I received some interesting emails following the publication of my last post. I must say there are certainly some creative landlords in our community! Here are two landlord situations that I thought were particularly interesting.
This first one has me very skeptical. The nonprofit tenant signed a triple-net lease with an individual as the landlord. By separate agreement, the landlord agreed to reimburse the tenant for many of the triple-net charges. The agreement included a clause that said the tenant could sue the landlord if he failed to reimburse it for these expenses. It also said the landlord could treat the amounts reimbursed as donations to the nonprofit tenant. What do you think would be the IRS position on those donations?
In another creative landlord situation, the landlord was a limited partnership. The rent was more than the nonprofit tenant could afford to pay. So one of the limited partners committed to making an annual contribution to the nonprofit of a fixed amount, which was enough to cover the difference in the amount the nonprofit could afford to pay and the rent that was stated in the lease. How do you think the IRS would view this arrangement?
There is an added dimension to both of these situations. Because the donations in both cases exceed $250, the nonprofit must provide a letter acknowledging the gift and state the value of any consideration received by the donor.
I’m not going to offer an opinion, as I am not an accountant or a tax attorney. However, David Rosenberg, a partner at Thompson Knight, focuses his practice on nonprofit organizations. When asked about these two examples, he said: “As for the first scenario, in form it seems that the landlord has really just donated the space to the tenant. If the IRS was to look at this, it could assert that the landlord has effectively attempted to claim a charitable deduction for donated space.” (This is not allowed under the partial interest rule David discussed in my last post.)
“The nonprofit should be wary of providing an acknowledgment letter here,” David said. “If the IRS determines that the landlord was attempting to circumvent the partial interest rule, the nonprofit could be seen as complicit in this attempt. On the other hand, the second situation is much different. Here, the limited partner is coming out of pocket to make the cash contributions that enable the tenant to meet its rent obligation. Although the limited partner benefits from these contributions when the nonprofit uses them to pay rent, the limited partner recognizes income when the limited partnership receives the rent payments. So, nothing inappropriate has occurred, and the nonprofit should issue a contribution acknowledgment to the limited partner.”
What should we learn from these two scenarios? Get expert advice whenever the concept of donated lease space is being discussed!
Eliza Solender is president of Solender/Hall Inc., a commercial real estate and consulting firm. Contact her at [email protected]
Note: I want to thank David Rosenberg for his comments on both this and my prior blog about donated lease space. It was very kind of him to help me. And, he is definitely an expert.