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Leasing from a Key Insider

Last modified: June 29, 2022
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At Foundation Group, we work with a lot of organizations which may be best suited to lease property from a board member, officer, or employee. While not disallowed, the organization does have the burden to demonstrate that the arrangement with the key insider is not privately benefitting that individual(s).

How do you do that?

Due diligence must be done by the board to ensure that the property or facility in consideration is actually a good location for the organization to be situated. Then the determination of the fair market value must take place. This is done in one of two ways.

First, the organization would look at other locations in the area similar to the property in consideration. Multiple comparables and their rates need to be considered in making this determination. In looking at these similar available options, a fair market value can be determined, with the board then voting on this matter, with the interested individual(s) recusing themselves from voting, per the Conflict of Interest.

Secondly, a qualified appraisal could be done on the property to determine the fair market rental value. In doing so, the board can rely on this professional assessment to ensure that no private benefit is present to the key insider for use of the property.

 These details need to be captured in the meeting minutes where the discussion of the property and the evaluations are discussed by a quorum of the Board of Directors. These details are what will show the state or the IRS that a compliant decision has taken place.

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