Can Renting Jeopardize Your Church's Status?
By David Newkirk
As a pastor, you can’t help to think about the fact that during many hours of the week you have this beautiful, spacious building that, for most of the time, is unused. So when someone drops in or gives you a call offering to pay a little rent or to provide a “donation” in the place of rent to use the church building for just a few hours per week, one cannot help but think this might be a way that God is providing for the financial needs of your ministry.
However, before you jump on that opportunity with an enthusiastic “YES,” there are some things that you should take into consideration.
A letter of concern
Not long ago, I received a call from three different individuals over three weeks. All three callers were concerned about the ramifications of having a for-profit business using their church building. But this was not the only thing that these three callers had in common.
All three churches were allowing the same organization to use their facility. After hearing their stories and asking a few questions, I found out that each of them received a letter that was sent to many churches in the United States. The purpose of the letter that was sent with good intent was to draw attention to churches that were allowing a certain group that commonly rents a part of a church building every week for an educational program. The individuals whom I spoke with, had just assumed that this group, which was a type of homeschool program, was a nonprofit. The surprising reality, though, was that the group was actually a for-profit business!
Now, to be clear, if you’re running a nonprofit, you can allow a for-profit business to rent a portion of your facilities. However, the main question to focus on in this situation is if you know the ramifications of engaging in such activities?
On top of that challenge, are you certain that you know all of the liabilities and risk you are subject to when agreeing to allow someone or some group to use your church facilities?
Here are six factors your church should assess before you say “yes” to a for-profit business renting your church’s facility.
6 things to consider before saying “yes”
1. Property taxes
This is probably the most common reason why a church would want to be hesitant at the thought of renting to a for-profit business.
Many states allow churches to obtain property tax exemption. A church facility carries a very high appraisal value, which means they also would have to deal with a high annual cost of having to pay property tax if it were not for property tax exemption.
By renting a portion of your church’s facilities to a for-profit organization, you could put your church property tax in jeopardy, much like the First Presbyterian Church of Miami experienced not too long ago. Click here to read more about that event.
2. Sales tax
Many states have regulations that require your church to collect sales tax on a lease or rental agreement. The best way to find out about your state’s requirements is to contact your state’s department of revenue and ask one of their representatives if sales tax is required to be collected.
Part of the consideration here should also include an examination of whether the church is receiving unrelated business income. Though, in some cases, a church may not be required to pay sales tax on the rental income of their real property, they may be required to pay income tax on the rental of any personal property.
There is a difference between the two. Real property has to do with anything that is considered the building or a part of the building, like kitchen cabinets, sanctuary chairs, or pews. The personal property of the church is considered as items like a mobile sound system, chairs, tables, or any type of mobile equipment. The rental of these items could result in unrelated business income tax. Which, if a church is acquiring unrelated business income of more than $1,000 per year, then the church would need to report the total income on a Form 990-T to the IRS.
You can learn more about the difference between these two types of property by reading our blog, "Church Activities Subject to Taxes?"
3. Private inurement
If the group or individuals looking to rent the building is someone who the IRS would describe as a disqualified person, then the church could end up facing an excise tax of up to 225 percent of the value of the benefit.
A disqualified person is defined on the IRS website as: “any person who was in a position to exercise substantial influence over the affairs of the applicable tax-exempt organization. Family members of the disqualified person and entities controlled by the disqualified person are also disqualified persons.”
Therefore, a disqualified person could be anyone one on the board or directors (of the church or ministry) or anyone related to them. It could also be someone with an invested interest in the organization who is looking to rent the facility. This can be an area of concern.
4. Fair market value
If the church is going to rent or lease its facility to an organization, it should be done at a rate that would be considered fair market value. By doing this, the church puts itself in a position where it is not providing private benefit to one individual or organization.
It is to provide it at less than fair market value, then the church would want to provide the tenant a Form 1099 to show the difference between the required rent and the fair market value.
If the church has counted all the costs from the previous points and still sees value in renting its facility to an individual or organization, then it should consider how this may affect their current insurance coverages. Even if the church is considering a tenant that is a nonprofit, it would still be wise to assess their activities and functions in conjunction with the insurance coverage that the church holds.
I recall a few years back when I was a senior pastor in a small rural town in Kansas. We were just months away from our new church building’s open house. I was very excited.
It had been a long, hard-fought 18 months to turn what was once a wheat field into what is now a 10,000 square foot church just waiting to be used as an amazing place of worship!
I remember sitting at my desk staring at my computer screen realizing that we needed to write some sort of policies—specifically policies for church building usage. I knew that a new fancy building would attract people who would want to use it for weddings, birthdays, and anniversary parties. All of these are very common to have in a church’s facility.
However, I wanted a document that would help outline expectations and would protect the church of certain liabilities. I clearly recall staring at that blank screen for such a long time… And I never got those policies written.
Create Policies For Your Church Today!Click Here
If you have ever found yourself in the same position, I encourage you, do better than me and take the time to develop an event use agreement. Here are some items that should be included in your agreement.
- The renters are in charge and control of the space they are using.
- No supervision will be provided.
- The church does not warrant or represent that the space is safe or suitable for the event, and the renters are responsible to ensure that all measures necessary be taken to maintain public safety that is consistent with their intended purpose.
- If the renters are going to use your instruments or other appliances, they should be provided on an “as is” basis without any warranties.
- You do not set up or tear down.
- The renters clean after they are done.
- The agreement should contain an indemnification clause. This is a clause that releases your church from liability resulting from the use of the space.
Protection for years to come
As a church planting specialist, I tell pastors all the time that we put our seat belts on each time we get into the car, not because we expect to get into a wreck that day but to prepare ourselves in the event that we may get into an accident.
I encourage you to give us a call today to learn how we can help you put on your “seat belt” by providing your ministry with a solid legal foundation to provide the protection you need today, tomorrow, and for years to come.
Others fail to establish good policies and procedures or keep good books. Keep in mind, these issues almost always start as small things that later become big problems. Let us help you! Give us a call at 877-494-4655 or click the button below to have a church planting specialist call you. Just as you have been called to lead your church, we have been called to help churches stay compliant.