June 27, 2018
Houston – Nonprofits are uniquely positioned to lower overall occupancy costs by implementing a real estate strategy that capitalizes on their tax-exempt status. Stephen Powers, Managing Director and leader of Transwestern’s Nonprofit Advisory Services group, outlines three real estate tactics for nonprofit operators to achieve substantial savings in the latest edition of Insights.
In a typical lease or co-operative, the real estate tax burden passes through to the tenant or occupant, regardless if the user is tax-exempt. This expense can be avoided entirely by rejecting traditional leasing options and instead buying the organization’s desired real estate.
“Ownership presents a variety of benefits to nonprofits that go beyond eliminating the pass-through property taxes in traditional leases,” said Powers. “As a landlord, a nonprofit can help offset mortgage payments or generate revenue to support its mission by leasing excess space in the property.”
While this may seem like an aggressive strategy, the nonprofit may be able to issue tax-exempt bonds to finance the acquisition and exercise its exempt status on state or local taxes associated with closing costs or property transfers. Strategies such as these can mitigate the required upfront cost for the acquisition.
If owning real estate is not an option, nonprofits can still achieve the benefits of their tax exemptions while leasing conventional commercial space, though the exact scenario will vary based on state and local tax practices. For example, nonprofits can utilize a leasehold condominium structure in New York as long as the agreement is binding for at least 30 years. In California, a nonprofit can achieve exemption from property tax on real estate that it occupies entirely or if all tenants in a multitenant building are qualifying nonprofit organizations.
Once committed to a space, whether owned or leased, nonprofit organizations should be conscious of the sales tax that could be incurred on construction materials, furnishings and fixtures. The organization can continue to capitalize on its tax-exempt status by purchasing those items directly rather than through the general contractor building out the space.
“A real estate transaction, whether to lease space from a landlord or acquire a property, is a complex and nuanced process that presents myriad opportunities for nonprofits to take advantage of their tax-exempt status,” Powers said. “A sound real estate strategy should consider all points throughout the process to identify potential savings and thoroughly examine how real estate options support the mission of the nonprofit.”
Transwestern is a privately held real estate firm of collaborative entrepreneurs who deliver a higher level of personalized service – the Transwestern Experience. Specializing in Agency Leasing, Tenant Advisory, Capital Markets, Asset Services and Research, our fully integrated global enterprise adds value for investors, owners and occupiers of all commercial property types. We leverage market insights and operational expertise from members of the Transwestern family of companies specializing in development, real estate investment management and research. Based in Houston, Transwestern has 35 U.S. offices and assists clients through more than 211 offices in 36 countries as part of a strategic alliance with BNP Paribas Real Estate. Experience Extraordinary at transwestern.com and @Transwestern.