Real Estate Gifts: Are They Trojan Horses?

“Trust not the horse, people of Troy.

Whatever it is, I fear the Greeks even when they bear gifts.”

-Virgil, Aeneid, II, 4.

Most are familiar with the story of Greece’s use of a hollow wooden horse, disguised as a gift, to smuggle warriors behind enemy lines and bring about the fall of Troy.  The term “Trojan horse” has come to be a shorthand expression for an attractive gift that is actually just a giant problem.  In discussions with charities from every corner of the country, CCK has come to realize that some organizations consider real estate gifts to be in this category and simply refuse to take them.  At the other end of the spectrum are charities that will accept literally any and all such gifts.  We believe that the prudent attitude may be somewhere in the middle.

Every piece of real estate, improved or unimproved, is unique.  As such, we cannot articulate universal rules about accepting or rejecting such gifts.  We advise that no charity adopt an across-the-board policy to accept all real estate, or to reject all real estate.  Nonetheless, the do’s and don’ts provided in this posting may prove useful.

Don’t Place Too Much Reliance on the “Innocent Landowner” Defense

Charities that are quick to accept virtually any form of real estate usually believe that all potential liability can be avoided by the “innocent landowner” defense, which asserts that only those actually responsible for problems are required to fix them.  This is not true.

In the first place, such a defense is available only in cases where liability is predicated upon pre-existing environmental issues.  Even there, the defense is by no means a “sure thing,” nor is it applicable under all regulations.

Furthermore, there are non-environmental liabilities that can accompany the acquisition of real estate, such as unpaid taxes and association fees; the cost of property insurance; personal injury lawsuits involving the property (slip and fall, attractive nuisance); maintenance expenses; and mechanics liens.

Do Realize That Real Estate Risk Is a Continuum

Some categories of real estate are inherently more worrisome than others.  Commercial property, apartment houses, and agricultural land carry greater risk than single-family residential real estate.  The level of due diligence that a charity needs to perform prior to accepting ownership of real estate will vary according to the situation.

It is, however, a rare and possibly non-existent situation where an organization should take title without any form of due diligence.  Charities should develop a good understanding of the environmental and financial investigation that can be done with respect to real property and assess each potential gift as the situation demands.

Ideally, a charity – especially one that cultivates gifts of real property – should have a fairly detailed policy in place describing how it will assess a potential acquisition.

Don’t Overlook the Rent-A-Recipient Solution

There are several reputable 501(c)(3) organizations that can act as the recipient of certain types of real estate for another charity.  These organizations charge a small (usually 5% of the value of the property) fee but undertake all the investigative work and assume the liability risk in complex cases.  In these situations, the designated charity will receive a cash payout and avoid the issues involved in accepting real estate.

(Note:  It is possible that such a receiving organization will decline to become involved in a transaction because of the degree of risk.  If that happens, it is a good indication that the charity named as beneficiary would be well advised to take a pass as well.)

Charitable Solutions LLC specializes in handling non-cash assets, as do many community foundations.

Do Avoid Taking Title When Possible

In our view, it is usually preferable for the executor to sell the property and distribute the proceeds. This usually happens when multiple charities share the same property.

When only one charity is the recipient, it can take some arm-twisting to force a sale during probate, but persistence frequently pays off.  Without a title transfer, most of the risks connected with real estate can be avoided.

Don’t Think Insurance Is the Full Answer

Some charities (maybe the same ones that have a false sense of security over the innocent landowner defense) believe that their existing insurance will protect them against liabilities connected with acquired real estate.  Not true.

The typical policies will exclude most, and maybe all, environmental coverage and will certainly not cover pre-existing liens, debts, and other obligations.  There are specialized policies available for charities that have made a substantial commitment to cultivating real estate gifts.  These policies are extremely expensive and probably not cost-effective for most charities.

It is rarely possible to buy an insurance policy to cover a specific gift, especially when some of the problems with the realty are already known.  (Insurance companies might consider this as similar to buying a policy after the accident occurs!)

Do Avoid Real Estate That Screams “I’m a Problem”

Sometimes, it just has to be “no.”  The shack with the windows painted black and graffiti covering every inch of the inside and outside.  The timeshare that didn’t sell on eBay.  The cemetery plot.  The irregularly shaped sliver of commercial land that has been on the market for sixteen years.

Charities have limited resources, both financial and human.  Part of good organizational management is determining tasks worth the devotion of effort.

The yardstick is always the same:  Will accepting this gift advance the mission?  In the case of a real estate gift, if the answer is “yes” or even “maybe,” it can often be full steam ahead.  If the answer is “no possible way,” it is time to decline the gift with respect and express gratitude for the sentiment that motivated it.