings and low key rentals by yoga teachers etc. The little management it will need can be handled by volunteers. Costs $2K/mo (add more insurance, janitorial, landscaping, expenses etc), probably $1K/mo revenue, net loss about $12K/yr. Same “however” as above. Volunteers also will burn out eventually. Not a long term strategy.

3. Full commercial use, actively marketed and rented out. Needs a nearly full time manager, non-wage costs $5-6K/mo (add even more expenses, property tax, income tax) plus manager wage/cost, probably $170K to $200K/yr revenue, net income about $30K to $60K/yr, less a reserve for major expenses. Sustainable long term strategy (the non profit did this for many decades).

We’d start in state 1) of course, Covid gives us no choice, and stay there well into 2021. Transitioning to state 2) won’t be terribly hard. Transitioning to state 3) will be tricky, because weddings and similar events are booked many months in advance, and if you spend the deposits (rather than reserving them) you can get in trouble fast.

[RWebb]

you will want to contact a non-profit tax attorney (a specialist) before generating income for your 501c3