When it comes to facilities, every nonprofit has to answer the question at one time or another: “Should we lease or buy?” Certainly, if a nonprofit has enough cash for the standard 30-35 percent down payment, buying facilities can make sense.
But leasing is a better option for many organizations today, especially newly minted nonprofits that may want more flexibility in the short-term. Leasing also requires very little in the way of up-front costs. Depending on the landlord, concession packages that include allowances and a period of free rent may reduce out-of-pocket costs to virtually zero.
Depending on the area, the typical lease cycle could be a 10-year term followed by a five-year renewal. In each lease “event,” the costs typically increase. Yet, even in the middle of a long-term lease, there are opportunities to renegotiate the term and reduce costs or “right size” the space. Under a conventional lease, nonprofits are treated no differently than any other applicant. In fact, 501(c)3 organizations typically pay a portion of a leased building’s real estate taxes just like anyone else. The only exemption is for a building that is actually purchased by the nonprofit. That said, there are some alternatives to a conventional lease that can help make leasing work for your nonprofit:
Many nonprofits like the idea of owning a building. Yet leasing makes sense in a number of cases. Regardless, make sure all tax, legal and financial considerations are evaluated by an attorney and tax professional.
Under the current approach to lease accounting, leases are required to be classified as either operating leases (i.e., off-balance sheet) or capital leases (i.e., on-balance sheet). Frequently, leases of office equipment are capital leases, while office space and vehicle leases are operating leases. However, each lease must be analyzed individually.
Under an operating lease, the total lease rent obligation is not recorded on a nonprofit’s books and only appears as a footnote disclosure in a set of financial statements. Under capital leases, a nonprofit records the lease obligation as debt and a related lease asset.
With new regulations in the works, nonprofits may soon be facing changes in the way that debt is recorded. The Financial Accounting Standards Board (FASB) has proposed rules that would treat all leases similar to capital leases, meaning that nonprofits would be required to record debt on their books for all leases.
The proposed regulations have been hotly debated over the past several years, and FASB and the International Accounting Standards Board (IASB) continue working jointly toward a resolution. In the meantime, nonprofits can take some actions now while waiting for the final standards:
For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.