Naming rights have become an increasingly popular strategy as corporations seek high-profile public exposure from their sponsorships—think SoFi Stadium, which set a record for naming rights in 2019 as part of a 20-year deal reportedly valued at more than $30 million per year. Similarly, charitable individuals and families utilize naming rights as well, in connection with a donation as a way of honoring a loved one, establishing a family legacy, enhancing a personal brand or strengthening ties to a community.
We spoke with Jeffrey Haskell, chief legal officer of Foundation Source, to understand how gifting through a private foundation—instead of giving directly to the organization—offers significant advantages and what should be included in such agreements.
Russ Prince: What naming rights advantages are possible when gifting through a foundation instead of directly to the organization?
Jeffrey Haskell: Many donors use their foundations to help ensure there is a party to the naming rights agreement, which will endure beyond the donor’s death. In many areas, heirs can be denied the right to enforce naming rights agreements entered into by individuals. A private foundation, however, can endure indefinitely ensuring that there is a party in existence to monitor the grantee’s compliance with the agreement. Additionally, should a breach occur, it’s much easier to negotiate for return of funds when the donor is a private foundation than when the donor is an individual.
There may also be tax benefits to using a foundation. For example, if the grantee is not a U.S. charity, the donor will almost certainly be better off using a foundation, as an individual generally cannot get a tax deduction for a gift to a non-U.S. charity.
Prince: Are there any risks associated with obtaining naming rights through a foundation?
Haskell: While donors are generally not allowed to personally profit from their private foundations, the tax rules mainly treat public recognition, including naming rights, as a benefit that is “merely incidental” to the charitable purposes served by the foundation’s gift. Perhaps, because it recognizes that public charities generate a lot of revenue from facilitating naming gifts, the IRS has generally blessed the use of foundations to make grants in exchange for naming rights. This does not mean that there is no risk involved, and much may depend on how the distribution is framed. However, if done correctly with a carefully drafted agreement, using a private foundation to secure naming rights has a long-accepted track record of success and generally does not present tax risks.
Prince: What are the key elements of an effective naming rights agreement?
Haskell: The written gift agreement should address many or all of the following:
1. Parties to the agreement. Usually these will be the foundation making the grant and the charity receiving it.
2. Amount and timing of the grant. Some grants will be made in a lump sum. In other situations, grant installments may be more desirable and might be conditioned on meeting certain milestones.
3. The name and its appearance. The donor, of course, will want to specify how the name will read. It can be very specific, such as requiring a certain font and size. There is no need to mention the foundation unless desired.
4. To what the name attaches. Charities will want flexibility to offer other naming opportunities in and around the named space. The agreement should be clear on the extent to which these other opportunities will be offered and ensure that no other naming opportunity will be afforded more prominent treatment.
5. Destruction. What happens if the named space is destroyed and not rebuilt during the term of the naming right? Can the name be transferred to another space? If it’s important to the donor, it should all be specified.
6. Publicity. What are the rules here? Must all publicity of the space use the space’s full name? Will the foundation have the right to pre-approve promotional materials involving the name?
7. Time limits and morality clauses. Charities are increasingly seeking to put time limits on naming rights and to ensure that they have a way out if circumstances change—in particular, if the name becomes a source of concern or embarrassment. These provisions are highly sensitive and should be carefully negotiated between the donor and/or the foundation and the charity.
8. Remedies for violation of the agreement. These may include reversion of funds or “gift over” provisions, whereby breach of the agreement results in the transfer of funds to another charity or coordinated alternative solutions.
When all parties to a naming agreement respect the needs and imperatives of the other, the agreement can align both sets of goals providing much needed resources to the charity and cementing the donor’s philanthropic legacy for years to come.
Request a complimentary PDF copy of Elite Wealth Planning: Lessons from the Super Rich at [email protected].