Property owners' association renting storage space to members

[Stephen in MB SC]

Jurisdiction

South Carolina

We are a non-profit property owners' association. The association makes available to members a space in a fenced lot to store an RV, boat, etc. and currently charges the member only a nominal annual $5.00 fee for a registration sticker to capture the contact information and ensure only registered items are stored in the lot.
The association has liability and casualty insurance, but nothing calls out the storage lot in particular. Each member using the lot signs an informal waiver: "I acknowledge that in consideration for being allowed to use the <Association Name> Storage Lot at no charge to me, I agree that I assume all responsibility for loss or damage of any kind in connection with my use of the storage facility".
If the association starts to charge each owner a monthly fee (rental?) for the space, $50.00 to $100.00 (local market rate), does the association need to buy additional insurance, liability or casualty? Does charging a monthly fee change the relationship between the association and the member? Does "renting" the space in the lot affect the non-profit status of the association?
Thank you.

 

[adjusterjack]

Doesn't matter how much the association charges.
Doesn't matter if the association provides the space for free.
Doesn't matter how many waivers the users sign or how they are written, though they may help in seeking indemnification for a claim.

The association can still be sued and be liable for any damage or injury that occurs on the lot.

So, the answer to the question

does the association need to buy additional insurance, liability or casualty?

Is yes. The association either needs to buy it or needs to talk to its insurance agent and see if maybe it's already in the policy. Could go either way depending on the type of commercial package policy. Call the insurance agent ASAP.

If you are the association's go to person for insurance I suggest you educate yourself better, starting with the difference between liability and casualty insurance.

What is the difference between casualty and liability insurance?

Does charging a monthly fee change the relationship between the association and the member?

No. It doesn't change the existing relationship. It creates a new relationship in addition to the existing relationship. The new relationship is one of landlord/tenant.

Does "renting" the space in the lot affect the non-profit status of the association?

Maybe, maybe not.

According to our tax expert @Tax Counsel

The IRS does not use the term "nonprofit" as that is a misnomer. A lot of big charities effectively run at a profit. It used the term "exempt organization" and there are more types of exempt organizations than just charitable and religious organizations. But the key thing to keep in mind is that those profits also are used to further the exempt mission of the organization. They cannot go to the persons who set it and run the organization.

Depends on what the revenue is used for.

 

[zddoodah]

If the association starts to charge each owner a monthly fee (rental?) for the space, $50.00 to $100.00 (local market rate), does the association need to buy additional insurance, liability or casualty?

No. It may be desirable to buy more/different insurance, but increasing the charge doesn't impact the amount or type of insurance that might be needed or desirable. Since we don't know anything about the association's current insurance coverage, it's impossible to opine intelligently about what additional/different insurance might be desirable.

Does charging a monthly fee change the relationship between the association and the member?

No.

Does "renting" the space in the lot affect the non-profit status of the association?

Impossible to say based solely on this single piece of information, but "non-profit" does not mean that the taxpayer cannot charge for goods and services provided.

 

[flyingron]

HOAs get a special tax treatment provided that at least 60% of the income comes from dues, fees, or assessments of property owners and 90% is spent on expenses to acquire, build, manage, maintain, or care for the property of the HOA.

 

[Tax Counsel]

Does "renting" the space in the lot affect the non-profit status of the association?
Thank you.

Not with the IRS. The IRS does not use the term "nonprofit" as a legal/tax term. It uses the term "exempt organizations." It does use the term nonprofit on its web site to help people find the information they need since most people are not familiar with the term exempt organization.

Whether what they are doing might jeopardize their tax exempt status with the IRS depends on what kind of tax exempt organization they are. An exempt organization (EO) might take in more money than it spent in a particular year, thus having a profit for the year. In fact with large EOs its pretty common. What matters more is what the organization does with the money it receives. It needs to have at least a good chunk of their revenue going to support its exempt purpose. It's unlikely that simply renting out the parking spaces is a problem with being an EO, but I can't tell you that with certainty because I don't have all the facts needed to determine that.

Some states use the term "nonprofit" when referring to a charity or similar organization. You'd need to look at your state's law to determine if that term has any legal meaning and if it does, what kind of activities the nonprofit may do and still keep its nonprofit status. States have different rules for organizations set up for the public good than the IRS does.

If you are on the board of an exempt organization, then I recommend you suggest to the board that it retain a tax professional who has a lot of exempt organization experience to answer the tax questions. Some of the rules are complex or deal with issues that most people aren't familiar with and making a mistake can cost the organization a fine or even loss of exempt status.

 

[flyingron]

If the rental is purely to people who own real estate under the HOA, the rental income is just a fee that is an exempt function income. As long as the money gained (90%) is also spent on exempt expenses, there's not a problem.

The problem would come if you rented to people who are not HOA members. Then it comes down to a numbers thing.