A: In this day and age, everyone is looking for ways to bring in extra dollars to facilitate their mission. If you have extra space, the idea of renting it out is an excellent way to do just that. You are wise, however, to raise the questions you do before entering into any agreements.
You will not risk your nonprofit status by merely renting property to a legitimate for-profit corporation. And, in most circumstances, you will not incur a federal tax liability, though you could potentially incur state and/or local real property taxes. If you were to owe a federal tax it would be UBIT or unrelated business income tax.
Generally, rent is considered exempt, nontaxable income. The fact that you are thinking of renting to a company that provides services related to your mission adds an extra layer of protection. But, several conditions could wipe away the exemption. The first is if your property is currently debt-financed – e.g., through a mortgage or municipal bond – or was within the prior year. The second is if, instead of a set rent you base the terms of the lease on the day care center’s profit. The third is if the rental agreement requires the diversion of “substantial” resources or staff time from your organization to satisfy the center’s needs. This might be something as simple as having your janitorial service maintain its space beyond emptying the trash and keeping the common areas clean. Fourth is if you provide the daycare center with furniture and/or office equipment that is worth more than 10% of the total rent. The amount of taxes due will differ according to the value of the furniture and/or equipment actually provided.
Of course, as I’ve said before in this column, paying taxes is not always bad. It means that you are making money. And, if you must pay taxes you can include a clause in the lease that makes the daycare center responsible for paying the applicable taxes or simply increase the rent you charge to cover them.
You also asked about other ramifications. Before making any final decisions consider your needs beyond the financial. For instance, how will housing the adult day care center affect your residents, families, and staff? Will you be able to retain sufficient space to offer the services required by your residents as you grow? Do you have sufficient parking for everyone? Will your dining room be open to those associated with the adult day care center and, if so, how will that affect the food services provided to those associated with your organization? How will such an agreement affect your insurance?
As always, I remind my readers that I am not an attorney and that the laws may vary in different states. I recommend that you run your specific situation by an attorney in your own community that is conversant in both nonprofit and real estate law.