Submission Date:
Question:
The board of trustees of a public school district library owns the library building. A private club occupies the entire second floor. The private club has traditionally not paid any rent or utilities, nor has it contributed to the upkeep of the building in any way.
The library, through a public vote of the school district, covers all of the costs of the building. Could the library be in danger of mismanagement of funds or losing its charter?
Answer:
What an interesting set-up! If I started a private club,[1] I would totally want it over a library. Or a museum. Either way, very cool.
While cool, the operation of my private club over a school district public library would not be without concerns, because all non-association libraries have to abide by a bar on inurement[2] (which applies to all “charitable” organizations) and Article VIII Section 1 of the New York State Constitution,[3] which bars use of public assets for private use.[4]
That means that my private club could not pay less than fair market value for occupancy, except under some very particular circumstances:
- A person deeded the property to the library on the condition that my private club has a permanent right to use it.
- The library has arranged an in-kind exchange that is demonstrably worth what it would otherwise have to charge for rent and utilities. For instance, if my private club provides lawn maintenance, etc. roughly equal to the fair market value of the rent.[5]
- If the occupancy creates a library mission-related benefit to the public, such as the club running an ESL program or free computer skills clinic during library hours in the space, and the arrangement is confirmed with an agreement.[6] In that type of example, it helps if the private club is also a type of charity.[7]
In the absence of those factors, there is a strong chance the arrangement could run afoul of the law. But would it, as the member asks, create a danger of the library being regarded as mismanaging funds, or of losing its charter from the New York State Education Department (NYSED)?
That answer would depend on several factors, but I can say this: no attorney for the library, once learning of this, without one of the above-listed reasons to justify the arrangement, would feel comfortable saying (much less putting in writing), “Oh, sure, keep the club upstairs! No harm, no foul.”
Instead, the attorney would be nervous because while the threat of charter revocation would be remote (there are usually warnings and time to correct the situation before a charter is revoked by NYSED[8]), these items are of immediate concern:
- Violation of bar on inurement (which could be called “financial mismanagement,” among other things).
- Violation of the State Constitution’s bar on use of public property for private purposes without payment of fair market value (which could also be called “financial mismanagement,” among other things).
- Risk of denial of insurance coverage if tenant causes fire or other property damage.
- Risk of denial of insurance coverage if tenant member causes personal injury.
- Possible zoning issue.[9]
A willful failure to resolve the above-listed problems, if not remedied, could eventually lead to the type of trouble that could jeopardize a charter.[10]
So, what would I do with a situation like this? It is clear that the matter calls for some homework; if there is any reason that justifies the occupancy, there is still a strong motivation to ensure that the proper insurance coverage and indemnification arrangements are in place. At the same time, there is a “human factor;” if the club has been there forever, and everyone is cool with it (even though it’s not legally cool), making things right without causing a fracas will take research, careful planning, and diplomacy.
The most likely resolution to the research, planning, and diplomacy process would be a lease agreement.
Thank you for a great question!
[1] The dress code in my private club would involve wearing all natural fabrics, and we would be united by a commitment to making the world a better place through gardening and the martial arts (“Spardening”).
[2] Legalese for benefits to an individual or entity other than the not-for-profit, as barred by both the Not-for-Profit Corporation Law and the IRS.
[3] “Gift or loan of property or credit of local subdivisions prohibited; exceptions for enumerated purposes.”
[4] To be clear: association libraries can’t violate the bar on inurement either, but they don’t have to lose sleep over Article VIII.
[5] Not an arrangement to wing; it should be reviewed by lawyers and accountants, so it is well-documented as being in-kind.
[6] See footnote #3.
[7] In New York State, there are many kinds of charities; not all of them are not-for-profit corporations.
[8] Hi NYSED! We know you are tough but fair.
[9] I know this seems like I’m reaching, but trust me, zoning has ruined many a cozy real estate relationship.
[10] I don’t know if NYSED would care about the zoning part. But lots of other entities with power could.
