Given the array of nonprofit sectors, there are a variety of reasons why an organization may choose to sell all or a portion of their real estate holdings. Charitable organizations, foundations, trade associations, social service organizations, and unions each acquire and utilize property to suit their individual needs.
To make the best and most informed decisions leading up to, during, and after nonprofit real estate transactions, nonprofits in each of these areas must consider the possible outcomes and advantages of sale. They should also consider the restrictions that are currently in place for 501(c)(3) organizations that limit excessive personal gain from the sale of property.
Doing so will enable them to make the correct choice of when to sell and when to hold onto their real estate assets.
Benefits of Sale
Nonprofit organizations, much like their for-profit counterparts, are permitted to buy and sell assets, establish lines of credit, and sign contracts to fulfill their operational needs and meet strategic objectives. They can benefit in a number of ways from the sale of property. Here are five of the most common benefits.
- Freeing Up Capital. Selling off real estate holdings can enable nonprofits with the ability to free up capital that can beused elsewhere in their strategic outlay. Making those funds available enhances other programs, services, and initiatives. By recapitalizing assets, a nonprofit organization can allocate more funds to expand programming, reinforce staffing, or address other operational needs.
- Debt Relief. It is common for nonprofit organizations to take on long-term debt at different phases of their lifecycle as a way of financing their agendas. But recent studies have shown the risks inherent in the use of debt financing are often too great to justify it as a method of funding nonprofit operations. These organizations, in turn, are able to achieve either partial or full debt relief through the sale of real estate assets.
- Right-Sizing. In real estate, space comes at a premium. But if you have too much of it, your unused spaces can be a sizeable financial burden. “Right-sizing” is a practice many nonprofits are pursuing, selling their real estate assets to relocate to a facility that aligns more closely with the size of their staff. “Right-sizing” also helps organizations keep pace with evolving workplace trends. In the past decade, the average amount of office space required per person has decreased by 20 percent. This change is due largely to the use of smaller technology and preference for open floorplans, and has resulted in many organizations moving into smaller, “right-sized” spaces.
- Branding. As industry standards evolve, nonprofits need to shift their message and branding periodically to reach intended audiences. Relocating to a space that better reflects a nonprofit’s mission helps to not only meet these changing standards, but also to recruit top talent.
- Cost Control. Heating and cooling old or excessively large spaces and maintenance requirements can add significant costs in a relatively short amount of time. Nonprofits can control these costs by selling outdated property and moving into updated spaces that more efficiently accommodate organizational needs.
Understanding these benefits and how they can improve mission outcomes helps nonprofits determine the best time to sell.
Restrictions on Nonprofit Sale of Property
Due to IRS-imposed restrictions, 501(c)(3) organizations are subject to a number of rules limiting the sale of property. These regulations address both the possibility of an individual abusing the sale of assets for personal gain as well as self-dealing where a disqualified person or stakeholder takes advantage of their position to benefit their own interest.
- Excess Benefit. The IRS defines excess benefit transactions as any agreement that provides economic benefit exceeding “the value of the consideration received by the organization.” Instances where a nonprofit organization dispenses of real property in a way that provides a financial benefit to a disqualified person qualify as “excess benefit” and must be reversed by means of reparative payment to the applicable tax-exempt organization in the amount of the benefit plus interest.
- Self-Dealing. For sales or exchanges of property, self-dealing refers to any transaction between a nonprofit and a disqualified person. Whereas excess benefit transactions refer exclusively to financial gain, self-dealing may encompass other types of material gains.
Both excess benefit and self-dealing transactions violate the nonprofit principle of non-distribution constraint, the basis for donor trust which prohibits organizations from distributing net gains to administrative personnel, staff, or board of directors.
As long as a nonprofit does their due diligence in preparation for a nonprofit real estate sale, they should have no problem steering clear of regulatory issues.
Ready to Sell?
If your organization is ready to sell or wants to explore the possibility of a sale in Arizona, now is the time to get in touch with a member of our expert commercial real estate team. R.O.I. Properties has decades of experience finding buyers for nonprofit assets in Arizona. Contact us today to schedule a free assessment of your asset’s potential.
