Non-Profit renting out a facility they own - is it UBTI?

[BulldogTom]

A friend of ours who we square dance with asked me this question.   The square dance club he is a member of is an Exempt Organization.   He is the president of the club and a director for the EO.  They currently rent space to dance in from another EO.   The EO that they rent from is trying to sell the building and property, which means the square dance club will not have a place to dance every week.   Our friend is considering having the square dance club purchase the property, and he will personally finance the acquisition, taking a note from the club on the building and land.   In order for the Square Dance club to make the mortgage payment, they will need to rent the facility to unrelated parties for events.

When I read §514, it appears that since the property has a mortgage on it, the EO would have to include the rents from unrelated parties in UBTI?   But if they did not have a mortgage, it would be exempt from UBI?   

Am I reading this correctly?

Tom
Longview, TX

[PapaJoe]

Working from memory from a loooong time ago, but I believe that is correct.

[Margaret CPA in OH]

From Jody Blazek Tax Planning and Compliance for Tax-Exempt Organizations, Fifth Edition:

The type of indebted property subject to the debt-financed rules is best defined by listing those that are not included in the term.

Exempt-Use Property. When substantially al of the actual use of the real, tangible, or intangible property is substantially related to the performance of the organization's charitable, educational, or other exempt functions, the property is not subject to the debt-financed rules. IRC Sec513(b)(1)(A)(i)The exempt purpose usage must occur at least 85 percent or more of the time. Such use  must be actually devoted to exempt activity purposes and used directly in the organization's exempt or related activities to be exempt.

I could go on but it's a book.  From my church's experience, we rent only to non-profits, 501(c)(3) organizations.  And with that, keep in mind that you may be subject to real estate tax.  We discovered that not all states or municipalities waive real estate tax on churches or non-profits.  Now we are subject to re tax on all the space for which we collect rent.  Your state may differ. 

Your organization may want to restrict rental to exempt organizations.  We thought that our doing so would be all that was needed.  As a church, all the Space Sharers (as we call them), do support all of our mission and ministry in their respective missions so we do not have to file a 990T for UBIT and we never rent to for-profit organizations.

Let us know the outcome.

[Lee B]

If your friend just rents it to the square dance club, the situation would be much less complex.

Who knows 5 or 10 years from now how relationships might change,

In addition, your friend could rent the space to anyone.

Why make it so complicated?

[BulldogTom]

10 minutes ago, Lee B said:

If your friend just rents it to the square dance club, the situation would be much less complex.

Who knows 5 or 10 years from now how relationships might change,

In addition, your friend could rent the space to anyone.

Why make it so complicated?

This was my line of thinking as well.   However, I don't know how that fits into his estate plans, as he is in his 70s.   Lots of possibilities...

Tom
Longview, TX

[Lee B]

Another simple option would be for the Square Dance Club to buy the facility and have your friend cosign the loan