Seemingly Generous Pledge Attracts Interest and Suspicion, but No Takers

The telephone message was the first hint that something wasn’t quite right.

Jennie Peabody, director of planned giving at Mercy Corps, an international aid and development organization in Portland, Ore., thought it was odd to get a voice-mail message from a friend of a prospective donor who wanted to make a nearly $2-million real-estate gift to the charity.

Why doesn’t the donor himself call, Ms. Peabody wondered. Who is the donor, and why would his friend leave so many details about the gift and its specific terms in a telephone message?

Ms. Peabody, who got the call in June shortly before she was scheduled to take a maternity leave, was taken aback, but she wasn’t going to ignore the possibility of such a big donation, no matter how peculiar the circumstances. She quickly passed on the information to K. Gene Christian, the charity’s planned-giving consultant, so he could pursue the donation during her absence.

Mr. Christian had immediate concerns, too, especially about the conditions of the contribution, which called for Mercy Corps to set up a charitable gift annuity for the donor based on the donor’s own assessment of the property’s value. With this type of arrangement, a charity agrees to make annual payments to a donor based on the value of the donated real estate, paying the donor from proceeds of its sale, and ending up with some share of the assets when the donor dies.

Mr. Christian was worried that the donor in this case was asking that the size of the annual payments be based on what appeared to be an inflated appraisal of the property. That might mean little, if any, gift money left over for Mercy Corps after the payments were made. Still, he spent time over the next few months analyzing the property, running the numbers, and talking with the prospective donor’s friend.

“Right away you say, Oof, this doesn’t sound right,” Mr. Christian says. “But the size of the gift keeps your nose in the tent.”

Numerous Pitches

Indeed, the seemingly generous offer has attracted plenty of interest: It turns out that all year long the same person had been contacting charities around the country, which, one by one, after some scrutiny, have rejected the deal.

Mercy Corps refused the offer in September.

In October, a warning about the gift offer appeared on an online discussion group for fund raisers who specialize in arranging planned gifts.

Bryan Clontz, president of Charitable Solutions, a Jacksonville, Fla., company that counsels charities about their planned-giving programs, made the post after he learned that at least 15 charities had fielded the offer since February.

“I’m not out to tell charities they have to turn down the gift,” he says. “I just thought they should know others have already been on the same goose chase with the same piece of property and the same terms, and that it’s created a monumental waste of time.”

Real-Estate Donations

While real-estate donations are often a boon for nonprofit groups, in many cases charities turn them down. Some charities may not have the expertise to handle the transactions, and others may reject the gift because of concerns about a volatile real-estate market or uncertainty about a piece of property’s tax, zoning, or environmental status.

Many charities, too, are reluctant to accept gifts of real estate when they are not made as outright donations, but in exchange for, say, a charitable gift annuity. In those cases, if the negotiated annuity rate is too high, the donor lives longer than expected, or the charity cannot sell the property quickly or at a certain price, the value of the gift can diminish or disappear altogether. In some instances, it can cost the charity.

But even with plenty of real-estate gifts offered, considered, and, ultimately rejected by charities all the time, the one rebuffed by Mercy Corps — and so many other groups — stands out.

Charity officials and experts in planned giving say the prospective donor in this case had been remarkably persistent and inflexible. It is unusual, perhaps unheard of, for a donor to continue to shop around the very same gift with the very same terms after getting rejected by so many organizations. What’s more, the fund raisers say, the terms of the gift are so unfavorable and the circumstances of the donor so mysterious that it is surprising the gift offer stayed afloat as long as it did.

At the same time, the observers and experts say, the refusal so far of all of the charities to accept what appears to be a faulty gift is a testament to the growing sophistication among fund raisers, and to the power of information sharing among charities.

Calling Fund Raisers

According to a handful of fund raisers who have fielded the offer, here’s what the would-be deal looks like: An ailing California man owns a six-unit town-house complex in Costa Mesa, Calif. His friend — girlfriend, by some accounts — named Jackie, acting as his adviser, will call a charity and say that the man would like to donate the property, worth $1.9-million, according to their appraisals. In exchange, the group would provide a charitable gift annuity. Jackie will explain that the man is somewhat incapacitated having suffered a series of strokes and is unlikely to live much longer.

Among the terms of the gift that she then lays out: The gift annuity would be set at a higher-than-normal rate because of the donor’s failing health; the donor would pay no transaction fees; and the annuity payments would start immediately, even before the sale of the property.

In some cases, Jackie will insist that the charity reinsure the gift annuity, meaning the organization would pay a premium to an insurance company that would then guarantee the annual payments.

(Most of the charities contacted about the gift declined to be named by The Chronicle, and none would share enough information for a reporter to contact Jackie or the prospective donor.)

Job one for a charity fielding such a real-estate offer is to assess the property. Mercy Corps, for example, had three local real-estate agents give their opinions about the sale price of the Costa Mesa town homes. Their estimates ranged from $1.2-million to $1.6-million.

But Mercy Corps, like the other charities, learned that Jackie and the donor were not willing to budge from their $1.9-million appraisal. Some of the fund raisers who described the gift offer guessed that the appraisal was simply outdated, and from a time, perhaps last year, when the California real-estate market was stronger. And, they surmised, the donor wanted to stick with it in order to maximize the annual payment he would receive in exchange for his donation. Charities and donors can agree to base their payment plan on whatever price they would like, although the donor’s tax deduction must be based on an appraisal approved by Internal Revenue Service regulations.

To avoid losing money on the deal if the gift annuity were to be based on the high appraisal figure, one charity tried to figure a way to structure the gift so the property title would never pass through the charity, in the hopes of relieving the organization of some liability if the sale price did not meet expectations. Another charity considered seeking reinsurance at a lower-than-usual premium based on the donor’s particularly poor health, but couldn’t get the donor to agree to share his medical records.

Mr. Clontz, the consultant, says it is probably just as well those efforts didn’t work out because any such finagling would be risky. Unless the sale price of the property approached the $1.9-million valuation the donor is stuck on, a charity trying to meet conditions of the gift could end up losing hundreds of thousands of dollars after covering all the transaction costs and making the annual payments, he says.

Ultimately, it is the reality of that financial gamble that has been the final deal breaker for charities so far, but fund raisers who have considered the gift say they encountered other red flags along the way, too.

Charitable Intentions

They found it worrisome, for example, that they couldn’t speak directly to the donor to assess his mental capacity and interest in making a contribution. Some wondered about the donor’s charitable intent since he had never before supported their organization or seemed to have any connection to it. And some were put off when they learned that the donor, still in negotiations with them, was shopping the gift to other groups.

John A. Payton, a fund raiser for a California college who read Mr. Clontz’s online post about the gift offer, says he understands why organizations pursued the gift, even with the alarm bells ringing.

“Sometimes, until you exhaust all the possibilities,” says Mr. Payton, of Point Loma Nazarene University at Arcadia, “the dollar signs shine just as brightly as the red flags.”

Now that the word is out about this case, though, he says, fewer organizations will probably spend too much time on it unless the terms of the gift change.

“You have to do your homework on things like this,” he says, “but this time it looks like a dozen other places did all the homework for us already.”