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Looking a Gift Horse in the Mouth

Originally posted on ctschoollaw.com

January 23, 2015

Authors: Donna L. Brooks

Your development office has just informed you that one of your biggest donors has expressed an interest in donating to your institution real property near campus.  A very gracious “thank you” seems in order since the gift is quite generous. However, there are a number of issues related to gifts of real property that are not present in gifts of cash or even securities.  Educational institutions should be aware of these issues in assessing the desirability and prudence of accepting gifts of real property.

Environmental

One of the primary concerns is whether the property is contaminated in any way.  The institution could be jointly and severally liable for clean-up costs related to, and damages to others caused by, environmental hazards on or originating from the property.  Prior to taking title, educational institutions would be wise to obtain an environmental audit and site assessment by an environmental consultant to determine the status of the property.  Whether or not particular issues are identified, institutions should also consider obtaining certain declarations and indemnifications from the prior owner as a way to mitigate their risks.

Tax Liens

Tax liens on the property pose another headache for educational institutions.  If there are unpaid property taxes or other tax liens on the property, the donor and the institution will need to make provision as to who will make the delinquent payments so that the liens may be released so that the institution will not risk losing the property to foreclosure.

Zoning

Educational institutions will need to consider the use to which they intend to put the donated property.  Zoning regulations may not permit the intended use.  If not, the institution will need to decide if it can petition the appropriate regulatory authority to have the property re-zoned or to obtain a variance from the zoning regulations.

Landlord/Tenant Matters

If the property includes commercial or residential buildings producing income through rents, educational institutions will become landlords responsible for managing the property and abiding by the applicable lease terms and will also have liability to those tenants for any causes of action arising under the lease, perhaps even if they occurred prior to transfer of the property to the institution. Therefore, it is important to review all leases prior to agreeing to accept property and to seek written tenant estoppel certificates, which would disclose any claims that tenants have related to the property.  Educational institutions should also be mindful of the condition and “reputation” of the property so as not have their reputations tarnished by association with a poorly maintained or managed property. Further, unrelated business taxable income could result if the property is debt financed, personal property leasing is occurring or services are being provided.

Public Liability

Ownership of property necessarily is accompanied by public liability exposure for personal injury, for example.  While educational institutions are already exposed to this type of liability, they should review their insurance coverage and make sure any new properties are added to their policies.  Institutions should accept property only upon being satisfied that the nature of the structure and its uses are such that insurance sufficiently covers this exposure.

Title

Before accepting a gift of real property, educational institutions should obtain a title search, which would disclose any easements, rights of way, and mortgages and other liens against the property, including mechanics’ liens and tax liens.  If there are liens against the property, the donor should make the required payments so that the liens can be discharged. Otherwise, the institution may be forced to make the payments to remove the liens and avoid the risk of losing the property in foreclosure.  Having a title insurance company issue title insurance is also another way to mitigate risks associated with unknown title defects.

So, you can see that a simple “thank you” to your donor without doing your homework on the property can saddle the educational institution with unexpected or unwanted liabilities.  Thus, it is better to look a gift horse in the mouth even if that may seem impolite or ungrateful.  Doing so will at least enable educational institutions to make informed decisions about accepting gifts of real property and to take risk mitigation steps that will serve them well in the long run.

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