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When Nonprofits Run Aground

SAN FRANCISCO-Special considerations come into play when nonprofit organizations want or need to engage in real estate transactions, explains Manatt, Phelps & Phillips' Marv Pearlstein in this EXCLUSIVE commentary.

By Marv Pearlstein, Partner at Manatt, Phelps & Phillips | Updated on November 21, 2013

SAN FRANCISCO-Special considerations come into play when nonprofit organizations want or need to engage in real estate transactions. With very few exceptions, nonprofits have a focus on something entirely unrelated to real property. Whether their mission is educational in nature, is health related, is directed to social issues, or addresses other needs, the typical nonprofit’s real estate dealings are ancillary to its purpose. Thus, in such dealings, the nonprofit staff members are usually on unfamiliar terrain. While this is also true of many for-profit enterprises, the nonprofit’s tolerance for risk and appetite for creative or alternative deal structures may be set much lower than would be the case for a business whose core mission is generating profits.

As the economy recovers from the Great Recession, the opportunities for nonprofit organizations to generate revenue from real estate holdings is rising, dramatically so in some markets. The cleanest disposition approach, of course, is to sell land or convey it by means of a long-term ground lease. Investment activities of this type generally produce income that is not subject to income tax and pose no threat to the tax exempt status of the nonprofit entity. On the other end of the spectrum is the possibility of transferring land by contribution to a joint venture, in which the nonprofit will possess an ownership interest. This scenario would likely be utilized where the contributed land is to be developed for residential, commercial or mixed uses. With land prices escalating rapidly in many metropolitan markets, land sellers are increasingly presented with the option to realize potentially greater value from their owned land by assuming the risks inherent in property redevelopment. And therein lies the rub, particularly for a nonprofit with goals wholly unrelated to land or its development.

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