Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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Why is there such a disparity between the value of the real estate available for contri- butions to charities and the amount that is actually donated? In many cases, the inves- tors/owners are unaware that donation can be a viable means to dispose of property. In addition, charities turn down an estimated 80 percent real estate donations off ered to them. Reasons range from fear of the drain on time-challenged staff members to lack of familiarity with donation procedures, evaluation processes, and legal and tax issues, to the perceived complexity of due diligence and removal of encumbrances. Environmental horror stories and holding costs for maintenance, entitlements, and market futures also cause some charities to shy away from real estate donations. Real Estate Donation Fundamentals Unfortunately, many development direc- tors at charitable institutions and real estate professionals are familiar with the infamous Boys Scouts of America real estate donation case. In short, BSA was the recipient of an environmentally impacted tract of land located outside of Chicago that ultimately cost the organization mil- lions of dollars. This case illustrates how improper or insuffi cient due diligence can derail the real estate donation process. With the assistance of qualifi ed local commercial real estate experts, such as CCIMs, charitable enti- ties have the ability to perform thorough and proper due diligence. T e goal — and responsibility — in the real estate giſt ing process is to ensure that all parties are fully and clearly represented. (See sidebar for a case study of a successful manufacturing facility donation.) Unlike standard real estate transactions where legal representation is suffi cient, giſt - ing of real estate involves a team, which, in many cases, is coordinated by a quali- fi ed real estate broker. On the donor side the team includes an attorney, a fi nancial planner, an accountant, and an appraiser. On the donee side, in addition to real estate and legal representatives, specialists such as engineers may be required. 40 September | October | 2012 In cases where the charity has neither the time nor fi nancial resources required to pro- ceed with such a transaction, a third-party professional facilitator such as the Educa- tion Foundation of the CCIM Institute can be used to streamline the donation process. T e foundation is a 501C3 entity that is equipped to manage all facets of a real estate donation on behalf of the charity, including receiving and liquidating the property, for a percentage of the cash received. (See sidebar about the foundation's Real Estate Giſt ing Realized program.) Gift Structures and Benefi ts There are many different ways that the giſt ing of real estate can be accomplished depending on the donor's goals. An out- right gift is the most straightforward method of donating a real estate asset. T e main benefi t of outright giſt ing is that the donor may take the full appraised value of the asset as a tax deduction at the time of the title transfer to the charity. T e donor also has the benefi t of determining the tim- ing of the asset disposal and can mitigate costly delays in transferring title. CASE STUDY: OBSOLETE MANUFACTURING FACILITY In today's market conditions, many corporations can benefi t from donating under- utilized property to charitable organizations. Corporations that own properties with strict environmental regulations or special-use limitations, in poor locations, or structural defi ciencies can achieve quick disposition of an asset through a charitable donation. In one such case, a major manufacturing corporation located in the Southeast owned an outdated and economically obsolete property that had been vacant for several years. Located on approximately 47 acres of land within an industrial/light manufacturing area with access to rail and highway transportation, the facilities consisted of three main buildings totaling 103,000 square feet. Updating the facility would have required funds the owner was not willing to invest. In addition, the corporation was spending more than $100,000 per year in holding costs to maintain the property, not including internal management time. The solution presented to the owners was a disposition strategy structured as a donation to a charitable 501C3 corporation. For the owners, the donation value based on appraisal was $2.25 million. For the charity, the sale value was $600,000 within 90 days. Moreover, the Internal Revenue Service audited the donation transaction and no adjustment was made to the deduction claim. In this case, the benefi ts of donating the property included: • eliminating the costs and risks of ownership; • benefi ting from a quick transaction; • receiving a tax deduction equal to the fair market value of the real estate; • recycling the property quickly, which improved public relations; • allowing a better allocation of the corporation's resources; • eliminating a capital gains tax with the donation; and • providing more after-tax dollars than with a conventional sale. In fact, there are circumstances where a charitable transaction may outper- form a conventional sale, such as when fair market value established by an appraisal exceeds the most readily available offer, the sale or offer is all cash, or the seller has exposed, taxable income.—Chase V. Magnuson, CCIM, president of Real Estate for Charities in Arlington, Va. Commercial Investment Real Estate