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Representing Tax-Exempt Organizations in Lease Negotiations

By Dana Malkus
December 18, 2009

When a real estate attorney is asked to assist a client with lease negotiations, the proposed landlord and tenant typically are individuals acting in their separate capacities, or taxpayer entities such as corporations, partnerships, or limited liability companies. However, nearly every real estate attorney will, at some point, find him- or herself involved in lease negotiations in which the landlord or the tenant is a tax-exempt organization. While many of the same principles that apply to lease negotiations between taxpaying individuals or entities also apply to lease negotiations involving one or more tax-exempt organizations, there are some additional considerations the real estate attorney should consider when assisting a client in such negotiations.

In “Tax Issues for Real Estate Leasing by Tax-Exempt Organizations,” the first in a series that appeared in the March 2009 issue of this newsletter, Michael Huft and Nina Knierim explained some of the tax considerations that tax-exempt landlords should consider when leasing real estate to third-party tenants. Other articles followed; the final article will appear in an upcoming issue. The primary issues examined in those articles were how to structure the lease payments or the relationship with the developer of the land to avoid having payments to the tax-exempt organization subject to tax for engaging in an business unrelated to the organization's exempt purpose. This article provides an overview of some of the other issues to be considered in lease negotiations involving one or more tax-exempt organizations. Specifically, effective lease negotiations require consideration of the tax-exempt organization's motives for entering into the transaction, the expectations and available resources of the tax-exempt organization, and viable exit strategies.

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