December 9, 2021
By:
Anastas Shkurti
A tax-exempt Illinois not-for-profit corporation (or Exempt NFP) can rent or own commercial real estate or hold interests in another corporation that does so. The current real estate market has created many opportunities for Exempt NFPs. However, unlike their for-profit relatives, an Exempt NFP faces a unique set of challenges at each step.
Long-Term Planning: An Exempt NFP has at its core a stated mission and membership recruitment strategy. The Exempt NFP should consider how that mission and strategy will be advanced by leasing versus owning said property. This analysis should be performed by specialized professionals (accountant, attorney, broker, and lender) who have served the not-for-profit industry in the past. Such professionals might be among the members of the Exempt NFP. However, true expertise should surpass the impetus of hiring a member of the Exempt NFP for such purposes.
Authority: An Exempt NFP has its own bylaws and governing documents. Such operating charters set forth the manner that purchase decisions are made. All Illinois Exempt NFPs are required to have a board of directors with at least three members. The directors (or trustees) are tasked with most managerial decisions. The bylaws may also require that, before a significant investment is made, the decision be approved by the general membership or another overseeing body. Before engaging the professionals to assist with the acquisition, the Exempt NFP should list each step involved in the transaction and note the respective approving bodies.
Financing Considerations: Some Exempt NFPs have the means to fund the purchase in cash. Others need financing for the purchase or the improvements or both. The Exempt NFP should begin work early with a seasoned lender who understand the dynamics of a not-for-profit or a charity. The lender will need more time to analyze the financial data (such as cash reserves, debt-equity ratios, enrollment or membership history, and financial modeling) before it can present the loan for approval. The lender will also have less options to sell or service the loan to another lender and might hold it in-house for longer than a standard commercial loan. Hence, the Exempt NFP needs to adopt a realistic time frame for the closing.
Property Characteristics: Each real state parcel is unique. This is true more so for real estate designed for institutional use. Whether the Exempt NFP is looking to purchase real property that is currently in not-for-profit use or convert it to such, its directors should be prepared to analyze it with the same keen eye as a seasoned real estate developer. Such analysis begins long before a letter of intent is drafted. The Exempt NFP should have a “model” property in mind and search for one like it. When candidates arise, the next step involves a zoning analysis on the current and anticipated use of the property. The board should list the desired improvements for that specific parcel and whether further zoning relief is required to accommodate them. Institutional properties may be located within a historical district that limits permitted external alterations. These steps often involve the cooperation of both an architect and an attorney. Moreover, the Exempt NFP should identify the various municipal departments that must approve the project.
Contracts: The Exempt NFP should not rely on form letters of intent or form contracts when it negotiates with the Seller. It should also hire commercial brokers and real estate attorneys with experience in the not-for-profit industry. It should strictly follow its bylaws before making an offer, executing a binding contract, seeking financing, hiring an architect and a general contractor, or applying for building permits and zoning relief with the municipality. To achieve such compliance, the various contracts and applications must be made readily available in advance for review by the board and other approving bodies. As result, the various contingencies and deadlines that are built into the contract are typically longer than in a regular commercial deal.
Pre-Closing Contingencies: Typical commercial contract contingencies such as environmental, financing, physical inspection, and zoning due diligence also apply to buying not-for-profit real estate. However, the stakes are higher for an Exempt NFP. It may not have the flexibility of a for-profit developer who can alter the plans depending on the reception by the municipality or changes in the market conditions. It also may not be able to readily sell the property if a few years after the closing it appears that the project is unfeasible. Most Exempt NFPs own and use real estate for the long run and in a way that advances their mission and strategy. A school needs classrooms and learning facilities, a house of worship needs gathering areas and kitchens, but neither can then start leasing out space to unrelated third-party office users or retailers if enrollment or congregation membership declines without tax-related consequence. As a result, the Exempt NFP needs to be very confident that the project will work in the long run before committing and closing the purchase.
Government and Public Forums: An Exempt NFP that is about to purchase real estate should be mindful that not everyone will line up behind its cause and support its project. While the mission of the Exempt NFP might appear noble to its members, one should expect that some part of the public might object to adding that parcel to the local tax-exempt roll or keeping it there. So, it should employ a public opinion campaign to educate the neighbors and the municipal officials of the benefits that such use will bring to the local community. This is particularly important when the Exempt NFP must seek zoning relief such as a special use permit or a variance to use or improve the property.
Post-Closing Strategies: The purchase closing could be only the halfway point for the Exempt nfp. It might still need to improve the property before it can make full use of it. The directors should outline the steps needed for that purpose. They should also identify or retain the general contractor who will perform the improvements. The Exempt nfp should also retain an assessment appeal attorney who will apply to continue existing tax treatment of the real estate or apply for exempt status. Many municipalities also provide specific tax incentives for properties within certain districts or that serve charitable purposes. All these considerations will continue for as long as the Exempt NFP owns the real estate.
This list is not exhaustive. Each entity has its own unique needs. DiMonte & Lizak has a wealth of experience in advising and representing Illinois Exempt NFPs in their day-to-day operation, compliance, and acquisition of real estate. Always reach one of our attorneys before entering into a real estate lease or purchase contract.
For more information on tax exempt not-for-profits or other entities, contact Anastas Shkurti:
Phone: (847) 698-9600. Email: ashkurti@robbinsdimonte.com.