Identify the foundation and the proposed landlord
A founder who establishes a private foundation may want its office inside a building the founder already owns. The property can be convenient, and the proposed rent can be lower than market. Before entering that arrangement, determine whether the landlord is a disqualified person with respect to the foundation. The private-foundation self-dealing rules require a separate analysis from the commercial fairness of the rent.
Obtain the foundation determination documents, ownership chart for the building, contributor and manager information, proposed lease, and payment instructions. Have the advisor identify the relevant relationships, including entities involved in ownership or reimbursement. This guide assumes a private foundation and a landlord already determined to be a disqualified person; it does not extend that classification to every charity or every landlord.
Compare a discounted lease with the actual exception
The IRS describes a specific exception when a disqualified person leases property to the foundation without charge. Offering a bargain rental rate is a different proposal. Before approving rent, have counsel identify an applicable exception rather than treating a favorable appraisal of market rent as sufficient permission. The foundation and owner need a supported transaction, even when both believe the charity benefits.
Assume independently supported market rent would be $3,000 a month. The founder proposes charging the foundation $1,000 a month, presenting an annual $24,000 discount against $36,000 of market rent. The discount arithmetic is correct, but the foundation would still pay $12,000 of rent. That proposal is not the without-charge lease described in the exception. Do not book the discount as proof that the payment qualifies.
Now assume the parties instead evaluate a genuinely rent-free arrangement. The property owner would receive no rental payment under the proposed lease. Compare that actual commitment with the owner’s building expenses, financing covenants, and other obligations. This is a cash and legal planning exercise, not a conclusion that the owner receives a charitable deduction for forgone rent. Obtain the separate deduction analysis before including any tax benefit.
Trace maintenance payments to their actual recipients
The IRS explanation permits specified operating costs under the without-charge exception when payment is not made directly or indirectly to a disqualified person. Identify the vendor and ultimate recipient before approving each cost. A lease labeled free can still require review when it directs the foundation to reimburse the founder or a related property entity.
For an illustrative budget, assume the foundation expects $400 a month of utilities and $250 of janitorial costs, paid to independent vendors under the reviewed arrangement. The combined annual operating budget is $7,800. Those expenses do not become rent merely because they arise from occupancy, but the exception’s actual conditions still need to be established. Preserve invoices and payment records showing who supplied the services and received the money.
If the lease instead requires a single $650 monthly payment to the founder’s property company, do not assume the same annual total produces the same legal result. The recipient and reimbursement structure changed. Ask counsel to review it before the first payment; changing an accounting description from rent to maintenance does not establish that an indirect payment condition is satisfied.
Coordinate the occupancy agreement and payment controls
Prepare an agreement that identifies the space, duration, permitted use, expense responsibilities, access, insurance, and approval process for changes. Review building-lender and insurer requirements separately. The tax exception does not determine whether another contract allows charitable occupancy or which party bears a particular premises risk.
Give accounting a reviewed recipient list and expense policy. Require additional approval before adding a founder-related vendor, reimbursing an owner expense, or changing the occupancy charge. Reconcile actual payments to the agreement periodically. The board should receive an explanation of unusual items rather than only a combined office expense total.
Review existing payments before changing future terms
If rent or reimbursements have already been paid, preserve the original lease, invoices, approvals, and transaction history. Ask the foundation advisor to evaluate reporting, correction, and any excise-tax consequences. A prospective rent-free amendment does not by itself resolve earlier payments. Avoid destroying the original record while trying to improve the arrangement.
The useful decision is whether the founder can provide premises under a supported exception with actual payment controls. Compare the owner’s commitment and the foundation’s operating budget before signing, document the relationships and expense recipients, and reassess later changes. Commercial generosity and compliance must both be demonstrated from the arrangement that actually occurs.
Sources & further reading
Consult the original guidance and its effective dates. These references support the educational discussion; their application depends on the specific facts.