Business/Investment people: help me structure this

[Ns1]

My wife and I run a non-profit. We have been given an offer to buy the property our facility is currently on. We ("we" meaning the non-profit") do not currently have the money to do so.

What I would propose is to get a combination of investors and donors to help us make the down payment on the property via some type of investment structure (ie a company or REIT) where the non-profit and the donors would own the underlying property. A 20% down payment would be ~150k we would need to come up with.

ex) I want the non-profit to own at least 51% of the company (or whatever) that would own the property. That would mean we would need to come up with ~$76.5k via donations or loans. We would then seek investors for the other $73.5k, possibly via forming a corporation and selling shares (ie 735 shares @ $100 ea). Alternatively we could just structure the whole thing as a corporation, sell 1500 shares @$100ea, and have the non-profit buy 51% of the shares.

To the investors this would be no different than any other investment property. For us it would mean that we would be able to operate w/o worrying about being evicted or the property sold; the latter is a very real possibility at the moment. It gives us long term options because if the non-profit runs out of money, we could just vacate the property and rent it out until the finances are in better shape. It would also give us expansion opportunities because if we move, we could again just rent out the former property and use the rental income to fund ongoing operations.

I realize that forming a corporation would cost money in the form of corporate requirements; I'm not sure if there is a better way.

Thoughts?

 

[SaltyNuts]

You form an LLC (you don't want a corporation, you want an LLC as a flow-through). The non-profit would put in its share of money. The third-party investors would put in their share of the money. The LLC would purchase the property from the non-profit. The LLC would then enter into a lease agreement with the non-profit leasing the property back. Lease payments would be distributed by the LLC to its owners over time. HOWEVER, there are certain "self-dealing" and similar IRS rules for non-profits, that's not my area of expertise so you'd have to make sure this plan (non-profit being on both sides of the transaction) does not trip you up under those rules.

 

[Carson Dyle]

Sounds like oil and water. Can you form any kind of corporation that qualifies as a non-profit if there's for-profit investment in that corporation or its assets? Doesn't make sense (to me).

What would be the incentive for anyone to invest in real estate where the majority share holder has no reason to ever sell, and where that share holder controls whether its sold? Again, doesn't make much sense.

Not to mention... if your finances are shaky, who's going to pay the mortgage every month?

 

[SaltyNuts]

Yes, I would worry about the non-profit not becoming a non-profit because it is getting a significant chunk of income not related to its primary purpose.

 

[louis redfoot]

just make it a standard for-profit company and make sure you don't make a profit

 

[dullard]

just make it a standard for-profit company and make sure you don't make a profit

What investors will invest in this company that is structured to not profit? What donors will donate to the charity that is a for-profit company so that there are no tax deductions?

 

[louis redfoot]

What investors will invest in this company that is structured to not profit? What donors will donate to the charity that is a for-profit company so that there are no tax deductions?

1) ask jeff bezos
2) people who donate in cash anyway

 

[SaltyNuts]

just make it a standard for-profit company and make sure you don't make a profit

Errr, but he is saying he want's the non-profit to be a member in a for-profit entity. No bueno. Huge risks in my mind.

 

[Ns1]

Errr, but he is saying he want's the non-profit to be a member in a for-profit entity. No bueno. Huge risks in my mind.

Why can't the non-profit be a 51% owner in a for-profit entity? The non-profit will still get 66% of it's funding from donations (or w/e the IRS requirement is, I forget at the moment). If the underlying property ends up making money (because the non-profit vacates the property), once again, why does it matter? It just becomes another stream of revenue for the non-profit to fund it's primary mission

What investors will invest in this company that is structured to not profit? What donors will donate to the charity that is a for-profit company so that there are no tax deductions?

Donors (who want the tax deduction) can donate to us so we can purchase the 51% interest in the underlying property. Investors (who want returns) can invest in the other 49%. The investor is not investing in the not-for profit company, the investor is investing in the for-profit company that owns the property that the non-profit is on.

Yes, I would worry about the non-profit not becoming a non-profit because it is getting a significant chunk of income not related to its primary purpose.

A valid point - we would need to ensure the ratio of revenues from donations vs non-donations are IRS compliant.

What would be the incentive for anyone to invest in real estate where the majority share holder has no reason to ever sell

A pro-rata % of perpetual rental income. Make no mistake about it though, the investor would need to understand that their ROI would be lower than other similar investments and would probably be a supporter of the non-profit's mission anyway.

 

[Ns1]

When nonprofits do business
Where things get trickier, though, is when nonprofit organizations have wholly owned for-profit businesses. This is common in the healthcare industry, where nonprofit hospitals or other healthcare institutions can own for-profit enterprises like medical professional practices or real-estate holding companies.

In such cases, the key question for the nonprofit is whether the for-profit subsidiary will jeopardize its tax-exempt status. The IRS has drawn the line at the point at which the business activities of the for-profit subsidiary essentially become the key aspect of the nonprofit parent's operations.

Fortunately, it's generally fairly easy for nonprofits to stay on the right side of the line. As long as the for-profit business is kept in a separate corporate entity with distinct boards of directors and officers, then it will be hard for the IRS to challenge the separation of the two. Only when there's no functional distinction is it likely that the nonprofit will lose its tax-exempt status.

The idea that a nonprofit shouldn't hold stock makes a degree of sense, but such a prohibition would keep the nonprofit from making smart investments to further its charitable purpose. Smart nonprofit organizations invest in stock all the time as a means to earning more money to support their missions.

https://www.fool.com/knowledge-center/can-a-nonprofit-organization-invest-in-stock.aspx

 

[SaltyNuts]

"A valid point - we would need to ensure the ratio of revenues from donations vs non-donations are IRS compliant."


Indeed. I think theoretically ANY amount of UBTI can threaten the tax exempt status of an entity, the IRS just doesn't typically go that route, they just make you pay tax on UBTI. Its even weirder here, where the only profit the non-profit is getting is coming from a rent stream it is paying.

There is several complex set of rules/limitations you'll need to run the traps on. Excess benefit rules, private inurement rules, ext. But that's all I know - I'm not helping you any more unless I get paid for it.

 

[Ns1]

Its even weirder here, where the only profit the non-profit is getting is coming from a rent stream it is paying.

You seem to get it though We're already paying rent, might as well make us the landlord.

 

[deadlyapp]

I think SaltyNuts had a better idea to open an LLC that is for-profit that then owns the property, and then lease it back to the non-profit. Do you have enough personal assets or loan collateral where you could do this? I don't think there is anything inherently wrong in a non-profit having investment that makes money, provided it goes into operating the non-profit. You may need to establish someone else as the owner of the LLC though - you'll probably get in some hot water with blurring the lines if you operate both.

 

[Ns1]

SaltyNuts and I are on the same page except he specifically called it an LLC. The company would be the owner of the property, and the non-profit would be leasing from the company.

The non-profit would then get 51% of the profits of said company, thus effectively becoming a rebate on the monthly rent.

I/we can't lay out personal money due to self dealing/enrichment rules. That said I would probably buy shares and gift to friends.

And of course I'll flush out these ideas with lawyers and accountants and whatnot, id just like to have a better understanding of what I'm going to propose first.

 

[Murloc]

The investor is not investing in the not-for profit company, the investor is investing in the for-profit company that owns the property that the non-profit is on.

I don't think that was his point.
I think his point is that the for-profit entity will not make a profit because how this is thought out, not that it's a non-profit in a juridical sense, and so the investors might not want to actually invest, but I guess that if the donations that come every year go towards paying rent, it is an investment of sorts, even if the property doesn't get flipped, since they get part of that rent.

 

[louis redfoot]

I don't think that was his point.
I think his point is that the for-profit entity will not make a profit because how this is thought out, not that it's a non-profit in a juridical sense, and so the investors might not want to actually invest, but I guess that if the donations that come every year go towards paying rent, it is an investment of sorts, even if the property doesn't get flipped, since they get part of that rent.

if the main issue is the property, op could simply start a trust to buy the property and then rent it to the nonprofit and make himself the trustee. come on guys, it's not that hard

 

[Ns1]

I think his point is that the for-profit entity will not make a profit because how this is thought out, not that it's a non-profit in a juridical sense, and so the investors might not want to actually invest, but I guess that if the donations that come every year go towards paying rent, it is an investment of sorts, even if the property doesn't get flipped, since they get part of that rent.

The for-profit company will should make a profit - the excess of rent payments over mortgage payments, taxes, corporate costs & other etc expenses (depending on how the rent arrangement is structured).

if the main issue is the property, op could simply start a trust to buy the property and then rent it to the nonprofit and make himself the trustee. come on guys, it's not that hard

Can't due to self-dealing/enrichment rules.

 

[Carson Dyle]

Are you going to be paying more rent than you are now? It's not often that you can buy a place and be immediately in the black on rent alone.

Seem to be two issues at play here: 1) the legal/accounting/tax questions for the non-profit, and 2) the attractiveness to any potential investor.

Are we talking about a commercial property or a home? If it's a home, is it also your primary residence?

 

[Ns1]

I would assume that the down payment would put us in a position where rent > payments. We'd need to consult with a professional to run the numbers and make this work out for the investors.

It is essentially a small ranch property so yes it has a house on it. Someone needs to live at the house to provide 24/7 coverage to the dogs (it's a kennel facility). The property is appropriately zoned for this type of thing.

 

[louis redfoot]

I would assume that the down payment would put us in a position where rent > payments. We'd need to consult with a professional to run the numbers and make this work out for the investors.

It is essentially a small ranch property so yes it has a house on it. Someone needs to live at the house to provide 24/7 coverage to the dogs (it's a kennel facility). The property is appropriately zoned for this type of thing.

are you trying to start a cult? hmmmmmmm?

 

[Carson Dyle]

It is essentially a small ranch property so yes it has a house on it. Someone needs to live at the house to provide 24/7 coverage to the dogs (it's a kennel facility). The property is appropriately zoned for this type of thing.

Is that someone you? Or do/will you have employees who will be required to live on the property?

 

[Ns1]

Is that someone you?

It is currently us now, because we are willing to work for free. Long term we would expect 1 or 2 employees to live on the property. Long-long term we would expect to move to a larger facility/ranch and then rent out this property or sell it.

If y'all have ever seen the show "Pitbulls & Parolees" it's structurally the same setup.

 

[Fern]

-snip-
Donors (who want the tax deduction) can donate to us so we can purchase the 51% interest in the underlying property. Investors (who want returns) can invest in the other 49%. The investor is not investing in the not-for profit company, the investor is investing in the for-profit company that owns the property that the non-profit is on.

Too complicated, likely unnecessarily so.

There are generally two ways to raise capital: (1) debt and (2) equity. Use debt, not equity. Get your investors to loan money to your non-profit. Agree upon an interest rate (fixed or not) and let them put a mortgage on the r/e.

I.e., title the property in the nonprofit's ("NP") name. Have the NP execute notes in favor of the investors. Allow the investors to use those notes as a mortgage against the r/e. If a bank must also be involved it will require that the investors' mortgage(s) be subordinated to the bank's mortgage.

There is no UBIT this way. Nor any need for a corp, pship or LLC etc.
------------------------

Notwithstanding the above, rental r/e should generally be held in partnership form to avoid potential double taxation in the event of a disposition (distribution or sale) of the r/e. (An LLC doesn't actually exist for tax purposes. There are no LLC tax forms. LLCs are taxed as regular corps, S corps or partnerships when there is more than one owner. You choose which entity you wish it to be for tax filing purposes)

A minority interest in a small company/pship/LLC is discounted. I.e., worth less than a majority interest because of lack of control. E.g., the NP could decide to rent the building to itself for $1 annually and screw the investors. Minority ownership is not very attractive because there is no control and the minority portion will likely be difficult liquidate/sell.

Dealing with (equity) partners can be problematic (read: usually will be problematic at some point). What if more capital is needed? If a bank is involved it may request the (equity) owners to sign personal guarantees. Will they want to do that? Can they do that? What happens when one of the (equity) partners dies, gets divorced or goes bankrupt? Lot of potential problems here.

Fern

 

[Ns1]

I've thought about the debt approach but with the debt approach I'd have to pay people back immediately. I'm not confident in the non-profit's ability to pay back loans, mortgage, AND on-going costs.

A minority interest in a small company/pship/LLC is discounted. I.e., worth less than a majority interest because of lack of control. E.g., the NP could decide to rent the building to itself for $1 annually and screw the investors. Minority ownership is not very attractive because there is no control and the minority portion will likely be difficult liquidate/sell.

Valid - I would propose long term leases with automatic renewal terms and include reasonable rent increases within the lease terms. Because conversely, I can't risk the NP being a minority partner and getting pushed out of the property in search of profits.

What happens when one of the (equity) partners dies, gets divorced or goes bankrupt?

Their shares of the company (which owns the land that the NP property is on) will transfer to next of kin like any other shares of ownership. No?

 

[Fern]

I've thought about the debt approach but with the debt approach I'd have to pay people back immediately. I'm not confident in the non-profit's ability to pay back loans, mortgage, AND on-going costs.

Why "immediately'? Why not make the notes for ten or twenty years? If the investors accept, make it interest only for 10 or 20 yrs. You may be able to pay out those investors after some years. Take out a bank loan and pay them off.

If the NP can't pay reasonable interest I don't know how the investment in r/e can be expected to be profitable, nor why an equity position would be desirable. Ownership in a pship/corp/LLC is not as secure as the loan option. E.g., if any problem develops, debt holders (mortgage) get paid off before equity owners. It's a better deal for them.

Their shares of the company (which owns the land that the NP property is on) will transfer to next of kin like any other shares of ownership. No?

Well, yeah. But it wasn't an 'academic' question. My point was that you lose control over who your partners are. They may turn out to be adversarial. You want the lawyer of some angry ex-wife who got shares in a divorce harassing you to jack the rent on the NP so she can get some cash flow? (Rhetorical question).

Fern