For Non-Profit Groups That Seek Guidance on Real-Estate Gifts, It’s a Buyer’s Market

Gifts of real estate are complicated for many charities to handle. Most worrisome to many groups is whether they will be able to sell the property in a reasonable amount of time.

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Another big concern is whether they might be held legally responsible for any mishaps that arise while they own the property, or for environmental damage caused by the property. Additional problems arise when a donated property carries debt, such as a home on which the donor still owes a substantial amount on the mortgage.

To cope with such difficulties, non-profit groups can turn to an increasing number of resources, including other non-profit institutions and corporations.

Small charities, for example, can sometimes turn to their local community foundation. Some community funds, which raise and distribute money in a specific geographic area, have helped donors use real estate to create a donor-advised fund at the foundation. The donors are usually allowed to recommend that their fund at the community foundation send money to the charity that they want to benefit from the land gift.

The Community Foundation of Greater Memphis even set up a separate non-profit arm, called Community Foundation Realty, to help bring about such gifts. It has also helped some local charities accept donated property from area companies. All told, the realty unit has helped raise more than $5-million from real-estate donations since 1992, its first full year of operation.

Non-profit groups can also get help from an expanding number of individual experts and companies that are trying to carve out a niche for themselves by offering the particular brand of real-estate, tax, and legal expertise required in transactions that involve donated property.

“I’ve seen more experts getting into this area,” says Ron Peters, a Saratoga Springs, N.Y., commercial real-estate consultant who has spent the last 12 years helping charities arrange gifts of property. “There is definitely more competition now.”

Mr. Peters and other consultants advise charities on whether a property is worth accepting, line up the necessary appraisals and environmental inspections, conduct title searches, find qualified real-estate brokers who can sell a particular type of property, file tax documents on donated properties, and perform a variety of other tasks.

For those services, the consultants generally charge a set fee, and they usually also earn a percentage of the sale price when the donated property is sold.

Charities can also seek help from a few realty companies that now work with donated property. Washington’s CarrAmerica, which develops high-rise office buildings, for example, has created a charitable-services division that focuses on donated real estate.

The companies may also be willing to pay off a mortgage or other debt on a donated property and assume management of the real estate until it can be sold. In such cases, the company usually charges a fee based on a percentage of any debt it pays off, as well as a commission on the sale of the property.

One new company created in October, American Foundation Realty, in Santa Fe, N.M., is being watched closely by fund raisers and other planned-giving experts. The company, founded by by two real-estate investors, has come up with a new approach for a specific type of property: commercial real estate that has significant debts.

Lawyers for the company are now asking the Internal Revenue Service to review its approach to be sure that it complies with the tax code.

Commercial real estate is usually much more valuable than other types of property, such as a home or undeveloped land. Yet it is also the most difficult for charities to handle, particularly when it has debts, as most commercial properties do.

Problems with indebted real estate come up when donors want to use it to create certain types of planned gifts, particularly charitable remainder trusts. Such trusts offer donors tax breaks and income in exchange for giving their assets to charity. But the Internal Revenue Service prohibits the use of a debt-burdened property in setting up those trusts.

Even when donors want to give an outright gift of indebted property, there are problems. Many non-profit institutions are unable or unwilling to help pay off the debt, though they would ultimately come out ahead when the property was sold.

To facilitate donations of such property, American Foundation Realty plans to operate as a real-estate investment trust, issuing stock on its asset base: a portfolio of commercial real estate.

Here’s how it works: First, the company will decide whether a donated commercial property such as a shopping center or an office building has a market value of at least $1-million, meets certain other criteria, and can be profitably managed.

If so, the company will take the property’s title from the donor, pay off the debt, and add the property to its portfolio.

In exchange for the property, the company will issue stock to the donor that is worth the market value of the property, minus the debt. The donor can then give the stock to charity as an outright gift, or use it to set up a charitable trust or other deferred gift.

Although the company’s stock is not yet publicly traded, it will pay dividends on a quarterly basis, said Jay Grab, American Foundation Realty’s president, in an interview. Mr. Grab and his partner and co-founder, Garrett Thornburg, chairman of Thornburg Mortgage Asset Corporation, another real-estate investment trust, said they hope to take their new company’s stock public within the next 18 to 20 months.

Mr. Grab, who previously ran a real-estate acquisition company, said that the idea for the new company came when he was obtaining property from a non-profit institution. The charity’s officials told him about some potentially valuable properties that they were unable to accept as donations. He recognized then, he said, that a need was not being filled.

Mr. Grab said that although his new corporation has yet to complete its first gift transaction, negotiations are under way on about a dozen property gifts.

The I.R.S. has been asked to review a gift being handled by the company, an office building worth more than $1-million, with a debt of approximately $250,000.

Several experts who are following the new company’s progress say that they are withholding judgment on the new approach until it has the I.R.S.’s blessing. A decision is expected within a few months.

Others say that they would not do business with American Foundation Realty until its stock was traded publicly. If the stock wasn’t offered on the open market, they say, charities could be left with an asset that generated few or inadequate returns.

Most experts agree, however, that the company is attempting to offer a valuable service: making it possible for charities, even small ones, to benefit from donated commercial real estate without having to spend time and money to manage and sell it. That, they say, could dramatically increase the flow of real-estate assets into philanthropy.