Should Your Church Rent its Facilities to Another Church?
By Raul Rivera
When a young pastor of a startup church called Pastor Craig to see if his church could rent some space from Pastor Craig’s church, Pastor Craig was delighted at the thought of helping this new church since he had once been in the same boat.
Pastor Craig saw it more as a stewardship responsibility for Kingdom purposes than as a way for his church to have an additional stream of income.
When Pastor Craig met the young pastor, he knew instantly they were kindred spirits. Pastor Craig told the young pastor he was inclined to say yes, but before doing so, he would need to meet with his board and ask them, "Should we rent part of our church facilities to another church?"
"I had no idea it was this complicated"
The following week, Pastor Craig presented the proposal to his board. He asked if anyone would be willing to research the matter to verify whether there were any legal repercussions for allowing the startup church to meet in their facilities.
Stanley, who had recently retired, decided he would do the research and get back to Pastor Craig. He figured it would take a couple of phone calls and an hour or two of research in order to find an answer.
Boy was he wrong!
After several weeks of dedicated research and consultation, Stanley identified 5 major issues (each hosting its own set of concerns).
Below is what he discovered.
5 issues to consider before leasing your facilities to another church
1. Your church could get sued by the members of the other church.
Stanley learned about an organization (Shreveport Progressive Men's Club*) that rented its building to a small group for a Christmas party. At the party, one of the attendees slipped and suffered an injury that resulted in her needing a hip replacement.
The injured lady sued the club claiming it was responsible for keeping the floor safe. The club protested saying that it rented the building to the small group and could not be held responsible.
The court ruled that the club was responsible for her safety because it exercised control of the facility while the party was going on.
The club said it was not responsible because it rented the facility to the small group. The court disagreed stating that the club had "right of direction and control" over the facility, and drew "some kind of benefit from them." (Progressive Men's Club, 25581 ( La. App. 2 Cir 03/30/94), 634 So. 2d 947, 949)
In order to avoid such liability, it needed to make sure that the agreement it entered into was an event use agreement and not a lease.
2. It is best to enter into an event use agreement and not a lease agreement.
There is a difference between an event use agreement and a lease agreement. A lease is an extended long-term agreement and is subject to extensive legal proceedings if you have to do an eviction. An event use agreement is a one time use contract that details how the renters will use the space and for how many hours.
The event use agreement should contain the following criteria:
- 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 setup 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.
In addition, you should require the renters to provide you a binder for a $1,000,000.00 insurance liability policy that covers the renting church's pastor, officers, board members, regular church members (even in the case of sexual misconduct), and your church.
Require the renters to have a children's policy for their volunteer workers, which includes background checks and sufficient supervision of children.
Make sure that a clause is included to require them to honor copyright laws and that they will not use any of the audio or video equipment in a way that violates copyright laws or infringes on any copyrighted materials.
Consider including a prohibited activities clause. This is something that we discuss in our conferences. It is important that such clause be included in your bylaws. In essence, this clause requires that the renting church not engage in any activity that is in direct opposition to your church's written doctrines.
(Recommended reading: "5 Things Your Church Needs to Know About Leases")
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3. Beware of property tax liability.
In some states, such as those in the Northeast, many city and county governments aggressively look for ways to render your property tax exemption void. You should consider how your local county officials view such activity. A recent New Hampshire Supreme Court case ruled that the government was allowed to go room by room and determine which parts of the church facilities were tax exempt and which were not, based on how each room was being used*.
(Recommended reading: "Tax Forms You Must Know About")
4. Sales tax may need to be collected.
Most states have laws requiring your church to collect sales tax on a lease or user agreement. If you are located in one of the few states that do not require it, count your blessings.
The best way to find out if your state requires you to collect sales tax on rent is to contact your state's department of revenue and ask one of their representatives if sales tax is required to be collected.
(Recommended reading: "Approved by IRS, Revoked by State")
5. Be mindful of unrelated business income pitfall.
The rent you charge for someone to use your facilities is subject to unrelated business income tax unless you own your building free and clear of any mortgages (aka debt-financed rule).
There is an exception to the debt-financed property rule known as the 85 percent rule. (See Treasury Regulation § 1.514(b)-1(b)(1))
In short, the 85 percent rule says if substantially all (85% or more) of the use of your church property is substantially related to your church’s tax-exempt purposes, the property is not treated as debt-financed property.
So it is safe to say that if you rent out your church facilities to another church and your church has a mortgage, then the rental income you receive will not be subject to unrelated business income tax. This is because the activities of the church that is renting from you is substantially related to your church’s tax-exempt purpose.
You will, however, need to be mindful of unrelated business income if you rent out your church facilities to an organization that is not substantially related to your church’s tax-exempt purpose, such as a for-profit business.
If your church collects $1,000.00 or more in unrelated business income for the year, then you must file Form 990-T and report the income and pay taxes on those profits.
When it comes to unrelated business income tax, we always strive to steer a churches away from activities that require them to file a Form 990-T. The reason for this is because unrelated business income can jeopardize your church’s tax-exempt status.
We recommend that churches consider forming a for-profit arm and use it to generate income for the church. It is part of what we call the Ultimate Church Structure and we discuss it in detail at all of our conferences.
(Recommended reading: "Can Our Church Own a Business?")
What is the price for peace of mind?
Pastor Craig had no idea that the tax and legal matters regarding another church renting and using part of his church’s facilities could be so complicated. He was glad that Stanley did his research and reported back because it gave him a peace of mind moving forward.
With that peace of mind, Pastor Craig’s church leaders moved ahead to allow their wonderful brothers and sisters in Christ to use some of their space.
My prayer is that this blog helps give you peace of mind should a similar situation arise for you and your church. More than that though, my prayer is that you would have peace of mind in all things surrounding church and ministry compliance.
Now, the question you have to answer is, “What price are you willing to pay for that peace of mind?”
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- Aufrichtig v. Progressive Men's Club, 25581 ( La. App. 2 Cir 03/30/94), 634 So. 2d 947
- Appeal of Liberty Assembly of God, 163 N.H. 622, 44 A.3d 507 (2012)