In many cases nonprofit organizations do not have large endowments or reserves in place from which they draw upon to readily accomplish and sustain a real estate acquisition. In today’s market, buyers are typically expected to contribute between 10-20% cash equity upfront as well as meet reoccurring payments of debt service, operating expenses and real estate taxes. As a result, many transactions require creative ways to maintain sufficient cash flow from various sources to fund operational and programmatic needs.
Some nonprofit organizations have been able to make their project work by obtaining a real property tax abatement from the local jurisdiction within which the property resides. Some nonprofit organizations are automatically exempt from real property taxes simply due to the nature of their charitable mission, however, it is not quite as easy in other jurisdictions. For example, in the District of Columbia, a nonprofit organization must meet very specific criteria to fit within the real property tax exemption category. On the other hand, although an abatement is not guaranteed, any nonprofit is eligible to request a tax abatement from DC Council.
The abatement frees up cash flow for a finite period so that the organization’s cash can be used towards other necessary expenditures. In the past, our clients have achieved varying amounts for different periods of time. We have seen one nonprofit organization receive a $5 Million Dollar tax abatement over the course of 5 years while another received up to $20 Million Dollars for a period of 10 years.
A variety of factors may impact a tax abatement request. Certainly the size and duration of the abatement are significant factors that weigh heavily on the outcome of the request. However, other factors that should be highlighted to help achieve a favorable result are the benefits that the organization specifically brings to the District of Columbia, the services that the organization brings to District residents, how many jobs are created for District residents, whether the organization is relocating into the District from outside the city or moving into an area that is in need of revitalization and more!
In summary, receiving a tax abatement is not guaranteed since it is subject to and at the discretion of the DC Council. However, if you use the proper channels, it is typically a fairly quick process to determine the likelihood of being successful. Thus, the monetary risk is fairly minimal but the potential gain can be the deciding factor when it comes to making the project financially viable.