Significant Rule Change for Certain Tax Exempt Organizations Reporting Donor Information

By Marc Berger, CPA, JD, LLM

On July 16, 2018, the Internal Revenue Service (IRS) released Revenue Procedure 2018-38, modifying the information reported to the IRS by certain tax-exempt organizations on their annual Form 990 or Form 990-EZ information return. Affected organizations will no longer be required to report the names and addresses of their reportable contributors on Schedule B of their Forms 990 or 990-EZ.

This change affects all organizations that are tax-exempt under Section 501(c), other than charitable organizations described under Section 501(c)(3). This includes labor unions, trade associations, social welfare groups, issue-advocacy groups, local chambers of commerce and veteran groups. Nevertheless, Section 527 political organizations, like charitable organizations, will still be required to report the names and addresses of their reportable contributors on their annual returns.

The reasons provided by the IRS for the change include decreased compliance costs for affected organizations, reduced consumption of IRS resources in connection with the redaction of such information and reduced risk of the inadvertent disclosure of information that’s not open to public inspection.

The tax-exempt organizations relieved of the obligation to report the names and addresses of their contributors must continue to keep this information in their books and records in case the IRS wishes to examine this information. In addition, the change does not affect the reporting of contribution information on Schedule B, other than the names and addresses of contributors, including the dollar amount of contributions.

The revised reporting requirements apply to information returns for tax years ending on or after Dec. 31, 2018. Thus, the revised requirements generally will apply to returns that become due on or after May 15, 2019.

Implications for Nonprofits

Reactions to the new rules from those affected are strong.

Advocates claim it as an important win that supports:

  • Data privacy: While the IRS isn’t allowed to disclose confidential donor information, it has inadvertently done so in the past. Eliminating this information from tax filings will reduce the chances it may be accidentally released or fall into the wrong hands.
  • Free speech: Free-speech advocates believe donor information should be kept private, so that it can’t be used by the government to target donors. For example, the IRS was previously accused of unfairly targeting Tea Party and progressive groups.

Critics express several concerns:

  • Hampers fraud detection: The IRS may not need donor information for tax administration purposes, but it is useful for detecting fraud. The government will now have no means to track how cash is being funneled into these tax-exempt organizations, leaving the door open to potentially dangerous and foreign influences.
  • Reduces fiscal transparency: The move is a major setback for those who champion more transparency around political donations. While donor information was never disclosed to the public, the government will now remain in the dark about how foreign actors might be influencing the political landscape.

Regardless of the new guidance, all tax-exempt organizations should still diligently collect information about their donors to prepare for a potential audit or change of course by the IRS down the road.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

Identifying and Overcoming Common Nonprofit Challenges

By Laurie De Armond, CPA, and Adam Cole, CPA

Nonprofit organizations are uniquely shaped by their mission, history, size, program goals and community.

But leaders of these organizations—whether a CFO at a global health services charity, a CIO of an education endowment or the executive director at a museum—share a common goal of advancing their organization’s mission. To drive forward progress, it’s essential that leaders understand where their organization sits in relation to its peers on objective measures of performance.

The BDO Institute for Nonprofit Excellence’s 2018 benchmarking survey, Nonprofit Standards, surveyed leaders at midrange organizations (those with less than $25 million in annual revenue), upper-midrange organizations ($25-$75 million in annual revenue), and large nonprofits (above $75 million in revenue) to reveal insights nonprofits can leverage to strengthen their organization. Across the spectrum, the report finds that upper-midrange organizations face more significant challenges than their smaller and larger peers.

Funding Challenges Amid Rising Costs

While 56 percent of upper-midrange nonprofits saw their revenues grow over the past year, this was dwarfed by the 69 percent of large nonprofits and 70 percent of midrange nonprofits that also saw some revenue growth. At the same time, nearly half (49 percent) say declining revenue and funding is at least a moderate challenge, compared to 45 percent of midrange and large organizations. Perhaps as a result of this challenge, 49 percent of organizations at this scale maintain six months or less of operating reserves, and one third cite maintaining adequate liquidity as a moderate or significant challenge—indicating a potential gap in the fiscal safety net for these organizations.

Some of the funding challenges upper-midrange nonprofits face may be attributable to the types of funding sources these organizations rely upon, including individual contributions (15 percent), government grants (12.6 percent), fundraising/special events (11.4 percent), and corporate contributions (7.8 percent)—all of which can be either cyclical in nature or impacted by regulatory changes, such as tax reform.

Nevertheless, amid these challenges in securing funding, upper-midrange nonprofits face the same challenges as all other organization sizes in addressing rising overhead costs: 58 percent of upper-midrange nonprofits and nonprofits overall say rising costs is at least a moderate challenge.

Program Growth Emphasizes Importance of Communicating Impact

Despite challenges in securing funding, upper-midrange nonprofits are working to expand their program offerings and deliver on their core mission. Organizations in the upper-midrange devote 80 percent of their total expenditures to program-related activities—compared to 78 percent for large nonprofits and 68 percent for midrange nonprofits. Forty-two percent of upper-midrange nonprofits also say the inability to meet demand for their services is a high or moderate challenge, and 58 percent are responding by planning to introduce new programs in the next year without eliminating others.

This program expansion makes demonstrating impact to stakeholders more important than ever. When it comes to making an impact, nearly all nonprofits surveyed (93 percent) communicate their impact outside of the organization; meanwhile, 72 percent of upper-midrange nonprofits say some portion of their donors have demanded more information about outcomes and impact than before.

But as nonprofit leaders know all too well, reporting impact to donors and other stakeholders is no easy task. Organizations in the upper-midrange are more likely than midrange or large nonprofits to say they face moderate or significant challenges in reporting impact, including having no consistent framework for measuring and reporting (66 percent vs. 56 and 53 percent, respectively), lacking clear program objectives and/or key performance indicators (55 percent vs. 43 and 41 percent, respectively), and inadequate financial resources devoted to reporting (55 percent vs. 31 and 33 percent, respectively).

Recruitment and Retention Challenge Upper-Midrange Organizations

Nonprofits derive their strength from dedicated and driven employees, yet recruitment and retention remain a high or moderate challenge for 6 in 10 nonprofit leaders. Upper-midrange nonprofits are the most concerned, with 70 percent citing recruitment and retention as a high or moderate challenge, compared to 61 percent of large organizations and only 35 percent of midrange organizations.

Key factors in keeping employees engaged and growing employee satisfaction levels for all organizations include having competitive compensation levels (59 percent), up-to-date technology (58 percent), internal communications (54 percent), and management-employee relations (51 percent). These challenges were all most pronounced among upper-midsized organizations. While 7 in 10 midrange nonprofits were able to provide at least a 3 percent increase in employee compensation levels within the last year, only 44 percent of upper-midrange and large nonprofits were able to do the same.

Overcoming Key Challenges: Planning Ahead

Do the data show that upper-midrange nonprofits are doomed? Not at all. Instead, this year’s Nonprofit Standards highlights the success of many nonprofits that were able to overcome these classic scaling challenges to grow successfully and expand their programs.

While not comprehensive, below are some best practices for organizations looking to overcome these challenges.

Fundraising Effectiveness: Nonprofits looking to increase their fundraising effectiveness should:

  • Match their donor behavior. Nonprofits should consider what influences their donors to donate in general—and to their organization specifically—and tailor their messaging accordingly.
  • Reduce their giving barriers. It’s critical that organizations regularly update and modernize their donation channels (including online and mobile giving platforms) to keep pace with changing consumer behavior.
  • Leverage data analytics. Nonprofits should dig into their own data to understand the demographics of their core contributors and to identify new prospects. (See the article on page 10 entitled, How Predictive Analytics is Transforming NPO Fundraising.)

Donor Communications & Impact Reporting: To ensure smoother donor communications and reporting, nonprofits should:

  • Start with the end in mind. Organizations should identify the story they want to tell their stakeholders and paint a vision of what the world could look like if their mission were achieved.
  • Make reporting an ongoing process. Nonprofits should gather and report data on a quarterly or monthly basis to keep stakeholders in the loop and make year-end reports less daunting.
  • Remain transparent. Nonprofit reports offer an unparalleled opportunity to contextualize an organization’s metrics and finances.
  • Share their report widely. Organizations should distribute their report via multiple channels so both existing and prospective donors have a chance to see it.

Staffing and Recruiting: To maintain and attract top talent, nonprofits should:

  • Stay competitive in their local market. Nonprofits should ensure their policies make their organization an attractive place for potential employees.
  • Capitalize on flexible work options. Remote work arrangements can be both beneficial to employees and cost-effective for organizations.
  • Remain proactive about succession planning. With 4 million baby boomers retiring each year, the need for a succession plan is a “when” rather than an “if” scenario.

The more upper-midrange nonprofits—and those of all sizes—can learn from benchmarking against their peers, the better prepared they will be to advance their mission and support continued growth. Gaining intelligence is vital to staying afloat.

Adapted from article originally published in NC State University’s Philanthropy Journal News.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

Tax Reform & Tariffs Widen the Affordable Housing Gap

By Joseph Canataro and Kyle Paisley

The U.S. has an affordable housing gap, and the combined impact of tax reform and tariffs could make it a lot worse. What’s the scope of the current supply gap? The National Low Income Housing Coalition reports a shortage of 7.2 million affordable and available rental homes. This means that there are only 35 available units for every 100 extremely low-income renters (ELI). A household is characterized as ELI when their income is at or below the poverty guideline or 30 percent of their area median income (AMI). While the severity of the supply shortage varies greatly by state, the housing affordability gap stretches nationwide.

What’s taxing the affordable housing market?

Last year’s federal tax overhaul is the largest factor projected to negatively impact affordable housing development. The reduced corporate tax rate from 35 to 21 percent lowered the value of low-income housing tax credit (LIHTC) investments. Housing experts initially estimated tax reform could cut the growth of the affordable housing market by more than 230,000 units over the next decade.

While the reduced corporate tax rate has the most direct impact on LIHTC, it’s not the only tax change affordable housing developers are watching. The current tax code reduces the alternative depreciation system (ADS) cost recovery period for residential rental property from 40 to 30 years. Most LIHTC partnerships will elect under Section 163(j)(7)(B) to use the real property trade or business exception to the net business interest expense limitation. This election requires the use of ADS instead of the MACRS depreciation method, which has a useful life of 27.5 years for residential rental property.

With the one-year anniversary of the new tax law fast approaching, how has the affordable housing market shifted? Shortly after the 2016 presidential election, LIHTC pricing trends began their first sharp decline in anticipation of a reduced corporate tax rate. Pricing trends have stabilized and remained steady since March 2017, with average pricing fluctuating between 91 cents and 93 cents per LIHTC. Prior to the election, pricing was at a high over $1 per LIHTC. The reduction in LIHTC pricing increases need for other financing and funding from federal, state and local programs to support future affordable housing development.

Trade disputes abroad raise supply costs at home

In addition to tax changes, affordable housing developers also face increased construction costs of future affordable housing projects and those already in development. The price of lumber, steel and aluminum—all essential building materials—climbed steadily as a result of the ongoing trade disputes.

The cost of 1,000-feet of western Canadian lumber in June was up nearly 80 percent over the past 12 months, according to data from trade publication Random Lengths. Lumber prices first started rising in October 2015, when a decade-old softwood lumber agreement between the United States and Canada expired without a replacement. The Trump administration’s 20 percent tariff on Canadian lumber accelerated the commodity’s price hike. An overall reduction in the supply of Canadian lumber due to rail slowdowns and tree disease have also contributed to the cost increases.

After this summer’s record highs, lumber prices have started to settle. There is renewed hope that the U.S. and Canada can reach a new softwood agreement as well. U.S. and Canada trade relations are showing signs of improvement, with a tentative agreement to replace NAFTA with the United-States-Mexico-Canada Agreement (USMCA) in motion. Progress in NAFTA renegotiations have renewed hope that the United States and Canada could also reach a new agreement on softwood lumber trade agreement.

The United States also began imposing tariffs on imported steel and aluminum of 25 percent and 10 percent, respectively. Construction costs are expected to rise modestly as a result, particularly for the development of high-rise assets that require far more steel and aluminum than multi-family townhouses. Trade tensions may be easing in North America, but the outlook for global trade relations remains uncertain. For affordable housing developers, the question remains: Will the trade disputes reach a resolution, or are the tariffs here to stay?

Legislative bright spots for affordable housing

The future is not all doom and gloom, however. Congress has already taken measures to address affordable housing advocates and developers’ concerns. In March 2018, Congress increased the LIHTC volume cap by 12.5 percent with the passage of The Consolidated Appropriations Act of 2018. The four-year temporary volume cap increase does not fully mitigate the impact of tax reform on affordable rental housing development and supply, but it does improve the outlook.

The March 2018 Act also included a new income-averaging set-aside option for LIHTC properties. Under the new option, income and rent limits for at least 40 percent of the units must average 60 percent or less. The new legislation will assist an owner’s ability to offset lower rental revenues where certain funding sources may require lower set-aside for a number of rental units with greater rental revenues from units at 70 or 80 percent AMI. The change will also provide relief to owners that are acquiring new affordable housing developments or rehabilitating existing properties where certain units could be ‘over income.’

Changes still ahead

The affordable housing sector has several other policy changes on their wish list. There are bipartisan efforts in Congress to go beyond the 12.5 percent increase in volume cap allocated federal LIHTCs passed this March and obtain a 50 percent increase. Additionally, there are appeals to establish a minimum 4 percent rate for LIHTC used to finance acquisitions and bond-financed developments.

If enacted, both changes would improve the outlook for the development of new affordable housing units. As the market currently stands, the fallout from tax reform and tariffs still present a considerable barrier for new developments. With increased construction costs and a tax code that makes LIHTC investments less attractive, 2019 will not be the year the U.S. bridges its affordable housing supply gap.

This article originally appeared in BDO USA, LLP’s “BDO Real Estate and Construction Monitor” (Winter 2019). Copyright © 2019 BDO USA, LLP. All rights reserved. www.bdo.com

How Predictive Analytics Is Transforming NPO Fundraising

By Joe Sremack, CFE, and Gurjeet Singh, MCP

The art of nonprofit fundraising is quickly becoming a science. Fundraising is a vital process for the mission of many nonprofit organizations (NPOs), and the better organizations are at this process, the more effective they become in their missions.

Historically, this process consisted of following standard fundraising processes and tracking the results to periodically adjust the processes based on results. This feedback loop could take months or years; however, NPOs have begun improving this process by utilizing analytics, rather than simply responding to past results.

Perhaps the most important technological breakthrough for NPO fundraising in recent memory is predictive analytics. This technology is enabling NPOs to run more effective fundraising campaigns and quickly boost their fundraising results. Rather than relying on evaluating the effectiveness of past fundraising efforts and basing decisions on opinions and experience, predictive analytics provide guidance on what will likely be the most effective campaigns, whom to target and how to allocate resources to maximize fundraising results. This article discusses how predictive analytics works and several ways it can be employed to enhance your fundraising efforts.

WHAT IS PREDICTIVE ANALYTICS AND HOW DOES IT FIT WITHIN NPOS?

Predictive analytics is a set of techniques and technologies that extract information from data to identify patterns and predict future outcomes. Based on a variety of statistical techniques and software technology, predictive analytics helps to understand the relationships between data points, and identify patterns within the data, as well as factors contributing to the prediction. This whole analysis can be configured to show prediction based on various factors and can be refined further over time as more information is included in the analysis.

Predictive analytics is being employed across numerous industries, including nonprofits. The most common examples of predictive analytics are found in data-centric industries—such as tech firms, finance, and insurance—where data is readily available and the ability to predict outcomes directly relates to the financial success of those organizations. The same is true of NPOs. While NPOs may or may not collect millions of records across hundreds of data points, they do collect a sufficient amount of donor information, marketing touch-point records, and other information that can be utilized for predictive analytics, and that predictive ability can make a significant difference in fundraising efforts.

NPOs are uniquely positioned to benefit from predictive analytics. Most NPOs house the kind of data that can fuel detailed analysis, which results in actionable insights. They have donor information that often includes a wide array of demographic information, historical behavior information and information about how donors responded to past fundraising campaigns. This type and breadth of information can quickly be converted into predictions and more effective fundraising campaigns. Even if the NPO only has hundreds or thousands of donor records—as opposed to hundreds of thousands or more—that is sufficient for creating effective predictive analyses.

When Should NPOs Consider Predictive Analytics?

  • Seeking to improve fundraising results
  • Facing competition for donors
  • Fundraising efforts not meeting goals and objectives
  • Exploring opportunities for new or enhanced fundraising campaigns
  • Shrinking donor base or difficulty reaching your donors

HOW PREDICTIVE ANALYTICS WORKS
In the traditional fundraising process, several steps are typically employed across different layers of an NPO’s data. First, key donors are identified and targeted. This may be done based on selecting key individual donors, by a prior donation level threshold, and/or demographic information. Next, past campaigns are assessed, and new campaigns may be discussed and evaluated. Finally, a plan is developed and executed to drive fundraising. For this entire process, the rigor of data analysis and the evaluation of past campaign effectiveness may vary by organization but, at a high level, the processes are similar: organizations make use of data and personal judgment to drive future fundraising efforts.

The predictive analytics process runs alongside this methodology to augment it, which acts as an advisor to existing activities and decision-making processes. Predictive analytics offers a way to look at the information in a new way by incorporating your existing methods and institutional knowledge. Predictive analytics can be run parallel to your process to offer new ideas, prove or disprove existing ideas and approaches, and provide a way to gauge how effective new approaches to fundraising will be.

A major misconception about predictive analytics is that it can replace a fundraising team or will serve as a stand-alone fundraising strategy function. A predictive analytic model is only as effective as the information and guidance that is provided to it, and performing predictive analytics effectively requires institutional knowledge and refinement. Predictive analytics is a statistical and technological way to utilize data based on institutional knowledge, so it is useful only if it is designed, implemented and evaluated by data and industry experts.

A typical scenario for NPOs to implement predictive analytics is when an NPO recognizes that its fundraising efforts could be improved. They currently may have sufficient data to understand what worked well in the past, but they often rely on comparisons between past approaches and new approaches, market research and small test campaigns for evaluating new ways to raise funds. They also recognize that these techniques test ideas and require an investment of time and resources, which may not deliver the level of results they want. This leads them to work with a data science team or a predictive analytics software package to improve their process. This begins the predictive analytics development, which may produce immediate results.

The predictive analytics process involves several steps. First, the organization’s goals are outlined and historical data is surveyed to map the goals to key data points. In this step, the organization determines which questions it wants answered and whether the data it needs is available. Next, a predictive model is developed, and the data is analyzed and visualized to derive insights. This step is where forward-looking analyses and findings are derived from historical data, and it involves specialized analysis using specialized software and/or custom-developed logic in a programming language, such as Python or R. The results are next evaluated to determine whether the analysis was effective and, if so, how to apply the findings for meaningful actions. Finally, an iterative process of refining and re-running the analysis is performed based on the findings and changes. These steps are outlined below:

WHAT CAN NPOS PREDICT?

One way that NPOs can increase fundraising results is by using predictive analytics to identify the people who are most likely to donate as well as those who will not. Through this analysis, NPOs can identify potential donors based on utilizing past donor information to identify the characteristics that most accurately determine whether someone donates. Unlike traditional analysis methods that only examine past donation information, predictive analytics leverages information—such as age, income, lifestyle, past donation information and associations to NPOs with similar missions—to pinpoint donors. With this information, NPOs can more precisely target a pool of potential donors to maximize fundraising results.

For example, an NPO with a list of 3,000 past donors and 2,500 potential donors may only be able to directly contact 2,000 donors through in-person meetings, phone calls and/or direct/digital mailing due to budget constraints. Because of this constraint and the need to maximize fundraising, the NPO wants to know which of the 5,500 potential donors to contact. The NPO utilizes predictive analytics to assign a donation probability to each potential donor based on historical donation information and each potential donor’s characteristics to then target only the donors with a high probability. This helps reduce the overhead of devoting resources to individuals or groups who are unlikely to donate and maximizes the donor conversion rate.

In addition to discovering the likelihood of donations, predictive analytics can be used to predict donation amounts. Analyzing donors for both their donation likelihood and predictive donation amount further helps NPOs identify key donor targets. An NPO may not get much value from identifying donors if they will donate in small amounts or if there is a high degree of donation amount variability. Instead, predictive analytics can be performed that assigns both a donation probability and an expected donation amount if they donate. This is an expected value for donors, and this information can be calculated to optimize the fundraising campaign. If an NPO identifies five high-value donors who only have a 40 percent donation probability, targeting those may still be more valuable than pursuing five low-value donors who have a greater than 90 percent probability of donating.

Predictive analytics can be applied to almost any area of NPO operations. While improving fundraising is often the first goal, predictive analytics can be used to improve other areas of the organization.Several examples of these are:

 Mission-specific goals
 Operational performance
 Cost forecasting
 Community and government outreach

CONCLUSION
Predictive analytics is an important method for improving your fundraising process. Just as major retailers, financial institutions and healthcare companies are utilizing predictive analytics to maximize revenue and reduce costs, NPOs have an opportunity to make use of this technology within their own organizations. Regardless of the volume of fundraising you are doing or the makeup of your donors, you can benefit from applying predictive analytics.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

4 Changing Realities of Hurricane Season for Hoteliers

By Clark Schweers

Only a year has passed since the costliest hurricane season on record in the U.S. took thousands of lives and amounted in over US$306.2 billion in damages.

The hospitality industry was among the hardest hit from the year’s three most significant storms: Hurricanes Harvey, Irma and Maria. Hotels experienced—and many are still recovering from—physical property damage, business interruption losses and long-term impacts on occupancy rates.

Now, it’s déjà vu. Hurricane Florence—the first major hurricane of 2018—made landfall in the Carolinas in September. Hard-hit areas accumulated over 30 inches of rainfall, and more than 1.4 million people experienced extended power outages. This month, Hurricane Michael threatened the Florida Panhandle, hitting the coast as a Category 4 hurricane.

When a hurricane strike is looming, protecting the safety and well-being of guests is the hotel industry’s number one priority. While the core elements of an effective natural disaster response plan have not changed dramatically in the past year, hotels are encountering new and worsening risks and experiencing a shift in government response, prompting many to revisit their insurance policies and dedicate more resources to disaster response.

With more than a month left to hurricane season, hotel risk managers should consider four changing realities to better prepare for the remainder of the hurricane season:

  1. The frequency and severity of extreme weather events are increasing—and top business leaders are taking an active role.

Hotels are facing natural disasters and dealing with the fallout on a more consistent basis. To adapt to this reality, risk managers are no longer the only stakeholders involved in developing disaster response plans. Corporate boards and C-Suite executives of multinational hotel companies are increasingly playing key roles in deciding how to mitigate property damage risks and business interruption losses.

  1. Mandatory evacuation orders are becoming more common, but not all insurance policies offer full coverage for losses incurred during an evacuation.

Authorities are declaring states of emergency and issuing mandatory evacuation orders earlier than ever before, erring on the side of caution to protect human life. Hotels could be evacuated for several days, or even a week, prior to the storm making landfall. While there are avenues for hotels to recoup financial losses incurred during an evacuation, insurance policies are not always clear about the coverage provided.

Oftentimes, coverage begins the moment a hurricane makes landfall, which could leave hotels without grounds to recover financial losses in the days leading up to the storm. Protection and Preservation coverage allows for cost recovery for activities such as boarding up windows and sandbagging vulnerable areas, but the lost business associated with closing early may or may not be covered as part of this policy. Proactively discussing this issue with insurance carriers and brokers ca n help hotels reduce unwelcome surprises after an extreme weather event.

  1. Recovery and financial losses don’t end the moment business resumes.

In the midst of a storm and in the immediate aftermath, a hotel’s first priorities are accounting for the safety of its guests, restoring power, repairing physical damage and resuming operations. But after the lights come on and all systems are up and running, the financial strain of a natural disaster is likely to persist.

Hotels are in the business of tourism, and occupancy rates rise and fall depending on the attractiveness of the destination. Some hotels are protected by loss of attraction insurance, which allows companies to make a financial claim if something that drives business to your asset has been impacted. If an airport, convention center, sporting events center or preeminent tourist attraction is under repair, hotels may recover lost revenue.

A severe weather event could decrease traffic to a location for a significant period of time. Travelers may be reluctant to visit an area still rebuilding from a natural disaster. Many hotels’ insurance policies include an extended period of indemnity provision, which accounts for the time it takes to regain guests and restore normal occupancy levels. After last year’s devastating hurricane season, hotels found that losses can go well in excess of the 60 days, or even 180 days, that most policies cover. In many cases, hoteliers are looking to extend their policies to cover one full year.

  1. Storms that have lower category designations can still produce significant financial losses.

Many people—seasoned hotel executives included—breathed a sigh of relief recently when Hurricane Florence was downgraded from a category 4 to a category 1. What few people understand, however, is that wind speed is the only factor considered when a storm is categorized. Rainfall and flooding, the primary causes of storm-related deaths and damages, are not reflected in the hurricane’s category. Hotel executives should take precautions and consider all elements of a storm when preparing for disaster response.

With the first major storms of the year behind us, hotels are staring down the rest of hurricane season, which ends November 30. To meet the challenges ahead, hoteliers should take steps to clarify their insurance policies and refresh their natural disaster response plans.

This article was originally published in Hotels Magazine. You can view the original here.

This article originally appeared in BDO USA, LLP’s “BDO Real Estate and Construction Monitor” (Winter 2019). Copyright © 2019 BDO USA, LLP. All rights reserved. www.bdo.com

Compensation Committee Wake-Up Call – The ‘Other Obstacle’ To Leadership Transition

By Michael Conover

I have previously discussed the inevitable transition of numerous baby boomers holding leadership posts in nonprofit organizations. The topic has been well-covered in a variety of publications for nearly a decade.

However, I believe the seismic shift that some have predicted has failed to materialize on a scale that was predicted. I attribute this to a variety of factors, including: delayed retirements out of financial need or resistance to change; belief that age 75 is the new 65; or just procrastination.

The slowdown in the rate of change will not soften its impact. It may intensify it. The delay on the part of these baby boomer executives and the boards to whom they report could increase the likelihood of an unexpected and disruptive leadership crisis. The problems can range from a noticeable decline in performance to an abrupt departure caused by sickness or death. Leadership changes under the best of circumstances are not 100 percent successful; thus, in crisis mode, the odds of success are much slimmer.

The other obstacle I allude to in my title is executive retirement arrangements (or lack of same). As organizations finally confront the departure of a long-tenured and critically important executive, the details of the retirement arrangements come to the forefront. This is the point at which many organizations and executives discover the price that will be paid for failing to address this important issue well in advance. Proper advance planning can not only minimize financial uncertainties for the executive and the organization that may interfere with retirement planning, but can prevent other potential and very expensive obstacles as well.

Many compensation committees have failed to proactively raise the subject of retirement plans and acknowledge the impact that they will have on an orderly retirement / leadership transition. There are a variety of reasons including: financial costs; reluctance to broach the subject of leadership change; mistaken assumptions that arrangements made many years ago will address the needs; embarrassment that arrangements are inadequate or have not been made; etc. Committee members must realize that time is not on their side for addressing retirement-related arrangements. Delaying can create many negative impacts for both the executive and the organization.

I would like to describe a few different scenarios that illustrate the types of situations we have discovered in “11th hour” reviews of retirement arrangements:

Plan Document Failures: Plan documents (e.g., employment contracts, deferred compensation arrangements, life insurance plans, etc.) developed many years ago and / or those that have been drafted without the benefit of needed expertise to ensure compliance with current requirements pose potential problems to the unwary.

The inclusion of what appear to be ordinary terms in the arrangements, or the failure to include critical details, can prove disastrous in terms of potential tax liability and penalties for the executive as well as the employer. Language included to ensure that retirement resources are secure may produce inadvertent vesting of a benefit and tax liability long before it is actually available. Similarly, incorrectly structuring payments can result in an unforeseen tax liability and punitive excise tax penalties.

If these issues are identified proactively or within a time period that corrective actions can be taken, the problems can be minimized. There is, however, a point at which it is simply too late.

Plan Administration Failures: In some instances, well-drafted plan documents are not adhered to from an administrative standpoint. Contributions, excess contributions, payment amounts and / or payment terms are made that fail to follow plan requirements. The failure to ensure compliance may result in adverse tax consequences to the executive and the organization.

Failure to properly recognize and report details of retirement arrangements are also common. The executive’s W-2 form, personal tax return and the organization’s Form 990 may all need to include information related to the plan arrangements as well as timely recognition of income when vesting occurs. Discovering these issues after the fact can necessitate amending prior year returns and also involve adverse tax consequences to the executive and the organization.

Improbable Catch Up: A compensation committee’s failure to establish a specific position on retirement benefits for the executive, as well as a specific objective for the level of benefits to be provided well in advance of the probable retirement event, drastically diminishes the likelihood of providing any level of benefit beyond that provided to all employees. Waiting until just a year or two prior to retirement will likely place an unreasonable financial burden on the organization to fund a benefit that might have been spread over many years of employment. Similarly, large contributions / payments toward the very end of employment may trigger an excess benefit situation, or the appearance of same, that may create adverse consequences for the executive and the organization.

The Wake-Up Call

Most compensation committees spend most of their time on decisions about current cash compensation (i.e., salary, bonus and incentive) matters for executives. Clearly, these are important matters and ones that require the committee’s attention in light of the disclosure of this information to external stakeholders and the public. I am not suggesting the committee members spend any less time on them.

I am however suggesting that compensation committees incorporate an immediate and recurring review of the organization’s retirement program to ensure that all documentation, administration and funding are in accordance with the organization’s policy, on track to meet stated objectives and fully compliant with pertinent regulatory and reporting requirements. Regular checkups may also be beneficial in helping the organization to be more attentive and proactive on succession / transition needs. As we have pointed out, delay on these matters is the enemy of effective solutions.

Executive management also has a role to play in this wake up call. Steps should be taken to ensure that the compensation committee has access to all internal and external information and advice that will assist them in their efforts to ensure that all steps have been taken to ensure that the retirement arrangements pose no obstacles to the inevitable retirement and leadership succession that every organization faces.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

Navigating the New Age of Retail Real Estate

By Stuart Eisenberg and David Berliner

Plagued by seven straight years of unprofitability, Sears filed for bankruptcy at the urging of banks that hold the retailers’ debt this October. Near the end of the year, Sears will close 142 unprofitable stores in addition to the previously announced closure of 46 stores.

Sears joins a long list of retailers shuttering storefronts this year. In the first six months of 2018 alone, more than a dozen retailers with 20 stores or more filed for bankruptcy and closed a total of 3,838 stores according to Retail in the Red, BDO’s biannual bankruptcy update.

Despite strong underlying economic fundamentals and high consumer confidence, brick-and-mortar retailers have continued to suffer. A confluence of factors are to blame for retail’s decline, including: burdensome levels of debt, the rise of e-commerce and rapid delivery, shifting consumer preferences, and younger generations spending more on experiences rather than on physical goods.

ARE RETAIL LANDLORDS FEELING THE IMPACT OF THEIR TENANTS’ FINANCIAL HARDSHIPS?

The real estate industry is keeping a close eye on retail’s restructurings and bankruptcies. Many large owners and operators of malls—including retail REITs—have experienced financial damage due to retail vacancies and declining demand. Real estate owners that have older malls or lost anchor stores—like Bon Ton, Sears, or Macy’s—at many different properties in their portfolios were the hardest hit.

HOW ARE RETAIL OWNERS, OPERATORS—INCLUDING RETAIL REITS—RESPONDING?

One approach gaining momentum among retail REITs to refresh retail properties and fill vacancies is designing a “reimagined mall.” With the goal of increasing foot traffic, many mall operators are redeveloping and repositioning lagging properties to adapt to changing consumer tastes. This generally involves adding dining and entertainment options and shifting some of the property for new uses, including apartments, hotels, fitness centers, wellness, office buildings, distribution space, and even supermarkets like Whole Foods.

While redeveloping and repositioning sounds like a winning strategy on paper, there are significant hurdles to execution. The largest stumbling block to launch such projects is access to adequate investment capital and prior expertise executing similar initiatives. Retail REITs and property owners may not be able to undertake such an initiative on their own, and consequently, may pursue a sale or become an acquisition target for a buyer that has the resources. For instance, following Brookfield Property Partners’ acquisition of retail REIT GGP, Brookfield plans to expand GGP’s top-tier properties, while adding office and other mixed-use spaces to less successful malls.

Developers constructing new retail properties are factoring in the future of retail into their blueprints. In Florida, a proposed project for what would be the largest mall in the country plans to include an indoor ski slope, submarine pool, and other unconventional attractions. The cost implications for such a project, however, are potentially enormous. The American Dream Meadowlands, a similar project first proposed in 2003, faced numerous legal and financial setbacks that have delayed its opening to Spring 2019.

BDO’S TAKE: WHAT TO EXPECT THROUGH 2019
Even if retailers finish the year with strong sales, BDO projects more bankruptcy announcements and store closings before the new year. The future of retail is changing, and real estate owners and operators that embrace multiuse space will be best positioned to attract the next generation of consumers.

This article originally appeared in BDO USA, LLP’s “BDO Real Estate and Construction Monitor” (Winter 2019). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

IRS Provides Guidance On New UBTI Rules

By Marc Berger, CPA, JD, LLM

On Aug. 21, 2018, the Internal Revenue Service (IRS) released Notice 2018-67 (Notice), providing tax-exempt organizations and their tax advisors some much-needed guidance with respect to new Internal Revenue Code Section 512(a)(6). This is the provision in the new Tax Cuts and Jobs Act that requires calculation of unrelated business taxable income (UBTI) separately with respect to each unrelated trade or business.

While the IRS still intends to issue proposed regulations on this issue sometime in the future, the Notice provides some guidelines which will help exempt organizations compute their UBTI in the short-term.

Prior to enactment of Section 512(a)(6), organizations with multiple sources of unrelated business income calculated their UBTI by aggregating the gross income from all unrelated trades or businesses less the aggregate deductions allowed with respect to such unrelated trades or businesses. Section 512(a)(6), effective for tax years beginning after Dec. 31, 2017, requires UBTI to be calculated separately for each trade or business, and that UBTI for any such trade or business shall not be less than zero. In effect, the provision prevents an organization from using a net loss from one trade or business to offset net income from another trade or business.

In enacting Section 512(a)(6) Congress did not provide criteria for determining whether an exempt organization has more than one unrelated trade or business or how to identify separate unrelated trades or businesses. While the proposed regulations to be issued will address these areas, the Notice provides interim guidance that exempt organizations can rely on in reporting UBTI on their 2018 Form 990-Ts, Exempt Organization Business Income Tax Return (and proxy tax under section 6033(e)).

The Notice provides that in determining whether an exempt organization has more than one unrelated trade or business, it may rely on a reasonable, good-faith interpretation of the law considering all of the facts and circumstances, and that a reasonable good-faith interpretation includes using the North American Industry Classification System (NAICS) six-digit codes. Exempt organizations filing Form 990-T already are required to use the six-digit NAICS codes when describing the organization’s unrelated trades or businesses in Block E on page 1 of the return. For example, all of an organization’s advertising activities and related services, reported under NAICS code 541800, might be considered one unrelated trade or business activity, regardless of the source of the advertising income.

Perhaps the most important part of the Notice pertains to the reporting of an organization’s income from investment partnerships. Section 512(c) requires an exempt organization that is a partner in a partnership that conducts a trade or business that is an unrelated trade or business with respect to the exempt organization to include in UBTI its distributive share of gross partnership income (and directly connected partnership deductions) from such unrelated trade or business. Reacting to comments it received from the exempt organization community regarding the potential significant reporting and administrative burden imposed by Section 512(a)(6) on exempt organizations with numerous investments in multi-tier partnership structures that generate UBTI, the IRS intends to issue proposed regulations treating certain investment activities of an exempt organization as one trade or business for purposes of Section 512(a)(6)(A). This would permit exempt organizations to aggregate gross income and directly connected deductions from such “investment activities.”

Until the regulations are issued the Notice provides an interim rule which allows an organization to aggregate its UBTI from its interest in a single partnership with multiple trades or businesses, including trades or businesses conducted by lower-tier partnerships. The interim rule can be used as long as the directly held partnership interest meets the requirements of either the de minimis test or the control test, which provide:

De minimis test – The partnership interest qualifies as long as the exempt organization holds directly no more than 2 percent of the profits interest and no more than 2 percent of the capital interest. Percentage interests held by certain related organizations and individuals are included in this determination.

Control test – The partnership interest qualifies as long as the exempt organization (i) directly holds no more than 20% of the capital interest in the partnership; and (ii) does not have control or influence over the partnership. Similar to the de minimis test, certain related organizations and individuals are included in this determination.

In determining the exempt organization’s percentage interest in the partnership for these tests, the organization may rely on the information provided to them on Schedule K-1.

The Notice provides a transition rule for partnership interests acquired prior to Aug. 21, 2018. This rule treats each partnership interest as a single trade or business, whether or not there is more than one trade or business conducted by the partnership or lower-tier partnerships. Thus, an exempt organization can treat each partnership interest acquired prior to Aug. 21, 2018 as comprising a single trade or business for purposes of computing UBTI under Section 512(a)(6).

When Section 512(a)(6) was enacted organizations feared having to report and track the annual net income or loss from each partnership investment separately. The gist of these interim and transition rules is that an organization with numerous investment partnership interests may be able to aggregate and treat those investments as one trade or business under Section 512(a)(6).

The Notice also addresses several other issues relating to Section 512(a)(6), including the effect of new Section 512(a)(7), which increases UBTI for certain qualified transportation fringe benefits and qualified parking. The Notice states that UBTI created from 512(a)(7) is not income derived from an unrelated trade or business, and as a result, any amount included in UBTI under Section 512(a)(7) is not subject to Section 512(a)(6).

Along the same lines, the Notice provides that income reported as unrelated business income under Section 512(a)(4), reporting unrelated debt-financed income, 512(b)(13), reporting specified payments from controlled entities, and 512(a)(17), reporting certain insurance income, does not have a nexus to an unrelated trade or business. However, the Notice provides that aggregating income included in UBTI under these provisions “may be appropriate in certain circumstances.”

Finally, the Notice sheds some light on the use of net operating loss (NOL) carryforwards from years beginning prior to the effective date of Section 512(a)(6) (Pre-2018 NOLs). These NOL carryforwards are allowed to be used against UBTI as calculated under Section 512(a)(6). The organization will first calculate UBTI for each separate trade or business under Section 512(a)(6)(A), and then apply an NOL carryforward to those trades or businesses with UBTI under Section 512(a)(6)(B). This will have the effect that post-2017 NOLs will be calculated and taken before pre-2018 NOLs (because UBTI with respect to each separate trade or business is calculated under Section 512(a)(6)(A) before calculating total UBTI under 512(a)(6)(B)).

Notice 2018-67 is a good first step in providing exempt organizations some guidance on this one provision in the new law. Stay tuned for additional guidance in the future with respect to all of the tax changes affecting exempt organizations.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

Blockchain’s Impact On The Future Of Real Estate And Construction Companies

By David Butcher

For the real estate and construction industries, sensors, data and automation will increasingly define construction projects, as well as cityscapes. Illustrated by the fact that there are currently more than 1,000 on-going smart city projects around the world.

The emergence of the connected city leads to many new possibilities—and challenges—for the real estate and construction industries. For example, how to integrate and leverage smart features, how to safeguard personal data and how to create a seamless interaction between various systems, including individual buildings and city infrastructure like transport and energy systems.

I advise several blockchain companies and follow the evolving ecosystem closely. From personal experience it is clear that blockchain is about much more than cryptocurrencies and payment services. By 2020, there will be 600 recognised smart cities around the world and blockchain can underpin many, if not most, of the processes that will make those cityscapes smart.

The question becomes: if blockchain is going to be the foundation of smart cities, what does that mean for construction and real estate companies?

The Growing City-Scape

More than half the world’s population now lives in cities. Before the middle of the century, that number will jump to two-thirds.

While cities account for the bulk of many countries’ economies, they also present administrative, organisational, logistical, social and environmental challenges.

Smart cities that involve the use of Information and Communication Technologies (ICT) as well as Internet of Things (IoT) and other related technologies has been heralded as the way to mitigate at least some of these issues.

However, smart city technologies like ICT and IoT come with their own conundrums. For example, how the various systems that ‘live’ within a smart city environment interact with each other and individuals. How does a smart building, for example, ‘talk’ with a driverless car, know you, the passenger, has the right to enter and let the vehicle through the outer gates? Or how does one automate and democratise the use of energy in a building, so that inhabitants can choose if they only want to use locally produced renewable energy?

The answer is that without efficient, protected data transfer and proper use of data, most smart city initiatives and technologies will fall short.

Blockchain to the Rescue

All of which brings us to blockchain. For the smart city revolution to reach its potential, it needs horizontal integration of individual services that is a) highly automated, b) highly secure and c) allows for streamlined, accountable transmission of data. Using buildings as an example, they need to be able to collect data as well as exchange it with other buildings, power delivery systems, driverless vehicles, weather forecast systems and vice versa. Some of this data will be personally sensitive, some financial, and some business-related.

One possible solution is for individuals to have a blockchain-based ‘self-sovereign identity’ (SSI) – a consolidated digital identity. The goal is to provide individuals with a wholly unique and safe ID also helps store data, in place of the fragments that each of us currently have scattered across different pulci and private organisations, applications, and websites, with little to no control over their storage, updating, or sharing. Not to mention the risk of losing control of data to hackers.

Without delving too deeply into the technology, blockchain’s decentralised Distributed Ledger Technology (DLT), distributed key management and peer-to-peer encryption technology is regarded as about the closest to unhackable we know today. It also enables the use of smart contracts with an IF/THEN structure (If A happens THEN B happens automatically). In other words, blockchain could potentially automate many of the processes and interactions between systems that smart cities will rely on. Simultaneously, it could allow for secure logging of data and data transfers within and between systems.

While still in the early stages, the potential is underscored by the fact that large corporations are engaged in developing these aspects of smart cities. For example the Chinese e-commerce giant JD, who has opened a dedicated smart city research centre with a focus on blockchain and AI.

Country and city governments are also backing the technology. Sweden, the UK, USA, UAE, to name but a few. Perhaps the best illustration of the potential public organisations see in blockchain-driven smart cities comes from China. The country, which has been solidly against cryptocurrencies, looks set to integrate blockchain in many smart city projects, including the $380 billion development of Xiongan.

The Many Uses of Blockchain

While some of the above is a glance into the crystal ball at what the future may hold, the construction industry need not wait with integrating/trialling blockchain technology. It already has several uses that can alleviate current bottlenecks and inefficiencies.

During construction projects, blockchain can add transparency and efficiency. This is doubly the case for the construction supply chain. Blockchain also shows potential in areas such as logistics and storage, paymentscontracts, and fleet management.

Logistics and storage aspects of construction projects alone could see savings in six or seven figure range by using blockchain solutions, depending on the size of the specific project, while making the whole process completely transparent to all stakeholders.

Real estate companies can employ blockchain-based building maintenancemanagement, streamline contract processes and manage land registries. The latter is currently being tested in Georgia.

From Tenant to User?

For both real estate and construction companies, it is perhaps worth looking at the emergence of smart cities and new, disruptive technologies from a bird’s eye view. They, along with changing customer demands, indicate that both industries are on the cusp of profound changes.

In the previous century construction projects and the finished product were, while not completely cut off from their surroundings, not nearly as integrated with other systems as is the case today. Furthermore, the tenants were generally less concerned with or interested in knowing how a project was completed and the number of systems within, for example, a newly constructed building, they could interact with and manipulate was rather limited.

Today that is changing. Tenants increasingly want flexibility, control and transparency without sacrificing ease-of-use. To meet changing demands, construction and real estate companies may need to rethink how they view their customers. Instead of as tenants, they are end-users—similar to the business-customer relationship found in the technology industry. As is generally the case within the technology sector, long-term future success in smart city environments relies not only on your products (buildings/infrastructure projects), but also how they can be integrated with other systems and on your subsequent use of the data that your solutions generate to gain insights and identify new business opportunities.

Data is ‘the new oil,’ and construction and real estate companies are sitting on what is the equivalent of a sizeable chunk of the world’s resources. Historically, they have struggled to make full use of that resource, and perhaps blockchain’s biggest future boom for both industries is how it can allow those companies to collect and process data in new ways to boost innovation and drive new solutions.

This article originally appeared in BDO USA, LLP’s “BDO Real Estate and Construction Monitor” (Winter 2019). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com