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Advantages and Disadvantages of REFFs

Advantages and Disadvantages of REFFs

How best to configure various real estate activities at an institution? A portion of Growing the Greater Campus: The Use of Institutionally Related Foundations in Real Estate Activities that focuses on this question is excerpted below.

In recent years, the ongoing decline of state funding, reluctance on the part of state legislatures to allocate funds for capital projects, and the search for alternative revenue sources have led many public educational institutions to look to their institutionally related foundations (IRFs) as partners to finance, acquire, develop, and manage property.

A Quick Governance Survey conducted by AGB in 2014 found that over 40 percent of participating IRFs had assumed an increasingly active role in real property projects and entrepreneurial ventures over the past five years.

Any institution must first determine if an institutionally related foundation should undertake real estate activities instead of the institution, but then a logical follow-up question could be: “Is there a need for a dedicated real estate-focused IRF (“REFF”), or can the main IRF undertake these activities?”

Some general considerations of an REFF versus the main IRF include:

Advantages of an REFF:

  • Isolates risk from the corpus of the main IRF’s assets
  • Focuses the mission of the organization on real estate
  • Develops a board of directors and staff with real estate experience
  • Favorable tax treatment of unrelated business income and real estate tax benefits
  • Possible non-mission real estate investment opportunities

Disadvantages of an REFF:

  • Additional administration/staff time and financial resources
  • Another company and board of directors with which to deal
  • Further financial/tax reports and filings with resulting expenses

An REFF may be unnecessary:

  • If you do not have a concern about risks to the IRF’s core assets
  • If UBI is not a concern
  • If real estate assets are not significant or there is a no plan to undertake a significant amount of real estate acquisition or development
  • If there are not significant unrelated uses expected in the real estate development

(The examination of REFF advantages over disadvantages listed above is not a uniform comparison, as each IRF is unique in its circumstances and situation.)

Learn more about REFFs and other key questions facing institutionally related foundations at the 2017 Foundation Leadership Forum, held January 22-24, 2017, in Naples, Florida. Register today!
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