A Bulletin for Nonprofit Organizations
by the Public Law Center August 2010, Volume 5, Issue 2
Thank you to the Access to Justice Annual Fund Donors
PLC's work is life-changing for thousands of children, families, adults and seniors each year. They depend upon PLC for assistance in civil matters that threaten their safety and security in basic areas of living. PLC in turn depends upon the financial support of the Access to Justice Annual Fund to ensure that Orange County's low-income residents receive vitally needed legal assistance. Make your contribution to the 2010 Access to Justice Annual Fund Today.
With 22% of office space in Orange County vacant, landlords are sharply cutting rents to attract new tenants. For the emerging organization with a strong fiscal outlook, it may be the right time to secure an affordable lease. If your organization has thought about renting commercial space, but don't know where to begin, start by reading Claudia Parker's article on negotiating commercial leases. The second article on Commercial Coventures will get you thinking about the potential to raise funds passively. And finally, you should be aware of important new legal developments that may affect your clients as well as your organization, updates from the IRS and upcoming legal trainings for nonprofits. If you have any questions about the information provided, please feel free to contact me.
Community Organizations Legal Assistance Project (COLAP)
The Public Law Center, Orange County's pro bono law firm, is committed to providing access to justice for low-income residents.
The Nuts and Bolts of Negotiating a New Lease
You've grown and your nonprofit needs office space. From the start, you should: 1) engage an experienced commercial (not residential) real estate broker; 2) discuss your current and future needs and finances with your broker; 3) visit sites to narrow possibilities; 4) formulate a non-binding Letter of Intent ("LOI"-- more on LOIs below); 5) settle on final/best offer; and 6) negotiate/enter into the lease.
Your team should consist of you, your broker, lawyer and insurance agent. A good commercial broker experienced in representing tenants is key to saving time, money and attorneys' fees. Likewise, have an experienced real estate attorney review and negotiate the LOI and lease documents. Real estate law has specific pitfalls which may not be evident to a non-real estate attorney.
Most office leases in multi-tenant buildings are called "gross" or "Full Service Gross," which means that the stated base rent includes all costs. "Modified Gross" means operating expenses for the building/project are passed through to the tenants. If the building is a single-tenant building, the lease is usually "triple net" (net of taxes, insurance, and maintenance expenses, which tenant pays in addition to the rent). Single-tenant building leases are unlikely to be considered by fledgling nonprofits and are not discussed herein.
Your broker begins drafting the LOI, which should identify: landlord and tenant; building/complex; leased premises and size; rent rate (any escalations); lease term (extension/early termination rights); expansion options; tenant's proportionate share of operating or common area expenses ("CAM") and any "cap" or exclusions from CAM; tenant improvements ("TIs"); scope/responsibility for TIs and TI allowance; permitted uses (broader is better); exceptions to usual assignment/subletting prohibitions; parking; heating/ventilation/air conditioning ("HVAC") hours and after-hours charges; desired early occupancy rights; and address site-specific issues. LOI negotiations usually occur at the broker/tenant-to-landlord level, but your attorney's review and input are essential. Unfortunate choices of LOI language often result in later landlord intractability.
Today's excess of office space is an opportune time for credit-worthy tenants to go office shopping. Do not be surprised if a landlord seeks protection by requiring a third party guarantee to back up your obligations. If the landlord's response to your LOI requires a guarantee, try to delete it then, rather than waiting for the lease drafting/negotiation stage; you are unlikely to prevail. Ultimately, if you are a non-credit worthy fledgling nonprofit, you may have to provide a guarantor.
Often, LOIs are not signed but become "roadmaps" for lease drafting. Landlords typically draft the lease for your review. Lease drafts can vary from fully customized to a "standard" AIRę (Commercial Real Estate Association) form with interlineations/addenda. You and your broker will review the draft to ensure that your LOI business terms are included. Your real estate lawyer should review, discuss potential issues and prepare a response.
A tenant's business/legal issues in most leases of limited size and term involve: (a) cost control, (b) building control, and (c) risk allocation. A tenant's ability to gain control in these areas often depends on the relative bargaining strength between tenant and landlord.
a. Cost Control
Tenant Improvements. If the landlord is performing TIs using a TI allowance, include a substantial completion date; eliminate/limit construction management/oversight fees; require competitively bid contracts; specify guaranteed maximum sum/stipulated sum construction contracts; and prohibit amendment of plans/specifications without tenant's consent.
- Common Area Maintenance Costs ("CAM"). This is the fastest way to get into trouble. Most tenants and unsophisticated brokers do not carefully review these provisions or the building's prior history. Requesting a cap on CAM is the easiest way to limit expenses. If the landlord balks, respond with a "laundry list" of CAM exclusions and obtain audit rights of the landlord's books/records. You and your broker should review the building's CAM charge history.
b. Building Control
Alterations. If asked, landlords typically agree to tenants performing cosmetic, non-structural alterations to the premises costing less than a specified amount individually/in the aggregate per lease year. Related is the tenant's obligation to remove alterations at termination. At a minimum, the tenant should not be required to remove initial tenant improvements.
Relocation. Avoid the landlord's right to relocate tenant which is expensive and interferes with operations.
After-Hours Use. Landlords typically limit HVAC use to specified business hours, so specify an hourly rate for after-hours HVAC use.
c. Risk Allocation
Tenants are required to carry insurance for personal property, commercial general liability, workers' compensation and rental interruption. Landlords are typically not so obligated. Carefully review with your insurance agent/lawyer the insurance and indemnity provisions. Your insurance agent will determine whether existing policies are sufficient, additional coverage is needed or suggest other required changes.
Organizations that are considering entering into a new lease should consult with an attorney for specific legal guidance. The Public Law Center may be able to provide legal assistance through pro bono counsel.
Fundraising Through Commercial Coventures
What is a commercial coventure?
A commercial coventure is a specific type of cause-related marketing relationship. Cause-related marketing is an umbrella term for various promotions in which a business provides some financial benefit to a nonprofit organization in exchange for limited use of the organization's name. If the alliance is successful, the business enjoys public goodwill, advertising exposure, and increased revenue through "values branding." The organization receives funds without having to invest significant time and money on a campaign. In addition to providing funds, cause-related marketing can generate increased name recognition and visibility for the organization and its cause. A well-known cause-related marketing effort is the Product Red campaign, in which a number of businesses including Gap and Apple agreed to donate up to 50 percent of their profits on certain products to the Global Fund's HIV health programs in Africa.
In a coventure, a business donates a portion of the purchase price on a promoted service or product in return for license to use the beneficiary organization's name and logo. For example, a running store might agree to give a health-oriented organization $25 from every pair of a particular brand of shoes sold during a three-month period, in return for the use of that organization's name in the promotion. KFC's recent "Buckets for the Cure" promotion donated 50 cents to Susan G. Komen For the Cure for every pink bucket of chicken sold.
Although commercial coventures can go by multiple different names, the term "coventure" is used here because it matches the terminology that California uses to regulate this practice. It is important to remember that in California, coventures only describe relationships with businesses that are not normally in the business of raising money or soliciting for charitable donations. What are the organization's rights and obligations?
An organization's name and other identifying marks are valuable property. The organization has the right to determine whether and how they can be used. When the organization enters into a coventure agreement, it has the right to the funds generated for it under the agreement. The written coventure agreement should detail this and other rights.
California regulates coventures in order to protect the public from fraud and deception in charitable solicitations, and this places certain obligations on the organization. The organization must report the coventure to the State Attorney General. The organization must also exercise control over the coventure and approve any written contracts and agreements to do with the coventure. It must assure that the fundraising activity is conducted without coercion, and must generally exercise control over the coventure. The organization should take special care that the coventure refrain from misrepresenting the amount of money the organization will receive through the promotion. The organization should seek legal advice in order to avoid any acts prohibited during the planning or execution of any charitable sales promotion. What are the business's obligations?
The business is required to register with the California Attorney General and pay a $350 fee, and it must make annual coventurer financial reports. The business can avoid the registration fee and reporting duties if it meets the following three requirements: (1) it executes a written contract, signed by two officers of the organization, before the business makes any representations to the public about the coventure; (2) within 90 days of its first communication to the public about the coventure promotion, and at least every 90 days afterward, the business transfers all funds raised for the charity, according to the terms of the contract; and (3) the business provides a written accounting to the organization of all funds received along with each disbursement.
The business must also disclose specific information to each prospective purchaser. Among other things, this includes a statement about the percentage of the price that will go to the organization and whether any portion of the purchase is tax deductible. Are there any legal pitfalls to avoid?
Two aspects of a coventure have bearing on an organization's tax-exempt status. First, an organization can lose its exempt status if it conducts more than an insubstantial amount of business activity unrelated to its exempt purpose, and income received from unrelated business activities will also be taxed by the IRS. Therefore, it is important to structure the coventure so that any income received is clearly royalty income, received for the use of the organization's name.
The most important way to ensure that the income is classified as a royalty is for the organization to have a largely passive role with regard to the promotion itself. The relationship should be understood as a marketing alliance or a licensing agreement rather than a partnership or joint venture. The organization should not create advertising materials or conduct any marketing for the coventure. It should not promote the business or the business's products to its membership or mailing lists, and it should not provide other services to the business.
The second matter to keep in mind is maintaining public charity status. A 501(c)(3) must meet a public support test or it may lose its status as a public charity and be classified by the IRS as a private foundation. The IRS will not count royalty income from a coventure as public support. Structuring the coventure agreement
A clearly written coventure agreement is essential for an organization that wishes to properly control the coventure and protect its exempt status. Important terms of the agreement include the dates of the coventure promotion, the products to be sold, the amount of each sale that will go to the organization, the organization's right to pre-approve any advertising about the promotion, and the business's obligation to meet its reporting and disclosure requirements. A detailed description of the best terms for an agreement is beyond the scope of this article and will depend on the specific circumstances. Conclusion
There is nothing wrong with being proactive in seeking a coventure relationship. It is a good idea to approach a business whose work complements the mission of the charity. For example, an animal welfare organization might consider approaching a vegan restaurant, but might find less affinity with a steakhouse. Regardless of the type of coventure, it is important to make sure the relationship is governed by an agreement that clearly spells out the organization's rights and contains terms that enable the organization to comply with the law and protect its exempt status.
The Public Law Center may be able to provide legal assistance through pro bono counsel. Top
Legal Developments Affecting Your Clients
The US Court of Appeals for the Ninth Circuit upheld a Redondo Beach city ordinance forbidding anyone to stand on a street or highway and solicit, or attempt to solicit, employment, business or contributions from an occupant of any motor vehicle. The decision reversed a lower court decision that had prohibited police from enforcing the ordinance.
If enacted, AB 2018 would allow CA residents to keep their benefits when relocating without having to re-apply in the new county. For other Food Stamps-related legislation, visit the Western Center on Law & Poverty website.
President Obama ordered his health secretary to issue new rules granting hospital visitation rights to same-sex partners and making it easier to make medical decisions on behalf of their partners. Any hospital that participates in Medicare or Medicaid would be subject to the new rules. View the Presidential Memo on the White House website.
The US Department of Labor (DOL) clarified in a news release the definition of "son and daughter" under the Family and Medical Leave Act (FMLA) to ensure that an employee who assumes the role of caring for a child receives parental rights to family leave regardless of the legal or biological relationship.
The US Department of Justice (DOJ) clarified in a memorandum that the Violence Against Women Act (VAWA) is intended to protect individuals in gay and lesbian relationships as well as those in heterosexual ones.
The US Department of Health and Human Services (DHHS) launched HealthCare.gov, a website with information and resources to help consumers access quality, affordable health care coverage. It includes information on how to navigate the insurance marketplace, benefits of the Affordable Care Act, Medicaid, Children's Health Insurance Program, and more.
Housing & Mortgage Reform
In February 2010, President Obama established the Hardest Hit Fund to provide targeted aid to families in the states hit hardest by the housing market downturn. CA is one of the states that will receive the first round of funding from the Foreclosure-Prevention Funding. The US Treasury Department has approved CA Housing Finance Agency's (CalHFA) plan to use nearly $700 million in federal funding to help CA families struggling to pay their mortgages. For additional information, visit the Making Home Affordable website.
In an effort to curb loan modification fraud, the CA Attorney General (AG) launched a website to help consumers. The AG's office also issued this warning on short sale fraud. In addition, the AG is investigating whether tenants' rights have been violated under the federal Protecting Tenants at Foreclosure Act. A complaint can be filed at the AG's website.
The Federal Trade Commission (FTC) sued Countrywide for unfair and deceptive practices in servicing the mortgages of homeowners in default or Chapter 13 bankruptcy. The case settled, requiring Countrywide to pay $108 million in refunds. The FTC will send refunds to eligible homeowners in the coming months. For settlement information, visit the FTC website.
If enacted, the Protect Our Workers from Exploitation and Retaliation
(POWER) Act (S.3207) would expand the U-Visa program by protecting victims of crime or serious labor violations from deportation during Department of Homeland Security (DHS) enforcement actions. Recently introduced, the bill would offer temporary protection against deportation and retaliation for non-citizen workers who file complaints or are witnesses in lawsuits or criminal investigations against employers. For additional information, visit the National Immigration Law Center website
US Citizenship and Immigration Services (USCIS) redesigned the Permanent Resident Card
, a.k.a. the "Green Card", to incorporate new security features to curb immigration fraud. Existing Green Cards will be replaced as individuals apply for renewal or replacement.
US Immigration and Customs Enforcement (ICE) launched its Online Detainee Locator System
(ODLS) to assist the public in locating individuals in custody. The ODLS has brochures
in English, Spanish, French, Mandarin, Vietnamese, Portuguese, Russian, Arabic and Somali.
The US Supreme Court unanimously ruled in Carachuri-Rosendo v. Holder
that immigrants who are in the US legally need not be automatically deported for minor drug offenses.
If enacted, SB 399
will allow any prisoner sentenced to life without parole for a crime committed as a juvenile to petition the court for a sentencing review after serving a minimum of 10 years. The review can be granted if the petitioner meets at least 3 of 8 specific requirements. For more on this bill, visit the National Center for Youth Law website
The US Supreme Court ruled in Graham v. Florida
that juveniles who commit crimes in which no one is killed may not be sentenced to life in prison without the possibility of parole.
On July 22, the President signed into law a restoration of federal benefits for people who have been out of work for 6 months or more. This legislation restores access to federal extension benefits retroactive to June 2, 2010, and extends that access through November 30, 2010.
New Department of Veterans Affairs (VA) regulations make it easier for veterans to qualify for Post-Traumatic Stress Disorder (PTSD) Benefits. Veterans are no longer required to document specific events causing PTSD. Under the new rules, a veteran only needs to demonstrate that he or she served in a war and performed a job during which events could have happened that could cause the disorder. For more information, review this Fact Sheet
The VA now allows patients treated at its facilities to use medical marijuana in states where it is legal. Patients who use it no longer need to fear the loss of access to prescription pain medication, but doctors may modify a patient's treatment plan or decide not to prescribe pain medicine if there is a risk of a drug interaction. The policy does not permit VA doctors to prescribe marijuana.
Legal Developments Affecting Your Organization
If enacted, the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 ("TRAC") (H. R. 3408, S. 2882) would make it more difficult for employers to classify workers as independent contractors for employment tax purposes and would significantly increase employer penalties in the event of misclassification. Additionally, if enacted, the Employee Misclassification Prevention Act ("EMPA")(H.R. 5107, S. 3254) would amend the Fair Labor Standards Act ("FLSA") to impose strict recordkeeping and notice requirements on employers with respect to workers treated as independent contractors. It would expose employers to fines from $1,100 to $5,000 per employee for each violation of the law.
Employees' Privacy Rights
In City of Ontario v. Quon, the US Supreme Court ruled in favor of the police chief who read an officer's text messages sent on his work pager. It rejected the employee's argument that his privacy rights were violated, ruling that supervisors conducted a reasonable search when they suspected rules were being violated.
Effective for the first plan year beginning on or after September 23, 2010 (January 1, 2011 for calendar-year plans), the new healthcare legislation requires that group health plans provide preventive health care and screenings without cost-sharing (i.e., no co-payments, deductibles or co-insurance). Employers should confirm with their insurers or third-party administrators/administrative services only providers that the required preventive services will be available without cost-sharing.
Health care professionals who received student loan relief under state programs that reward those who work in underserved communities may qualify for refunds on their 2009 federal income tax returns as well as an annual tax cut going forward under a new provision in the Affordable Care Act. Employers, including tax-exempt employers, in underserved areas can help eligible health professionals take advantage of this new benefit. An individual whose employer withheld and paid taxes under the Federal Insurance Contributions Act (FICA) on payments covered under the new exclusion may request that the employer seek a refund of withheld FICA on the employee's behalf. And because employers also pay a portion of the FICA tax, the employer also may also be entitled to a refund. For more information, visit the IRS website.
AB 1025 imposes new certification requirements on employees and volunteers who supervise student activities. It requires that any person who will assume a paid or volunteer position to supervise, direct, or coach a "pupil activity program" sponsored by or affiliated with a school district obtain an Activity Supervisor Clearance Certificate (ASCC) from the California Commission on Teacher Credentialing (CTC) prior to assuming such position. It also requires CTC to send fingerprint images and related information to the Department of Justice for any applicant for an ASCC to obtain information related to the applicant's criminal history.
For text and status updates of state law, visit the Official CA Legislative Information website.
Revocations of Tax-Exempt Status
The IRS just announced one-time filing relief for small organizations that failed to file for three consecutive years as long as their returns are filed by October 15, 2010
. Two types of relief are available for small exempt organizations-- a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice (e-Postcard), and a voluntary compliance program (VCP) for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax. For more information about the filing relief program, click here
. Learn more about automatic revocations by clicking here
The StayExempt micro-site
has been expanded. If you're not already familiar with this virtual workshop, it covers the basics that exempt organization managers need to know. Healthcare Tax Credit
Many organizations that provide health insurance coverage to their employees now qualify for a special tax credit under the Patient Protection and Affordable Care Act (PPACA)
, signed into law in March 2010. The credit is designed to encourage small employers to offer health care coverage for the first time or maintain the coverage they have. PPACA contains some tax provisions that take effect this year and others that will be implemented during the next several years. For the years 2010 to 2013, a small tax-exempt employer may be entitled to a maximum credit of 25% of the employer's health insurance premium expenses that count toward the credit. To find out more, review the latest news releases and legal guidance on www.IRS.gov
. Payroll Tax Exemption
A special payroll tax exemption designed to encourage employers to hire and retain new workers was created by the Hiring Incentives to Restore Employment (HIRE) Act
, signed into law in March 2010. The IRS announced
that the newly-revised payroll tax form to claim the exemption is posted on their website. For additional information on the exemption, visit www.IRS.gov
. Unrelated Business Income (UBI)
Publication 598, Tax on Unrelated Business Income of Exempt Organizations
, was revised and released in March 2010. The publication explains the rules that apply to the taxation of unrelated business income, including the types of organizations that are subject to the tax and how to figure unrelated business taxable income. Top
|Starting a New Nonprofit|
September 7; November 2Info/Register
Employment Law Update: Employees vs. Independent Contractors
October 28, 9am-12pm
Fundraising & the Law
November 16, 9am-12pm
Volunteers & the Law
November 30, 9am-12pm
Nonprofit & Enterprise: What Are Your Options?
December 7, 10am-4pm
These workshops are made possible through a partnership with the Volunteer Center of Orange County (VCOC). Workshops are held at VCOC, located at 1901 E. Fourth St. Ste 100, Santa Ana, CA 92705. To register, please visit their website
or call (714) 953-5757.
|About COLAP |
|PLC's Community Organizations Legal Assistance Project (COLAP), through staff and pro bono volunteer attorneys, provides free transactional legal assistance to local nonprofit organizations that face a variety of business law issues in areas such as contract law, employment law, fundraising law, corporate governance law, and real estate law. For instance, COLAP can match organizations with attorneys to review and draft bylaws, employment handbooks, service provider contracts, and commercial leases. COLAP also provides free legal assistance to those interested in starting new nonprofit organizations that benefit Orange County's low-income population. In addition to providing direct representation on a number of business law-related issues, COLAP assists organizations through a legal check-up program. Through this program, volunteer attorneys and law students conduct legal checkups of organizations to make sure they are complying with various state and federal laws. The service allows organizations to address legal issues before they become a problem. If nonprofits do not comply with legal requirements, they may be subject to administrative fines or they can even lose their tax-exempt status. This project helps organizations avoid these consequences. For more information on COLAP services, please visit PLC's website, or contact Diamond Tran.|
Nothing in this bulletin should be construed as legal advice. For more information about complying with the laws mentioned in this bulletin, please consult a legal or tax professional.