The New York State  Attorney General's Charities Bureau has witnessed a growing number of houses of worship entering into complex land deals with real estate developers that could potentially interfere with their charitable mission in a number of different ways, according to Bureau Chief James Sheehan, a speaker at the Foundation for Accounting Education’s Exempt Organizations Conference on Dec. 17.

Sheehan said that, over the past two years, there has been a marked increase in houses of worship in neighborhoods such as Harlem, Crown Heights and Bedford Stuyvesant being approached by real estate brokers to convince them to sell their property. Many of these houses of worship, he said, have been operating for a very long time with very little money, while the land beneath them slowly became more valuable until, today, these properties are worth millions of dollars. These offers, he said, are very tempting to a religious organization used to a shoestring budget

“The broker brings in a developer, and the developer says, ‘I’ll tear down your house, and in three days rebuild it. We’ll take the property you have, knock it down, and when we’re finished, you’ll have a condominium church, a parsonage overlooking the East River or Prospect Park, and you’ll have a bundle of cash,’” he said. “What could be wrong with this picture?”

One thing, he said, is that many of these churches don’t have easy access to the type of documentation needed to complete this kind of deal. His bureau reviews these deals before they go through, and he’s often found that the prospective sellers often don’t keep detailed financial records, and even if they do, they’re almost never audited, which is a requirement before the transaction can be approved. He said his bureau also requires their bylaws, which often means “they need to go into their business [office] because no one has looked at them.” Similarly, they also need their charter, which “is filed with the county clerk, so they need to dig through the church’s basement to find it.”

All this documentation is to answer the ultimate question of who has ultimate sign-off authority on this deal, which is a more difficult question than one might think.

“Is it the members? The board? If it’s the members, who decides who is a member? I’ve been fascinated, having been raised Catholic, they tell us what we’re supposed to do, but in congregational churches and synagogues there’s this concept called democracy, which is wonderful until you try to decide who gets to vote. … You’d think the question of who belongs to a synagogue is a simple question, but it’s a lot less simple when it’s a $50 million matter,” he said.

Another issue is a major disparity in terms of knowledge and experience between buyer and seller. For a house of worship, this kind of deal represents a once in a lifetime opportunity. For the developers, it’s simply their job, and they’ve been doing it for years. He said his bureau is concerned about whether these houses of worship are getting fair consideration for their property, that the terms are reasonable, and that the deal serves the interests of their organization.

“They look at the price, but remember, [with] a lot of these prices, it’s not, ‘Here’s a check for $5 million.’ It’s, ‘Here’s a check for $1 million, and you get $4 million in value,’” he said, which necessitates valuation of the noncash parts of the transaction.

He noted that real estate transactions of this size tend to be very complex. Having seen a great deal of construction litigation, which he said goes on and on, and no one is ever happy, he knows how these deals can go sour fast. Meanwhile, he said, the developers will be presenting these houses of worship with a one-page deal that’s ostensibly comprehensive.

“The idea you can have a one-pager saying what you’ll get is ridiculous,” he said.

The bureau’s concern does not end with the buyer. Sheehan said that sometimes real estate developers go out of business, or at least their LLCs do. So, he said, he also asks the developers for audited financial statements, something “they’re very offended at,” in order to see if they have the ability to actually deliver what they are promising.

“If they go bust, you’re left with a hole in the ground. The reason we’re into this much more now is there’s several holes in the ground in New York City that used to be houses of worship—the developers bought the property, said, ‘We’ll put you up somewhere,’ and now’s five years later and nothing happens,” he said.

A related issue has been companies choosing to lease parts of these properties for cell towers. He said that 5G technology requires a “backpack hung on a pole every few hundred feet,” rather than a single tower that with a miles-wide radius. Telecommunications companies, he said, have been approaching churches with tall steeples and asking if they can lease that space to put up one of those 5G relays.

“Most folks think this is manna from Heaven,” he said.

But first he said, the telecoms tend to offer standard deals with a very “take it or leave it” stance, “but it really isn’t, some are more lucrative than others,” and so he said he wants to see houses of worship gain a sufficient level of sophistication to negotiate these deals in their best interest.  Second, he said, these deals often have conditions where the property cannot be disturbed during the lease period, which bumps up against the other trend of developers outright buying their properties.

“Now you decide you want to sell your church for the $10 million the developer wants to give you. Guess what you’ve got to get rid of? You promised them there would be no change in the facility you’re operating,” he said.

With these sorts of issues in mind, Sheehan said that the Charities Bureau has been working on guidance for houses of worship that he hopes will educate them on matters they should think about before deciding to cut deals like this. It will be out sometime in early 2020.