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Lease Of 501(c)(3) Owned Property To For Profit Entity

Discuss anything to do with property law - buying, selling property

Lease Of 501(c)(3) Owned Property To For Profit Entity

Postby Bedford » Tue Nov 29, 2016 10:31 am

Dear Sir,

I am on the board of a small chain of non-profit nursing homes that are currently self-managed and backed by tax exempt bonds.  We are considering hiring a management company or leasing the facilities.  Should we relinquish management, we would want to ensure our bond payments and their tax exempt status.  Ideally, this would come in the form of some sort of guaranteed payment in return for rights to operate the nursing homes.  I know of many other non-profits that have management companies for a percent of revenue, but is triple-net leasing the facilities/operations possible to a for-profit  at market rates or some other sort of guaranteed payment schedule possible without jeopardizing the tax exempt nature of our debt?  How so?  All tax-exempt debt backed facilities/operations would continue to operate according to charter(e.g. skilled/long term care of disabled & senior citizens).

Thanks!
Bedford
 
Posts: 35
Joined: Thu Feb 20, 2014 1:04 pm

Lease Of 501(c)(3) Owned Property To For Profit Entity

Postby Wells » Thu Dec 01, 2016 3:16 am

I am assuming that the non-profit nursing homes are part of a 501(c)(3) organization. I am also assuming that the management company would not be related to your corporate insiders or relatives of your corporate insiders. Your main issue is what the IRS calls "private benefit" and the IRS does not have any bright line rules but looks at all of the facts and circumstances(especially the contract) to decide whether the arrangement would jeopardize 501(c)(3) organization status. See, for example,

www.irs.gov/pub/irs-tege/eotopich01.pdf a 2001 internal memo of the IRS "PRIVATE BENEFIT UNDER IRC 501(c)(3)"

especially starting with Situation 2 on page 10 which involves a triple-net lease.  Situation 3 involves a nursing home financed by tax exempt bonds.

On page 18 we read " Deciding whether benefits conferred are incidental to, or one of the intended consequences of, an applicant's proposed activity cannot be decided by a fixed set of principles." The IRS does not have a principle "no triple-net leases" or any such rule.  The triple-net lease would be considered along with all of the applicable factors.  I can not give you an answer "Yes, a triple-net lease in your situation is allowed by the IRS". I would be willing to work on your matter, but I would need to spend a substantial amount of time reviewing the details and possibily offering a way to structure the transaction to improve tax treatment. I would also want to research if and what the circumstances were when the IRS did approve a triple-net lease, as I do not know, off the top of my head of any such details. That would be beyond the scope of this free forum. If you want to hire me for such work, please contact me directly to the email address below. Harvey Mechanic

Attorney at Law

[email protected]  
Wells
 
Posts: 39
Joined: Thu Jan 02, 2014 7:18 pm

Lease Of 501(c)(3) Owned Property To For Profit Entity

Postby Dietz » Mon Dec 05, 2016 2:29 am

Dear Sir,

I am on the board of a small chain of non-profit nursing homes that are currently self-managed and backed by tax exempt bonds.  We are considering hiring a management company or leasing the facilities.  Should we relinquish management, we would want to ensure our bond payments and their tax exempt status.  Ideally, this would come in the form of some sort of guaranteed payment in return for rights to operate the nursing homes.  I know of many other non-profits that have management companies for a percent of revenue, but is triple-net leasing the facilities/operations possible to a for-profit  at market rates or some other sort of guaranteed payment schedule possible without jeopardizing the tax exempt nature of our debt?  How so?  All tax-exempt debt backed facilities/operations would continue to operate according to charter(e.g. skilled/long term care of disabled & senior citizens).

Thanks!
Dietz
 
Posts: 41
Joined: Wed Feb 12, 2014 2:48 pm


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