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Making Room: Third-Party Facility Usage Agreements

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With nonprofit program reductions and expansions, shifting congregational sizes within houses of worship, and organizational desires to monetize excess space, nonprofits in such situations may enter into space provision agreements with third parties. Should these arrangements be put in writing? As “leases”? And may the nonprofit owners charge “rent”? What key elements should be contained in the agreements, whether for long-term arrangements or a single usage?

As the last article in our “Making Room” blog series on facility usage, this article addresses important points for memorializing third-party facility usage. Prior articles addressed advisability of a facility usage policy, unrelated business income tax liability implications, and property tax exemption protection.[1] Collectively, this series aims to serve nonprofits in strengthening their missions and minimizing risk through wise and legally compliant facility stewardship.

Initial Parameters

A written agreement for third-party facility usage is highly advisable! In common legal parlance, the parties should seek a “meeting of the minds” that is memorialized in a written document, often further developed with legal counsel, into a formal agreement. The written agreement may be for long-term usage, such as for another organization to regularly occupy the subject property, or it may be short-term in nature, such as for a wedding or other special event. Additionally, the agreement may cover an owner’s entire facility or only a part of it; such distinction may carry enormous implications particularly for any shared common usage or other “roommate” types of issues that may later arise. The agreement may also be “friendly” in nature, such as between two organizations that are related or otherwise involve significant community connections. Or it may be more arms-length (even between otherwise friendly folks), to formally address how the parties will handle their respective rights and obligations regarding facility usage.

Commercial or Non-Commercial?

To preserve a property’s tax-exempt status (and potentially for other tax-exempt considerations as addressed in our prior articles), a Section 501(c)(3) nonprofit owner should generally steer clear of any commercial third-party property usage – such as to a business, to private individuals, or to a nonprofit that operates in a commercial manner (e.g., through charging fees without provision for charitable dynamics) or is not a public charity. As covered at length in our prior article in this series, renting commercially may, and likely will, result in loss of property tax exemption qualification. The remainder of this article will focus on nonprofit third-party facility usage agreements consistent with property tax exemption, in light of our law firm’s focus in serving primarily Section 501(c)(3) nonprofit property owners.

Recitals – Exempt Purposes and Mission Alignment

For legal compliance particularly with respect to continued property tax exemption, the written agreement should start with recitals (i.e., “Whereas . . . “) that reflect how the intended space usage is consistent with each party’s tax-exempt mission. Mission alignment is not just lip service; the parties must be distinctly aligned in their missions. Perhaps the two organizations are both religious entities seeking to mutually advance their spiritual cause. Or perhaps the owner organization can embrace the guest user’s educational, charitable, or other tax-exempt mission as a generally supported outreach. The recitals should thus set forth each party’s mission and how they fit together for purposes of the intended facility usage.

Consistent with these considerations, the facility usage agreement provides a key opportunity to reflect how the arrangement is non-commercial in nature. While other terms may involve fee payments and related financial aspects, the agreement may not be “with a view to profit” for purposes of property tax exemption qualification. Well drafted recitals therefore support exemption compliance and help orient the parties to the legally correct approach for these facility usage arrangements.

Terms and Terminology

On a related non-commercial note, terminology matters! A non-commercial usage agreement is not a lease. Call it a “space sharing agreement,” “facility usage agreement,” or even a “contribution agreement” – but not a “lease” – to help protect the owner’s property tax exemption. For example, the nonprofit property owner should be identified simply as “Owner,” not “Landlord.” Correspondingly, the guest occupant should be identified as “Guest” or “Occupant,” not “Tenant.”


A facility usage agreement certainly may provide for an occupant to pay money for its usage. But in keeping with the property’s exempt status, the fees should be termed as simply “Fees,” or “Contributions” or other non-commercial language – not “rent.” Such terminology usage here is not merely cosmetic. The agreement should further reflect how the fees (or contributions) help cover the owner’s expenses, perhaps both short-term and long-term (e.g., for maintenance, cleaning, utilities, ordinary wear and tear, and exterior upkeep). Another arrangement could be for the guest user to pay whatever actual costs are incurred for the property, such as if the user occupies the entire facility exclusively.

All such language further helps distinguish the arrangement from a commercial lease. Whatever amounts charged may or may not be less than market rent, but they should be supported by language that clearly demonstrates the requisite absence of any “view to profit” (consistent with property tax exemption requirements). Likewise, no heavy-handed termination fees, reletting fees, or other solely monetary penalties should be included in the agreement, as typically found in commercial leases.

Designation of Space – Exclusive, Nonexclusive, and Occasional Use

Many (if not most) nonprofit facility usage agreements provide for only partial use of the facility by the third party. Ideally, as addressed above, the facility owner has invited the third-party user into its facility to engage in or enhance the owner’s own exempt programs. For example, a nonprofit owning a community center might provide use of Classroom A in its facility to a nonprofit after-school program on Tuesdays and to a nonprofit arts organization on Thursdays, reserving the room for its own use the rest of the week. It may further provide Office B to the after-school program for its sole use, and it may allow both the after-school program and the arts organization to use Auditorium C on an as-needed basis.

In such a scenario, the facility owner must ensure, first, that its provision of space to third parties does not interfere with its own usage of the facility, and second, that the usage of one third party does not interfere with that of another. The more third parties that are given usage rights at the facility, the more complex the picture becomes. Facility owners should therefore carefully tailor each third-party usage agreement to minimize ambiguity and undesired overlap in usage rights. And literally speaking, a picture is worth the proverbial thousand words – so using a floor plan or other pictorial depiction as an agreement exhibit can prove immeasurably beneficial.

To continue the example, in its facility usage agreement with the after-school program, the owner of the community center needs to clearly delineate the scope of the after-school program’s usage rights to each portion of the designated space. The agreement should provide that the after-school program is given exclusive use of Office B at all times, nonexclusive use of Classroom A on Tuesdays, and occasional use of Auditorium C upon request, as needed and as available. For the sake of clarity, the agreement should also identify any common use areas and provide which areas of the facility may be used for ingress and egress by the after-school program and its invitees. If any areas of the facility are reserved for the exclusive use of the facility owner or other third parties, the agreement should also make that clear. All such space usage provisions should not only be described in words but also reflected in an attached floor plan, such as by different color coding for exclusive, non-exclusive, and occasional usage.

Risk Management – Indemnification and Protection of Exempt Status

Nonprofits encounter unique risks when providing space to third parties. One such risk involves the possibility of claims against the nonprofit property owner arising from the guest occupant’s activities. While such claims are always a concern for property owners, some nonprofits may be at heightened risk depending on their financial situations. Therefore, facility usage agreements should always include robust indemnification provisions, shifting liability to the occupant for all claims made against the owner by other parties as a result of the occupant’s use. Correspondingly, and for good measure, the agreement should impose insurance obligations on the occupant such as (a) minimum amounts and types of insurance coverage, and (b) naming the facility owner as an “additional insured.”

For tax-exempt properties, facility owners should include terms in the facility usage agreement strictly governing permitted use, shifting risk that could arise from prohibited use of the space. For example, the agreement should include a provision limiting the guest occupant to a narrowly defined permitted use, such as the operation of a community after-school program and related activities. This should be followed up with a provision defining prohibited uses, such as any illegal activity or any activity that would adversely affect the facility’s property tax exemption. Finally, the agreement should require the occupant to assume responsibility for any taxes assessed against the facility resulting of the occupant’s use, to protect the owner if property tax exemption is jeopardized.

Dispute Resolution

Given the hoped-for mission alignment involved with nonprofit facility usage agreements, along with shared usage arrangements involved in many agreements, a strong dispute resolution provision can become of critical importance during an agreement’s term. Such provision should address “roommate” or other issues that may arise apart from a potential agreement termination for breach (e.g., in case of a guest user’s nonpayment of fees). The provision may allow for an ongoing “review committee” or other joint group to address issues that may arise, particularly with respect to non-exclusive areas and occasional space usage per above. Setting up such safeguards for optimal relationship building and dispute resolution can prove invaluable, especially for long-term arrangements.

What Else?

While third-party facility usage arrangements may be non-commercial in nature, they still need to cover numerous topics as one might expect through a commercial lease. Key additional provisions thus likely include the following: (1) allocation of rights and responsibilities for the property’s upkeep, maintenance, and repair; (2) whether a security deposit is charged; (3) the term length and any potential renewals; (4) keys and related security/access aspects; (5) “quiet enjoyment” considerations; (6) signage; (7) any potentially additional fees (e.g., for utilities that are separately metered); (8) any potentially applicable “rules and regulations”; (9) alterations: (10) default and other exit strategy matters; and (11) miscellaneous terms, as with any well drafted contract.

Concluding Remarks

Third-party facility usage can provide wonderful stewardship opportunities, for owners and guest users alike. Using a well drafted facility usage agreement is highly beneficial, both so the parties appreciably understand their respective rights and responsibilities and for effective legal compliance particularly with respect to preservation of property tax exemption. Our law firm regularly assists our nonprofit clients with both long-term and short-term facility usage agreements, including tailored agreements for highly client-specific situations. Thinking through all such considerations and then implementing them in a written agreement should serve nonprofit leaders well, helping to ensure that their organizations’ space-usage goals are achieved effectively, efficiently, and responsibly.

[1] Please visit our website to read our law firm’s “Making Room” blog series’ on these topics: (1) the benefits of a facility usage policy; (2) property tax exemption implications; and (3) unrelated business income tax liability aspects.

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