As real estate gift activity continues to increase – especially at institutions actively promoting their interest in real estate gifts – more and more professionals are concentrating on the growing field of real estate gift planning.  In my work, I often confer with colleagues specializing in this discipline.

This issue of my newsletter is entirely devoted to recent trends in the real estate gift arena, based on my experience working with a range of clients, and on my conversations with three trusted colleagues: Chase Magnuson,  Director of Planned Giving-Real Estate at George Washington University; Harry Estroff, Real Estate Gift Manager at The Nature Conservancy; and Jerry McCarter, Professional Advisor Relations Officer at the Minnesota Real Estate Foundation.

Overall real estate gift trends

Among organizations with which I’m working, real estate gift activity is clearly up at institutions that have decided they want to be more proactive in making real estate gifts happen, e.g. marketing, initiating conversation with promising real estate gift prospects, gift officer training, etc.  For organizations that aren’t specifically promoting their interest in real estate gifts, it is my experience that they generally continue to receive the occasional inquiry at about the same rate as in previous years.

Chase reports real estate gift activity at GWU has increased dramatically in recent years, which of course coincides with the time period that GWU decided to invest in a dedicated staffer to pursue real estate gifts.  Jerry reports that the Minnesota Real Estate Foundation completed 15 gifts in 2010, compared to 5 in 2009.  He reports new real estate gift prospects are emerging at the rate of two to three per month.  Harry reports that The Nature Conservancy’s overall number of real estate gifts has declined in the last two years, but that the average gift size has increased.

The most frequent real estate gift structures

My experience is that the most dramatic increase in real estate gift activity is in the area of outright gifts, followed by charitable gift annuities funded with real estate.

At The Nature Conservancy, the trend has been fewer life income gifts and more outright gifts and retained life estates.  The Minnesota Real Estate Foundation also reports outright gifts as the most popular gift type, with numerous inquiries about Charitable Remainder Trusts. GWU reports continued strong interest in both CRTs and CGAs as ways to provide income streams to donors.

What is motivating the real estate donor these days?

We are all in agreement that most donors of real estate these days are motivated by a desire to rid themselves of the headaches of owning and managing property they no longer use.  Generally, charitable intent is equally important.  The trend is that use of tax deductions, and desire for an income stream, are less a part of the motivation than they might have been in earlier years.

I have found that the most successful marketing efforts explicitly appeal to older property owners who may be facing decisions about what to do with seldom-used property that is now more of a burden than it is enjoyable.

Who are these donors, and what properties are they giving away?

The most common real estate gift scenario for the Minnesota Real Estate Foundation is the over-60 donor looking to make a gift of a debt-free vacation property or raw land.  The Nature Conservancy has seen a marked increase in inquiries from donors without a history of supporting the organization who are challenged by the difficulties presented by current market conditions.  For George Washington University, a common fact pattern is folks in the 70 to 85 range looking to dispose of a residential property in order to get rid of management headaches and produce a life time income.

My own experience is that the most common real estate donor profile is an over-70 individual or couple, with multiple properties scattered geographically, looking for help in disposing of a second home, who often times have not previously shown up on the radar screen of the non-profit they wind up giving their property to.  Also, we know from the most recently-available IRS data (2007) that the average size of reported real estate gifts for donors over 65 (the vast majority of such donors) was $787,000.

How do real estate gifts find their way to you?

The Minnesota Real Estate Foundation has been especially successful cultivating relationships with financial advisors, attorneys and CPAs who are their best referral sources. The Foundation’s partner organizations, armed with marketing material from the Foundation, also produce a significant number of referrals.

George Washington University has had considerable success training its major gift officers to initiate conversations with donor prospects identified by a prospect research team focusing on owners of multiple pieces of real estate. Similarly, The Nature Conservancy benefits from their army of well-trained field fundraisers exploring the full range of assets, including real estate, with their donor prospects. TNC also generates many inquiries through its excellent real estate gifts website.  (I recommend it to all my clients: http://giftplanning.nature.org/giftguide/)

Though some institutions have generated gifts through mailings highlighting the story of actual real estate donors, the trend seems to be greater results from web pages that specifically highlight real estate as an asset to be donated. But the one trend that tops them all is the success of those development shops that focus prospect research on real estate donors, and then encourage (or require) their trained gift officers to initiate real estate conversations with prospects.

What is your advice to other non-profits interested in ramping up their real estate gift activity?

The themes that emerge from our collective experience are:

1. Seek professional help in developing real estate gift acceptance policies and procedures appropriate for your organization.
2. Find a combination of in-house staff eager to be trained, and outside consultants, who can evaluate gift opportunities, structure and close the gifts.
3. Make sure that all staff and board members fully understand the organization’s interest in real estate gifts, and that they feel comfortable at least starting the discussion with donors when appropriate.
4. Be patient. Understand that an investment of time and money will be necessary, but that with patience it will pay off in the form of substantial real estate gifts.

And finally, as a reminder that organizations that follow these practices are successful in attracting real estate gifts, a national survey of almost 600 non-profits conducted by the National Committee on Planned Giving (now the Partnership for Philanthropic Planning) in 2008, revealed that 13% of survey respondents – virtually all of which employed the steps outlined above – reported that 10% or greater of their total giving in recent years had been in the form of real estate gifts.

I have recently had occasion to work with several non-profit retirement communities, helping them attract and structure real estate gifts.  My experience with such communities is that their residents may have disposed of their primary home (though some still own them), but many of them continue to own a summer home on the lake or on the shore, or a farm, or an investment property.  Many times these property owners, as they age, are especially receptive to ideas about how they might dispose of their real estate in a way that benefits charities in their life (including the retirement community)  while addressing their tax planning and/or retirement income needs.

In other instances, I have seen non-profit retirement communities work with prospective new residents to see if a donation of their home could meet the entrance fee (or purchase price) requirements of moving into the community.

I have often wondered why more non-profit retirement communities don’t explore ways that they could provide a valuable service to their residents – helping dispose of increasingly burdensome real estate — while at the same time opening up the possibility of substantial charitable gifts, to their organization and others as well.

Let’s say that you are in your 70s, and have for some years not been getting much use out of your vacation home on the shore. Instead, you’ve been renting it out more and more, and have become rather accustomed to the extra cash flow from your property.

But now, as you age, the hassles of maintaining the property (and of paying taxes, utilities, repairs, etc.) and carrying around that responsibility are starting to outweigh the benefits of property ownership. Which means it’s time to dispose of the property.

Let’s also say that you have watched friends go through this process, and this has left you dreading the task of listing the property, working with a broker, adjusting he asking price, fielding offers, and working the process all the way through to a closing. (Not to mention you’re not excited at the prospect of paying a very considerable capital gains tax upon the sale of your low-basis property.)

So, what is the alternative?

Well, if your financial situation permitted, you could make an outright gift of the property to a charity of significance to you. You would be eligible for a charitable tax deduction equal to the current appraised value of the property, there would be absolutely no capital gains tax paid, you would have made a magnificent gift. And the charity, not you, would assume all the responsibility for selling the property.

If you’re not in position to give it away outright, and instead need a continuing stream of income, perhaps you could talk with a charity of meaning to you about funding a charitable gift annuity with your waterside property. With a gift annuity, you would lock in a steady, regular income stream for the rest of your life, you would generate a substantial tax deduction, and you would pass on to the charity (as in the case of an outright gift) the responsibility for selling the property.

More and more charities are interested in working with property owners on this sort of arrangement, because they have become more adept at structuring the arrangement in ways that minimize the risks that they might need to begin making annuity payments prior to the time they’ve sold the property.  Also, an increasing number of charities are recognizing that many property owners want to roll their property into a steady income stream, not the variable income that would come from a charitable remainder trust.

If the situation above sounds a little bit like yours, talk with your advisors, or talk with your favorite charity, about the possibility of a charitable gift annuity funded by a property that you are ready to dispose of however reluctantly.

Starting with Tax Year 2003 the IRS has been producing reports called “Individual Noncash Charitable Contributions.”  IRS researchers have examined Form 8283 (Noncash Charitable Contributions) used to substantiate charitable deductions greater than $500 claimed on Schedule A (Itemized Deductions) of Form 1040.

In the spring of 2010 such a study was issued for the Tax Year 2007.  Here is a quick comparison of key real estate gift data from Tax year 2005 vs. Tax Year 2007.

What does this mean?

I think it means that in the middle of the decade the idea of real estate giving was grabbing hold.  Total real estate giving increased by over 30% during this period, with an especially dramatic increase (261%!) in the average size of the gift for donors 65 years and older.  This is especially significant, as a very high percentage of real estate giving comes from these older donors.

I predict that we will see a continuation of this trend once the IRS issues its report for Tax Year 2009.

When development officers tell me that real estate gifts are time consuming, sometimes complicated, and that some are pursued without ever making it to completion, I agree with all of this. But I point out: If the size of the gift is likely to be in the range of $400,000 or $500,000 or more, isn’t it worth a little investment of time and resources? Explain to me how this is a poor return on investment?

Here’s a link to the complete IRS Report: http://www.irs.gov/pub/irs-soi/10sprbulindcont07.pdf

Research and anectodal reports point to one marketing theme that tends to work better than all others when it comes to attracting gifts of real estate to a non-profit organization.  It isn’t an emphasis on the tax deductions that can be generated by real estate gifts. And it isn’t an appeal to the wonderful mission and good works of the organization.  

What is it? It’s an appeal to the fact that many aging property owners find the continued ownership and management of properties (especially second or third or fourth homes) burdensome and worrisome.  

Such property owners are often eager for ideas on low-hassle ways of disposing of their real estate, especially when it furthers their charitable objectives and serves their tax planning needs.

So, rather than run magazine and newsletter advertisements that say “Give us your real estate because we’re a wonderful organization and will do good things with your gift,” try something like this: 

“If you’re approaching a time in your life when you need to make decisions about parting with a property that has become more burdensome than enjoyable, give us a call. We have ideas that might work for you and work for us.”

For information on how Bidwell Advisors can help develop a real estate gifts marketing program, click here.

It always surprises me when I learn that a non-profit client uses estimates of a prospect’s real estate wealth as one of the indicators pointing to the size of the cash gift they will solicit.  I recently talked with a development officer who was aware that a prospect owns four pieces of property with an estimated total value of about $5 million. He estimated the total net worth ofhis prospect at about $10 million. He then laid out a plan for asking that prospect for a $2 million cash gift. 

Why, I asked him, didn’t you just ask your prospect  for one or two of her properties, which she appears to not be using as she ages? Well, I’m just not comfortable talking with folks about the complexities of real estate, he responded.

To which I say: It’s time to get comfortable with at least introducing the real estate topic, knowing there’s expertise waiting in the wings to help you out.

This points to the need for many organizations to think differently about their prospect research.  I contend that organizations should be mining their data bases and their collective organizational histories to identify  prospects who fit this pattern: own multiple pieces of property in multiple states; are age 65 or over; are charitably inclined to your organization.  When this fact pattern is used for screening, very strong real estate gift prospects emerge that in many cases may not have even been rated using traditional prospect rating systems. Identifying real estate gift prospects requires a different approach to thinking about wealth and thinking about donor motivations. 

We know from a report on second home ownership prepared by the National Association of Realtors in 2005 that:

• 1 in 10 households owned 2 or more properties
• 1 in 25 households owner 3 or more properties
• 40% of the residences sold in 2005 were either vacation homes of residences owned for investment purposes

Fundraising consultants can provide a valuable service to their clients by reminding them to turn their attention, and that of their researchers, to the real estate holdings of their donor prospects.  Often, friends of the organization that are short on cash and appreciated securities can realize their charitable objectives through real estate gifts they had not previously considered.

For more information on how  Bidwell Advisors can help fundraising consultants to better advise their clients, click here.

More and more non-profits are becoming aware that they are receiving fewer real estate gifts than some of their peers. They are realizing that other organizations have enjoyed considerable success in attracting a portion of the estimated 30 percent of the nation’s private wealth that is in real estate holdings.

In some cases, these organizations have responded by transitioning from a program that occasionally accepts gifts of real estate in various forms, to one that seeks to make such gifts happen. This transition needs to occur, of course, while taking appropriate precautions to manage the various types of risk (environmental, liquidity, holding cost) associated with owning real estate.

A review of the experience of those non-profits that have successfully made this transition reveals several important steps in developing a more active and lucrative real estate gifts program.

Get the key players on the same page

Successful programs tend to have clear gift acceptance policies and procedures governing real estate. These policies assure that everyone in the institution is on the same page regarding the types of properties (residential, commercial, farms and ranches, etc.) that will be accepted and the gift structures (CRTs, CGAs, retained life estates, etc.) that can be employed. These policies also tend to establish minimum gift amounts that take into account the often time-consuming and costly process of structuring, analyzing, and closing gifts of real estate.

Team structure is important, as well. It needs to be clear which parties in the organization (planned giving staff, treasurer’s office, general counsel, board development committee), as well as which outside sources of expertise, are involved in which aspects of the real estate gift review and approval process.

It is helpful for all of an institution’s key players with responsibility for real estate gifts to meet in order to refine these gift acceptance policies and procedures. Suc h a working session encourages all to express their concerns and then to devise due diligence and approval procedures that address those worries. What emerges is often not just a set of clear policies and procedures, but an enhanced appreciation for the potential of real estate gifts and streamlined relationships for facilitating such gifts in the future.

A two-stage review process

Increasingly, non-profits are adopting more “user-friendly” postures with regard to potential real estate gifts. One way this new attitude comes across is by adopting a two -stage process for reviewing such gifts.

The aim of the first stage is to gather essential information about the property, the prospect, and the proposed gift structure as rapidly as possible in order to give the prospect a prompt indication of whether or not your institution wants to pursue the gift. Providing such an From PG Calc-U-Letter Issue #70, August 2008 Copyright 2008 PG Calc Incorporated answer quickly not only avoids wasting a great deal of time and effort on the part of the donor prospect, but also assures that your institution’s staff is spending its time on the truly promising gifts.

For potential gifts that pass such an initial screen, a period of due diligence then follows. It is generally at this point that the donor prospect is asked to provide much more extensive information and documentation about their property and their financial situation. The key elements in a due diligence process designed to identify, manage, and minimize risks generally consist of the following:

1. a title investigation with the assistance of a local real estate attorney;

2. a Phase I environmental assessment, with follow-up as needed;

3. an independent assessment of local market conditions and the property’s market value (usually stopping short of a full-blown qualified appraisal); and

4. a building inspection (if appropriate), along with a personal visit by a representative of the institution. Moreover, non-profits are recognizing that in order to be in control of the due diligence process, as well as to be more “donor friendly,” it makes good business sense to assume the costs of these investigations, rather than ask the donor to do so.

Gift acceptance letter

Once the committee charged with assessing potential real estate gifts has reviewed the various documents generated in the due diligence process and has agreed to accept the gift, it is generally good practice to communicate this decision to the donor in a detailed letter. Such a letter would include any conditions placed on the gift and any proposed alternative gift structures, as well as a “roadmap” of sorts detailing who needs to do what along the way towards a closing of the gift.

Property disposition

Since the majority of real estate gifts are accepted with the intent to sell the property as soon as possible, it usually makes sense to retain a local real estate broker to handle the listing and sale of the property.

Staff and board training

Once there is agreement within the institution on the types of real estate gifts that will be accepted, as well as the process for analyzing and accepting such gifts, many organizations find it useful to conduct real estate gift training sessions for development staff and board members. These sessions should include everyone who may converse with a donor prospect about a gift of real estate. The importance of briefing board members on real estate gifts cannot be overstated. After all, it is highly likely that they will come into contact with donor prospects (including fellow board members) who might mention, for example, plans to sell the family’s summer home, thus making them candidates for followup gift conversations.

Marketing

When there is awareness at the staff and board level of the “profile” of the likely real estate donor, as well as concurrence on the types of real estate gifts to be accepted, organizations often choose to get the word out about giving real estate. Case studies in newsletters and mailings, web site illustrations, special mailings, workshops for professional advisors, annual report “advertising,” and other marketing vehicles should be used to plant the seed for friends of your organization who are seeking creative ideas about how they might use their surplus real estate holdings to further the mission of the organization.

Research and personal visits

Surveys have shown that the single most effective way to stimulate real estate gifts for many organizations is to conduct donor research that identifies prospects who own multiple pieces of real estate and are 65 or older, and then to arrange personal visits with such prospects during which their plans for their real estate holdings are discussed. It may take some time before gift officers at your organization develop a comfort level in initiating such conversations, but this is clearly a highly effective way to develop real estate gifts.

Conclusion

Real estate is a sizable component of the wealth of most donors. While gifts of real estate can be more complex and risky than gifts of cash or publicly-traded securities, there are some proven steps your organization can take to manage this complexity and risk. Once your organization has developed policies and procedures for handling real estate gifts and proceeds with targeted training and thoughtful marketing, including well-researched personal visits, it will be more prepared to attract and close lucrative real estate gifts.