NON PROFIT HOUSING WITH REVENUES
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
This is an open discussion about non-profits providing or facilitating special needs or specialty housing, yet doing so profitably for those who operate the housing services. This has basically arisen out of another thread.
I'd like to know who is doing N/P housing, what is the niche filled by the service and how are you structured.....tell all you can.
Anyone interested, jump in!
Bill Gulley hit it on the head with this.
Most of you here know that I prefer not to talk much about my holdings. What people don't know you have they can't go after. I'm involved in several nonprofits. I am both employed by several as well as have arrangements with them.
You have a lot of flexibility on your arrangements.
Donations to nonprofits work out very very well.
If you donate a property and receive a rather large deduction. This is helpful if it is a property that could take a very long time to sell.
Good thinking Michael, yes, tax credits fall in line with NP housing, but going there is an matter that you take up after the organization has some track record in its mission. If you guys don't mind, I'd like to get to the tax credits after we lay more ground work and it will fall in place later on.
Sean, that's my fault that I didn't explain the benefits in more detail.
This is my personal opinion from participation in NPs, having various missions, not just housing.
Perhaps contrary to the mindset of RE investors, especially those starting out, being active in your community and putting others first or contributing efforts for a better community pays dividends later on. Investors trying to make a living may be hard pressed to become active in hopes of financial returns months away. We generally look at programs or systems that earn an immediate return. Starting out in a NP environment for less experienced investors, going it alone, may take a long time to put consistant dollars in your pocket. It's not easy. That's the down side to consider, but depending on your area of influence this aspect can be quickly disolved.
I believe it really takes a different attitude in business to some extent. NPs are about where your heart is, giving, not taking, serving your community and working with others of like minded people.
So, by the nature of NPs, giving more than you take in a way, you will generally find many successful people in your community who are financially secure and don't need to earn a living from these NP missions. It's their way of contributing to the community. Your approach and attitude should be closely in line with this thinking and not by introducing yourself as one who is interested in assisting only as a means to make money. That can be hard at times starting out, but service before self is important.
How well you connect with people in these circles will depend on how quickly and how successfully you improve your own standing in any community and profit from it.
With that, here are some bullet points of benefits;
NO PERSONAL LIABILITY, Seems to me that investors who are starting out are overly concerned about personal liability, forming entities and some going to great lengths to avoid responsibility and liability. By law, Officers and Directors, employees and volunteers may not be held personally liable for their actions except for intentional acts. You'd have to slap a tenant or shoot them, just about, to be persoanlly liable. So long as you act in good faith, acting toward meeting the mission of the NP, even in so doing you make poor decissions or even negligent, you are not personally liable.
This is contrary to a business entity that works for profit assuming risks in business, NPs are to be serving the public and usually consist of volunteers and citizens who may not have specific professional knowledge, so in the eyes of the law, they get a break.
TAX BENEFITS, How would you like to run a business that pays you a fee or salary that doesn't have a tax liability? How would you like to buy $10,000 worth of materials and pay no sales tax?
DONATIONS, of labor and money are possible with NPs. Lowes contributed the paint, volunteers painted the hosue. Plumbers may give you cut rates as well as other trade professionals and some simply volunteer.
GOVERNMENT SUPPORT, You may find that someone at building regs actually assists you in meeting compliance issues, I have had an electrical inspector help rewire a house! Do you have a zonning issue, you will be favored by the powers to be. Does the city condem properties and take title to them? They sell them for a dollar to NPs.
Have a subdivision that needs roads cut and lots graded? In one project, the State National Guard, an Engineer unit, did the work as a training mission!
SOCIAL IMPACT, You will likely get calls to see if your organization would like granny's house, you'll get calls from individuals who would like to sell a property or seek your services on a professional basis simply because they want you to succeed due to your contributions in the community. It's the grapevine network and as mentioned above it's usually the grapevine of other civic leaders, successful members of the community that are not only willing to support the NP mission but also you personally for your efforts. It pays to be a good person.
FINANCING, loans to NPs are generally on a non-recourse basis without personal guarantees. Banks must comply, depending on how large they are, with the Community Reinvestment Act and laons as well as contributions to NPs in their lending area meets such requirements. While it's not a free ticket to loans, the underwriting is much different is certain respects, but after a number of successful transactions, a NP can almost have a rubber stamp approval.
Further in financing, you have the ability to receive grants from government (HUD), economic development grants from states and municipalities, private trusts and corporate donors.
So, by now you may be thinking that with such benefits for NPs how can private enterprise compete? They can't compete at all, but remember that NP hosuing entities provide hosuing for low and moderate income tenants/buyers which are underserved by private operators because it is not profitable to do so. The NP serves housing needs that private operators usually do not care to be involved with. It's critical that any NP consider their market carefully so as not to impead or directly compete with private enterprize, but there are plenty of opportunities in housing.
Hope that paints a better picture of NP housing.....
So, I would say that NP's are competing with me directly. If they provide a brand new 2-4 bed townhouse with an average unit cost of 188k for $875, how do I pencil in my low income tenants. After all, most tenants are lower income, that is why they rent, right?
Jeff, depends on who your tenant base is. Usually, NPs serve those who have difficulty in getting safe and affordable housing sufficient for the family size. Most likely, there will be some who you would not lease to, lack of stable income, credit issues or maybe they got out of prison for a DWI conviction.....what ever.
Next, the family size, a teenage boy and two teenage girls and an 8 year old means a 4 bedroom at one thrid of their income, would you rent a 4 bdr for 500 bucks for example if the market rate was 800?
The thinking of those Sec 42 projects is that such projects are made available for low income clients only for a period of time and eventually the financing clears and the units can go to market rates and owned by the developer, so the financial incentive is also toward the end, 15 years out for example when the same unit may rent at 1,200 a month.
Also, these concens go through plenty of political checks, city councils need to approve, the public housing authority signs off as to the needs not being met, your state representatives have input as to the project does not unfairly compete with for profits in that district, the state economic development folks review the projects and in some places the Governor may sign off. They are probably the most political housing issues ever devised by mankind and so much so, that unless you are politically connected, IMO, you don't have a chance of ever being involved, this is not something that a landlord developer just decides one day they will go do. Won't happen.
If there is sufficient housing for the population intended to be served such a project will not happen. So, while you might say you'd take that tenant, you would not likley serve the entire population of those tenants.
And, BTW, in many areas, a Sec 42 project requires a NP sponsor to have a successful application.
NPs serve those who are usually hard to serve in the private sector, due to various issues unique to that population....but they are people! Additionally, most such projects are mixed use where the developers must add other units at market rates and even commercial retail, maybe throw in a new fire station and parks for the area, so all in all, there is alot to it. It's no free ride......
Good points Bill.
In some of the nicer projects in Portland it is PC to add affordable housing to the higher end projects. Being low income can afford you some dog-gone nice areas. We have a south waterfront project (downtown waterfront property) that has planned 377 units for low income (less than 15k for vets) that will rent for $575 and additional units for people earning less than 25k.
It would be sweet to live in an area like that. Frankly, I am offended that taxpayers have to pay high prices for the poor with some of the most expensive property in the city.
During the foreclosure crisis, when the entire project was hurting, I was looking at a very small unit facing the street for close to 300k. River view properties are some of the more expensive condos in the city.
I was interested in this thread not because I want to start or maintain a non profit for special needs housing, but because I want to rent/lease to them and have been looking into it for about year. Let the NP and/or even a private care provider manage their housing/boarding business, their tenants, their payments from charitable and govt agencies. And pay me way better than market rates for an SFH that has been modified for their specific use. Several western states (not CA yet) are willing to pay housing costs of special needs adults and seniors who need assisted care to home care providers. Those providers need a house that can house 3-6 adults plus themselves. If you can get it through or past any special use/zoning issues, the provider or NP can pay and expects to pay way better than market for an SFH.
The trouble with any non profit or business plan that relies on government dollars to pay for housing or medical costs or child care......is that it relies on government dollars.
In some of the nicer projects in Portland it is PC to add affordable housing to the higher end projects. Being low income can afford you some dog-gone nice areas.
Jeff Sielicky You say it's PC to add affordable housing to projects but you might want to look into the motivating factors. It's often mandated and a project won't be approved without it. Low income units are mandatory in virtually every new multi unit build here in Santa Barbara (median price $800K). And the City of Portland is WAY groovier and more pro-housing than here. So I'm thinking developers aren't doing it for the PR but because they have no choice.
Even more challenging is when the city/county decides the units need to be for "extremely low income" buyers, as opposed to low income or mid-low income. So you've got 10 1.2M units for sale in the open market and 3 $275K units for sale to only qualified/approved ELI buyers....in the same project. The HOA/PUD fees alone will disqualify almost every potential ELI buyer/borrower. I don't think extremely low income families should necessarily own. And to be truthful, those units usually sell to singles, often civic employees or educators because they have stable, documented low income and documented down payment gifts. It's a game for the developers. You can imagine what they go through to make the low income units looks good on the outside in order to minimize the the objections of the $1.2M buyer. But the the inside, hmm, not so much.
K. you are right. Politically correct for the politicians. The developers win approval by dedicating a percentage to affordable housing. This way the politicians don't take so much heat for supplying more services to the rich. This area has light rail for its exclusive use. It also has a tram that goes to the hospital which is handy for hospital workers.
There has been criticism for creating street car and other amenities to the Pearl (another exclusive area) while other parts of town have huge pot holes in the roads. Housing advocates have brought these issues front and center. The city leaders hang their heads in shame because they did things to improve close-in poor areas (areas that had been redlined by the banks) and created gentrification.
So the developers have to spread the expense around and create even more expensive condos to compensate for their losses on the low-income portions. Guess that squeezes out the middle class. Developers get tax incentives, poor people get some nice digs, and the workers bees keep plugging away.
Jeff, when I die I already know how I will be remebered in my community. RE is a means to make a living and gain wealth in terms of dollars. It will never make you rich in life.
You have succeded in promting me to start a new thread about 'INVESTORS'. Thanks. Wathch for it at a RE site near you.
K. You have some valid points, however NPs serve another world that are not really in the same vocabulary spoken by "investors". This is about making money, not about policical issues, thoughts or any social aspect. It's about the reality of our population, the needs of society and the broader scope of all people living together in a free country. We are not the same and the poor will always be with us, the question is what do we do with our poor in our society. We can provide a solution or we can be part of the problem.
Hi Bill,
My day job allows me to work with affordable housing developers. It seems like they are always applying for funding from CDBG (community development block grants) or HUD grants to fund their purchases and rehabs.
I have been looking for a way to bridge the private side of our business (HMLs,) with the public side (tax credits, etc) It seems like you mentioned that you have done that before.
Would you mind elaborating on the potential for a hybrid model which would allow the best of the private sector with the non-profit housing sector?
I see a great need for senior housing in CA...and I'm wondering if going the NPH route will allow me to makea bigger difference while providing a decent return as well...
thanks
Bill Gulley Thanks for your input Jeff Sielicky and K. Marie Poe you have opened up my thinking while discussing the special needs housing and low income housing that is currently going on in your respective markets.
I am scheduling some meetings for later this month to see what the needs in my farm area are. It looks like a long term project but worth while. In the mean time I will continue to buy investment properties in Dayton.
@K Marie Poe....can't get that to work.....
I agree, the problem with government dollars is that there will always be strings attached, some can be rather long and knotted too.
All in all, you'd do very well getting in such a venture I've been involved in a couple of limited assisted living homes, just let the NP take the lead with the power to be for rehab and zonning issues.
And you're right, rents can be far over market rates per sq ft due to the nature of the amenities and services provided. Almost as profitable as a nice nursing home (and you probably know what a rip that can be...) Good luck.
My day job allows me to work with affordable housing developers. It seems like they are always applying for funding from CDBG (community development block grants) or HUD grants to fund their purchases and rehabs.
I have been looking for a way to bridge the private side of our business (HMLs,) with the public side (tax credits, etc) It seems like you mentioned that you have done that before.
Would you mind elaborating on the potential for a hybrid model which would allow the best of the private sector with the non-profit housing sector?
I see a great need for senior housing in CA...and I'm wondering if going the NPH route will allow me to makea bigger difference while providing a decent return as well...
thanks
First, welcome to BP!
Sagnik, are you a HML whois already working with AH issues, is that what you meant?
I'm not familiar with Cali CDBG issues except as they relate to HUD, federally, but here CDBG funds can be a grant for qualified projects but most of it are made available through low interest/no interest loans for various projects. Seconds can be made by the municipality eco. dev. dept.
You can bet that NPs will take the lion's share of CDBG funds and HUD allocations but private parties also have access in your economic development zones.
Probably the easiest way to tie gov. funds with private money is simply to piggy back the financing. Doing so will make the application or grant writing process easier if private money is injected in the deals reducing the need for Govt funds.
Not real sure how a NP would be jumping on any high interest HML, but there are also aspects of disqualified costs with projects, things that can't be financed through CDBG funding, like oraganizational costs and expenses, some legal fees, engineering and pre-project expenses, depends on the type of project and how your state uses the money.
I'm not really clear as to your matching up HML with a NP activity, the nature of each is a far spread away. HML are usually looking for high yields while the NP is looking for donations! Any clarity here? The funding I did was at or very near bank street rates not at the preditory levels.
Thanks for your interest too!
I forgot about this thread. I forgot to subscribe to it. Michael Lauther, don't hesitate to PM me if you want some details. Bill Gulley, One of the organizations helps to provide homes to individuals who cannot typically finance a property. We purchase or receive donated property and we get students and those who are having a hard time getting jobs in to teach them skills to help them find jobs. We then sell the properties most of the time through owner financing since Illinois has a program preventing High cost loans (which means good luck getting a loan for (50k).
-Steven the Tax Guy
Your guide to IRS Laws, rules and regulations.
I have cautioned several NPs about selling homes to individuals who do not come close to qualifying and there is more to home ownership that taking title and making a note payment.
You'll meet many who should never own a property as they are just not capable, for one reason or another, to take the responsibility of ownership. Many are much better off renting.
Steven didn't quite follow the high loan comment at 50K, Il. has usuary laws.
Habitat for Humanity has as part of its mission toprovide financing without interest, a biblical matter. I drafted the notes for HoH affiliates with title restrictions to future sales so that after a family receives a home below market that the property can not be sold for an immediate profit. The zero interest was also an issue with the IRS for imputed interest rates, but got that cleared up with the IRS that they would not seek such determinations for NPs. HfH does not scrape the bottom of the barrel for homeowners, there is also ownership training, personal finance classes, employment assistance and other support issues that assist families to move into home ownership. It's imperative that these social support services be available in selling properties to people who are on the edge so to speak, otherwise you'll have defaults and expensive issues.
People should probably be introduced to ownership opportunities through a lease initially, a testing period while many get back on their feet. I think it's a problem and it does no one any good in the long run taking people who have issues straight into a sale transaction, most are not ready for that.
As to the rental side, landlords should understand that leasing to a NP can be done on a NNN basis as it is leased to a corporation and not an individual. In some places residential lease can not exceed one year but can have automatic renewals, banks also go with that in mind as well.
What you can do is lease annually to the NP with an automatic renewal. Say that lease runs from 1 Jan to 31 Dec. Then make the provision that no tenant shall be displaced by any lease terminated if the sub-letting tenant agreement is 90 days or more beyond the termination date. But now, if you then make the sub-letting lease from 1 Jul to 30 June, you have the agreements overlapping and the automatic renewals take effect. So the leasing, while limited by some regulations or lending opinions, continues year after year.
NPs also have leeway in requiring participants (tenants) to meet certain other requirements for the lease that private parties can not do. Clients could be terminated from a program for drug use, failing to attend "improvement" classes, not earning so many work credits within a period of time and so on. I know some NPs who get carried away with these requirements, like attempting to get them to attend a certain church, but you can't go there and unreasonably require someone to do some things that violates basic freedoms, religious views, political affiliations, health issues, etc. The requirement should be directly related to the mission of housing.
Looks like Michael is on the right track, having his LLC contract for the management and he could provide properties at under market rates rents in consideration of the property having guaranteed tenant income, maintenance and taxes taken care of. It tosses that 50% rule out the window.....it's a whole different way of doing business and having a long term business operation.
Bill Gulley,
I agree many should not own a home and for many it is best to rent.
IL does not allow the cost of your loan to exceed 5%. Well there 1. is not enough money to be made on a loan below 50K. They buyer's costs cannot exceed this percentage.
Therefore in financing the properties to the potential homeowner(yes, classes and counseling are required) you are bypassing many fees that would have been required with traditional financing.
-Steven the Tax Guy
I have purchased a house that i am wanting to rent to special needs. N/P is somewhat confusing to me. I am seeing that i need to form an entity to protect myself from any liability? Need all the advice I can get from you guys.
Pam Shifflette,
Welcome to the forums. This is not quite the topic for your situation. A non profit means there is no intention to derive a profit for personal uses. A non-profit if formed before the property purchase can be very lucrative for the employees of the non-profit. Your best bet is to start off with a good insurance policy. Both a landlord and an umbrella policy are recommended. It is a bit late for a non-profit that you are an employee of.
-Steven the Tax Guy
I am new to bigger Pockets and i'm going through threads that are of interest to me. I have a client who we have 501c3 acceptance and the board is him, his wife, and his brother. All related. Earlier posts said unrelated, and i just wanted to clarify you can get approval if they are related. His intention is to buy or build an apartment complex as the next step after a half way house. We are still working on selling his current business so he has funds to do that, but i have really enjoyed previous posts that touch on this subject. Thank you.
John Briggs,
Welcome to the board. There is a wealth of information here.
I really hope he doesn't plan to take a salary from the 501 while being the main contributor and the primary donor. That will look like a for profit venture. The originating board should have definitely been unrelated individuals. Is he planning to rent at non-profit rates or with a for profit motive.
-Steven
Very interesting thread. I must read it again.
I have a question? Do we form entities first, then purchase property.
Pam, good bump! A review of this thread should address the basics of what you're looking for. Search LLC info here as well and if you provide more specifics, be happy to address your questions too.
John, I'd like to see that, the code referres to unrealted parties, our resident tax guy can probably look that up, but what is "related", it does relate to business interests, a husband wife may only be an issue if any compensation comes back to them or they control the board so that selected entities that are unrelated receive compensation. It's a gray area and one best avoided IMHO. Are you are attorney or accountant? And, welcome to BP! Please jump in with your experiences here, anything new? :)
Steven Hamilton II,
We plan on doing it an non profit rates, but that being said, he is still going to make a tremendous profit. Even if he is at only a 35% capacity, the NP will have a decent profit. The IRS in their follow up to the application did require that we claim a wage for him. It is very small for now...almost non existent really. Once he starts spending more time on it, there is no issue in increase his wage to a reasonable amount. The NP current has two single family resident houses in AZ that it is renting at non profit rates. But once again, IRS approved it with the related individuals on the originating board.
Bill Gulley,
I am a CPA, and we used an attorney to setup the NP. I guess I don't feel it is a gray area since we had full disclosure with the IRS and they approved it. Given, right now the activity within the NP is very low. As he funds his apartment project, i just have to make sure his compensation is reasonable. On a side note, I went to highschool at Cabool, MO which is an hour east of Springfield.
Hiroko, yes, it's best to be in compliance as a business, especially a N/P prior to funding it or purchasing assets. But you can transfer existing property to a newly formed business entity, the issue with a N/P is the interest of the Officers being compensated.
John, great! Another Ozarkian hillbilly, LOL. Glad to have you hear!
You probably have better phone numbers at the IRS than I did/do. I usually get different answers or I don't knows out of Kansas City.
While I have an accounting and finance background, taxes was never my specialty. So as I see it the compensation is an area where questions can arise, I just proceed as to avoid questions by the IRS which makes life easier. In real estate, I'm sure that the IRS will have it's stats as to what is fair compensation and in the event that is ever exceeded, probably wouldn't now until after the fact. So many variables come into play with the usual and customary that limitations in operations may be prudent. Duties as a property manager seem straight forawrd, flipping to a current market value with few improvement expenses is probably harder to identify and pulling in an excessive profit for the benefit of Officers or Directors could lead to problems, especially if the 501 tax benefit is pulled.
There will always be the perception of profits being made with related parties, not only by the IRS but by the public.
It's not that Officers can't be compensated, but in RE my suggestion is staying away from the issue altogether if possible and use the N/P as your primary customer from a profit making entity. This is easily done through agreements and from a compliance stand point an easier way for most in RE to operate from.
And, that brings up the point that any good N/P boared will try to have an attorney and accountant on the board or at least on retainer. IMO, any "newer" RE type starting a N/P will have their work cut out for them attempting to get off the ground and without a reputation, it will be difficult getting such professional to climb on board with a housing N/P.
As to your client, a husband and wife? Can you give general specifics (lol) as to the mission and primary means to drawings on fund balances for officers. Paying your executive director is not a problem, even golden parachutes to a transaction fly.
This thread is older and I think my thrust in getting involved with these housing entities was as a Director or contractor perfoming services in serving the mission.
Again, glad to see another bean counter here....LOL ;)