The decision to purchase or lease property is one a growing nonprofit has to weigh at some point. With the cost of purchasing an appropriate space and the associated commitment, it is often more sensible for a nonprofit to enter into a lease agreement. A nonprofit lease can be different from a lease you enter into when renting for personal or other business use. That is because a nonprofit is considered a tax-exempt entity by the IRS, with its own set of tax provisions.
TL;DR (Too Long; Didn't Read)
A lease agreement for a nonprofit organization allows for more flexibility in case the organization grows, relocates or dissolves. Leases also require far fewer upfront costs than purchases, and that cost savings is sometimes the deciding factor for a start-up organization.
Types of Nonprofit Lease Agreements
Lease agreements for nonprofit organizations are typically long-term leases that can be renewed. When entering into a nonprofit lease agreement that may last 10 years, you want to be sure to negotiate terms that are favorable to you. There are several types of lease agreements for nonprofit organizations:
- Full Service Gross: If you have a full service gross lease, the amount you pay in rent includes all property taxes, insurance and property maintenance fees. It will not include services you need to run your business, including phone and internet. With this type of lease, the landlord maintains control of the property and pays the expenses to the appropriate providers.
- Triple Net: If you have a triple net lease, your base rent is exclusive of property taxes, insurance and property maintenance fees. The landlord then charges triple net fees, which are additional fees for these expenses that are assessed based on the square footage of the rental. This type of lease is most common when leasing an entire building, and and it gives the renter more control of the building.
- Modified Gross: A modified gross lease requires the renter to pay a base rent, just like a triple net lease. However, instead of paying for other expenses based on square footage, the renter pays only for what is used by the organization, including utilities, phone, internet and janitorial costs.
Whichever type of lease you ultimately choose, you will sign a nonprofit lease agreement. Be sure all of the terms are favorable to you before signing.
Alternatives to Nonprofit Lease Agreements
A traditional nonprofit lease agreement may not make sense for your organization. If you don’t want to make a long-term commitment or don’t have the cash flow to cover monthly rent and other costs, there are some alternatives.
One option is to share space, and therefore costs, with another nonprofit. Just be sure to set ground rules and boundaries for use of the space and cost-splitting to avoid issues.
Another option is to find a sub-market lease. These leases provide a tax write-off to property managers who lease you space while allowing you to get low rental rates. Some property managers may even provide free space in exchange for your covering utilities and building maintenance. Be sure to determine what costs you’d actually have to cover before entering into such a lease.
Depending on your nonprofit, you may be able find a grant that can help pay for all or part of a lease. Some grants also cover the cost of utilities, office equipment and supplies.
Accounting for Nonprofit Lease Agreements
There are recent changes in how nonprofits account for their lease agreements, effective fiscal year 2020. The Financial Accounting Services Board now requires nonprofits to include operating leases on their balance sheets instead of in the footnotes of their financial statements, as previously required. This creates more transparency on leasing transactions by nonprofit organizations.
Under the revised FASB standards, nonprofit lease agreements are still categorized as either operating leases or capital leases. An operating lease is for the temporary use of an item, while a capital lease is for the purchase of an item. Assets and liabilities from both types of leases must now be reflected on a nonprofit’s balance sheet. An exception to this is leases of 12 months or less, which do not need to be accounted for.