Looking a Gift Horse in the Mouth: Advice for Nonprofits on Accepting Gifts of Real Estate

Over a decade ago, I had an a-ha moment with a good friend — we were talking about an upcoming holiday and all the gift-giving that happens.

We discussed the subtle difference between a present and a gift. A present is something that you want the recipient to have. A gift is something that the recipient would want. I reflect on this every holiday season and try to give more gifts than presents.

This is also an important concept for the social sector as we receive gifts other than money. Clients have told me some funny stories of donations they’ve received — horses, coffee roasters and real estate. One of my favorite colleagues, Eliza Solender, who focuses on real estate in the nonprofit sector, came up with the best checklist for evaluating gifts of real estate, which can be applied to other gifts, too.

Looking a Gift Horse in the Mouth — Eliza Solender

It is the dream of every nonprofit organization to be given a valuable piece of real estate that it can use or sell for a lot of money. However, just because the piece of property has value does not mean it is in the nonprofit’s best interest to accept the gift. Many organizations have learned the hard way that is not wise to quickly accept real estate gifts.

Nonprofit organizations need to do some work before they seek or are offered a gift of real estate. They need a policy for accepting gifts of real estate — one that establishes guidelines for determining whether potential gifts will indeed result in financial gain or be useful to the organization in another capacity.

Here’s a checklist when considering such gifts:

1. Ask the donor their reasons for making a gift. Frequently, there is an issue with the property, or they would have sold it themselves. This is particularly important if the donor is offering the gift at the end of the year for their tax purposes. If they are reluctant to explain their reasons, assume there is something wrong with the property and the organization will need to do a lot of due diligence before accepting the gift.
2. Do not accept gifts inconsistent with the goals and objectives of the organization. For example, Mothers Against Drunk Driving probably would not accept a gift of an operating bar serving alcohol.
3. Have the property inspected for hazardous waste contamination before accepting. Most urban properties have contamination/environmental issues. The organization may accept a property with contamination, but the organization will need to at least understand the issues and potential costs associated with cleaning it up ahead of time.
4. Evaluate the gift in light of debt, insurance, homeowners’ association fees and other carrying costs. Do not accept property with debt unless the debt is less than 50 percent of the appraised value. Anticipate that the organization may be required to assume the debt obligations. However, at a minimum, the organization should budget for all the carrying costs and be financially capable of paying them.
5. Determine that there are no restrictions, easements, liens or other title issues that would impair the value or marketability of the property. A title commitment prepared by a title company should reveal most of these issues.
6. Require the donor to retain an independent appraiser to establish the fair market value of the property. Factors such as high taxes, sizable debt or other carrying costs may dictate that the property be sold as quickly as possible for a lesser price.
7. Require that all documents be subject to legal review by your own real estate attorney prior to accepting the property. Also, insist on title insurance, even if the organization must pay for it.
8. List the property for sale with a licensed real estate broker who specializes in that type of real estate as soon as possible if it will not be used by the organization.
9. Retain legal counsel specializing in estate planning to facilitate the gift process if the donor wishes the gift to be used to fund a charitable trust or as part of a planned-giving program.
10. Consider avoiding gifts of lake lots, trailer park lots, lots in planned communities, time-shares, and properties in locations not within easy driving distance. These may not be worth the effort to acquire and sell, if their value is less than $10,000. The expense of acquiring and selling them should be at least equal to or greater than the net proceeds.
11. Be very wary of gifts of property saddled with conditions or restrictions. For example, a property with a “reversionary interest” is given for a very specific use, like a camp or childcare center. If it ceases to be used for that stated purpose, the property reverts to the donor or the donor’s heirs. Accepting the property with these conditions could mean spending more money to meet the conditions or losing the property many years later because of a failure to follow the donor’s restrictions.

Overall, a gift of real estate needs to be handled like any other real estate transaction. Having a policy that the nonprofit can give the potential donor upfront will go a long way toward preventing any misunderstandings during the gift process and establish concrete reasons for rejecting some gifts.

I hope that each of you get more gifts from donors than presents. We hope this has inspired you to be proactive and work with your board to develop (or update) your Gift Acceptance Policy. There are some amazing resources and samples available at the National Council of Nonprofits. If you have funny stories or cautionary tales, please share them — we can all learn from your experience!