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Real estate pro warns nonprofits: Beware Trojan House

The Minnesota Real Estate Foundation is warning nonprofits about real estate gifts that look too good to be true.

MREF provides free consultations to nonprofit organizations, helping them sort out whether the offered gift is a financial boon or a Trojan House (yes, I meant house).

Jerome “Jerry” McCarter, MREF’s professional adviser relations officer, said that he consults a dozen times a year on proposed real estate gifts that turn out to be properties with more debt than value. The owners can’t get rid of them. They hope to get a high-end appraisal, dump the property on an unsuspecting charity and get the tax write-off.

His advice: Run away
“I have had a number of consultations on those, and virtually everyone of them I have said, ‘Run away. Stay as far away from it as you can,’ ” he said.

McCarter is a numbers guy, a former principal at LarsonAllen, a Minneapolis-based accounting and consulting firm. Concepts like charitable remainder trusts come easily for him. He had a booth at the recent Minnesota Council of Nonprofits’ http://www.mncn.org/index.htm annual conference, and we talked for an hour about everything from the tax advantages of donating property to the warning signs of scams.

McCarter said some TV investment programs are advising people with troubled property to donate it to charity. Nonprofits should be particularly cautious when someone approaches them offering to donate property, expressing deep concern about their cause, but having no past history with the organization. Some offer an outright real estate gift. Others pitch a charity raffle.

Got a real estate charitable gift question? MREF’s number is 320-253-4380, or email McCarter at jmccarter@RealEstateGiving.org.

Developing real estate expertise
McCarter is a former board member of the Central Minnesota Community Foundation, the organization that created MREF in 2003.

Donors were offering the Central Minnesota Community Foundation real estate, and it lacked the expertise to accept them. Accepting donated property makes an organization responsible for tax and insurance bills until the property sells, and in some cases the property comes with tenants. Further, property could have environmental problems, such as contaminated soil.

“There is a potential risk of being in the chain of title in a real estate gift,” McCarter said.

Central Minnesota Community Foundation leaders didn’t want gifted property to put their other assets at risk, so they created MREF as a separate organization. MREF is a supporting organization for the foundation but works with any Minnesota nonprofit needing help with real estate gifts. It handles the paperwork, property management and sale. The donor gets the tax break; the nonprofit gets the cash.

To cover its costs, MREF gets a portion of the sale as a charitable gift (also deductible). The terms are set up front and range from 0.5 percent to 10 percent, depending on gift’s size and the deal’s complexity.

MREF hopes to close on five to 10 properties year. (The property has included a rental house in Sacramento, Calif., a partial interest in a St. Paul parking lot and a $1 million commercial building in Milaca.) Over the last five years, it has processed about $10 million in gifts. (That’s not counting property given to charities to use for their own programs.)

MREF is trying to increase real estate gifts. Right now, real estate makes up 40 percent of people’s wealth but less than 2 percent of their charitable giving, McCarter said.

He recalled a recent conversation with a development officer who told him he would rather accept $100,000 in cash or securities than a $250,000 piece of real estate, because real estate was so complicated. McCarter told him he was nuts.

“It might take another year to get it liquidated, but $250,000 is better than $100,000, and it may be better for the donor from a tax standpoint,” he said.

New venture
McCarter spends a lot of time talking with professional advisers and financial planners but he also is launching a new venture, called the Partners Program, to work more intensively with nonprofit organizations.

The Partners Program (still in design) would work with about 25 Minnesota nonprofits that want to aggressively seek real estate gifts. It would target organizations with development staff and strong donor bases.

Nonprofits would pay somewhere between $500 and $1,000 to participate.

MREF would work with each nonprofit for about 20 hours during the year. It would provide quarterly newsletter articles, work with development staff, do seminars with the organization’s supporters and consult on individual gifts.

Interested? Remember board members, charity starts at home.

Said McCarter: “Your board is always one of your best prospects, for either being a donor or identifying a donor.”

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