Making Room: Third-Party Facility Usage Policy

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Does your organization own real estate that could be used by others? Perhaps your organization’s building or other property is currently occupied in whole or in part by other occupants? While the nonprofit sector has occupants, usage fees, and related agreements, a parallel dynamic exists in the commercial world where occupants are known as tenants, usage fees are known as rent, and related agreements are comparable to leases. Oftentimes, the key driver for such an arrangement is financial, which is fully appropriate for a commercial setting. But in the nonprofit context, real estate may be exempt from property taxes, revenues preferably remain tax-exempt, and additional non-commercial considerations may warrant a different approach for third-party space usage.

At its core, the potential provision of a nonprofit’s physical space to others amounts to a stewardship question – that is, whether it is a good idea overall to allow others into the nonprofit’s space. This overarching stewardship inquiry encompasses several related matters such as how such provision advances the nonprofit’s mission, risk management, insurance coverage, staffing, consequent building repairs and wear and tear, revenue opportunities, and impact on the nonprofit’s property tax exemption.

To help an organization stay the course, such considerations may best be addressed through a written “facility usage policy” that an organization’s board thoughtfully develops and approves. What should be included in a third-party facility usage policy? The specific provisions may depend on the nonprofit’s goals, particular property attributes, and decisions about permissible uses. This article is the first in a multi-part series addressing third-party facility usage, with a facility usage policy as the key starting place.

Who decides?

As various requests may be made, whether internally by employees for private functions, neighbors who seek to use portions of the property if available, or others who express unsolicited interest, a facility usage policy should identify who is the ultimate decision-maker for such matters. The decision-maker could the nonprofit’s governing board, a committee to which such decisions are delegated, or even an individual with significant responsibility and authority. Such decision-makers should each hold a keen understanding of the potential implications arising from third-party usage, as follows and to be addressed further through additional articles in this series.

No one should be involved in specific facility decisions, however if he or she has a conflict of interest. Common examples would include service on the potential guest user’s board of directors and holding a personal financial interest in the proposed facility usage.[1]

Any ethical or doctrinal restrictions?

Many organizational leaders may seek to restrict their property usage based on types of activities, such as nothing immoral or otherwise conflicting with the nonprofit’s mission. Such restrictions thus could be based, for example, on a religious property owner’s doctrine, a health-oriented nonprofit’s concerns for its patients, or a school’s educational focus. Note that most nonprofits are not “public accommodations” under applicable anti-discrimination laws. As owners of private property, they may decide who may and may not be allowed on the property. But it can be quite helpful to articulate any potential restrictions through an organization’s written policy, especially to avoid confusion and misunderstandings. Such restrictions may consequently limit the potential range of occupants, which may or may not be attractive to nonprofits.

Which third parties – other nonprofits, commercial tenants too?

An additional key determinant on whether a nonprofit provides space to both nonprofits and commercial users (i.e., renters) may be whether the facility itself is exempt from property taxes or is taxable. A common example of commercial rental activity is when a nonprofit owns an apartment building or house - perhaps a former parsonage for a church - that it seeks to rent out privately. That is perfectly fine, but such usage will disqualify the property for property tax exemption under most state laws. Consequently, the nonprofit owner should either leave the property on the property tax rolls (if that is the current property status) or notify the local government authorities that the tax status should change from exempt to taxable. Later, if the property is used again for exempt purposes – such as a parsonage or other nonprofit program activity – tax exemption could be sought for the property.

This example points to some significant implications of deciding whether to allow property usage for exempt or non-exempt purposes. If the property is already tax-exempt (i.e., off the tax rolls), then perhaps the facility usage policy should restrict future third-party usage only to other nonprofits, as “guest” users that pay “contributions” (or “fees”). Typically, such nonprofits should be other Section 501(c)(3) public charities.

If a facility usage policy allows for commercial tenants, then such decision should be made carefully and preferably for a long-term lease arrangement, given the resulting property tax implications. The corresponding financial arrangements should also take into account the likely tax liability involved with such usage. In other words, the rent charged should include some allocation for property taxes, and the arrangement should be sufficiently favorable for the nonprofit owner to justify such commercial usage.

What kind of nonprofits, and for how much?

The facility usage policy should not only address nonprofit versus commercial allowed usage, but also what types of nonprofit usage is allowed. A helpful policy may identify certain types of nonprofits allowed, beyond merely allowing nonprofits categorially, as well as the basis for any fees charged. More specifically, to protect a property’s tax-exemption status, any third-party usage must be “without a view to profit” – both in terms of the owner/guest arrangement and with respect to the guest user’s actual usage.

A nonprofit property owner thus may charge fees but not for commercial “profit” reasons (and never termed “rent”). A key element of such non-commerciality therefore may be that the nonprofits have some type of synergy, such as that they are both religious organizations or other mission alignment that is consistent with the non-commercial arrangement. Quite commonly, an owner may allow third-party usage to promote its own community outreach or in some other way to foster sharing tax-exempt goals. The contributions or other fees charged thus should be to cover actual expenses, which may be long-term (e.g., capital improvements) and short-term (e.g., utilities, ordinary wear and tear, cleaning, maintenance, grounds).

Additionally, if the third-party user charges any fees for its services, then such fee structure should be consistent with the third party’s nonprofit nature. Examples include the third-party user’s generous allowance for fee waivers, fee reductions, and other financial assistance.

All such policy considerations are important for protecting a property’s property tax exemption. They should also help organizational leaders hone in on viable and appropriate third-party users, hopefully avoiding later confusion and other issues that may arise regarding appropriate third-party usage.

What kind of agreement?

A facility usage policy may allow for both long-term nonprofit agreements (e.g., once-a-week meetings, particular parts of the building for ongoing uses) and short-term nonprofit agreements (e.g., weddings, weekend conferences, and other special functions). Such agreements can be extremely helpful for designating allowed spaces, clarifying the non-commercial dynamics involved with such arrangements including articulated mission alignment, allocating the parties’ respective responsibilities, addressing sufficient insurance, and providing any specific rules or requirements for space usage (e.g., whether to use security deposits, key access, cleaning, safety). The facility usage policy also may provide for template long-term and short-term non-commercial facility usage agreements, as well as (if otherwise allowed) a template lease for potential commercial usage.

What about advertising?

The facility usage policy may address advertising as well. Particularly if the nonprofit owner seeks only to provide space usage to other nonprofits (as is quite typical), it may be best to find other guest users through word of mouth, with a strong emphasis on mission alignment, and related stewardship aspects. As a middle-ground approach, it may be helpful to post information on a nonprofit’s website - all per a well-developed facility usage policy that clearly articulates the reasons and parameters for making third-party facility usage available.

Formalizing a Policy

Once an organization’s board and/or other key persons develop their facility usage policy desires, it is important to formalize the policy in writing and obtain board approval, maintaining best practices in corporate governance.

More to Come

Many more considerations apply for a nonprofit organization’s wise, prudent, and legally compliant provision of third-party facility usage including categories of property tax exemption, whether and to what extent any “unrelated business income tax” liability may result, what to include in a usage agreement, and additional risk management aspects. We will address such matters further in forthcoming articles within this nonprofit real estate blog series.


[1] For more information on conflicts of interest, see our law firm’s blog article here.