Picture It: The ABC Painting HOA Clubhouse, The Zippy Printing HOA Rec Center
In this week's tip, we answer an HOAleader.com reader's question about whether a nonprofit HOA that gets tax breaks for being a nonprofit can sell naming rights to common areas. “To augment our reserves, our board has been asked to consider the sale of naming rights in our common areas, such that the HOA would sell for profits of upwards of $10,000 per signage displays to businesses and
homeowners.”
Are there tax or other drawbacks? You betcha.
Our reader says they've been advised this could affect their nonprofit status perhaps federally and certainly in their state. That's critically important advice to seek and to heed, says Jennifer Biletnikoff, a shareholder in the Naples, Fla., office of Becker & Poliakoff, who has represented condos and HOAs for more than 15 years.
“I haven't ever heard a board come up with that suggestion,” she says. “But one of the things I'm always very conscious of is what's in my wheelhouse and knowing when to stay in my lane. This reader says they have a tax exemption because they're a not-for-profit. And if a client with that status came to me
and asked about naming rights, my very first piece of advice would be that the client should pick up the phone and call their tax advisor to see what effects that move would have on their tax-exempt status.”
Melissa Garcia, a shareholder at
Altitude Community Law PC in Lakewood, Colo., who provides advice and counsel to Colorado associations in all areas of community association law, also suggests consulting with your tax advisor. She also says that, for her clients, and based only on the general information provided by this reader, it might be permissible.
“I've never heard of anybody selling the rights to put signs on common areas,” she says. “If the association gets money from this—and it is profit because they're getting money—generally, as long as they're using that money to offset common expenses and pay for HOA stuff, I don't think there's an issue.
“It's different for example, if they're running a golf course and they get money from that operation and profits go to homeowners,” adds Garcia. “But if they're selling the right to install a sign on common area, unless the documents prohibit the practice, I don't see a problem. As a general rule in Colorado, I don't think it would
affect their nonprofit status as long as the money goes right back to the HOA.”