Representing Tax-Exempt Organizations in Lease 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.