Donating a commercial property is a great tax strategy for an investor with high appreciation and a low basis, but it can also be a profitable transaction for a real estate pro, says Chase Magnuson, director of planned giving for real estate at George Washington University in Washington, D.C.
Do Well by Doing Good
Today, most charities don’t expect commercial practitioners to donate their services and fees when a client donates a property. Charities have recognized that they need to pay a fair price for commercial services, he says. Charities are also increasingly turning to experienced commercial practitioners to help them in performing due diligence and selling potential donations. Corporations with surplus space are prime donor candidates, especially if the property has fallen in price from its book value, Magnuson adds.
How Donations Work
Gifts of commercial real estate are made through either a charitable remainder trust or a charitable gift annuity. Both options allow the donor to offset capital gains tax and produce income for the donor over a specified period. The big difference is that the annuity option guarantees a specific rate of return while charitable remainder trust payments vary depending on the performance of the stock market. That makes the annuity option more attractive to most current donors because it avoids market volatility, says Magnuson. Rates of return for annuities vary based on age, but most pay a return several percentage points higher than other low-risk investments. One disadvantage of the annuity option is that payments stop when the donor dies. A charitable remainder trust can produce income for succeeding generations, up to 20 years after the life of the original donor, according to IRS regulations. Any type of property can be donated, and the property can be shared among several charities, says Magnuson.
Seeing the Potential
Magnuson expects gifts of property to grow as more charities and real estate practitioners become comfortable with the mechanics. Currently, real estate donations represent only about 2 percent of the approximately $4 billion in annual charitable giving, he says, but the potential is there to expand that by 200 to 300 percent. It’s a win-win for charities and commercial professionals, he says.
Don’t Wait for a Crisis to Strategize
Developing a strategic plan to turn your business around during the downturn is great, but strategic planning should not be limited to just the current phase in the real estate cycle, says Charles Hewlett, managing director with RCLCO Real Estate Advisors in Bethesda, Md., and coauthor of Strategy Planning for Real Estate Companies (Urban Land Institute, 2008).
Strategic planning should be done in a measured way and address all phases of a cycle, he says. That means you need to prepare strategies for growth now, before the market improves. Similarly, you need to start thinking about what you’ll do when the next downturn comes well before sales start to slip.
It’s also vital to include triggers that help you identify when conditions call for a shift in your strategies, says Hewlett. You need a staged contingency plan, one that shows you what actions to take at the first signs of trouble and what the next steps should be if conditions worsen. Without these actions in place, many companies wait too long to respond, Hewlett says. It’s human nature to bury your head in the sand and ignore market dissonance for as long as possible. Having a strategic plan for market changes isn’t a silver bullet, says Hewlett, but it provides a valuable framework for responding to the inevitable fluctuations of the market.
Latching Onto Sure Things
Which trends will shape commercial real estate in the next few years? Finding Certainty in Uncertain Times, a new collection of essays from the Urban Land Institute, pinpoints several key drivers that will shape demand and development. We believe that these trends will continue regardless of location, which political party is in power, and how quickly the economy recovers from recession, writes Maureen McAvey, ULI executive vice president of initiatives. Among the trends to watch:
• Regional migration, immigration, and population growth will create a new pool of middle-class, metro-area dwelling consumers.
• Sprawl will continue, with outer suburb areas growing three times as fast worldwide as central cities.
• Research, high-tech, education, and medical institutions will attract more capital to cities able to leverage the funds and create a positive climate for business and entrepreneurs.
• Green features will no longer be a bell and whistle but rather an essential component for both location and building performance.