A common practice among nonprofit organizations -- the offering of naming opportunities to donors – is seemingly receiving increased scrutiny. In the past fifteen months, for example, The New York Times featured an op-ed article on revising the way tax law treats naming rights and The Wall Street Journal ran a story on how naming rights can go wrong, focusing on a legal battle over a gift made by country singer Garth Brooks.
Naming rights have been a mainstay of philanthropic fundraising for ages, utilized by all sectors within the nonprofit world. They are most frequently offered to donors for facilities, endowments, and programs with the duration of the naming right often lasting for perpetuity. In the last several years, however, there has been movement toward time limitations on naming opportunities, especially in the arts and culture sector.
What concerns are being raised about naming rights? Questions that come up with some frequency include:
- Should there be a value ascribed to a naming right, reducing the tax deductible portion of the gift by this amount? (Presently the Internal Revenue Service does not view a naming right as offering a significant return benefit to the donor.*)
- What is the appropriate length of time, or term, for a naming right? Is it in the best interests of nonprofits and philanthropy to offer perpetual rights? Or, are naming rights in perpetuity too burdensome for charities?
- What do you do when a named building is no longer needed to carry out the nonprofit’s mission or is no longer inhabitable or useful?
- How does a charity respond when a donor for whom a building, endowment, or program is named exhibits public behavior or publicly states values that are contrary to the mission and values of the charity?
In light of questions like the above, it is important for nonprofits to employ several “best practices” in regard to naming rights. These “best practices” should include:
- Adopting a formal gift acceptance policy that outlines how and when gifts will be recognized. This policy should address the offering of naming opportunities for facilities, programs, and endowments. It should cover both honorific and philanthropic naming. The gift policy should also delineate how the organization will determine the term of naming rights, the process for changing or eliminating named buildings or programs, and the renaming or de-naming of buildings, programs and endowments.
- Establishing, as part of the formal donor recognition policy, minimum dollar amounts to name facilities, programs and endowments. This is especially important for facilities to ensure that limited physical spaces are maximized to encourage and honor donors. In establishing minimum gift amounts for the naming of facilities, it is appropriate to consider the actual construction or renovation costs related to the facility (often the expected minimum gift is 50% of these costs) and the prominence and public visibility of the space. For example, a named lobby would generally command a larger gift than a classroom or board room.
- Documenting each and every naming gift with a formal, written gift agreement. Gift agreements should clearly articulate what is being named and the parameters around the gift including the gift amount, payment schedule, and any restrictions placed on the gift by the donor. It should also state the term of the naming right (perpetuity, limited number of years, number of generations, etc.) and the basis and process for changing or terminating naming rights. Another important element of the gift agreement is a morality clause addressing the nonprofit’s rights in regard to donor behavior or values that run contrary to the nonprofit’s mission and values.
By employing these best practices, a nonprofit will promote transparency and avoid any misunderstanding of how it will handle naming rights.
* The content in this blog is provided for informational purposes only and should not be construed as legal or financial advice. Any individual making or considering a charitable gift should always seek their own legal, financial, tax or planning counsel as to the applicability of any charitable deduction or tax law as it relates to their personal financial situation. Those who advise charitable donors should encourage the same.